Genworth Financial Inc (GNW) 2006 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Genworth Financial's third quarter 2006 earnings conference call. My name is Elizabeth and I will be your coordinator today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference call. As a reminder, the conference is being recorded for replay purposes. Also we ask that you refrain from using cell phones, speakerphones or headsets during the question-and-answer portion of today's call. I would now like to turn the presentation over to your host for today's call, Jean Peters, Senior Vice President, investor relations and corporate communications. Ms. Peters you may proceed.

Thank you very much operator and welcome everyone to Genworth Financial's third quarter 2006 earnings conference call. As you know our press release and financial supplement were both released last evening and are posted on our website. This morning we will have several speakers. First our CEO Michael Fraizer will provide perspectives on our results, then Vic Moses, chief actuary and acting CFO will talk about progress on ROE and capital redeployment. Then Tom Mann and Marcia Dall will give an update on the U.S. housing market and George Zippel will give an update on long-term care. Pam Schutz, head of retirement income and investments is also available for questions.

In regard to forward-looking statements and the use of non-GAAP financial information some of the statements we make today during the call may contain such statements and our actual results may differ materially. We advise you to read the cautionary note regarding forward-looking statements in our release, the risk factors section of our most recent annual report Form 10-K filed with the SEC. And today's presentation also includes non-GAAP financial measures which are reconciled to GAAP where required in our financial supplement in accordance with SEC rules.

With that, let me now turn the call over to Mike Fraizer.

Thanks Jean. Genworth achieved good organic growth in the third quarter while driving shareholder value to capital redeployment and other key initiatives. Year-to-date net operating earnings per diluted share are up 11%; for the third quarter we saw net operating EPS growth of 2%. So after considering $16 million of higher extraordinary investment income last year the underlying growth was 7%. This morning I will discuss highlights of the quarter, outline a few challenges and talk about our accomplishments in generating and redeploying capital.

In the quarter, several higher return lines performed well. Life delivered earnings growth in the high single digits while fee-based retail grew 50% over last year. Internationally mortgage insurance and payment protection were up 12% and 9% respectively excluding foreign exchange. New business layers in each of these lines are generating accretive mid to high teens lifetime levered returns on equity. International earnings excluding the corporate segment, stood at 32% of total Genworth results, up from just under 28% a year ago. We are pleased with that move. For international mortgage insurance the unearned premium reserve grew to $2.3 billion, an increase of 25% excluding foreign exchange. Signifying double-digit revenue expansion in this business for several years to come.

In the U.S., we saw a pickup in mortgage insurance persistency at 74% for the quarter which drove our second quarter of growth for flow insurance in force. The flow market remains pressured by GSE penetration and portfolio seasoning. But on a positive note we are seeing additional signs of mortgage insurance competitiveness versus alternative products, and our U.S. mortgage insurance distribution strategy is on track with higher return growth segments making up 62% of sales in the quarter.

Now as I said, the quarter also had some challenges, so let me summarize them and focus on how we are addressing them. Beginning with sales we saw term life decline about 5% in the quarter for two reasons. First, as we have seen in the past this is a competitive pricing environment and some players who lost share in prior periods have become especially aggressive from a pricing standpoint. Second, we have seen the brokerage general agents channel shift towards universal life. Now this has certainly helped our universal life sales but at the expense of some of our term production. On a combined basis total life sales were up 12% year-to-date excluding excess deposits in universal life. And our just announced transaction to address universal life AXXX reserves is another positive move. We will continue to compete in term life on the basis of price, service and new products and will intensify our focus on broadening distribution.

The second challenge was in our spread-based retail line within retirement and this is a good news, bad news story. We saw higher lapsation in our fixed annuity block given the shape and inversion in the yield curve which makes alternatives competitive. Now these lapses came mainly from legacy low return blocks as we continued to actively reset crediting rates in these older blocks. This resulted in $4 million of accelerated DAC amortization. This run off release lower return capital to redeploy for growth but it pressures earnings in the line in the short-term.

Finally, in the long-term care business earnings were down 7% in the quarter as it remained challenged with the interest rate environment in lower than expected terminations on older closed blocks. The combination of new business growth and active block management is required here and George will discuss aspects of this in a few minutes.

Let me now turn to capital generation and redeployment where we are performing quite well in several areas. Genworth began the year with $1.7 billion of available capital capacity comprised of both surplus and additional available debt. Over the course of 2006 we anticipate that we will have generated an additional $1.3 billion of capacity through global statutory earnings in projects that free up trapped capital giving us around $3 billion to put to work. Our redeployment philosophy is twofold. First, drive capital to high-growth high return product lines and, second, return capital to shareholders through share repurchases and dividends. By year end we expect to have put $1.1 billion to work through new sales and acquisitions which includes a net $600 million going to organic growth and $500 million towards the three acquisitions closed to date this year, Continental Life, Vero and AssetMark.

Shifting to capital we returned to shareholders, we expect to allocate a minimum of $750 million for share repurchases this year though with the announced $250 million expansion of our existing repurchase authority we now have added flexibility to go beyond that minimum level. We are further refining the 2007 outlook for share repurchases during our annual planning process and will provide an update on our mid-December investor and analyst call. Shareholder dividends will represent an additional $150 million of capital return to shareholders in 2006. Our recent 20% increase in the quarterly dividend to $0.09 per share puts us right in our targeted range of 11% to 12% payout ratio.

So stepping back, as I look at where we are in 2006 I feel good about our progress. We have invested in and expanded multiple product lines throughout the year. We are seeing good directional shifts in the U.S. mortgage insurance and long-term care and the demand drivers in our markets remains sound. At the same time, we recognize realities, such as the competitive market, a tough interest rate environment and a softening housing market in the U.S.

Putting this together, Genworth is well positioned to grow and improve its returns by capitalizing on the opportunities and executing. Looking forward on the total year we expect to land squarely within our stated net operating earnings outlook of $2.75 to $2.85 per diluted share. This represents 11% EPS growth at the midpoint of that range and a corresponding operating ROE of around 11%.

One final note, our CFO search is going well and has included both external and internal candidates. In the meantime Vic Moses has been doing an excellent job as our acting CFO and with that let me turn it over to Vic.

Thanks Mike. My comments today will focus on growth and ROE levers along with some prospectives for the fourth quarter. We are driving improvement in operating ROE using four levers; organic growth, capital management included freeing up trapped capital, investment portfolio performance and expense efficiencies, self funding our growth initiatives. Beginning with our growth agenda we are growing sales through product and distribution expansion efforts in several product lines. Sales of universal life excluding excess deposits grew 29% over last year and we are seeing life brokerage distributors favor this product. Growth in income distribution was also significant this quarter with the median annuity sales up 32% over last year and sales of our income series product up more than twofold led by our guaranteed minimum withdrawal product.

Managed money sales had another terrific quarter, up 40% to more than $600 million. Shifting outside the U.S., the increase in total international earnings is a direct result of strong sales growth over the past two years and that growth continues at only a slightly more modest rate, given the higher base of business. Payment protection sales were strong on the European continent up 18% excluding FX. We are beginning to see premium flow in a few new countries although more gradually than expected. During the quarter, we added some Canadian exposure and payment protection for reinsurance and you should view this as good ROE but a thinner margin business.

Excluding foreign exchange, international mortgage flow insurance sales increased 20% overall led by Canada and Europe both of which were up more than 50% over last year. In Australia, where the economy has performed well, but the housing market has cooled somewhat, we saw more modest flow NIW growth, 4%. Now let's turn to capital management.

We remain focused on shifting our capital to product lines that have the highest returns and the best growth opportunities. Such as our international businesses, retirement income series, term life and new generation long-term care. These lines now represent over 40% of our total capital, a 6 percentage point improvement since the IPO. Conversely, our lowest return legacy blocks of business and surplus capital which together represent 25% of our total capital have decreased by 6 percentage points since the IPO. We continue to work on shifting this capital mix and are intensifying our assessments on ways to reduce the capital allocated to legacy blocks.

Another key aspect of capital management is freeing up trapped capital. This quarter, after working closely with state regulators for over a year, we released $300 million from our U.S. MI contingency reserves. Dividending most of that to our holding company for redeployment. Going forward we currently estimate an additional $300 million to $500 million of trapped capital will be freed up over the next two years. We also use capital markets to fund efficient growth, as a known later with nearly $2.5 billion in triple XXX reserve securitizations, just this week we successfully funded $315 million of universal life reserves using our newest AXXX solution. This should enable continued growth in this line at attractive returns.

Turning to investments, we have made great strides to build out our investment management infrastructure by adding key resources and launching the implementation of state-of-the-art portfolio and risk management system. Additionally, over the past two years we have prudently shifted 4% of the portfolio to higher return areas and recently have committed another 3% of reallocation to new asset classes over 24 months. Our efforts around active management, asset shifts and expanded use of third-party managers should generate an improvement in our total returns having both above the line and below the line components.

Finally, on the cost front we are focused on a simple operating principles. Self fund growth initiatives while maintaining or reducing our expense to revenue ratio. Our efforts this year should generate about $75 million efficiencies with most of it reinvested for growth. Putting these ROE levers together creates a clear improvement picture. We ended 2005 with the report of operating ROE of 10.7%. Embedded in that performance was about $60 million or 50 basis points of lift from bond calls, prepayments and other investment items. Putting the underlying ROE at 10.2%. Walking that forward to year-end 2006 we will pick up 25 to 30 basis points from growth including five basis points of lift from acquisitions.

Share repurchases will give us an additional 30 basis points of lift bringing the underlying ROE for 2006 to 10.8% or 60 basis points of improvement. We have also had some bond call and prepayment activity this year and that provides another 20 basis points of lift moving our reported ROE to an expected 11%.

Let me wrap up by turning to the fourth quarter. We do expect to see operating earnings growth across all three segments. In the tax area, we set out a full-year goal to achieve a one to two point improvement in our effective tax rate. From efficient structuring and lower tax jurisdictions along with other initiatives. We are on track to achieve that goal with the bulk of the benefit coming in the fourth quarter. We expect an effective tax rate for the entire company in the range of 25% to 28% for the fourth quarter and in the 30% to 31% range for the full year.

Let me also highlight a few items in the segments. The retirement income with the current interest rate environment and our active management of crediting rates we can see the same level of lapses in fixed annuities as we did this quarter. We expect both fee retail and institutional to perform consistently with the third quarter and overall, we are anticipating tax benefits of $0.02 to $0.03 in earnings per share for the segment.

For protection I would make note of two items. Payment protection will also benefit from tax efficiency and we anticipate ongoing earnings pressure in the long-term care business. In mortgage insurance, overall we expect to perform in line with the third quarter even after assuming a seasonal increase in U.S. mortgage delinquencies.

Lastly, looking ahead to 2007 I will point out one more item. Our 10-Q filing this quarter will provide details on our pending adoption of SOP05-1. As you may know this new accounting standard will require accelerated amortization of certain deferred acquisition costs. We estimate a below the line earnings impact for our group life and health business during the 2007 transition year of $60 million to $65 million after-tax. We will update you as interpretations continue to evolve. With that, I will hand it over to Tom for his thoughts on mortgage insurance.

Thanks Vic. This morning I will talk about current trends in the United States housing market and how our business is positioned in light of these trends. The strong global risk dispersion and growth opportunities. In the United States GDP growth and unemployment both remained stable at about 2.4 and 4.7% respectively which continues to be very positive for our portfolio. Nationally two additional forces are at play; a sequential drop in home prices in a number of markets and a significant increase in housing supply. Housing data now shows that about half of all the metropolitan areas where MSAs in the country saw a 2 percentage point drop on average in median home prices in the first half of the year. These MSAs are concentrated primarily on the coast and the Great Lakes region. Additionally, single-family housing inventory increased from 4.9 months in December to 7.3 months at the end of August. That will further pressure on prices.

It is important to remember that home price declines do not necessarily cause mortgage losses by themselves, but they may increase our relative claims severity and when coupled with increased unemployment can drive higher losses. We believe that Genworth remains well-positioned for these changing market dynamics. Regarding housing values we continue to believe that the greatest potential risk of future housing declines is from approximately 30 MSAs that have had the highest home price appreciation in recent quarters. These areas represent about 34% of the United States market but just about 10% of our portfolio. Remember that these MSAs including parts of California, Nevada and Florida have seen rapid home price appreciation driven in part by higher investor concentration and the use of exotic mortgage products to stretch affordability. As we said we do expect to see regional economic declines such as those occurring in the Great Lakes region, where our portfolio still is performing well within pricing expectations.

In addition to geographic dispersion our United States portfolio is well-positioned from a product perspective. 92% of our portfolio is prime-based with FICO scores over 620. 92% of the properties we ensure are primary residences. Short-term ARMs are only 6% of the portfolio and concentrations in Alt-A loans and interest only loans are both in the mid-single digits.

Turning to third quarter loss performance delinquencies increased about 5% sequentially consistent with normal seasonality. Claims paid were up marginally over the prior year and up around $4 million sequentially principally from higher claims in the Great Lakes region where we did see an uptick both in claims and in the average claim amount. We expect higher delinquencies in the fourth quarter again from normal seasonality as well as higher persistency with claims at about our third quarter level. We now expect the total year United States loss ratio to be in a 27% to 28% range. This solid loss performance is coupled with growth in ROE progress in the United States. Flow insurance in force grew for the second quarter in a row and we are very pleased to see signs of increased mortgage insurance penetration and a stable purchase market. We made excellent progress in reducing our expense ratio and expect to achieve about five points of improvement from last year's normalized rate of 42%.

So in summary excluding non-trendables U.S. earnings are flat for the quarter and up 5% on a year-to-date basis. And finally we expect return on equity for the United States mortgage insurance business to be at around 11% for the year. Helped by our release of $300 million of excess contingency reserves this quarter, which provided about a 30 basis points ROE lift from last year.

Now let me shift to our strong international performance. As you have heard me talk about today we are actively doing business in 15 countries with more than 300 international and multinational customers and more than half of our 1200 global mortgage insurance associates work outside the United States. We are excited about the growing housing demographics and our results reflect our strong execution. International insurance in force grew to nearly $320 billion up 36% from the prior year as we expand our leadership around the globe. New insurance written in Australia and Canada increased 24% from the prior year, and 45% sequentially excluding the impact of foreign exchange.

Europe production was up more than 50% from the prior year and will represent about 5% of international earnings this year. And on the earnings front, excluding non-trendables and foreign exchange international earnings are up 23% for the quarter and are up 26% on a year-to-date basis again poised for another strong year. We have expected to see more competition internationally for some time and that is why we work every day to maintain the deep relationships we have built with our mortgage partners over the past decade, providing tremendous technology and service advantages that give us a clear competitive edge.

So to wrap up, Genworth's mortgage insurance businesses is on track for strong growth around the globe. Our portfolio remains well dispersed both geographically and by product type and around the world. And we believe it is well-positioned given the trends in the United States housing markets. With that I will turn it over to George.

Thanks Tom and good morning. Genworth's long-term care business is a two-prong story of new business growth and in force performance. In the third quarter we demonstrated good sales momentum and delivered earnings in line with the previous outlook. Today I will update you on the progress we are making driving new LTC sales, and discuss the performance of the in force book. The individual LTC market continues to be in transition. While we have seen fewer in force rate actions or carrier exits this year than last, the market is clearly being impacted by those. We estimate that industry sales are down 10% through the third quarter. However, as a market leader Genworth is outperforming the industry. We have seen 16% sales growth this quarter and sales are up 11% year-to-date. Third quarter sales were boosted somewhat from higher sales in California ahead of a price increase on our current product.

We are well-positioned for full-year, double-digit sales growth for the first time in five years. The strong growth in our independent channel is more than covering softness in the career channel. Independent channel sales through financial planners, wire houses and brokerage general agencies are up 50% this quarter and are up 28% so far this year with strong growth across almost every major customer segment. Our investments in distribution expansion, wholesaler support, education programs and an industry-leading service platform are paying off and we expect the progress in independent channels to drive further LTC sales growth.

Career channel performance has been disappointing. Year-to-date sales are down 17% and have dropped to less than one third of total LTC sales today versus almost 60% three years ago. To respond we have shifted our career sales model to one that builds on the best practices from our independent channel success. Effective this quarter our career regional management team has become a group of independent business people with reduced reliance on national lead generation and an increased focus on local marketing and decision-making. Changes does two things. First, it improves efficiency by reducing the number of regional offices supporting career agents from 47 to 23 and we are dramatically reducing the costs associated with direct-mail lead generation and other centralized support activities.

Secondly, it positions us for sales growth. Agents are transitioning to a solutions oriented relationship sales model generating referral business based on methods tailored to the local markets while still being supported by targeted national programs. We believe these efforts will put the career channel back on a solid growth path but anticipate that it will take several quarters for any material shift to emerge.

Turning to LTC earnings and in force performance. Earnings in the third quarter were $38 million, up $38 million, were 7% below last year but were consistent with the range we talked about last quarter. The acquisition of Continental Life contributed less in the quarter than anticipated. We expect to make up that ground in the fourth quarter and to end the year with Continental life representing about 8% of LTC business earnings. As you recall in the second quarter we saw a significant uptick in incurred claims. Our experience did improve this quarter incurred claims still ran higher than last year. When you look at it on a year-to-date basis our incurred claims ratio is at the high end of the 30% to 35% range which we've discussed previously. And as we said last quarter we also have expiring reinsurance coverage on certain policies, coverage that previously absorbed some of the adverse claims impact.

Investment yields remain impacted by the low interest rate environment and the shape of the yield curve. New money rates were up almost 30 basis points from last year which enabled additional hedging actions this quarter but were over 60 basis points below our overall portfolio rate. Looking ahead we are extremely positive about the new investment initiatives Vic just discussed.

To wrap up, we are very pleased with our high-return, top-line growth results, especially in the independent channels. The in force block challenges we discussed this morning will continue to put pressure on earnings but we remain focused on ways to improve the performance of our older blocks while we accelerate sales growth momentum and build a strong profitable new book of business. With that I will turn the call back to Jean for the question-and-answer session.

Thanks George. Operator, we're ready to go to the question-and-answer session of the call.

(OPERATOR INSTRUCTIONS). Geoffrey Dunn, KBW.

Tom, could you talk a little bit about no surprise here, the Australian credit development in the quarter? And also more specifically where do you think monetary policy is heading? It seems like the interest-rate increases we were concerned about a couple years ago might be materializing now and how do you think that is going to shape up and affect your credit in the coming year?

Jeff, this is Tom. As we look at the loss development in Australia let me begin by saying that on a total international basis we are very pleased that we are in the low 20s. As you saw, Australia did increase to 37% loss ratio in the third quarter. The actual losses were somewhat consistent with what we did see in the second quarter and as we discussed last quarter we have given some guidance that we expect the total year loss ratio to be in the low to medium-range. Let me step back for a moment and I will try and answer your second question at the same time as I go through this.

The overall economy and the housing market obviously in Australia remains very, very sound. The Reserve Bank of Australia had initiated interest rate increases going back to 2003 and yes, you are correct, there has been one this year and there is also discussion of a future interest rate increase later on in the year given the inflationary concerns in that economy. But I don't see that really having a material impact on the business. We have now absorbed about three years of interest-rate increases. On a going forward basis I don't see a material change to the loss development that we have seen in Australia. In fact, more specifically to your question about third quarter I want to remind you that our 2003 prior books which represent about 35% to 40% of our insurance in force continued to perform very well.

Our 2004, 2005 and 9 months of 2006 books which do represent the complement of that insurance in force are seasonally normally and performing well as well. Now as I talked about on the last quarter we have been impacted by weaker performance and a limited number of distribution relationships. We have isolated those relationships. We have implemented corrective underwriting policies with those lenders and are engaged in appropriate loss mitigation strategies. As I said again last quarter as part of our normal risk management strategy, so again we expect Australia to continue the year or the end of the year with loss ratios in the low to mid 30s range.

The economy there remains very solid and as I said I do not think that the future monetary policy actions there will have a material impact on that. I think it will manage it very well. The portfolio is sound. And we are working with a few partners to minimize those losses.

And just to interpret one thing you said in terms of the actual claims were consistent, so does that mean we are seeing something similar to the U.S. where the repeats aren't necessarily ramping up but the reserve provisions are picking up in anticipation of a more seasoning of later vintage claims?

That's correct.

Dan Johnson, Citadel.

On the long-term care side you had mentioned that the range was within the commentary provided in the last conference call, but I'm sorry I didn't have a chance to take a look at the exact commentary you gave. But my perception was that we would expect to see some improvement even in this quarter due to the absence of what were considered to be onetime events in the second quarter. Can you refresh my memory sort of what you were talking about before and more importantly how has your thinking changed about the earnings progression of that book of business versus the last time we talked? Thank you.

Dan, it's Mike. We gave you an updated range sort of 155, 165 last quarter on a total year basis and that is what George was referring to. I will just remind you of the dynamics. The dynamics that have impacted older blocks of business have been lower terminations than expected. So you have policies staying on the books and then as they age you are going to have claims coming in. Secondly, an important dynamic has been lower investment environment. That has not abated as George said, we work that hard but still there is the reality of the portfolio rate versus the new money or the reinvestment rate. We made progress on that but there is still a gap. So those haven't changed. I think the commentary on last month's call was there was a spike and was that viewed as a trend? We did see that come back but we don't -- we wanted to emphasize that the fundamental dynamics of the older block are the same and therefore have created pressures.

Okay. And then on the mortgage business just as I recall here in the U. S. that you have used this chart in the past to show sort of the delinquency to claim ratio being highly dependent upon the home price appreciation indices. Now that we are seeing those numbers become negative, if they do stay modestly negative in terms of home price appreciation, how do we think about that linking that back into loss ratio expectations for the next 12 or 18 months?

Let me hand that over to Tom Mann.

It's a great question. We have seen a slowdown in home price appreciation on a sequential basis that actually began in the fourth quarter of last year. What you need to think about that is as our 2005 and now 2006 books roll through their delinquency period, which will really be in '07 and '08 and '09 you will see -- you should see and we will see a directional increase in the dealt to claim ratio and again it is hard to predict what that may be. We are going to have see how long the sequential downward movement in home price appreciation occurs. But again if you step back I want to remind you that probably 40% to 45% of our book is in 2003 or older vintages which has a very nice equity cushion if you will underneath it. And its also to a large degree protected from refinancing because of the weighted average coupon rates that we have on those books. But very clearly as we have said, when you see the '05 and '06 books roll through those periods they will be rolling through in periods of lower home price appreciation. In fact, flat may be down in some regions of the country, and there will be a directional movement up in that dealt to claim ratio.

Great. Much appreciated. Thank you.

Edward Spehar, Merrill Lynch.

I had a couple of questions. First I was wondering if you could talk a little bit about the AXXX securitization and perhaps give us some sense of the level of capital relief that you get from the AXXX securitization versus the XXX? And then the second question was on the tax rate, the full year tax rate of 30% to 31%, is this the type of tax rate that you would think we should continue to look for or are there more tax efficiencies sees that you are going to go after sort of aggressively into next year? Because there is obviously a pretty nice benefit in the fourth quarter. Thank you.

Let me hand that over to Vic Moses.

Let me get the AXXX piece first. We expect the overall capital benefits from AXXX to be similar in nature to what we get from XXX. A couple of big differences our universal life block is much smaller than our term block so on a policy for policy basis while the benefits are similar we just have a lot less universal life business. The securitization we just did securitizes almost all of our in force block and the total reserves that we will use under that program are about $475 million. To put that in perspective with the $2.5 billion of securitizations that we have already done on term you can kind of get a feel for the impact.

The other big difference I think is that the AXXX securitization has a much slower ramp up and a much longer tail on the back end. That's securitization will run for 45 years and so the impact is a little more muted over time than the XXX structure. But still a big benefit for us and a good lift.

Finally on the tax rate, let me start with that by kind of going back to the IPO two years ago where we came out with quite frankly a relatively inefficient tax structure. We said at that time we could improve the structure and we would deliver 1% to 2% reduction in our effective tax rate per year over several years. We also said that that progression would necessarily be smooth and it hasn't been. It has been choppy and we will see some of that this year. But overall we are on track to deliver 1% to 2% for this year and we believe we can do it for a couple more years.

That's helpful. Just one quick follow-up. In terms of the AXXX capital relief I think there has been some questions about you know would that just be the mortality component of that reserve or would you also get relief for the interest rates and lapses and the other sort of levels of uncertainty that you have with secondary guarantee UL versus term? Can you just give us a sense does it include more than just the mortality risk of the AXXX?

The AXXX securitization is effectively the mortality risk. If you look at the policies there is an account value component to universal life and as a result there is a risk that interest earned on assets won't cover interest credited on those account values. We are effectively taking that risk back through a limited guarantee from our holding company. So we had that risk to start out with. We still have the interest rate risk.

Jimmy Bhullar, JPMorgan.

I just have a couple of questions both for Tom. First on the domestic MI business, I think you mentioned part of the deterioration in the loss ratio was because of the seasonality. I think if I remember right historically the fourth quarter has been worse than the third quarter so and you mentioned that you expect sort of stable trends in the fourth quarter. Can you discuss if there is something more than seasonality this quarter that affected or that caused a spike in the loss (indiscernible) of the domestic MI business? And what your outlook for this margin of the business as the book ages and as the housing market remains under pressure? And then second, just on foreign MI if you could discuss what the competitive environment is like especially in Canada as more and more companies are trying to enter that market?

Jimmy, this is Tom. If I followed your first question and I hope that I did, we would expect to see a seasonality increase in the fourth quarter very consistent with what we saw, very consistent with what we saw in the third quarter. So we are planning based on historical averages for another 5% or so increase in the fourth quarter as it relates to our delinquency performance. As it relates to -- you mentioned I think a question about margins and the impact of home price appreciation and the fact that we do expect our loss ratios in 2007 to move up consistent with seasoning and the slowdown of the economy -- we are doing our best to continue to execute on both the revenue side and the productivity side. So that we would minimize and in fact we hope to improve those margins next year as well. If I take you back to the progress we have had this year in that regards, we gave guidance for modest income growth and ROE progress; as you heard in my comments we have delivered that. We believe that the United States business will be up on a core basis for the total year in the 5% to 6% income range and we have delivered the 100 basis points of ROE improvement. Revenues are up and I think compared to our peers in the industry we are very pleased with that. We are about 5% year-over-year. The expense progress of 5 points reduction in net expense ratio exceeds the 2 to 3 points of guidance that we gave you. And so we are going to keep driving those areas very heavily and strongly into 2007 and the goal is clearly to offset the increase in expected loss ratios.

And what has really changed I think if I am right your loss ratio assumptions for the full year had been mid-20s previously and now you are saying 27, 28 -- is that correct?

We actually started the year closer to 30. We lowered it to the mid-20s and we now have it back up to 27.

And what has changed over the past few months that has caused you besides home prices coming -- is that the entire difference or is there something else that is going on?

Jimmy, the primary driver would be the Great Lakes region and it is about 9% of our portfolio. We have seen a tad higher claims there as I indicated we have seen a marginal increase in our average claim payment. So as we have tried to look at the full year we have reflected that continued trend into the fourth quarter. And that is the primary driver between the movement from 25 to 27.

Your other question you had on foreign competition and I thank you for the question. I get it every quarter. I would just like to emphasize that we have been at the international game for a long time and as I had in my remarks to you that we believe that our first mover advantages and our product service and technology leadership will bode very well. We were very, very pleased in the third quarter to see the significant growth in our new insurance written really across the world. And that is the best litmus test I can give you as to how we are handling the global competitive issue.

Andrew Kligerman, UBS.

Just to Jimmy's prior question on loss ratio and mortgage insurance, I think you said with seasoning it would be up 5% just as it was this quarter. Does that mean that the domestic loss ratio would be closer to 42% or it would stay at around 37%? I just want to make sure I understand that.

You referring to the fourth quarter with that question?

Yes, maybe I just missed the question but it sounded like he was asking where the ratio would level out.

Let me answer that and if I don't do an effective job with it I will have Marcia Dall try to correct me. We have indicated on a total year basis we will be in the 27 to 28% range with the United States loss ratio. The way you want to think about that is that we were at a 19% loss ratio during the first two quarters of the year. On the guidance we have provided you, you can logically expect both the third and fourth quarter to be in the 30% with regards to the loss ratio.

Got it.

And again I want to continue to emphasize that if you go back through history you would normally see lower loss ratios in our industry in the first two quarters of the year and you will see higher loss ratios in the third and fourth quarters of the year. Totally or uniquely driven by the seasonality of how our delinquencies perform.

Got it. That makes perfect sense. Shifting over to actually another earlier question on the tax rate I just want to make sure I am clear on that. I know you talked a lot in the past about it, I think there were some benefits particularly in the payment protection area; we had a tax rate of 32%. Are you saying that we are going to see about 29% in the fourth quarter and then normalized it should be at around 30-ish going into '07, is that correct?

Vic, do you want to take that.

I think I can. I think your numbers are reasonably accurate -- we are looking for 25% to 28% as the range for third quarter and we are predicting for the year a 30% to 31% range overall.

So for this year it's a 30% to 31% range and then should that carry into next year because next quarter would be a catch-up at 20% to 25% to 28% and then it would normalize out again at around 30%. And maybe as you just said earlier go down 1% to 2% a year or so maybe even a little less than 30% next year -- is that the right kind of --

Let me correct what I said. I said 25% to 28% for the third quarter. I meant 25% to 28% for the fourth quarter.

Understood. Understood.

And at 30% to 31% for the full year and continued drop of one to two points for next year.

Okay. So are around 29-ish next year? And then just highlighting the key benefits I think a lot of that is coming from payment protection, other areas in particular?

You know a lot of the benefit will come from restructuring our offshore operations and both payment protection and the mortgage business will see that.

Okay. And then the last question, in payment protection it looked like the expense ratio jumped up quite a few basis points. I think I have been monitoring it around 55% of premium; it came in -- I mean at 50, 52%. It came in at 55%. Any thoughts on why that kind of jumped up a little bit?

George, do you want to take that?

Yes. In the payment protection business given the shift of business that is occurring mainly from our UK blocks to our growth in Continental Europe reflecting the differences in commission levels and the difference in profit share levels what you are seeing is really the effect of the mix shift of that business versus any increase in operating expenses or any increase in losses. The way we try to look at it from a total standpoint basis is to look at our combined ratio and our combined ratio continues to improve and you are seeing that on the pretax operating margins in the business. It continued to improve in the quarter as it has in prior quarters.

Got it. So look at it all in. Thanks a lot.

Until the mix shift settles out.

Nigel Dally, Morgan Stanley.

Tom, in Australia is it possible to quantify how much was the deterioration in the loss ratio was attributable to that handful of mortgage originators who may not have adhered to the underwriting standards? Also with sales slowing the portfolio seasoning and still a relatively weak real estate market, should we expect the loss ratio in Australia next year to get worse before it gets better?

Nigel, with regards to your first question it's difficult to do that but I think I can give you a pretty good directional feel and I think I mentioned this on the last earnings call as well. We would have expected that loss ratio to have been probably in the mid-20s this year. If we end the year as I believe we will in the low to mid 30s that is kind of a quantification of the impact of the issue that we have with our 2004 and 2005 books. And I'm going to avoid a little bit of a discussion next year, I am going to wait until December to give you more particular guidance on our Australian business next year. But I will say this to you that we are continuing to do very nicely there, when I think about even the third quarter we had this year with a 37% expense ratio, if you look at it on a combined ratio basis it is still a 51% combined ratio and we are going to deliver double-digit growth from Australia this year. So I expect the same next year. But again I do reserve the right to give you more directional guidance on that in December.

Joan Zief, Goldman Sachs.

I have a question for you. The legacy issues that you have seem to be masking some of your organic growth successes. It is keeping your ROE down. How confident are you that that 12% ROE goal by the end of 2008 isn't going to be delayed because of issues of lower interest rates? Take MI -- the things taking longer to materialize than you had originally hoped?

Well Joan, I still feel very good about achieving the goal that we have laid out and consistently articulated on that front. I would just remind you we have a number of levers that drive our ROE progression. We are not dependent on solely one. We continue to get very good impact out of our core growth as you alluded to and as Vic pointed out as we walk through.

In addition in both taking out capital that is sort of sub-performing, you have seen some of that coming out, an example of the annuity block, you see us working capital efficiency in both the XXX and AXXX side. You see us having now executed the second reduction in mortgage insurance contingency reserves. That has been important and then with both repurchase and dividends as well as acquisitions, the redeployment has worked well. We ought to start seeing over time here more of a positive impact from investments. And we have added over 50 people in investments. We are shifting asset managers. We are shifting asset mix, as Vic touched upon the new system we are putting in gives us much more capability to run a varied asset class as well as active strategies. And finally, the expense productivity lever has led us fund all the growth initiatives, the brand initiatives and basically self fund those.

Multiple speakers -- so if the long-term care business stays at the current low levels of earnings and the mortgage insurance, the U.S. mortgage insurance sort off levels out at these levels as well, you still feel you have enough levers to make your ROE goals?

We have certainly factored in the realities of the older long-term care block and again we are still working on, thought actively on how to improve that over time. And again I think as Tom has laid out we have a great international business and we anticipate continued ROE expansion coming out of the U.S. business. Remember we are taking that, we are planning to take that business up towards a 15% ROE by the 2010 range.

I have one last question. You raised your dividend 20% to get your 11% to 12% payout ratio. Is there any reason that you couldn't have a 15% to 20% payout ratio? Is there any reason for us to believe that over a period of time that the dividend growth couldn't even from this point exceed earnings growth?

Well think about this, we have been rigorous in saying first we want to fund core growth, and we have done that and we continue to do that and that is the most accretive impact for shareowners to create value. Secondly, is we have said we want to be a smart acquirer and I think we have been. And we have been able to use that acquisition lever in a targeted fashion. Then when it gets down to repurchase and dividends it has simply been a flexibility question. We wanted to be and we have talked to a number of investors about being within a certain range that has been deemed attractive. We just wanted to keep flexibility towards using capital either for acquisitions versus repurchases and that is why you have seen us continue to move down the repurchase path. So it is been a flexibility decision Joan. We look at that on an ongoing basis and we will balance out where we put capital to create what we think is the most attractive value creation path for an investor.

[Al Cupercino] with [Medoff}

I had a question on, I guess really two questions on the AXXX securitization, just following up on Ed Spehar's question. Could you talk about the competitive impact of this? I presume this will be harder for editors to copy this sort of transaction. And then secondly I guess something on the order of, if I recall 400 or 500 basis points of ROE I think is your term life advantage as far as ROEs go versus competitors. Should we expect something comparable as far as the ROE benefit on the UL side as well?

This is Mike. Let me give you just an overall thought and then I will hand it off to Vic on the specific return question. I think the reality we are seeing is that there will be more use of the capital markets in the insurance industry and our focus is to be a leader in that regard. We have done that in term life. We do that in universal; continue to look at other responsible areas where you can therefore improve capital efficiency. Anytime you have a move into a new area there are plenty of advisors in the market trying to help others move into that area too. You have seen that in the XXX environment on the term side. Our strategy is to always be on a continuous improvement curve. Much has -- if you want an analogy Al, I'd think about how the ABS market moved down an efficiency curve and one of the things that certainly helped us as you saw in the term area was our very good mortality experience. And we continue to get better and better pricing, finding better ways to execute new designs, new investors to reach. So I would anticipate sort of the same thing over time in XXX that you would see others come out and do transactions and that there will be a follow-on curve and a continuous improvement curve and we would intend to be at the front of that. Vic, let me turn it over to you on the specifics.

I think your numbers are pretty close. The AXXX solution will lift ROEs into the midteens for new UL business. And quite frankly with that capital solution in sight we repositioned our products in September of this year. Currently we feel we are very attractively priced in the marketplace and we believe long-term that having a capital market solution will give us better flexibility to compete and execute our UL growth plan.

Tamara Kravec, Banc of America Securities.

Not to beat a dead horse on the USMI but I just want to understand the reserve increase and kind of the reserving methodology. I mean, it seems like if you are expecting seasonality in the fourth quarter you have got the general seasoning of the book, then we should probably expect reserve increases as you are going along because reserves are driven by the higher number of delinquencies and the higher number of paid claims. Would that be a fair statement?

We now have the microphone on. Yes, that is exactly right. When you look at fourth quarter you would expect that the absolute level of reserves for the United States mortgage insurance business would increase consistent with the increase of delinquencies that will occur on a seasonal basis. The level of reserves at risk salvage is also impacted by the reserve that we post per delinquent. Now that can change from quarter to quarter but those are the two simple drivers that drive the, if you will, the change in our reserves on a quarter by quarter basis.

And are you seeing an increase in severity too? I mean your average loan sizes is lower than some of the peers but are you seeing a comparable increase in severity that we have seen at some of the other companies?

Our average loan balance are not comparable with our peers because we are not in the subprime book business. For the first point. Secondly if you look at the supplement we have seen an increase in the severity of our claim payments and that was at about a 98% level in the third quarter. And the way you want to think about that is that as you are running through quarters and periods of time with lower home price appreciation that tends to increase the severity of our claim payments. That is why you see, I think roughly an average about 95% last year and now we are at 98% in the third quarter. So as we continue in periods of lower home price appreciation that will continue to put pressure on our claim severity and that is why you see it, at I believe 98% in the third quarter.

And then a question on long-term care as well. I mean the loss ratio there and you have talked about the book of business in the underperformance of the old block and the loss ratio is now hovering around 96.5. And is that something that we should expect to continue to creep up in the fourth quarter '07, '08 or would you expect to maybe take some action at some certain point; when is it that you say we need to raise prices on the existing block or we have run out of alternatives and the loss ratio is creeping up too much?

Back a little bit on that question, when you look at the benefits ratio in our supplement it is really driven by a number of factors. First this quarter you have got the inclusion of the Continental Life acquisition in there for a full quarter that drives it up because the loss ratio in the med-sub business is at the higher end of our 60% to 70% stated range as is normal for that product versus the long-term care products is lower than that. So that mix shift drives it up.

Secondly when you take a look at where we are with just some of our in force books in terms of the aging vis-a-vis where we stand in terms of premium collection versus claim payments we would expect that that would trend up over time. And then you get the dynamics that Mike talked about where some of the older books are not performing well from a termination standpoint, a morbidity standpoint and interest rates are hurting quite a bit. So to the extent those trends do not improve over time I think you're going to see pressure on the benefit ratio and then there is the incurred claim ratio I talked about earlier. So I think you need to look at all those pieces when you are making estimates of where we are on the benefit ratio.

And then my final question is on acquisitions. You mentioned that you expected some ROE expansion, about five basis points from acquisitions and you've done AssetMark. Is there a direction that you want to go in? Do you think you will continue to look at retirement type acquisitions or there isn't much in MI most likely so I'm kind of wondering if you have a particular strategy with respect to those 5 basis points of acquisition?

Well overall retirement is certainly our number one priority when it comes to acquisitions. We would like to do both core growth and acquisitions increase the relative weighting of the retirement segment vis-a-vis the other two. We continue to look opportunistically at things that you might consider bolt-on in the protection area as an example. And from time to time we have looked at some blocks of business in mortgage insurance, but you are right retirement is a top priority.

Tom Gallagher, Credit Suisse.

Two quick questions, I guess both for Vic. One is just on the SOP05-1, you had mentioned the 60 to 65 million DAC write off for group life and health. I guess it confuses me a little bit. My understanding is this is for internal replacements which I associate with individual business. Can you help me a little bit there in terms of why that would affect your group business?

Yes, the SOP is actually much broader than just internal replacements and it looks at policies that are recast periodically on our group, business, we had deferred acquisition expenses on sales of group plans. And when they are repriced annually and there are material changes in those plans our belief is that under the new SOP we will be required to amortize all of that outstanding DAC. So you will see that flow through in '07 as we reprice each of our term policies throughout the year. Past '07 you won't see any impact.

Okay. So this would apply to group business that has been -- I guess would the litmus test be a significant change in pricing or would it be a policy terms or maybe both, and would that be group life and disability?

It actually, we were going to apply it as we are planning to just as a matter of course on group renewals to take down the acquisition expense asset. So there will be no question about whether or not it is an acceptable internal exchange or not.

Got it.

Tom, it's Mike. Two perspectives for you. I mean one is in general it is a group issue, as far as an industry issue because group in general and it depends on your individual block of business and your individual competitive positioning but there is an annual renewal cycle and the SOP focuses right on that. So this is not in our mind, this is a pretty broad thing across group. Then you have to look at it circumstance by circumstance, company by company. Number two is I will just remind you this is a below the line adjustment.

Got it. Okay. Sorry, go ahead Vic.

The only other comment I would add to that is a lot of companies are looking at their individual lines of business and internal exchange programs. We have never done big internal exchange programs. We don't have any planned; but if at some point in the future we were to do a big exchange program you could see a write off in DAC from that.

Got it. And then Mike I just wanted to clarify, I think Dan Johnson asked the question earlier about long-term care. The issue that you all had mentioned in the second quarter of a change in incidents or severity of long-term care claims, has that pretty much gone away or are you seeing any residual effects of that this quarter?

Two thoughts on that. One is we saw a spike and we have seen the spike come back down. A separate issue has been that you just have an aging block and as a block ages and terminations are lower than expected you see claims levels go up. So I encourage you to sort of separate the two issues. They might have gotten combined in consideration during the first second quarter call but those are the dynamics we are seeing.

So really what we are seeing now is simply what has been happening for the last several years which is low interest rates combined with low lapse rates pressuring margins?

And a gradual aging of the block. That's correct.

Suneet Kamath, Sanford Bernstein.

Just one question on long-term care if you could answer it. You talked about the earnings in the different businesses but bottom line is the ROE on that business getting better or getting worse and is there any way that you can sort of dimension the improvement or lack of improvement relative to the overall corporate ROE improvement target of like 50 basis points a year? Thanks.

I'll give you two thoughts on that. First, if you look at the newer generation business it has performed well, well within pricing expectations, as price for double-digit returns and that is exactly what we are seeing. Basically the longer the old business has stayed around the more painful it has been. Because you have had the dynamics I just talked about in response to Tom's question coupled with interest rates environment has remained challenging as we have touched upon. So that has created a drag dynamic. We basically do two things there, I mean one we continue to grow the new block which has a dilutive effect on the old one. Remember for three years we have pretty much didn't see growth and now the good news is we are getting that momentum back. That is very important from the -- I will say the mix between the old and the new economics. And the second thing is we continue to actively manage the old block whether it is everything from how we have merged operations from the expense area to how we work on investments to how we do case management to make sure people get the right care they need. And also, we will continue to keep open the opportunity to raise rates if that was appropriate. So there are sort of four different ways you can look at that old block and we spend a fair amount of time doing that. And as Vic alluded to, we continue to consider how do you also get more capital efficiency against that older block as well and we will spend our energies there.

I guess the point of my question was really to try to dimension the size of new business versus old business and if the old is getting a little bit worse and the new is coming on, and that is why I asked the question is the consolidated ROE of that business getting better or worse or staying the same?

When the growth of the new business slowed over the past few years and then so you didn't see the same rate of profit emergence it had the overall return would go down because you are not diluting the old block as fast. The dynamics we see now are you are starting to see growth go back up; of course the degree of that growth is fairly important economically. So we have to continue the momentum and progress that George laid out and actively manage the old block to turn the overall ROE profile.

Ladies and gentlemen, we have time for one final question. Your final question comes from Mark Finkelstein, Cochran, Caronia, Waller.

A couple quick questions. You repriced or you are repricing long-term care in California. I am just curious how significant the rate increase was and are there any other major states that are going through a further repricing?

California was the one holdover state. We launched our new product on a nation wide basis, or let's say we filed it in all 50 states a few years ago and California was the one state that did not approve that product. They weren't just picking on us because they did not approve the new product filings for a number of other LTC companies. So we just decided that we needed to raise the prices to reflect more the national levels on our other 49 state product and the order of magnitude price increase was about 30%. So we are now done; there are no further states to be repriced.

And just a quick follow-up on Australia mortgage insurance, are the loss characteristics of the Vero acquisition similar to the rest of the book maybe ex some of these special distributor kind of situations? Just trying to think about how that factors into the loss ratio in that business?

The Vero acquisition is performing exactly as we felt it would and it is seasoning again exactly as we thought it would. So definitely to answer your question directly there is no impact in the Vero acquisition from these limited number of relationships that we have there.

Gentlemen, are there any closing remarks?

Thank you operator. We appreciate everyone's time and attention on the call. We'll be talking to you through the quarter and at our December investor update and outlook conversation. Thank you.

Ladies and gentlemen, this concludes Genworth Financial third quarter 2006 earnings call. Thank you for your participation. At this time, the call will be concluded.