Genworth Financial Inc (GNW) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Genworth Financial fourth-quarter 2006 earnings conference call. My name is Wanda and I'll be your coordinator today. At this time, all participants are in 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 and headsets during the Q&A portion of today's call. I would now like to turn the presentation over to your host for today's call, Jean Peters, GFI's President, Investor Relations and Corporate Communications. Ms. Peters, you may proceed.

Thank you, operator and welcome everyone to Genworth Financial's fourth-quarter 2006 earnings conference call. As you know, our press release and financial supplement are posted on our website. There is also a slide showing our upcoming realigned business segments. This realignment will be reflected in our financial statements beginning with the first quarter of 2007 and re-segmented financial information will be provided by the end of the first quarter.

This morning, we will hear from Mike Frazier, Genworth's Chairman and CEO, providing a perspective on financial performance during 2006 then Vic Moses, Chief Actuary and acting CFO, will go over financial highlights of the quarter and an outlook for future growth in earnings. Also on hand for the call is Pam Schutz, Executive Vice President of the Retirement and Protection segment and Tom Mann, Executive Vice President of our International and U.S. Mortgage Insurance segments. In addition, we have Buck Stinson, President of Long-Term Care and Bill Goings, President of Life Insurance on hand for questions and answers.

With regard to forward-looking statements and the use of non-GAAP financial information, some of the statements we make during the call today will contain forward-looking statements and actual results may differ materially. We advise you to read risks and cautionary notes regarding such statements in the most recent annual report or Form 10-K or Q filed with the SEC.

Today's presentation also includes non-GAAP financial measures which we believe are meaningful to investors' understanding. In our financial supplement, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. With that, I am pleased to now turn the call over to Mike Frazier.

Thanks, Jean. Genworth had another terrific year in 2006, delivering our third consecutive year of mid-teens growth in operating earnings per share. Full-year net operating earnings per diluted share of $2.89 were up 15% from the prior year. Our strong earnings growth reflects our focused investment in key growth platforms, as well as the effective redeployment of excess capital.

As a result, we drove our operating ROE up to 11.3% for 2006 and we see a clear path to our goal of a 12% ROE in 2008 with progress to the 13% to 14% range looking out three to four years to 2010 and 2011.

Investments we are making in growth platforms are showing strong results and the organizational shifts we announced in January will accelerate that progress. We ended 2006 with 76% of our total capital allocated in sound and high return productlines, an increase of 7 points over the past 2.5 years. This reflects disciplined investment in higher return life insurance, retirement and international platforms. It also reflects moves to reposition certain businesses and continuing work on redeploying capital out of low return areas.

So let's look at our progress in 2006 starting with our growth platform. First, life insurance earnings grew 14%. Premium was up 11% and total insurance in force grew 12% net of reinsurance. Second, we made tremendous progress in building our fee-based Managed Money platform and retirement income productline.

We accomplished three basic things. We expanded our existing Managed Money businesses, completed the acquisition of AssetMark, dramatically accelerating our Managed Money presence and we tripled our retirement income series productline sales to $1.3 billion.

We had great growth in fee-based earnings, up 29% in 2006 and total fee-based assets under management nearly tripled to almost $21.9 billion and while half of that growth comes from AssetMark, our existing platforms were up 60% to $12.2 billion and net flows nearly doubled to $3.8 billion. We will actively build upon this performance in 2007.

Now let's turn to our international platforms. Total international earnings were up 30% for the year with 26% growth in Payment Protection and 32% growth in international Mortgage Insurance. As a result, international earnings are now 34% of total Genworth. Our Payment Protection business expanded its European footprint and drove sales growth in new markets. International Mortgage Insurance drove a 23% full-year increase in new insurance written to more than $96 billion, a tremendous result. We strengthened our leading positions in Canada, Australia and Europe and expanded our footprint into areas, including Mexico and India.

Now let's look at the three platforms we said we would reposition for growth through profitability or strategic pruning. These included U.S. Mortgage Insurance, long-term care insurance and small group benefits. We made great progress on two of the three and are working hard on the third. We effectively repositioned U.S. Mortgage Insurance for growth and improved profitability with earnings up 9%.

Let me point out five areas of progress. U.S. Mortgage Insurance delivered 13% growth in primary insurance in force from both flow and selective bulk products. In bulk, we are riding high credit quality business that generally includes stop loss and deductible features. We reduced our expense ratio by 12 points on a reported basis and 7 points on a normalized basis for the full year primarily through solid productivity improvements.

We managed our exposure to higher risk markets and products effectively. We freed up $300 million of trapped capital using additional capital capacity to fund overseas expansion and we increased U.S. Mortgage Insurance's ROE by more than 50 basis points to end the year at 11.2%.

We expect to see U.S. Mortgage Insurance earnings grow in the 5% to 8% range in 2007 by further expanding revenues, reducing expenses and seeking to free up additional trapped capital. This will offset expected normal loss seasoning in newer books, which have lower levels of home price appreciation.

Our second successful repositioning came in the announced sale in early January of our Employee Benefits Group business for $650 million. This is a key strategic component of our reorganization and focus.

Turning to long-term care, we delivered strong 19% overall sales growth with the independent channel up 30% offsetting weakness in the career channel. Sales growth was driven by distribution penetration while we position for the future with expanded offerings to meet consumer needs for flexibility and affordability. We gained momentum in supporting long-term care education and public policy initiatives, which should deepen understanding and demand for the product.

Additionally, we broadened our position in the senior supplemental product arena by acquiring Continental Life. However, as we talked about in December, about half of our long-term care capital blocks backs old blocks that are underperforming due to low terminations, declining investment yields and increasing claims as the block ages. We have multiple levers to address this problem over time and are pursuing these diligently.

In this connection, we are encouraged by the appetite we see in the capital markets for taking recently diversified risks across blended asset pools and we will use our capital markets expertise along with other approaches in new exploring ways to address old block issues. We have targeted a three-year timeframe to improve substantially the performance and the impact of this old block with the full intent of making significant progress during 2007.

With these strong investments in core growth and in repositioning activities, we also continued to plant some seeds for the future. In 2006, we established a pioneering position in the group retirement income market with ClearCourse, bringing guaranteed income to the 401(k) space. We have five companies that are at various stages of implementation with ClearCourse and see a robust pipeline for future growth.

We entered the linked benefits market with the launch of a universal life long-term care combination offering with others to follow. And outside of the U.S., we laid solid foundations for additional growth in Mexico, India and other markets for targeted productlines.

We made good progress in capital redeployment as well. We were the first to securitize reserves for universal life insurance and we continued our capital markets' leadership securitizing $1.3 billion of reserves for term insurance in 2006. We ran off significant amounts of lower term business and fixed annuities and guaranteed investment contracts, bringing up $400 million of capital. As I mentioned, we released $300 million of trapped capital in our Mortgage Insurance business.

In addition to investing more than $1.6 billion to fund core growth, we redeployed $540 million in acquisitions. Two of which included international blocks in Mortgage Insurance and Payment Protection.

Finally, we repurchased $1 billion of stock during 2006 with a current open authorization for an additional $500 million going forward. The strategic repositioning and investments of 2006 prepare us well to drive the growth and leverage the organizational alignment we are undertaking this year. I am pleased to welcome our new CFO, Pat Kelleher. Pat joined us this past Monday and it is just great to have him on board. His 25 years of financial services experience and background represent a terrific addition to our strong finance team.

When we announced our organizational realignment to better position Genworth for future growth, we said we would talk more about it on today's call. While there are details to work out, I am pleased with the enthusiastic response we have seen across Genworth for a new structure and focus.

Pam Schutz is actively engaged with the U.S. Retirement and Protection Organization to leverage the broad expertise we have in marketing, product development, distribution, operations, finance and so on across the business. In a similar fashion, Tom Mann and his teams in both the new international segment and the U.S. Mortgage Insurance segment are hard at work fine tuning global growth strategies and operational alignment. Both Pam and Tom are also exploring potential cost and/or consolidation opportunities and we expect to provide more details on these by our first-quarter earnings call.

But while cost synergies will be one catalyst for earnings growth in 2007, our real focus is on driving faster, more efficient and sustainable organic growth across these business platforms. The combination of Retirement and Protection allows us to better present one face to producers and distributors. It allows us to leverage key distribution relationships and service operations more effectively.

In addition, it enables us to provide a continuum of products for consumers, expanding wealth accumulation, protection, and solutions managing long-term care, longevity risk and retirement income needs.

By combining Payment Protection, international Mortgage Insurance and international business development into a unified segment, we can intensify our focus on new markets, leverage successful platforms and distribution relationships, harness global best practices and accelerate growth as we present a one Genworth face across targeted world markets.

We are also expanding our efforts in the capital markets arena under the leadership of Cheryl Whaley. We are a leader in using the capital markets to optimize the efficiency of our balance sheet and see a number of opportunities for the future. I am excited about our strengthening growth platforms and the solid capital position we have to fund strategic initiatives. We have reaffirmed our 2007 net operating earnings target of $3.15 to $3.25 per share and note that this outlook includes the impact of the sale of our Group business, which will become discontinued operations.

If you back out the roughly $0.08 per share that Group contributed to 2006 results, our outlook for 2007 represents 12% to 16% growth in earnings per share. And let me be clear, 70% of our growth outlook is driven by core growth in our businesses, including efficiency initiatives, which enhance product margins and Vic will walk you through the details.

So I will wrap up on two points. First, Genworth is entering its next act as a company that will drive sustainable growth in operating income and ROE for the next several years. I am excited about the talent, the experience and commitment of our leadership and our associates around the world to execute to this goal.

Second, and before I turn the call over to Vic Moses to go through the financial results in more detail, I want to share my appreciation for Vic's tremendous contribution as acting CFO. Vic will return to an expanded role as Chief Actuary with additional responsibility for overseeing Genworth's risk management organization. So Vic, please take us through the results.

Thanks, Mike. Genworth did have a very strong fourth quarter, closing out the year by delivering on our earnings goals, redeploying excess capital and focusing on strategies to position us for the future.

We delivered $367 million of net operating earnings and $0.80 per diluted share in the fourth quarter, up 29%. I will hit some of the quarter's highlights starting with sales and top-line growth. We have seen great growth in several productlines in the fourth quarter. Universal life annualized premiums were up 86% to $13 million; while term life is down 11% to $33 million. On a combined basis, our annualized premiums are up 5%.

Term has become a tougher competitive environment as competitors have become more aggressive on pricing and brokerage general agents have shifted focus to universal life. In response to this, we are broadly building or universal life capabilities and taking a disciplined approach to term sales while we continue to work to expand term distribution and introduce new products.

Our individual long-term care sales were up 11% to $42 million. Our independent channel is showing great growth and the transition of our career sales force is essentially complete. We expect stabilized sales there. Medicare supplement sales more than doubled, primarily from the acquisition of Continental Life. This will continue to be a growth area for us going forward.

The protection sales were up 64%, driven by core growth in Continental Europe and a large block acquisition. The block transaction is an example of the additional ways we are finding to partner with distribution and create mutually advantageous solutions. Globally, we are actively seeking other opportunities like this and will participate as they emerge.

In Retirement Income and Investments, our income series sales more than doubled and Managed Money was up nearly threefold. Our existing Managed Money was up 36% without the inclusion of AssetMark. From its closing in November through year-end, AssetMark added almost another $600 million to assets.

So while we kept our total spread-based assets under management relatively stable at approximately $32 billion, our higher return fee-based assets grew to nearly $22 billion. We are clearly making great strides in growing our fee-based business and the fee versus spread mixshift should accelerate during 2007.

We are also seeing excellent growth in the Mortgage Insurance business. Internationally, NIW grew 12% excluding the impact of foreign exchange driven by strong progress in Europe and Canada. Our earned premiums grew 29% excluding an adjustment that I am going to explain a little later.

Turning to the United States, an increasingly positive environment coupled with the execution of our distribution segmentation and penetration strategy helped us to grow our flow NIW by 10% and our bulk writings were also up materially from last year.

In connection with this, we do feel that Mortgage Insurance solutions will continue to regain share of the purchased market versus alternative solutions. Our U.S. earned premiums grew 14%, also excluding the adjustment I will get to shortly. This is strong premium performance and it reflects the growth in both our flow and bulk insurance in force.

Our fourth-quarter bulk transactions are another example of how we continue to selectively execute on opportunities with careful risk management. Throughout 2006, as both our experience and GSE participation in this market has grown, we have increased our levels of new insurance written in two areas. First, in Alt-A loans purchased by GSEs and secondly, in portfolio insurance for key lenders. This strategy enabled us to write $8 billion of bulk business in fourth quarter mainly from two large transactions.

These transactions have very high credit quality with an average FICO score of around 720, conservative loan-to-value levels, are structured with stop loss arrangements and some contain deductibles. Looking ahead, we pursue active deals in this area in a disciplined fashion.

On the investment front, we continue to improve the yield in our core portfolio by 20 basis points from 5.5% to 5.7% via investment in new asset classes and selective trading activity. We also executed a number of hedging transactions for our long-term care line, taking some interest risk off the table for new business.

We feel good about our loss experience in 2006 as we continue to see very favorable actual to expected mortality ratios in our life business and loss emergence in our mortgage businesses within expected ranges in most platforms. On an underlying basis, the international mortgage loss ratio was at 21% and consistent with our expectations.

[Royalty C] and Medicare supplement, they are now providing loss ratio metrics in the financial supplement and as we stated when we presented these in December, we would normally expect long-term care loss ratios to be in the 60% to 70% range. We ended the full year 2006 in the middle of that range at just over 65%. Results can fluctuate both above and below the range on a quarterly basis and we saw that in the current quarter as premium adjustments took the ratio up to 71.5% from an underlying 69%.

Even using the 69% number, the ratio has trended up quarter-by-quarter over the year. However, going forward, on average, we expect to remain in the upper end of the 60% to 70% range. This is primarily attributable to two factors. First, our growing new block, which is performing better than expected, is anticipated to begin offsetting the performance of the older block and second, we expect further benefit from our ongoing investment in improved claims processes and care management.

On the expense front, our overall expense ratio is down year-over-year. One great example of where we have made progress here is in our U.S. mortgage operations where the expense ratio declined 7 points on a normalized basis, putting us at about 35% for the year, adjusted for a few favorable items. We expect another 2 to 3 points of progression beyond this level in 2007.

Now I want to spend some time on two other items of note in the quarter. Let's begin with taxes. I will remind you that we came out of our IPO with an inefficient tax structure. Since then, we've made good progress in improving the efficiency of that structure as the additional opportunities to bring our overall effective tax rate down by another 1 to 1.5 points in 2007. As we execute this, you will see some quarterly lumpiness, particularly at the business level.

Specifically regarding 2006, we met our full-year goal of reducing our effective tax rate by a full point from 32% to 31%. We saw the impact of many of our initiatives come through in the fourth quarter from the resolution of some open tax audit issues, as well as implementation of our international strategies.

Second, our Mortgage Insurance business recognized a net $20 million of additional earnings as a result of periodic updates of both international premium revenue recognition and loss provisions. These updates resulted in a $0.04 addition to current period earnings.

As a reminder, we establish loss reserves on a per delinquency basis. The amount of the reserve reflects both expected claim frequency and severity factors. We review loss factors annually, updating them for recent experience as well as the projected economic environment.

Canada and Europe, there were no material changes to our loss reserves as a result of these reviews. In Australia, the result was a pretax increase in loss reserves of $34 million, driven by two items. First, $11 million related to the periodic update of our frequency and severity factors for known delinquencies; and secondly, $23 million related to the refinement of our estimate of incurred but not reported delinquencies. The second adjustment effectively accelerates the timing of loss recognition.

As you know, our international business is primarily single premium. We collect our premium at the inception of the loan and then earn it in proportion to the expected timing of losses. So in connection with these loss factor updates, we also updated our premium recognition factors to reflect any refinement in the expectation of the timing of losses.

Going forward we will review both loss factors and premium recognition curves at least annually. In Canada, this resulted in a pretax increase of $8 million in earned premium. There was no change in Europe. In Australia, the update drove recognition to $52 million of additional premium and $3 million of offsetting DAC amortization.

To better illustrate this update, we added a page to the financial supplement this quarter laying out the details by country and P&L lines. We also provided loss ratios excluding the impact of these updates to reflect the underlying loss performance in the platforms. These adjustments were against an unearned premium reserve overall of about $2.3 billion, so the impact on future periods is negligible.

That is all the quarterly items. So moving on to capital, Genworth also made great progress in 2006. As I go through this, you should note that this is a slightly different cut on capital generation and deployment than we have given in the past. We have taken out impacts of netting new and existing business to show you gross flows, which I think provides better insight.

We started out the year with approximately $1.7 billion of excess capital capacity. We grew that amount by about $2.4 billion from existing business, statutory earnings and capital runoff, bringing the total available for deployment to $4.1 billion. We deployed $2.2 billion for growth, including over $500 million in acquisitions and $1.7 billion to gross sales. We returned over $1.1 billion to shareholders and $1 billion of share repurchases and over $100 million in common stock dividends.

Stepping back, roughly two thirds of the capital we deployed in 2006 went for growth and we returned the remaining one third to shareholders bringing our year-end '06 capital capacity to approximately $800 million.

Looking forward to 2007, we expect to generate another $1.8 billion in existing business, statutory earnings and capital run-off, coupled with over $500 million in net proceeds from the sale of our Group business, giving us $3.1 billion to deploy in 2007.

We expect to invest $1.8 billion in new business growth and acquisitions and to return $700 million to $1 billion in share repurchases and dividends. This will leave us comfortably at $400 million to $600 million in capacity at the end of the year. This estimate has not changed since our December investor update.

Next, I would also like to touch on our ROE progression. When we ended 2005, we had an operating return on equity of 10.7%, which included about 50 basis points from investment items bringing us to an underlying starting point of 10.2% ROE as we entered 2006. In 2006, we achieved an 11.3% ROE. After adjusting for the benefit of investment items in the international premium and loss adjustments, the underlying ROE is about 10.8% or 60 basis points of ROE progression during the year.

And as we look forward in 2007, we expect another 60 to 80 basis points of progression, which keeps us on track to meet our goal of a 12% ROE in 2008. All in, we finished 2006 with a full-year EPS of $2.89. As Mike discussed, backing out approximately $0.08 for the Group operations that we have agreed to sell, puts us at $2.81.

Looking forward to 2007, we are on track to deliver between $3.15 and $3.25 in net operating earnings per diluted share, which is 12% to 16% EPS growth. If you adjusted 2006 for investment items or the mortgage premium and loss recognition items, the growth was even higher.

In 2007, we expect to benefit by roughly $0.05 from improvement in our overall tax rate and by roughly $0.07 from share repurchase. The remainder, approximately 70% of our EPS improvement, is expected to come from growth, including efficiency improvements that widen margin.

The strategic realignment we announced last month is just one part of this. In addition to the exciting growth opportunities that Mike discussed that will help sharpen our focus, we will also target meaningful cost efficiencies. For example, in our new Retirement and Protection segment, we are broadly consolidating various functions under unified leadership.

Internationally, we will grow from consolidated operating platform. In December, we estimated $150 million to $250 million of pretax cost savings would emerge over the next two years, both as part of the organizational changes we have announced and our ongoing expense discipline. Of this, we estimated at least $50 million to $75 million would flow to the bottom line over the same time period. As mentioned earlier, we have teams across the business working on analyses to refine and realize these cost savings opportunities.

So overall, Genworth had a very strong quarter and we are positioned well for 2007. With that, I will hand it over to Jean to start the question-and-answer session.

Thanks, Vic. Operator, we are ready to go to the question-and-answer session of the call please.

(OPERATOR INSTRUCTIONS). Ed Spehar, Merrill Lynch.

I have two questions. The first is -- on long-term care, I think the comment was made about some hedging to take some interest rate risk off the table for new business. I guess what I was wondering is if you can help us understand to what extent are you giving up return in order to hedge rate risk. When you consider where interest rates are now, which is still pretty low, is it worth it to do that?

And then on a strategic question, it sounds like there is this movement away from term toward UL and I'm wondering if you could talk about it as is this just a short-term movement based on what the market is like or is there some longer-term strategic move away from term toward UL?

I am going to ask Vic to take the first question on hedging.

On the long-term care hedging, we do not give up any current yield for putting on these hedges. The hedges are basically forward starting swaps, 10 or 20 years out, that lock in the reinvestment rates on the premiums we expect to receive at that point in time.

Your comment about current interest rate levels I think is accurate. As a result, we target about hedging today for about 50% of the cash flows on those products, leaving room for some benefit to flow through if yields improve in the future. If interest rates move up dramatically, we would consider increasing those hedging percentages. I will turn it over to Mike for the second piece.

We have Bill Goings with us today who leads the life business. Bill, do you want to --?

I think the way to think about it is that we are going to take a very disciplined approach to growing our term business. Certain competitors have lowered their pricing to levels that we currently find unacceptable and to some extent, that is the reason why we have seen a shift from some of our major distributors, VGAs for example, to universal life, which tends to have a higher premium associated with it.

I guess I would also like to just point out that there really are multiple levers to drive sales in the life insurance business; service excellence, product innovation, having additional wholesalers on the street, distribution expansion, working with our customers to improve and facilitate their growth and increasing our risk appetite. You have seen recently where we have raised our retention levels to $5 million. So we are going to be working these levers in our term business over the longer term to continue to grow this business.

And just one quick follow-up in terms of the competitors that are the most aggressive. I am assuming they tend to be the ones that have also been accessing capital market solutions?

That is correct and I think there's competitors that lost share back in 2005 and are now aggressively working to gain that share back.

Steven Schwartz, Raymond James & Associates.

A couple of questions. First for Vic, I was wondering, Vic, if you could talk to be DAC amortization coming out of the SPDA book and how we should be thinking about that going forward. And then kind of a follow-up I think to Ed's last question. Maybe Vic could talk to where we are or where the NAIC is with regards to principal-based reserving and maybe Bill could talk to how he thinks that might affect the universal life market?

Let me hit the DAC amortization first. If you look at the DAC amortization, in the numbers there was really $5 million of unlocking and it is $2 million to $4 million of true-up. We feel very good about where we are. That unlocking unlocked both for the actual experience that we have incurred during the quarter and also our expectation of future lapse rates, but we think we are positioned well on a DAC basis at this point.

So, Vic, just thinking about it, should we be and I am not looking at the number right now, but just thinking about it then that a more normal run rate will be some $7 million lower than what we saw in the fourth quarter?

I would probably temper that a little bit to maybe $5 million.

$5 million. Okay, great. And then onto principal-based reserving?

Let me just give you a general perspective. Of course the life team's involved and I participate in that dialog through the various industry groups that are focused on this area. It is basically -- a lot of hard work continues in the area. You have the NAIC fully engaged both overall, but more specifically at subcommittee levels. It is a complex area. But the whole focus, because a lot of words get thrown around, is finding the right level of reserves for the risk at hand and that is what the focus remains.

From an industry perspective, there are various groups working through trade groups who are working actively in this area and trying to coordinate efforts, but this is a gradual process fundamentally. So I think it is not an overnight shift. As you know, there is sort of a compromise that is in place, enabling work towards a more permanent solution.

You also have -- some of the reasons this also takes time is you also have to figure out as you head towards that how is it monitored because if you don't figure out the monitoring mechanism at the same time, can you imagine 50 different approaches to monitoring and judging the principles that are used. That is just as complex as what we have today. So you have to be very thoughtful about those areas and that is why I think it's a more gradual process, not an overnight one. But I would say both the industry and certainly the regulatory participants are hard at work in this area.

Mike, do you see anything coming in 2007 on this?

I think it is more gradual than that.

This is Vic. I would comment there. Although I would love to be proven wrong, we think from a practical standpoint, this is still at least two years away.

Here is my thought, Vic. As you have seen in term life as companies have done securitizations, they have gotten more competitive. You, I think have a bit of an advantage being I believe the only company to have completed an AXXX securitization. My sense would be if principal-based reserving does happen some time down the road, these securitizations won't be necessary and it will be the competitive advantage that you have now from having done an AXXX securitization would in effect go away. Is that an accurate statement?

I am not sure it is entirely accurate. I think that principal-based reserving will reduce the reserve requirements for a number of products in particular term and UL. Exactly how far down it will take those requirements is still not clear and there still may be opportunities to capitalize some of those reserves and put them into the marketplace and certainly we are well-positioned in that regard.

But as we look forward, this is certainly something that we have anticipated and if you want some commentary on exactly how we have thought about that, Bill might be a good person to respond to that.

I will let others ask questions.

Tamara Kravec, Banc of America Securities.

A couple of questions. Can you comment -- the bulk business was obviously much higher this quarter in USMI and if you can give us a sense of is that huge jump something we should expect going forward or are you just being selective and we should expect it to be lumpy and how are you feeling comfortable riding -- sort of increasing the bulk business this much?

Tamara, let me hand that off to Tom Mann.

Your first comment about the flow of the business, we do expect it to be lumpy, particularly when you are dealing with your lenders and your portfolio insurance product. It will come and go depending on their particular needs. So we are very excited about what we had in the fourth quarter.

It was characterized by two rather large transactions. One was in the Alternative-A space. There was a rather large deal that we did in connection with one of the [GOCs] and then the other part of the fourth-quarter increase was driven by a rather large transaction that we did with a particular lender. We are very -- as we approach the business, we understand this collateral very well and we do our pricing on a risk-adjusted basis and we will continue to have that discipline as we go forward.

I would add that one of the common characteristics with our bulk business is that it is high FICO business, high credit quality business as you heard Vic mention. So both in the Alt-A space and in the portfolio business, this is again high quality business with very conservative loan-to-values. As you heard Vic mention as well, characterized many times by deductibles and stop losses and so it is not subprime business and we feel very good about it.

Okay. Can you just update us on Australia and what you're seeing there? It seems like the loss ratio on an underlying basis went down sequentially from 37% to 35% excluding the loss factor update. So how are you feeling heading into 2007 about Australia?

Well, we feel relatively good about it. You're right; we did see a sequential improvement, but that is generally driven by seasonality in Australia. We normally see a downturn in the level of delinquencies reported from third quarter to fourth quarter. It is actually the opposite of what we see in the United States. So the 35% adjusted loss ratio was pretty much in line with what we were hoping to see and the 34% on the year I believe was in line with what we were hoping to see as well.

As we look to next year, as we have indicated in the past, you should expect to see our losses in Australia increase and again they will be driven by two factors and that is that as our 2004 and 2005 books continue to season through periods of relatively lower home price appreciation, we will see an increase in our losses as a result of that. And the second factor is the result of the underwriting issues that we had with a limited number of the distribution relationships that we have rectified. But you will see those impacting our loss ratios this year in 2007.

Okay. My last question is on the tax benefit for the quarter overall. I guess it is somewhere between $0.03 and $0.05. If you could just quantify it and then looking at this, in my view, it just seems like it is an operating item because you are going to continue to have this benefit coming in 2007 and it is part of your operating strategy. Is that a fair way of looking at it?

Let me turn that over to Vic. Go ahead, Vic.

I think to quantify the tax adjustments in fourth quarter, they amount to about $0.05 per share. On an operating basis, I think it is probably down to about -- ongoing operating basis about $0.02 a share. Sorry; I missed the last part of your question.

I'll take it. The [point] was should we look at this as operating and I think you basically should look at it as operating as Vic commented upon, Tamara. We are coming from a relatively inefficient structure right at the time of IPO and we are bringing it down to what we see is a more normalized structure in stages and I think Vic's comments talk to that. Any other color on that, Vic?

Even though we have some audit adjustments, some of those audit adjustments are one-time items. Others are clarifications of ongoing issues that will clarify our tax deductions on a go-forward basis and I think this is a combination of those things. In the aggregate, I think where we are for this year is a fair representation of the trend in our tax rates and we expect another 1% to 1.5% reduction next year.

Terry Shu, JPMorgan.

I have a question about the spread-based retail line and you had talked about the DAC unlocking, which is partly the reason for the spread compression, but just broadly looking at the trend, can you comment on why the drag continues to get larger and the DAC number has been higher throughout the last couple of quarters versus 2005 for the overall spread-based retail? And if you look at the -- if you calculate both the spread for the retail and institutional spread business, they have been coming down. Maybe you can just comment a little bit about the impact of the current yield curve, current flat yield curve on it and why the DAC drag continues to be so high.

Terry, it's Mike. Let me give you just sort of an overall thought and then I will turn it over to Vic. First from an overall block, recall that some of our older, fixed annuity blocks had some substantial guarantees in them and as those came out of guarantee periods, one thing we did quite deliberately was we dropped the crediting rates often times right to the floors and for periods of time, a number of those contracts stayed in place.

As the short end continued to be very attractive to investments along with CD alternatives, we've started seeing in staged -- in a staged sequence some of those policies lapse. And that is why they don't tend to lapse all in one quarter; they have lapsed in stages. So you have certainly seen that. Recall that in some prior calls when you saw some spread widening in that line when rates were still low overall it was because we were dropping the crediting rate, which created an increase in spread. Vic, do you want to provide some more color on that?

Mike, I think you've hit the key points with what is going on with the amortization very accurately. The only other thing I would add is that as we do widen spreads on these blocks of business and that spread drives increased margin, the amortization for those blocks also goes up somewhat just because we amortize them in relationship to profits. So there is really two things going on.

Now we will have one -- we had sort of some big years in 2005 and 2006 of those guarantees coming out of that guarantee period. Sometimes we often times get asked by investors well how much more. Well, we'll have about $800 million in '07 roughly that will be coming out. We will reset those assuming the interest rate environment is very similar. So you could see some of that lapse behavior in '07 but '07 would be the last year of sort of big resets from those guarantee blocks.

But we could continue to see some pressures through the next couple of quarters as we look out into '08, kind of the legacy drag will go away?

We are basically I would say over two thirds of the way through of those guarantee blocks as we go through the reset and Pam, I don't -- let me just ask Pam Schutz, do you have any other perspectives for Terry on that?

No. I think you said. This is -- the block that is running off is low ROE. They were impacted by the gains and so actually it is good news and we are redeploying that capital, which was about $300 million in the SPDA block that we released in the low ROE blocks this past year to our higher return businesses in fee-based.

But this business goes back to pre-spin from GE, the old --

Correct.

low ROE block?

2004 blocks.

Most of these were five-year guarantees.

I would just add that when we did the unlocking this year, we did, because we had better experience on these big rate reset blocks, we did adjust for our expectations for the block that is coming off in '07. So obviously that may not be perfect. There will be a little bit of variation, but hopefully we have provided for it already.

Okay. So it should not be -- the drag should not be as much as last year.

That's correct.

Darin Arita, Deutsche Bank.

A couple of questions here. The first one with respect to the bulk Mortgage Insurance business in the quarter, given its high credit quality, can you give us a sense of how the returns in that business compares with those of the flow business? And then the second question is on the Managed Money business. If you applied the new segmentation to the fourth quarter, what was the earnings contribution by Managed Money to the quarter and how should we think about the growth trajectory and returns for this business?

Darin, let me turn over to Tom here on the bulk question and then we'll come back with you on Managed Money.

Darin, you are correct; it is hard quality prime business. Therefore the returns that we attempt to get in this market are very similar to what we have on our flow business and that would be in the 15% to 20% range.

Vic, do you want to provide a perspective on the Managed Money mix?

I can. I think Managed Money -- the earnings contribution for fourth quarter was about $8 million. On a go-forward basis, I think we are expecting $10 million or so a quarter for next year. Pam, your thoughts?

We will provide the visibility on the entire Managed Money segment, which includes our existing blocks, AssetMark and our broker-dealer distribution in first quarter. However, as you can see from the strong growth in asset growth that Mike talked about in Managed Money, we feel very good about that. We feel very good about the AssetMark acquisition and the continued growth and our leadership in that market.

And what do the returns look like on the business now and how should it develop as it grows?

Here's the way you should think about that business. You should think about it that the margins are very similar to asset management and investment management businesses.

Great. That's helpful. Thanks.

Jimmy Bhullar, JPMorgan.

I just have a couple of questions. The first one is on LTC. In the past, you have spoken about repricing your legacy in force book of business. If you can address where you are in terms of your thinking on that? And then secondly, if we can just talk about severity trends in the Mortgage Insurance business domestically specifically in the auto states?

Let me give you just a perspective overall. As we have said to you in the past, there are sort of five fundamental levers that we use as we think about improving the performance of the old block. One of those levers has been pretty straightforward as Vic talked about, which was taking out reinvestment risk, actively using hedging when we saw appropriate windows and moves in the market such as we saw for a period last year to get the investment returns to run within a quarter that we found attractive or that we wanted it to run within.

Secondly is we have certainly managed expenses. We have combined the number of claims operations and brought them together, got some scale out of that. Third, we have worked on claims process improvements in how we provide additional resources in appropriate care management so people get the right amount of care at the right time and Buck and the team continue to invest in that area.

Fourth has been in force price increases and the opportunity to pursue those and then fifth, as we introduced to you really back in the December timeframe, looking more at the capital markets' opportunities and blended asset situation and how to use our expertise in that area.

We do continue to look actively at that fourth lever on in force pricing options along with the other levers and in combination and it is encompassing various approaches that we intend to improve the performance of that block over time. Buck, would you like to comment on the -- anything on the severity trends?

The severity question I think was on MI, right?

Was it only on -- I couldn't understand --.

Just on MI.

Just on MI. Okay.

You can comment on LTC too if you want.

Jimmy, the (technical difficulty) over 2006 and I believe we ended the year at about a 99% severity rate in the fourth quarter. That is exactly what we would expect to see given the lower levels of home price appreciation. Regarding the Great Lakes, it has been growing at that similar [past]; albeit it is a bit higher there. We are actually pleased with what we saw in the Great Lakes in the fourth quarter in that our average claim payments were flat and actually the increased delinquencies we saw in that environment were consistent with what we saw in the rest of the nation as well. So you should expect that severity again to increase a tad next year as well consistent with our books, flowing through their delinquency curves, if you will, occurring in periods of lower home price appreciation.

But is the Great Lakes region getting progressively worse or has it stabilized? Can you characterize that?

It did stabilize during the fourth quarter, but I would not suggest to you that we are out of the woods yet in relation to 2007 and again, the way I would think about it is that the increase in severity that we are experiencing is typical when you have businesses, books of business seasoning through lower periods of home price appreciation. So we expect to see a severity increase in our business next year in the Great Lakes -- that will occur in the Great Lakes as well.

Bob Glasspiegel, Langen McAlenney.

Are you going to discontinue Group when you are saying your outlook for '07 is off a base without it? So does that suggest as we model for '07 we should exclude any contribution from Group?

Bob, we're selling the business, so when we sell the business, we are not going to have an ongoing contribution. Now on this front, here's how you should think about it is there are other opportunities where you sell a product to employers like we sell through the 401(k) market. So there are other aspects quite different than the small group life and health business where we may be talking about the employer. We sell long-term care in group situations as well. So don't confuse that we may use that nomenclature in other areas going forward, but those are focused in a different situation than selling what is typically a bundle of benefits, life and health-related, in a small group when that is the business that we are selling to Sun Life.

Well, I was just trying to understand your calculation of greater growth and it appears -- so we should have six months of Group and reinvested proceeds in our '07 models or we should not have six months of growth? I lost you on that.

You should not. We will reclassify Group as discontinued operations in the first quarter and it will not be in our reported operating earnings.

But we will have the reinvested proceeds.

That's correct.

So it isn't fair necessarily to take it completely out of the base in thinking about year-over-year it would seem to me. That's a statement more than a question.

That's correct. Obviously the redeployment of those proceeds will determine what the return is going to be.

That's very helpful. On the AssetMark, you are saying you had half a quarter of it working in Q4?

(multiple speakers) October 20.

October 20.

We had roughly 2 months.

And you saw another couple million pickup sort of in the run rate going into Q1? Is that what you said going from 8 to 10 or did I misunderstand?

I think that is a reasonable estimate.

That business has lower margin on average assets as we model?

As I said, the way you should think about Managed Money margin is similar to investment management or asset management margins versus insurance.

Very helpful. Thank you very much.

Geoffrey Dunn, KBW.

I have two questions on the MI side. First, I think some of the lenders that have really been going to the market to offset their portfolios and get capital relief have given the impression that they are kind of sticking it to the MIs a bit. When you look at these transactions, are you in fact able to scrub and almost cherry pick the credits that you are willing to take?

Tom, do you want to take that?

I certainly will not comment on the impressions that you are getting from lenders. On the second point, the answer is yes and that is how we approach our business.

And it is a loan-by-loan underwriting?

It absolutely is.

And then on the international side, I think your previous guidance was that you might be able to achieve a 20% expense ratio in '07. Can you sort of reconcile the mechanics of getting there versus the premium level we saw this quarter on an adjusted basis relative to the expenses?

The way you ought to think about that is we continue to invest globally although potentially at a slower pace because we are pretty well invested in many of the markets and now the expense ratio should trend favorably given the leverage we will be getting from the premium income. I would remind you that we have about $2.3 billion of earned premium reserves that will be rolling through the financial statement and we are generally delivering very strong double-digit growth on the revenue line.

So is it correct to categorize it that we shouldn't expect the dollar level to drop from this quarter's run rate, but really just the ratio to be delivered by top-line leverage?

Yes, that would be directionally correct.

John Nadel, Fox-Pitt Kelton.

I have two questions. One is on the LTC book of business and then the other is just thinking about universal life. On LTC, I guess we are surprised at your reluctance to go after repricing on the older book of business considering its negative returns and I guess I would have to assume that that means that you have got some confidence in some alternative type of solution and I was wondering if you could just comment on the capital markets, what you are pursuing there and sort of the possible acceptance there.

I don't have a lot to add to what I laid out, which is we have five levers. We have certainly intently focused on our capital markets' expertise, which added a fifth lever I will say to the agenda and in looking at an area like in force rate increases, we tend to be very thoughtful in that area. And that is about it.

Maybe just to follow up on LTC, I was just thinking about -- I don't suppose you would go to providing us some sensitivity or some expectation on loss ratio for the older book versus the newer book, but just maybe you could just give us a sense for how wide the gap is between the loss ratios on the older book versus the newer book?

No, first of all, as we showed at the December investor day, we gave you a good view of the two blocks of business. We have also provided interest-adjusted loss ratios, which is what you really should focus on as the interest-adjusted loss ratio and that is where we are going to stay on that front. I mean obviously the older books just based on the characteristics of those books, the aging of those books, would have a higher ratio than the newer. As Vic said though on the newer front, we have certainly liked what we have seen as far as -- remember we use a lot of very sophisticated underwriting techniques. We priced those well and those have performed very nicely.

On the universal life insurance side, obviously a little bit of a boost from new product rollout and expanded distribution and maybe UL is at the expense of term more recently in the marketplace. I was just wondering if you could just give us a sense. Obviously the growth rate year-over-year is terrific, but in terms of absolute level of sales, is this a decent new base? Do you think the base ultimately is significantly higher from here? That is you have got a lot more momentum in terms of the expansion before you get to sort of a market rate of growth?

Let me give you a general perspective and hand it off to Bill Goings. Recall that as we went public, there was a primary focus certainly on the term life business with an emerging focus on universal life. From prior acquisitions in our history, we have some very significant universal life blocks in our business from First Colony, from what was Life of Virginia, looking back to who had various offerings in this area.

Then we moved to invest as we saw market demand grow in this area and invest with products, service, distribution support and so on with the intent of certainly coming up and becoming a much higher rank company and that is the transition that you are seeing. Bill, do you want to take it from there?

I think you are going to continue to see the kind of growth levels that you have seen in the past in this space. It is a relatively sort of reinvigorated effort over the last couple of years in universal life. We will be broadening our productline. We will be expanding our distribution into more the planning firms and other places. So I think that the growth rates that we have experienced in the past, this is a new base and we will continue to see it move forward in the future.

Great. Thank you very much.

Joan Zief, Goldman Sachs.

I have two questions; one on the international side and one on the Mortgage Insurance side. On the international side, since it is now becoming a larger piece of your business, could you talk about what product or countries are finally reaching maturity, seeing slower growth and if there is any regulatory challenges that we have to be aware of? And then which products or countries are now accelerated and ramping up in their earnings contribution to the bottom line?

Then my second question on the Mortgage Insurance really relates to what Countrywide indicated in their fourth-quarter conference call about placing Mortgage Insurance on a huge of amount of loans and I just wanted to know what your capacity is to write that type of business if you are interested and if it is good news or bad news. Good news with yes, lots of demand; bad news maybe because it reflects a concern about credit that you might have to take into consideration on your own assumptions?

Thanks, Joan. Two great questions. Tom, do you want to pick up on those?

Joan, on the first, we have typically described our Canadian and Australian platforms as platforms that as we move through the latter part of the decade will be experiencing slower growth although we are continuing to grow very nicely in both those platforms, in particularly Canada. So as I look at them over the rest of the decade, we still anticipate very strong double-digit growth.

We have also said that if you -- from the international perspective, that we have been investing earnestly in Europe, Mexico, India, some other environments, but they could augment and complement that growth. The next example that we hope to see excellent results from -- in fact 2007, in particular 2008 would be Europe and then I would rank Mexico and India behind that.

Coming back to your question about your reading from Countrywide. I would characterize this from a Mortgage Insurance perspective as good news. That being said, as we -- I want to remind you that as we approach this collateral and working with our lenders against their concerns for minimizing their credit exposure, we have continued to do it very carefully.

Just going back on the international, so that is the country. What about the products? I mean is your growth really going to be tied to the Mortgage Insurance? Is it going to be tied to the Payment Protection? Can that ramp up in these countries and is there a possibility of new product introduction that actually adds to this? And are you still holding by your view that you can have 50% of your earnings from international over the next several years?

Let me start backwards. The answer is yes on the 50% goal. We are working actively on it. Part of our realignment is in support of that. First, the most immediate international expansion will come from our two established platforms, Payment Protection and Mortgage Insurance. And I would suggest that we think there is a lot of runway for both of those.

That being said, both of those also use heavy bank assurance distribution and banks are serving other needs of customers around the world. As I travel around the world, you see the same aging dynamics. You see the same savings dynamics and pressures. You see certainly the same things on the income and having flexibility and retirement as far as caring for oneself and one's family. So that the two most active areas we have evaluated is certainly areas like long-term-care, retirement and retirement income.

So I think there is an opportunity to have more than what you might label two productlines on the international front and we have brought together all of our business development teams who have been doing a fair amount of work in this area in talking to a fair number of opportunities under common leadership with Tom and we will therefore pursue opportunities that we think make sense where we differentiate and bring new strength.

Suneet Kamath, Sanford Bernstein.

Two quick ones. First, on the tax rate. It's 1 to 2 percentage points of improvement. How sustainable is that? I know you're going to get it in '07, but should we be building that into '08, '09? I guess you talked about being an inefficient company with respect to taxes. So what would be sort of the efficient tax rate that you imagine?

Then second on the long-term care, Mike, you seem that you are pretty confident in getting something done in terms of the old block this year. Should we assume then that the negative return that old block will deliver in '07 will sort of be the trough for that block and it is kind of upwards to positive territory in '08 and beyond? Is that sort of the underlying message that you're sending out?

Vic, you want to start on the taxes?

Sure, Mike. I will take that one. We feel very good about the potential progress in our tax rate in '07. Obviously there is a limit to how low that rate can go. I think if I look long term, I think a 29% rate on an ongoing basis is a reasonable assumption.

Back on the long-term care, again I have been pretty specific in laying out first a three-year timeframe to substantially transition the performance of that block. Though certainly the intent is to do that as quickly as possible and to have, as I said, a significant -- make significant progress in 2007 and again after that, talked about the levers we have.

Ed Groshans, Fox-Pitt Kelton.

My questions have been asked and answered. Thank you very much.

Mark Finkelstein, Cochran Caronia Waller.

A couple of quick ones. Firstly on the international mortgage loss and premium study, it obviously had a sizable one-kind-of-time impact but I am curious if the kind of higher frequency and severity loss trends that you are building in is going to drive a quicker acceleration of premium in that business going forward and if so how should we think about that?

Vic, do you want to take that?

Sure Mike. We have adjusted the loss recognition curves for the accelerated frequency and assuming that the data doesn't change we think that there shouldn't be any further acceleration, but this is something we update every year and that is why we do it; as new information flows in we will make the corrections necessary.

And then just can you talk a little bit about the Payment Protection reinsurance deal you did in the U.K.? I guess what was the driver of that transaction? Was it a one-off opportunity and I guess are there other blocks of business that are potential and this is kind of part of the ongoing strategy going forward?

I guess the way I would think about that is when we think about our -- both our distribution relationships and we think about where do we try to use effectively acquisition capital, blocks of business can be attractive on both fronts. So from a, I will call it the M&A front, we do look for blocks of business that make a lot of sense for us but also for our customer base or partner base they may have objectives in re-allocating capital, where they want to put capital, how to leverage our expertise.

And therefore this actually helps you deepen that customer relationship and have effectively both a sort of a flow business relationship with them. You may support them with services but you also may support them in the block area and therefore their own capital management so that is how I'd think about it and we will yes continue to look at this opportunity going forward.

(OPERATOR INSTRUCTIONS). Thomas Gallagher, Credit Suisse.

Just a few quick ones. First is I just want to make sure I understand how the group benefit sale is going to be treated for the first quarter. When you report your operating EPS number should -- we should take out the $10 million or $11 million that you have been earning in that so are you going to have kind of a one quarter headwind as a result of that?

Vic, do you want to take that?

You should take out the first-quarter operating income for Group from your models.

Then just two other quick ones. One for Tom Mann. Can you just give a little bit in terms of the rationale behind getting stronger in the bulk business now? Is it that terms and conditions have improved substantially? Maybe just a little bit of what is behind that? Then just secondarily, back on long-term care, Mike, I heard you talk about the levers. Can you maybe just comment at all what you are seeing in the reinsurance market there and whether that is any opportunity as well? Thanks.

Tom?

The first quick comment is I want to remind you that the bulk business can be lumpy. The second comment is that let me take you back a bit and share with you how I think you should think about this. We have been very conservative in the past in the bulk business as we have indicated to you because of our concern over the level of performance data with several of these [collaterors] plus the concern over what we call successive books.

What you have seen throughout 2006 is as our confidence has grown with our own experience and also as the GSCs have continued to grow in this space, we have increased our participation rather consistently throughout the entire year. In fact, I think we wrote about $1.5 billion of new insurance written in the bulk in all of last year and through three quarters of this year, we were at about $5 billion to $6 billion.

That growth is coming in both Alt-A collateral and also in portfolio insurance for key lenders as I have talked to you about previously. And it is really not a terms and conditions issue at all. It is -- while the pricing in these markets is generally getting better, it is really our comfort level in participating in these markets. Again, we have not been a large player so we -- a lot of lenders and others like to balance their counterparty risk and so we have been a beneficiary of that again because of our reduced positions earlier.

It is high FICO business; it is lower loan-to-value business. The coverage -- if there are higher loan-to-value loans above 80% in what we do, it has primary Mortgage Insurance in front of it. We usually take that coverage of the deals down to about 50% and we have, as we've said, deductibles and stop losses in front of it. In short, it is our getting more comfortable with this space and the opportunities in this space and we will continue to operate here very selectively.

So Tom, just to follow up, in terms of the answer to the question of why now, it sounds like it is really a generous capacity issue because you just have not really done very much.

And Tom, I am sorry. I think that, as Mike has indicated, the capacity to grow smartly is somewhat -- is not constrained and we have been growing in this space consistently this year because we like the collateral, again prime base and we are getting very, very nice returns in it and we have demonstrated that consistently throughout the year. Think about the fourth quarter as lumpy. In 2007, if we see another large transaction that meets our risk-adjusted returns, we very well may make the decision to invest our capital in that.

Tom, I am going to turn it over to Buck Stinson to give you a perspective on the reinsurance market.

Tom, as it relates to reinsurers and long-term care, we have seen substantially more interest in the last several years from reinsurance partners. As you know, in the late '90s, that market softened considerably. But more recently, I think as the reinsurers have become more educated and understand long-term care insurance better, we not only see an opportunity for ongoing new business, but also, as Mike mentioned, some of the reinsurance partners are also interested in some of the in force blocks and some of the things we are doing to handle our in force issues. So we have seen substantially more interest in the reinsurance market.

And Buck, just one follow-up. The business -- the older block that you had with the reinsurance contract that expired that I guess has been talked about for the last two quarters, did you try and rebid that out to reinsurers and kind of what happened there?

There is a series of reinsurance contracts that we have across various policy forms and are in force and you are seeing -- those are typically 10-year duration contracts. So you are seeing those contracts run off and in terms of rebidding and we are not necessarily focused on rebidding, but we are exploring reinsurance opportunities in the capital market solutions that Mike discussed.

Ladies and gentlemen, this concludes Genworth Financial's fourth-quarter 2006 earnings call. Thank you for your participation. At this time, the call will conclude.