Genworth Financial Inc (GNW) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Genworth Financial's first quarter 2007 earnings conference call. My name is Cynthia and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). 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 Q&A portion of today's call. I would now like to turn the presentation over to your host for today's call, Alicia Charity, Vice President Investor Relations. Ms. Charity, you may proceed.

Welcome to Genworth Financial's first quarter 2007 earnings conference call. As you know, our press release and financial supplement were both released last night and are posted on our website. This morning you'll hear from Mike Fraizer, our Chairman and CEO, who will provide his perspective on our performance during the quarter. Following that, Pat Kelleher, our Chief Financial Officer, will review the financial highlights of the quarter and provide an outlook for growth in earnings.

Also on hand for today's call is Pam Schutz, Executive Vice President of our Retirement and Protection segment; Tom Mann, Executive Vice President of our International and U.S. Mortgage Insurance segment; Buck Stinson, President of Long Term Care; and Bill Goings, President of Life Insurance. Following our prepared comments we will open the call up 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 may contain forward-looking statements. Our actual results may differ materially from such statements, and we advise you to read the cautionary note regarding forward-looking statements in our earnings release or the Risk Factors section in our most recent annual report Form 10-K filed with the SEC.

Today's presentation also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. And with that let me turn the call over to Mike Fraizer.

Genworth had a sound start to 2007. We're making great strides in focusing our resources more tightly for growth, and through our realignment of businesses we are simplifying processes and operating platforms to become more efficient and effective.

We are seeing this progress play out where we want it to, in our results in managed money, fee-based retirement income and our international businesses all posting strong, double-digit earnings growth in the first quarter.

Briefly on the organizational front, we completed the strategic realignment of our business segment and finalized the expense efficiency targets we estimated for the investment community on our last call. At the heart of this is a focus on driving and funding future growth. And the new alignment is off to a great start. We have combined and linked our supporting functions in marketing and product development across our retirement and protection business to be more effective and to facilitate innovation.

We are leveraging our distribution and service resources, better focusing them on partners aligned with our emphasis on income distribution, providing these firms with an enhanced level of service and technology support. This should create tighter firm relationships and repeat producers.

We brought together our international businesses to leverage customer relationships and business development resources around the globe to accelerate growth. And we are already seeing progress.

In sum, Genworth is focused on bringing to market value propositions that combine product, services, service delivery, education and technology that together provide true solutions, making Genworth preferred by distributors and wanted by consumers.

These strategic initiatives are at the heart of what will drive Genworth to differentiate ourselves as a company that helps people build financial security, steadily grow our (technical difficulty) earnings, and realize our goal of a 13 to 14% operating return on equity by 2010 to 2011.

I wanted to give my perspective on four areas this morning. First, how we're driving change in our retirement business mix toward fee-based products. Second, I will give an update on key international initiatives. Next cover some trends that we are seeing in U.S. mortgage insurance, and finally, touch upon capital management and capital markets activities.

In retirement we saw great performance as a clear shift to fee-based products is occurring and driving strong sales growth. We have a broad product portfolio to provide multiple solutions for income and managed money. We are investing in wholesalers, in the independent broker-dealer channel and elsewhere, and are seeing this payoff in higher sales.

AssetMark is performing ahead of expectations. We are introducing some new sub advised funds to accelerate growth, sequentially adding some 3,700 new account in the quarter. And we are encouraged by the trends we see in this market, which is projected to be up 20% in 2007.

Next, the international businesses continued to deliver strong growth through both penetration in our (technical difficulty) stable environment for growth and selective expansion.

Our international customer relationships are strong. We have consistently provided innovative products, broadened our offerings to serve more distributor needs and differentiated with service levels and technology solutions that allow our business partners to grow. This approach has helped us in embed ourselves in our customers' value chains in markets such as Canada, which only solidifies our competitive position.

Let me touch on the U.S. mortgage insurance business which represents 17% of operating earnings, but has attracted a lot of focus, given the U.S. residential real estate market. The overall housing market is clearly impacted by subprime, and to a lesser extent low documentation mortgage issues, especially in the adjustable rate area. Increased foreclosures are a reality, and there is reduced available refinancing capacity. Both of these factors have resulted in larger housing inventories, depressed home value trends, and slowed home sales; however, we still see substantial variance among regions.

Given these factors, we see the inventory of existing homes for sale increasing to more than seven months versus just over six months in 2006, which adds to the pressure on home price appreciation. We now believe home prices nationally will likely fall about 3% on average with significant regional variations.

Turning to our in-force portfolio, I feel very good about how it is performing, and see this as a confirmation of our risk management discipline. We continue to see pressure in the Great Lakes region related to its economic downturn. We're also seeing a pick up in delinquencies in California and Florida. These two markets have had rapid home price appreciation that is now ending, and have higher concentrations in Alt-A and adjustable rate mortgages. Fortunately, our exposure to these two markets is limited.

While it is still early in this cyclical adjustment, Genworth's portfolio is well-positioned. We have no material participation in adjustable rate subprime or adjustable rate Alt-A products where delinquency rates are increasing. 91% of our portfolio is prime based. 93% of our portfolio is fixed-rate. And less than 2% overall is subject to initial rate resets this year. 93% of our portfolio is fully documented loans, and we have strong geographic dispersion within our portfolio with only 10% concentration in the entire Great Lakes region. And no state represents more than 10% of our portfolio, with California at just under 4% front

With that said, the growth dynamics for U.S. mortgage insurance are as positive as they have been in over 10 years, and this market correction is providing strong momentum behind them.

Pat will take you through more specific experience we saw in the quarter here and the factors which drive terrific opportunities for revenue growth in the U.S. mortgage insurance market.

I also wanted to provide an update on capital management and markets execution. Last week we completed our fifth capital markets structure funding XXX reserves for term life, bringing the total amount of XXX and A XXX reserves securitized to date to $3.3 billion. As part of our strategic realignment we created an even more extensive team to broaden our capital markets capabilities. Our objective is to enable a more dynamic business model that taps the capital markets to efficiently use our balance sheet. A key priority for this group is our older long term care block.

To wrap, Genworth is off to a good start in 2007. We expect earnings to ramp up steadily through the year from strong revenue growth across our business segments, while maintaining stable expense ratios as we fund new growth initiatives. This gives us good line of sight to deliver net operating earnings per share of $3.15 to $3.25, and an operating return on equity between 11.4% and 11.7% in 2007.

Looking out further, our recent realignment better focuses our businesses to reach our longer-term goal of a 13 to 14% operating ROE by the 2010 to 2011 timeframe. With that, I will turn it over to Pat.

Genworth has made good progress during the first quarter towards its operating earnings per share and return on equity goals for 2007. Achievements included our 11% year-over-year revenue growth, progress towards expense efficiencies, good overall risk performance, and movement towards a more normalized tax rate. Challenges experienced during the quarter included continuing drag from our old long term care block and higher U.S. mortgage insurance losses.

Let's look at segment results in some more depth. Retirement and Protection operating earnings increased 4% year-over-year. Key drivers underlying this result include growth of the in-force business, corresponding increases in investment income, and lower expense ratios for insurance products. These contributors to growth were partially offset by increases in benefits costs in selective areas, which I will address in more detail in a few minutes.

Looking first at the earnings growth drivers, we continue to see a shift in business mix, with strong sales growth for managed money, income distribution products, and universal life insurance. Segment revenues increased by 9% year-over-year with a 6% increase in premiums and a 33% increase in fees and other income, clear evidence of the business mix shift we are seeing towards higher return fee income products.

Given this shift, I will share some perspectives on growth strategies and expectations. Managed money sales and growth in assets under management are a priority, and we expect additional investments in building this business. Retirement income fee-based sales and assets under management growth are driven by new sales through the independent broker-dealer channel where we are seeing our investment in wholesalers pay off. We're also seeing progress here through wire house distributions.

The mix of new life insurance sales continues to shift from term to universal life products. We see more opportunities in universal life sales. Our distribution partners and the brokerage generally general agent channel are moving in this direction, and we're positioned to support them with a strong suite of product offerings.

Competitive pricing in the term marketplace continues, and we have chosen to adjust price where margins allow, though we have not aggressively moved price to retain our competitive position. In long term care sales increased 8% year-over-year with the increase attributed to the introduction of the linked benefit long term care product. Underlying this was a 15% increase through the independent channel and a decline in the career channel as it repositions to a more entrepreneurial mode.

Moving to other earnings growth drivers, we achieved improved investment spreads, improved late duration term life insurance persistency and expense efficiencies. With respect to benefits costs, long term care claims and life insurance mortality were higher year-over-year. In individual long term care, claims significantly improved from the fourth quarter to 65.4%, down from 71.5%. That's the loss ratios. But were higher than in the first quarter of 2006 due to the expected aging of the books. As we said last quarter, these are normal quarterly fluctuations with the annual loss ratio expected to be between 65 and 70%.

In our Medicare supplement business, which now includes Continental Life, claims improved from the year earlier result, but are again much higher in the first quarter, reflecting a normal seasonal increase in claims activity generally experienced by other carriers. This increase is associated with policyholders submitting new claims until they reach Medicare deductible limits.

In the life insurance business mortality experience, while still favorable relative to our pricing expectations, was slightly higher than prior year.

Looking at Retirement and Protection segment growth the 2006 quarter is a difficult comparison. Prior year earnings included favorable items related to long term care and immediate annuities totaling $11 million. Excluding these items, operating earnings for the Retirement and Protection segment increased by 11% (Company corrected after the call).

Looking ahead for 2007 we expect 8 to 10% revenue growth, combined with an ongoing shift to higher return fee-based products, about $15 million of additional earnings from Medicare supplement as claim levels normalize, and normal quarterly long term care claims and life insurance mortality fluctuations.

Turning to expenses, we expect further expense efficiencies, partly offset by increased investments and growth. In sum, we are comfortable with the expectations of an 8 to 12% increase in operating earnings for the Retirement and Protection segment in 2007.

Moving to the International segment, our progress remains strong with a 17% increase in earnings. This and all growth percentages in this segment exclude the impact of foreign exchange. We are seeing growth in our businesses in Canada, Australia and Europe, with additional progress creating tax efficiencies. This growth is partially offset by higher losses in Australia.

International segment insurance premiums grew 10%. This growth is largely determined by the scheduled release of unearned premium reserves, given the single premium nature of our products, which gives us good visibility into the expected premium level. As a result, we feel very confident with respect to delivering ongoing double-digit International earnings growth.

New mortgage insurance written increased 33% to $28 billion for this quarter, a strong indication of increased capacity for future earnings growth.

In payment protection, total new sales premiums increased 28% to $605 million, also increasing capacity for future earnings.

International mortgage insurance losses, excluding Australia, increased only modestly, especially relative to very strong revenue growth. In Australia losses increased from $14 million to $31 million year-over-year. Of this increase, $7 million was related to expected growth and seasoning of the portfolio. The remaining $10 million is related to higher losses from four distribution relationships we previously identified and addressed. We believe these losses are contained to primarily the 2004 and 2005 underwriting years. Our 2006 books with these lenders are showing performance in line with our pricing expectations.

Finally, we made good progress in establishing ongoing International segment tax efficiencies coming off a relatively inefficient base in 2004 and 2005. This added 6% to operating earnings year-over-year.

Full year outlook for International operating earnings growth remains strong at 13 to 17%, driven by strong revenue growth and offset partially by new investments to expand our global presence.

Turning to the U.S. Mortgage Insurance segment, we feel good about how the business performed overall, particularly given the current market conditions. From a growth perspective we have the wind at our backs, and from a loss perspective the portfolio is performing very well despite weakness we are seeing in some regional housing markets, a testament to our sound risk management practices and prime-based book.

Operating earnings declined 10% year-over-year. The year-over-year comparison is difficult given the first quarter of 2006 had a highly favorable loss environment with a loss ratio of just 16%.

As a reminder, delinquency counts dropped 16% from the fourth quarter of '05 to the first quarter of '06, well beyond the historical average 5% reduction, reflecting last year's declining insurance in-force levels and very favorable economic and housing environment, as well as the reserve release for Katrina-related delinquencies.

First, let's take a closer look at what we consider is one of the best environments for growth in the U.S. mortgage insurance market that we have seen in years. Simultaneous second mortgage penetration remains on the decline, down to around 40% in the first quarter, reflecting a drop of nearly 10 points from a year ago. We believe this is driven by regulatory concerns, rating agency changes, a flat yield curve, and early signs of the benefits of mortgage insurance deductibility.

[VSB] penetration of the mortgage-backed securities issuance market is on the rise. And as a result we estimate that flow mortgage insurance purchase penetration is around 10%, up (technical difficulty) over a year ago, and headed to 11% for the full year. We estimate these changes will lead to a 25% increase in the slow mortgage insurance market size, the first increase since 2003.

We also see ways to selectively grow in two distinct segments of the bulk channel, GSE Alt-A bulk, where we saw good opportunities, and portfolio bulk transactions. This part of the market has increased recently primarily from regulatory pressure on lenders to manage the risk in their mortgage loan portfolios.

From our perspective, we pursue targeted smart deals in these two bulk segments, where we were able to select the loans with attractive characteristics, many with primary mortgage insurance coverages, and structure these bulk transactions to benefit from additional features, including stop losses and/or deductibles to manage risk. Note that we do not participate in the subprime bulk market.

Finally, we are seeing materially higher persistency than we have seen in recent years, 78% in the current quarter. These market conditions are playing out in our results. We now estimate insurance in-force growth in 2007 to be in the range at 20 to 25%, slightly higher than our previous estimate. We are also increasing our outlook for revenue growth from low double-digits to 15 to 20%.

On the expense front, or expense ratio declined 7 points to 29%, reflecting our ongoing execution of both growth and improved efficiency plans. Turning to losses, as we have discussed before, unemployment rates are a leading indicator of delinquency levels. Unemployment has remained stable at 4.5%, supporting the normal seasonal decline in delinquency counts that we saw from fourth quarter last year to first quarter this year.

On the other hand, home price appreciation has declined, increasing the probability that delinquencies will go to claim and increasing average claim amounts. Given the circumstances, our portfolio is performing in line with our expectations, and we are revising modestly upward our outlook for paid claims by $10 million to $160 million to $185 million.

From a product pricing perspective, individual book performance will vary based on economic cycles and the mix of product within the book. Our 2004 and prior books represent 45% of our portfolio. They have significant levels of embedded home price appreciation and are performing better than pricing. We expect that to continue.

Our 2005 book spot about 20% of the risk in-force has a modest level of embedded home price appreciation. This book is performing in line with pricing expectations, and we expect that to continue.

Our 2006 and 2007 books represent about 35% of our risk in-force, and clearly have some pockets of flat to down home price depreciation. While it is too soon to call, we expect these books to develop in line with our pricing expectations, dependent of course on future economic trends.

In the first quarter paid claims increased $7 million year-over-year. Paid claims increased within the Great Lakes region, reflecting the ongoing regional economic weakness we have seen in recent quarters. And otherwise paid claims increased in line with the normal seasoning of our books through the loss cycles that I just discussed.

Turning to reserves, we saw a 4% reduction in delinquency counts from year-end, consistent with historical trends. And our primary delinquency rate remains low at 2.9%. The overall delinquency decrease was more than offset by an increase in our reserve for delinquency, which resulted in a sequential $14 million increase in reserves driven by two factors, higher delinquent loan balances, particularly in California and Florida, where there are higher concentrations of Alt-A products, and more late-stage delinquencies reflecting increased foreclosures.

In U.S. Mortgage Insurance our outlook for 2007 is unchanged, although the drivers have shifted a bit. We expect increased revenue growth to offset the pressure on losses we are seeing currently.

We made excellent progress with respect to capital generation and redeployment during the quarter. Our interest and dividend coverage ratios continue to be strong, providing good financial flexibility. As of March 31 we have completed 233 million of the 500 million share repurchase program authorized in December 2006. And in March an additional 600 million was added to repurchase authority in connection with the maturity of equity units in May.

Looking ahead, we expect life mortality to return to normalized levels. There are also a few timing factors that will particularly drive strong earnings in the second half of the year -- strong revenue growth we see in the U.S. mortgage business to drive higher earnings. We expect a ramp up in other international mortgage insurance earnings as the European platform matures. Finally, we expect certain tax favorability in the second half of the year, bringing the full year rate to approximately 30%.

In sum, we feel good about our delivering our operating earnings per share outlook of $3.15 to $3.25 per diluted share in 2007, and the progress we made this quarter. With that, I will turn it back over to Alicia for questions.

Operator, we're now ready to take questions.

(OPERATOR INSTRUCTIONS). Eric Berg, Lehman Brothers.

I actually just had one question this morning regarding the domestic mortgage insurance business. This is really directed to whoever is best to address it. I think Mike and Pat repeatedly mentioned Alt-A or reduced documentation loans as an issue. My question is what has gone wrong with these Alt-A loans? By that I mean, obviously the lenders who made them didn't think that having reduced documentation would by its very nature produce a problem. There would be backup systems to check people's -- the veracity of people's statements, their assets and so forth, their income levels. You might look at a balance sheet. What is it about this reduced documentation process that has caused a problem? And are you thinking that it is just a fundamentally flawed idea? Thank you.

This is Mike. Great question. Tom Mann, why don't you provide some perspectives on it.

This is Tom. This is an excellent question. And I the first point I would make to you is I do not believe that the product, if done correctly, is a flawed product. We have seen growth of reduced documentation loans principally in those states that have been under affordability pressure. And the global mortgage-backed security markets have been more than happy to fund them, and quite honestly in my view, with a view of risk that has bit understated. And so I think those have been the pervasive pressures that have been pushing those products.

I can best response to you by talking about the quality of our portfolio, what we have done. We have restricted our concentrations in the product. We have restricted those -- our loan to values in the product to a cap of 95%. And primarily restricted also the FICO score for that we have in that product, which as you may recall is at 620. In fact about 85 to 90% of our product in that area is above a 660 FICO score as well.

We have also been very careful about the lenders that we're doing business with, I think, to get back to your first question, the first point of your question. And that is what may be going wrong out there as it relates to this product? We have been very careful with the lenders that understand the product and the appropriate use of the product as best we can. And we have tried to box the credit and also the loan to value characteristics.

One final point as well, a lot of the noise you hear in the market about Alternative A is -- products is where they have also been used in concert with subprime lending. And so I don't want to suggest that all roads lead back to subprime lending, but if you're going to do business in the subprime market with adjustable rate business, as I think Mike had in his comments, in the subprime market, and then you're going to do it with different variance of reduced documentation, that is what has caused most of the noise in the market. Sorry for the length of that reply.

No, it is very clear. It sounds like it is sort of a confluence of factors, subprime lending being paired up with reduced documentation, high loan to values. When they all come together it sounds like you think that is where the problem inevitably happened.

I think that is a fair assessment.

Tamara Kravec, Banc of America Securities.

A couple of questions. The first is on managed money. You had nice performance this quarter, and you had said you were expecting, I think, AssetMark to be up 20% in '07. And I just wanted to clarify what your expectation is there for organic growth versus additional acquisitions this year or potentially in 2008.

Then I had a question on the tax rate in Australia. I know you talked in your remarks about the tax efficiencies that you're getting. But it seemed unusually low, and I am just wondering what your outlook is for the tax rate there. And also if you could just talk more broadly about your outlook for the loss ratios in Australia and Canada, that would be very helpful. Thanks.

It is Mike. Let me just provide one perspective on your first question, and then I'm going to hand that off to Pam Schutz, who will walk through the other two. Very clearly we have through the combination of AssetMark acquisition, but also platforms we already have, put together a very strong core growth agenda. So that is the main event for 2007. There is no doubt that if we can add to that via acquisition, we're certainly interested in doing so. But this is driven by core growth.

Pam, why don't you drill down a little and share some of the perspective of the good core growth we have seen?

Let me give you some dynamics of the market. We see strong growth in fee-based managed money platforms industrywide, also growth in the independent channel distribution, which is driving growth from an industrywide perspective. And we believe we have a very strong platform that is even outperforming the industry.

Just to give you a little context on organic versus AssetMark, sales were up 190% overall, but in our organic growth, without AssetMark, we were up roughly 50% in sales. So strong performance all the way around.

Why don't we move to Pat on the tax rate question, and then we will go to Tom Mann on the loss question.

That is a good question on the tax efficiencies. I guess the way I would ask you to look at that is that the tax efficiencies relate to an international strategy where we are implementing a number of changes over time to move from a fairly inefficient tax base to a more efficient tax base.

And as we do this, what you'll see is, as we realize certain gains relating to the plans that we have put in place, you'll see a little bit of lumpiness come through, both from quarter to quarter and from jurisdiction to jurisdiction. So I will assure you that we're making steady progress towards improving these tax efficiencies to a more normalized level, although you'll just see it come through a little bit lumpy.

Tom, you want to pick up on the Australia and Canada questions?

Let me start with Canada. It is relatively flat year-over-year sequentially, and we don't really see a lot of movement in that. That economy and HP environment remains very strong. Let me move into Australia, and let me ask you step back for moment, and I would try to do this very quickly.

I want to remind you that the Australian economy remains very, very strong. And if you go back, the Reserve Bank of Australia rate actions did slow home price depreciation in '04 and '05. It did serve to depress some of our HPA values in the new South Wales area. But very importantly housing markets there have recovered very nicely in 2006.

Let me talk to you about our books, very similar to how I believe Pat took you through the United States business. Here's how when what you think about it, again, 2000 and prior books make up about 28% of our insurance -- our risk in-force, and it is performing very well. 37% of our risk in-force is comprised of our 2004 and 2005 books. Now they are performing, as we have discussed, above pricing, and driven by the limited distribution partner issue that you heard Pat mentioned, and also by the lower home price depreciation we have seen in New South Wales.

Very importantly our 2006 and 2007 books now represent about 35% of our risk in-force. And while it is very early, the performance of those books looks very solid, which is clear evidence in our view out of the gate. And we have put a ring fence around the limited partnership issues, again as you heard Pat mention. And we are now seeing the benefit of increased home price appreciation in 2006.

So net net about 2% of our risk in-force exposure in Australia is with these limited distribution relationships. And again they are dominated in that '04 -- 2004 and 2005 book. So we expect that loss ratio to maintain at that level for the year. I hope to see -- I'm hopeful of some improvement in the latter part of the year, again because we are seeing signs of improvement in the 2004 book. And I believe that we will see (technical difficulty) development for 2006. So tough to predict but we feel very good about it.

The loss ratio trends down sequentially, that is what you would expect to see in Australia?

I wouldn't -- I would say that we're going to see the loss ratios in the 45 to 50% range for the year. And I'm hopeful that we will see some beginning improvement in the latter part of the year.

Can I just ask a follow-up on Canada? Just given that there have been quite a few players moving into that market in the last year, and I think before you said that if you have multiple years ahead and that it takes time for licenses to be issued and for agents to really hit the ground running. How much of a lead do you think you still -- you still have there? And what do you think you can maintain in terms of marketshare?

Again my reference in the past was that our track record, if you will, moving into a country, sustaining a material presence and material income from that usually ranges from 3 to 5 years.

It is tough for me to judge what is going to happen in these markets vis-a-vis the entry of others. So let me go back to my standard on this is we have provided excellent outlook -- I mean outlook for you that is going to exhibit very strong insurance in-force growth this year. We just had a terrific quarter as well, particularly in Canada, I might add. We're not only -- where our growth was driven not only by increased market size there, but very importantly by penetration.

You heard me talk about Canada in the past that indicated that well over half of that market was available for us to grow into. And I think that we are seeing clear signs that we're doing that. And honestly I expect to continue to do it. We've got terrific relationships, proactive services. We have penetrated that value chain, and continue to feel very good about our presence globally. We have always expected increased competition. We have done, I think, a very nice job over the past couple of years to prepare for it.

Tom Gallagher, Credit Suisse.

One question on individual life and long term care combined. Was the negative impact of higher mortality on the individual life line offset by the positive impact on your long term care block?

This is Pat. I will take that. Actually, the way that I'm looking at the long term care results are we've got the individual long term care claims ratio, which moved favorably. We also saw on the medical supplement business the normal seasonal fluctuations, higher claims. In terms of looking at that productline, we got results where I think there was an offset within that productline.

I look at the individual life mortality as something entirely different. And that is just a normal fluctuation from period to period that we will expect to see. It was, I would add, higher mortality than we saw in any of the four quarters last year, but only slightly higher than the first quarter.

Got it. So in other words any positive benefit you might have had the mortality front in OTC was offset by the higher seasonal loss ratio in med supp. Is that fair to say?

That is how I look at the runrate, so I think that is there to say. I would also add that the mortality, while unusually high, was within our pricing.

Got it. I guess a bigger picture question on long term care. Should we take away any positive signs in that you did have a pretty good improvement sequentially in the loss ratio? Maybe you can talk a little bit about claims incidence and how things are trending on that front, and just overall maybe what the expectations are for long term care right now?

We have Buck Stinson with us who runs that business. So, Buck, you want to provide some perspective?

Yes. I think while we predicted the improvement in loss ratios down to the 65 range -- that is within the guidance we talked about at the investor call in December. That ranch being in the 60 to 70% range. 65 is right in the middle of that. We expect that to trend up a little bit through the year. The story stays the same. We're going to continue to get pressure from the older block and the new block is performing very well.

Got it. Okay. And then I guess just one other question for Tom Mann. Can you just comment a little bit about terms and conditions in the U.S. bulk MI market? Are you still pretty positive on pricing and risk selection there right now?

Yes, we are. We are very comfortable with the strategy that we have put in place, as you heard us describe, very comfortable with pricing that we have seen on the transactions that we're done.

As to your question on terms and condition, the general rule of thumb is that whether it is in the Federal Home Loan Bank space where we do business, or in the Alternative A space in connection with providing supplemental coverage to the government-supported enterprises, the GSEs, or in our portfolio business, the majority of that business in one form or another, while conservatively underwritten we believe and appropriately priced, is structured in many cases for first loss deductibles or stop loss coverages behind it. That can vary by transaction, again, depending on our view of the risk and also the level of risk that the counterparty is willing to share.

Our performance there is today in both of these areas is excellent, and clearly within the pricing expectations. I will remind you that our portfolio -- it is still early -- with the portfolio transactions that we have done, because we don't have a lot of water under the bridge regarding those, but out of the gate they are performing very nicely.

Geoffrey Dunn, KBW.

Tom, on the bulk business that you're doing it sounds like you continue to be pretty conservative looking for kind of [mod pool] type business. Do you expect that the growth of that business to gradually pressure your premium rate, or do you think the improvement in the purchase market and maybe some general price improvement can offset that?

It is relatively conservative, with a reminder that we do not participate, and have not participated in the subprime bulk market. Secondly, as we look out for 2007, I would expect to get pricing accretion, or increases, from our insurance in-force in this space, simply because we're going to see larger concentrations relative to the total in the GSE Alt-A space and also the portfolio of business.

It is important to remember because we did not -- we have not participated heavily into this market, particularly in the subprime in the past, that we do not have large insurance in-force books built up with large premiums that are now running off. So clearly over the next year or so you should expect to see, I think, nice growth with our participation in the bulk market, which will serve to provide revenue accretion, if that is the correct word, revenue growth.

Okay. You provided a lot of updates in your guidance for the U.S. business. I was wondering if you could also update us on the expense side, simply because it looks like it is running better than I was expecting, at least, and you're picking up the added topline leverage?

That is exactly right. I think our guidance on that was that we were shooting for 2 to 3 basis points improvement year-over-year. I think we were at about 32 basis points last year, 2 to 3 full points, I'm sorry about that. And so I think we came in at about 29, and I would look for us to stay in that ballpark for the rest of the year.

I think Jeff Schuman has a follow-up please.

Just a couple of quick product questions. First off, long term care you have introduced a lower premium product. I was wondering what you did on the benefit side to create the opportunity for lower premiums, and whether that positions you uniquely in the independent channel?

And then secondly, on the life insurance side you have had some growth in the universal life first year deposits, much bigger growth in the excess deposits. Is that something -- that strong growth in excess deposits, is that something that is trendable, or is that a unique situation we should be careful about extrapolating?

It is Mike. I'm going to have Buck Stinson answer the first question and Bill Goings will pick up the second.

On the lower premium product we're excited about this product. What we did was introduce some of the features that you would normally find in traditional health insurance products, like coinsurance, and deductible features that are not traditional in the long term care product as we know it. That, combined with adjusting some of the benefits how we pay for room and board in assisted living facilities, helped us bring out a product that is carrying a price point roughly half of what our normal product is in the market today.

We're excited and we think that that is going to have a lot of play, not only in our independent channels, but also across our career channels, and with some of our affinity partners. It is a very unique product, and we have seen a lot of excitement in the market. We launched that on April 30 through our career system, and we will be doing a full rollout later this summer.

To your question regarding UL growth, we feel very good about our UL growth quarter-over-quarter, year-over-year. We're very attractive in the short pay product for the [milless] guarantee product, and as a result we are attracting excess. I do not think that it is something that you can trend, because these excess deposits are -- tend to be very lumpy, and so therefore projecting them going forward is a little bit of an art, not a science.

Al Copersino, Madoff.

I had a question I guess for Tom. Pat mentioned that there were a handful, maybe four producers in Australia, that accounted for a portion of the increase in the losses. It sounds like those losses are from the '04 and 2004, 2005 vintages, and that you feel much better about the 2006 vintages.

Obviously it is a little bit soon. We have, I guess, about 12 months or so of data on that vintage, but can you talk about how that '06 Australia business with those producers is trending? I am assume you're seeing some good signs that make you hopeful on that front.

Yes. This is Tom. As I said to you earlier, it is very early, but we are confident with our knowledge of the business that the actions we took in early 2006 to rectify the drivers, the key drivers of the losses in '04, '05. We were confident when they put them in. And now after as long as five quarters, I guess, and as short as one quarter when you think about the 2006 book. When you look at the various measures that we do -- that we utilized, and this is primarily to the delinquency levels, we see those performing again in line with what we would expect. That is the best evidence that we have. And honestly that is exactly what we look at. But, again, I'm sharing with you how we view it and what we do look at.

I also want to remind you again that very importantly there in 2006 there has been a continued strong economic -- a continued strong economic environment in Canada, and a recovery of home price appreciation as well. So that is going to help that 2006 book. And if we can continue with that level of home price appreciation, that will also help us with outer years performance for 2004 and 2005 book.

You mentioned Canada, did you mean Australia?

I'm sorry. It is my error.

Thank you very much.

Thank you, and I apologize to you for that.

Not at all.

Bob Glasspiegel, Langen McAlenney.

I just want to go back to the domestic mortgage insurance discussion. Just sort of summarizing what you seem to be saying is losses are coming in a little bit more than we think -- dislocations in subprime obviously. But the change in the environment are so positive that we're going to start to grow our way out of any of the issues these higher losses are going to generate. So we will sort of produce the numbers we thought we were going to going into the year.

Are there any risks that growing now might be on -- what are the -- it sounds like you are looking at unemployment as one key driver, that if that ticked up you may think you might not want to grow here. What else could go wrong to try to grow here, given that we could get a change in the macro environment that was pretty significant?

This is Pat. I will start with your answer to that question and turn it over to Tom. What I did describe was that with respect to the claims we expected to see in the current environment, they are -- the claim payments themselves are emerging as expected. And when we look at the reserve side of the equation, we are looking at changes that have occurred recently in certain regions, and how they affect our estimates of loss payments or claim payments in the future. And we take those into account, the changed economic circumstances, in generating the loss provision. That same information that we use in understanding the emerging financial results is also available to the people who are performing risk management on the portfolio and doing the pricing. And I will turn over to Tom for a clearer view on how we are handling that.

Again, it is a great question. The way I think about it is this. As Pat was saying, and I guess that we have provided, it is actually deeper or higher claims guidance we have provided previously. And we did that by our assessment that year-over-year we're going to see this 3% down trend in home price appreciation, which is I think more aggressive than most have in the market as well. I feel at this point reasonably comfortable with the claims guidance we provided to you.

Unemployment today is 4.5%, and we do view that our original expectation was that it would be at 4.9, and I think that we made again -- that continues to be our expectation, moving back up to 4.9. But to your point, should there be unemployment issues or pressures, that clearly would roll through and impact our reserves for delinquency on the year-end and to the next year as well.

Let me comment about revenue as well, because I think when we were talking to you earlier and we said there were really two fundamental changes here. So in short we are seeing deeper home price appreciation and that is going to spillover into our prime book, we believe as we have discussed.

But the revenue equation should not be underestimated as well. And when looking at both most importantly the flow and also the bulk revenue growth that we saw in the year, it is indeed is above what we were expecting. And I remain equally helpful that we will continue to see strong growth there through the rest of the year, maybe some increased purchase penetration, that will serve to offset whatever issues we made possibly encounter on the loss front as well.

So while it still early, we have clearly increased our claims guidance, and more than we have provided you later, and we have also increased our revenue guidance based on the performance that we saw in the first quarter.

Joan Zief, Goldman Sachs.

I have two questions. The first is on the mortality side, when you saw this fluctuation did you go back and look was it in new policies, was it universal life or was it term, was it UL with secondary guarantees? Was there any way you could slice to see which area of your book had this negative mortality swing?

Then the second question I have is how discretionary is your spending on all these investments? Because what happens if the losses on the mortgage insurance, whether it is the U.S. or international, just happened to be significantly worse than you think -- that the moves towards delinquencies increases beyond your expectations for whatever reason. Do you have some discretion in the second half is that materializes, do you postpone your investment spending into 2008?

Pat, why don't you start off, and then I will come in on the second question.

Sure. With respect to the mortality, when you look at -- when we look at the quarterly fluctuations, the numbers of claim counts and the variability and who dies, whether it is people with large policies or small policies, means that basically there is limited credibility to the kind of actual to expected mortality results in any one quarter, which is why we refer to these as normal quarterly fluctuations.

To get at your underlying question about trends in mortality, you have to look at our book over a series of quarters. And when we do that, we have a lot more numbers of claims and trends and claims that we can look at, and we can actually segment the book a little bit between the term products and the UL. And what I would share with you is that both the UL products and the term products have been consistently performing over time, kind of in the range of pricing expectation, actually slightly under. The only observation I would make is on the term book the trends in mortality seem to be a little bit more favorable, if that gives you an idea how it looks like overall?

Thank you.

On your second question I think you have to segment the question. This is Mike. First internationally. Internationally there is only one loss issue, and that is four mortgage managers in Australia. You look at Canada, strong, Europe strong, rest of world strong. And if you go to Australia it is a bimodal distribution, as far as those four being at one end of loss ratio spectrum and the rest of the portfolio performing extremely, extremely well within expectations. We have analyzed that to the nth degree and think that is very well boxed. So international is not where I would sit there and focus on saying is there something unknown out there?

As Tom and others have talked, in the U.S. market I think we're very focused on things like housing supply, as far as unsold homes, and therefore home price appreciation. I think the economy is relatively strong. I know there's a lot of question about is there potential spillover effect. Even that aspect I think it is within containment, unless people don't take any action to help borrowers restructure loans. And you see financial institutions and those who can trying to keep people in homes, which helps as far as not having more housing stock coming onto the market, and therefore impacting home price appreciation. So that is where there is more variables out that we think the way the portfolio is structured and the way Tom has laid out our assumption on home price appreciation, that even taking up our loss estimates there as far as paid claims, estimates will cover that.

For any fluctuation you would see in '07 in that area, I would say we think we have enough other levers, and the business expense could be one of them most certainly. But we said in responding to Bob's question, you have seen some real positive aspects on the revenue side in the U.S. MI, but Genworth-wide we have some other levers that we think could deal with any scenario we see in '07, and therefore that is why we feel good about our guidance.

Steven Schwartz, Raymond James & Associates.

A couple of questions on Canada for Tom. First time, could you broach the subject -- I guess it is two weeks ago now that the Canadian Exchange, Tom, their requirements on MI, can you talk about how that might affect you?

As well, could you talk to the creditor business that you are doing there on a reinsurance basis? I'm guessing that is through banks. I think RGA is big in that business. But I have talked to some others who aren't real fans -- don't think there's much margin in that business. Maybe you can tell us what that is about?

Tom, why don't you start off on the MI question.

Sure. I believe the change you're referring to it is the fact that the mandatory requirement for mortgage insurance has now been increased from 75% loan to value to 80% loan to value. That has been in the works for, I guess, well over a year. And it probably represents about 5% of the market. So there will be, if you will, a 5% impact on our flow of business going forward. Again clearly offset by the continued raw growth of that market in Canada and our penetration.

It obviously will help our bulk business a bit, because the bulk business in Canada is primarily the insurance of those loans that do not have flow mortgage insurance on them that are being taken into the secondary markets. We don't really see any real material impact from that change in Canada.

Pat, do you want to provide prospective on the payment protection question?

Sure. I am very familiar with that business actually. I guess the way I would ask you to look at it is we're looking at it as a very safe business. And also we have important distribution relationships with the banks in Canada, and we're taking action to make sure that we are serving their needs from a number of dimensions.

Very safe sometimes in insurance means there is not a whole lot of margin on it. Is that a fair statement?

This is Mike. You look at it as lower margin than other markets that we're in, and that is why we're very selective.

Darin Arita, Deutsche Bank.

On the payment protection business, and premiums year-over-year for the first time grew in a while. Are we now past the drag caused by the runoff of spillover return UK business, or is there something else driving the growth here?

This is Pat. We are seeing good growth in the payment protection business as we expand the marketing effort and move into new country markets. We still do see a little bit of a drag on the growth in operating earnings coming through on that business as we roll off the older book that we're running off. And that will become less over time. When you look at the relationship between growth in revenues and growth in earnings, the growth in earnings is a little bit less than what you expect due to that, but that will diminish.

Then I guess turning to Australia, can you just remind us what happened with these four distributors that are causing problems. Why did the problems occur and how were they resolved?

Tom, do you want to provide some prospective.

I will be glad to do so. Again I'm not going to get into to high level specifics related to these individual customers, but suffice to say that in '04 and '05 that there was a movement in underwriting guidelines that was undertaken, that when we looked at the development of that book in the later 2005 timeframe we were not pleased with, if you will.

The other issue that we had with the four mortgage -- these limited distribution partners is they were domiciled quite heavily in the New South Wales area. And given the fact that we saw a decline in home price appreciation, a margin decline over '04 and '05, it added to that issue. Your corrective action was simply, as I said earlier, was going in and pulling apart every aspect of what was driving the losses, and taking corrective action vis-s-vis the policy and procedures that were being utilized by those mortgage managers. And also working with them on a going forward basis to minimize the losses that had been emerging from those books.

It is fair to say we have added some resources to the market, and with a lot of focused responsibilities to prevent revisiting that experience.

Operative Andrew Kligerman, UBS.

Just a quick follow-up on that Australian distribution managers issue. I'm just not quite clear what you missed on the underwriting guidelines. And maybe just to extrapolate why would we be sure that that couldn't happen elsewhere, both internationally and in the U.S.?

Then my second question is just any updates on long term care, the older block? I saw a comment in the press release that you're focused on transitioning the performance of our old long term care block. Are you doing anything with reinsurance or securitization, any real -- any updates there?

This is Mike. Let me just provide a perspective on Australia that I think you might find helpful. And a very good question. Simply stated, with different relationships you can have different levels of depth for your underwriting review process. As you know, underwriting is a multistage process with all sorts of documentation. In some cases there is huge inches thick packs of information. In the other cases there is more streamlined packs of information. There are different levels of audits, as an example, or different ways you examine appraisers and relative appraisal accuracy.

And it was a confluence of differences on all those types of fronts that frankly caused a problem. And it is fair to say we have tightened up on every one of those funds. We have focused on a different group of appraisers we work with. We are dealing with a lot more documentation. We review it. We have added resources to areas like audits and review. So we think we had a very responsible approach in place. Sometimes you get some variation in your experience, and with that variation you have to make adjustments.

Now one of the things I think it is important for an organization to do is that when something doesn't go the way you think, you make sure you learn from it so that you don't repeat it. And we have done two things. One is we made sure through all of the cycles we took everything we learned in the U.S. market and took it internationally. And internationally we took things like we learned in this Australian experience and took that back around the world. So weaving that web of learning and best practices also is a reason you should step back and say, why should I feel good this has not recurred?

I think you can also go to the U.S. and just look at the performance. What is happening in the U.S. market and how the trends would unfold is basically exactly what we have been telling the investment community. And it is exactly why we designed the dispersion in our book and stayed with a prime-based book. And I think that strategy has been vindicated, so another prospective.

Now on your second question on long term care --.

Ladies and gentlemen, we have time for one final question.

No, we had a second question there that I am still finishing. On your question on long term care is that we have five levers to deal with that older block. We made some nice progress managing our own operating expenses. A second lever has been to deal with the investments behind that block. We have used things like forward hedging and other ways to create a more predictable pattern of investment income. Continue with claims process improvements, making sure people get the care they want, but also have the opportunity for rehabilitation. And investing heavily on things like nurses and care coordinators helps that happen.

And then one of the areas that you touched upon that we have talked about is sort of a blended asset liability placement opportunity where you put different types of assets and liabilities together and try to afford yourself of liquidity available in the Capital markets to release some capital from that old block. We're intently focused there, along with there are some reinsurance options in the same category. And we will continue the examination we have talked about on prior calls of the option of in-force rate actions on older blocks of business. So five levers. I would say a lot of intent resources on those last two levers that I mentioned.

We have time for one final question. Your last question comes from Jimmy Bhullar, JP Morgan.

I just have a couple of quick ones. The first one is on tax rate. I think your previous guidance had been 29%. It is that right? You are revising that to 30% now?

Pat, if you want to take that?

Excuse me, could I ask you to repeat that?

Just on the tax rate, I think during investor day you had mentioned that you expected the tax rate for '07 to be 29%. In your commentary now you said 30%. Is that correct, or am I getting something wrong?

Yes, you heard me accurately, and we are looking at 30%.

Then secondly, just on the business that you have written through the four lenders in Australia that is coming in a little bit higher on claims. The '04 and '05 books, how long -- how is the deal on that business? How long is this going to be a drag on your results? Like over time should it decline, I'm assuming? That if you can just discuss the accounting on that?

Tom, you want to take that please?

Again, without question it will decline over time. As I indicated to you earlier, we're very hopeful that we have seen -- we will see the peak of those loss ratios this year, which are going to be, as I indicated, in the mid to high 40s.

I also indicated that we are seeing at this point, I think, favorable development of our 2004 book, even as it relates to these four mortgage managers, simply because they are now moving towards the other stages of your delinquency curve. 2005 is emerging into that, so we'll have a loss impact from that in 2007, and to a degree into next year. But again as a result of the corrective action that Mike has described to you, that we would expect that the 2006 book, particularly in 2008, will show very strong performance. So you will see the impact begin to wane.

That is what happens when you isolate the issue, as Mike has described, to the 2004 and 2005 books. Next year we will be two to three years away from that, and you should see improvements in those numbers.

Thank you, ladies and gentlemen. I will turn the call back over to Alicia Charity.

Thank you. And thanks to all of you for joining us today. My apologies for those who did not have the opportunity to ask a question. We will be available today to answer any follow up questions. I also want to mention we are holding our investor day on May 30. So we look forward to seeing you there. Thank you.

Ladies and gentlemen, this concludes Genworth Financial's conference call. Thank you for your participation. At this time the call will end.