Genworth Financial Inc (GNW) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Genworth Financial's fourth-quarter earnings conference call. My name is Jody and I will be your coordinator today. At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to Alicia Charity, Vice President, Investor Relations. Ms. Charity, you may proceed.

Thank you and welcome to Genworth Financial's fourth-quarter 2007 earnings conference call. As you know, our press release and financial supplement were both released last and are posted on our website. We also scheduled a conference call for 11 o'clock this morning, where Kevin Schneider, the President of our U.S. Mortgage Insurance business, will go into some detail on the U.S. Mortgage Insurance business, including the expected benefit from lender captive reinsurance, and provide some stress scenarios designed to answer investor questions around book value. The presentation would be posted at 10 AM, and the webcast again will begin at 11. We look forward to your participation given the limited advance notice.

This morning, you'll first hear from Mike Fraizer, our Chairman and CEO, and then Pat Kelleher, our Chief Financial Officer. Following our prepared comments, we will open up the call for a question-and-answer period. Pam Schutz, Executive Vice President of our Retirement & Protection segment; Tom Mann, Executive Vice President of our International and U.S. Mortgage Insurance segments; Kevin Schneider, president of U.S. Mortgage Insurance; Vic Moses, our Chief Actuary; as well as other business leaders will be available to take questions.

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. We advise you to read the cautionary note regarding forward-looking statements in our earnings release or the risk factors section of our most recent annual report, Form 10-K filed with the SEC, and our resegmentation Form 8-K filed with the SEC in April 2007.

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.

Finally, when we talk about International segment results, please note that all percent changes exclude the impact of foreign exchange. And with that, let me turn the call over to Mike Fraizer.

Thanks, Alicia. In 2007, Genworth delivered 10% operating EPS growth, ending the year at $3.07 operating earnings per diluted share versus $2.80 for 2006.

Overall, I would characterize our 2007 performance as mixed. While we delivered good growth in much of our business, I am disappointed that we fell short of our original earnings goals.

This morning, I will first share perspectives on 2007, covering core strengths and some misses. Then looking to 2008, I will review the market environment and share key priorities.

Let's start with the progress we made in 2007, shifting our profile to higher-growth, higher-return businesses, in particular, fee-based retirement offerings and our International lines.

In retirement income, we introduced several new products and executed well on a distribution strategy that focuses on top revenue and profit generating distribution partners. This group of what we call focus firms delivered more than 40% sales growth for the year.

In managed money, combining our existing platform with the acquisition of AssetMark has given us a terrific unified approach to the fee-based advisor market and will fuel strong growth going forward. We have filed a guaranteed income offering for our managed account platform and see sound prospects for expansion here.

Turning to International, growth has been substantial. We made sound progress towards our goal of driving half of our earnings from non-U.S.-based businesses by the end of the decade, with the segment representing 39% of earnings for the year. More specifically, Canada and Australia mortgage insurance continue to grow from increasing customer penetration. Payment protection saw strong sales growth in Continental Europe, plus our expansion into markets including Poland and Mexico brought attractive growth as well.

We also made sound progress in driving profitable universal life and new long-term care production while redeploying capital effectively through both share repurchases and dividends.

Now let's turn to some misses. U.S. Mortgage Insurance was a disappointment in 2007. We recognize that it has been a tough environment, tougher than we anticipated, which brings humility and some lessons learned with it. We clearly maintained a more risk-averse product business mix than the rest of the industry and underweighted California through the strong efforts of our dedicated mortgage insurance professionals, whose efforts I appreciate very much. These decisions led us to outperform competitors.

However, we could have moved more quickly to underweight Florida and a few other markets and further reduce exposure to alternative products. As we pointed out, our substantial lender captive reinsurance coverage, now at 63% of flow risk in-force, provides important protection and will be central to the earnings transition we expect in 2009. So we anticipate a moderate loss in this business in 2008, followed by a 2009 recovery.

In the investment portfolio, we worked to contain our exposure to residential mortgage-backed securities associated with subprime and Alt-A collateral to areas where we could be comfortable with the originators, underwriting, product types, geography, and ratings, while avoiding CDOs altogether. In retrospect, we should have held less of these securities at the single-A and below level. I am disappointed with the speed at which these securities became impaired this quarter, but see current market values depressed below the estimated economic value given today's lack of liquidity for such securities. So hopefully, we will recover a portion of these losses over time, depending on how market factors and securities' actual performance play out.

Entering 2008, we remain cautious given the accelerating downturn in the U.S. housing market, slowing global economies, financial market volatility, and a shifting interest rate environment. Internationally, after a 14% growth pace excluding foreign exchange, we see that shifting to a 10% earnings growth rate in 2008, still a strong result in this market context.

In the U.S., some Retirement & Protection businesses will perform better in this environment than others as consumers tend to gravitate towards guaranteed income and basic protection offerings. We have discussed the transition for U.S. Mortgage Insurance results.

In December, we provided a wide range of outlook for 2008 to reflect market uncertainty, and we're seeing that play out. In view of the current environment, we see 2008 results coming in at the lower end of the $2.65 to $3.15 operating earnings per share range previously provided; and we will update our outlook fully at the end of the first quarter.

With that as context, let me lay out our key priorities for the year. First, we will navigate the storm in U.S. Mortgage Insurance and be the industry leader in improving the risk and profitability business model. Pat will go into additional detail on how we are actively managing risk in this business and the benefits we expect from captive reinsurance coverage. We will see quality revenue growth as the market continues its return to traditional mortgage insurance solutions, but we will be selective in the business we do. We may also serve as a conduit to bring external capital to the industry as a whole.

Second, the growth of wealth management and retirement income remain high priorities for capital deployment. Here, we will build on our focused distribution strategy, product innovation, service initiatives, and risk management disciplines.

Third, we will grow our International platforms responsibly. Let me emphasize that we do not believe in growth for growth's sake. We will rapidly respond in any geography where we see increased risk or weakening performance, and avoid market situations where we don't see a sound risk-reward equation.

For example, we have acted and are acting aggressively to slow mortgage insurance growth in select parts of Europe, including Italy and Spain, where specific lender or market factors indicated weakness. And you will see this in our numbers as we move forward.

Fourth, we are focused on transitioning our long-term care insurance and life insurance businesses in different ways. In long-term care insurance, we're growing our profitable new block of business with new products, independent distribution expansion, leveraging our career sales operations, and are optimistic about our partnership with AARP. Underwriting and pricing disciplines remain top of mind here, and the rate increase on the old long-term care block is proceeding as intended.

In the life business, we have an ongoing shift towards universal life, building off a strong position in brokerage distribution while avoiding stranger or investor-owned life segments of the market. At the same time, we will work to position our term life platform around more attractive market segments and additional distributors, so it is a better home for capital in what has intensified as a very price competitive market.

Fifth, we are focused on strong capital management. This includes extracting underperforming capital and maintaining good capital buffers and capital flexibility. Regarding the former, we aim at extracting underperforming capital through reinsurance, capital markets, or hybrid transactions, and could pursue a closed block transaction. As you know, we have low return legacy blocks of long-term care that we continue to work on.

With the consolidated reassessment of other business blocks across Retirement & Protection, we have identified additional spread annuity and life insurance blocks for potential capital extraction and redeployment. In addition, we will keep a sharp eye on costs in this environment.

To wrap up, we enter 2008 with clear strategies that set the stage for our ongoing mix shift towards more profitable and high-return business lines that reinforce Genworth as a company that provides financial security.

We enter 2008 with a magnified focus on risk management, given the environment. And we enter 2008 with a sound capital position with multiple levers that provide a foundation for targeted growth and the commitment to optimize capital redeployment to create value.

With that, I will turn the call over to Pat. Pat?

Thanks, Mike. This morning, I will focus on how we use risk management disciplines to generate sound growth and navigate today's volatile financial market environment. We're being cautious, making disciplined choices as we manage existing businesses, our investment portfolio, and selectively position Genworth for growth in 2009. I will illustrate this in a fewer areas.

First, how we are managing business risk around the globe to be both selective and opportunistic about growth. Second, how we are managing risks in U.S. Mortgage Insurance through loss mitigation, captive reinsurance, and importantly through price, product, and guideline changes that will target a high-quality new business portfolio going forward. Third, how we manage risk and return expectations in our investment portfolio through diversification, asset liability management, and credit disciplines.

Let's start with our International businesses. In 2007, we saw highly favorable market conditions internationally. This contributed to sales growth, particularly in Canada, and strong 14% earnings growth, excluding the positive impact from foreign exchange.

We have become more cautious since year end that the downturn and potential recession in the U.S. could cause some global economies to slow. We anticipate some market slowdown both in Canada and Australia and are already experiencing a slowdown in Europe, most notably in Spain.

In 2008, we expect slowing in housing finance levels and lower home price appreciation in some global markets. This reflects increased mortgage rates and also some liquidity contagion impact from the U.S. market, although nowhere near the extent we have seen domestically.

With this market context, we are keenly focused on two strategies -- deepening relationships with our lender partners to help them grow, and pulling back in geographies where the risk profile is less attractive.

First, in Canada, we are gaining share with our customers through product development, service differentiation, and lender training programs. In Australia, we are focused on both large banks and regional lenders to help them tap the high loan-to-value lending market to further develop their business with first-time homeowners.

Second, given the economic concerns, we will slow business growth by proactively altering our underwriting guidelines. In Canada and Australia, we're tightening underwriting requirements and restricting loan-to-value distributions in selected geographies. In Europe, we're taking deeper measures to manage risk. In the UK, for example, we have an older book and we have limited new flow production. Here our $1 billion of risk in-force has an average 64% effective loan-to-value. In Italy and Spain, where we have about $4 billion of risk in-force, we have taken actions to aggressively tighten underwriting requirements and other measures, resulting in close to 50% sequential decline in new insurance written in the fourth quarter. Growth is expected to slow further in this market as a result of these changes.

Now let's turn to U.S. Mortgage Insurance. First, I will update you on the loss trends we saw in the fourth quarter. Second, I will discuss captive reinsurance. Third, I will review the results of the actions taken to improve the risk characteristics of the business we are writing today.

Starting with the fourth-quarter loss trends, continue to see higher losses where there are concentrations of alternative products including Florida, California, Arizona, and Nevada. For example, of the $122 million reserve increase in the quarter, underperforming states and products accounted for $106 million or almost 88% of this total.

In particular, losses have been significantly higher than expectations in Florida, where the delinquency rate is now over 7%, high for a prime-based book of business.

We remain focused on enhancing loss mitigation processes and systems, including launching a homeowners assistance website, expanding use of short sales, and working with the GSEs to introduce workout programs to help consumers work through financial challenges and keep their homes.

Second, I want to focus on the importance of lender captive reinsurance and our expectations for U.S. Mortgage Insurance earnings to rebound in 2009. We have lender captive reinsurance on about 63% of our flow book and expect coverage to attach on our 2005, 2006, and 2007 books. This provides a significant backstop to absorb expected increased losses in these books.

This quarter, we realized about $1 million of benefit from captive reinsurance. If losses accelerate in 2008, we could see material captive benefits in the latter half of the year. Our current view is that captives will absorb a significant portion of our losses in 2009.

Now as Alicia said, Kevin Schneider will review the U.S. Mortgage Insurance business and review lender captives in some detail later this morning. To give you a preview, the 2006 book has made the most progress towards attachment. In aggregate, it was 58% of the way there at the end of the fourth quarter; that is up from 39% in the third quarter. And the 2005 book is 49% of the way there in aggregate.

Third, let's look at steps we have taken on price, guideline, and product changes that are already starting to show results. In the fourth quarter, we saw sales of Alt-A decline by nearly 75% from the prior quarter, very close to the result we were targeting. Similarly, we saw sequential drop in sales of 100% loan-to-value products and expect this to build as the geographic restrictions and price increases take effect.

Our 2008 goal is to limit sales of Alt-A subprime and A- to less than 8% of flow production, with the remaining 92% comprised of core prime-based business. We have introduced these changes and aligned product repositioning with the GSEs, who are making similar restrictions and price increases.

As a result of these changes, and opportunities to be more selective in a rapidly-growing mortgage insurance market, we expect to build a 2008 book with attractive risk characteristics.

Next, let's take a closer look at risk and return from Genworth's investment portfolio. We have strong asset liability management, including duration matching and hedging strategies to mitigate financial market risk and assure adequate liquidity. In the current market, liquidity, diversification, and asset quality are all key considerations.

At the holding company level, we ended the year with approximately $375 million of cash and short-term investments, providing funding flexibility to meet additional near-term needs.

Our high-quality portfolio performed well during through 2007, although I was disappointed by the impairments during Q4 of $123 million after-tax. These impairments included $19 million from various corporate credits and $93 million from residential mortgage-backed securities backed by subprime and Alt-A collateral.

In the RMBS category, impairments reflect the write-down to fair market value of securities not expected to achieve original pricing expectations. All of these write-downs relate to securities that are rated at or below the single-A level, in line with where we have higher risk exposures. We believe that the fundamental outlook for these assets is better than what is implied by current market valuations based on liquidity concerns.

Now, stepping back to look at overall asset quality and diversification, nearly 50% of our portfolio is in investment-grade bonds and only 4% of the total portfolio is below investment grade. The investments in mortgage and asset-backed securities investments are comprised of residential mortgage-backed securities, commercial mortgage-backed securities, and other asset-backed securities.

These RMBS securities include $2 billion backed by prime collateral with an average rating of AAA. Another $1.5 billion is collateralized by subprime loans, with 73% rated AAA or AA; and $1.4 billion are collateralized by Alt-A loans, with 79% rated AAA or AA.

The commercial mortgage-backed securities are about 98% investment-grade, with low loan-to-value ratios. About 60% is fixed rate. These have average loan-to-values of 67%. The other 40% is floating, and these have loan-to-values averaging only 48%.

Our other asset-backed securities have collateral such as primary credit card receivables, automobile loans, and student loans. These are highly rated, with 78% rated at AAA.

We invest in tax-exempt municipal securities, primarily in our non-life portfolios. These totaled about $2.2 billion at year end, and 64% are credit enhanced.

We underwrite to the underlying credit of each security in which we invest, and do not rely solely on the guarantee. About 85% of these credits are A-rated or higher on a stand-alone basis. This portfolio is well diversified, and credit performance has been very good, with no defaults.

We also a $9 billion commercial real estate loan portfolio which is largely comprised of whole mortgage loans. Important to note, the average loan-to-value in this portfolio is about 52%. The average loan size is just $4 million, and currently there are no loans in default.

The key point here is that we actively monitor and manage investment risk. In addition to active asset liability management, we diversify exposure by asset class, sector, and individual credit; and we actively monitor and manage liquidity.

Finally, we remain well capitalized to fund growth in 2008 and to absorb increases in U.S. Mortgage Insurance losses.

First, in U.S. Mortgage Insurance, we have multiple levers including changing intercompany reinsurance arrangements that redeployed U.S. Mortgage Insurance capital to fund growth in Australia and Europe. We can also shift U.S. Mortgage Insurance investments to improve risk-based capital levels.

Next, we are intensely focused in our Retirement & Protection business on extracting capital from old long-term care, life, and annuity blocks as additional sources of capital.

Finally, we can and will pull back growth in areas with less attractive risk-adjusted returns.

To wrap up, Genworth's focus on profitable growth, risk, and capital management will continue. Events of the past year remind us of how important these disciplines really are.

We are cautious about 2008, based upon the uncertain and changing markets we see around the globe. Clearly, 2008 is expected to be a transitional year. Our focus during this period is on making disciplined choices to position Genworth for future growth and meet our longer-term financial goals.

With that, I will open up the call for questions.

(OPERATOR INSTRUCTIONS) Andrew Kligerman with UBS.

Hey, good morning, everyone. Two questions. First, with respect to your comments about 10% growth in International and you alluded to some issues in Spain and Italy, what are you -- I mean, the loss ratio was a superb 29% in International mortgage insurance. What might we be looking to see during the course of 2008, given your more cautious comments about International?

Thanks, Andrew. Let me turn that over to Tom Mann.

Andrew, again, as we wrapped up 2008, very pleased with what we saw. We did see an increase --

Wrapped up 2007.

Excuse me, I'm sorry, 2007.

If you're pleased with '08, I'm really excited.

Yes, well, I'm excited about 2008, too. I'm sorry about that. We did wrap up 2007 in very good shape. We did have an uptick in our European loss ratio in the fourth quarter. If you focus on the supplement, [where] they provided it actually touched about 59%.

As we look towards next year, we have provided in the outlook -- or as reflected in the outlook that Mike provided to you, we're looking for continued strong performance in Canada and Australia; and we're looking for increased loss ratios in Europe that do reflect the slowdown that we are seeing in Spain.

I mean, when you say increased in Europe, are you thinking something in the 100% range like we are seeing in the U.S.? Or does it sort of stabilize at something not too much higher?

Andrew, we currently -- our pricing levels in Europe are at about a 60% to 65% level. We will expect to see it increase over that next year, and we provided that in the outlook. But I am not going to get into the exact range that we may see there. But it will be above pricing.

I want to remind you that when you think about Europe, it's only about 5% of our global risk in-force and Spain is about 2%. So our risk in-force in Europe is comparatively small because of the very low coverage levels that we have on a [per-loan] basis there.

As you look at the total European equation, again, Canada will be very sound. We're actually expecting Australia to maintain similar levels to 2007, possibly come down.

So I think we're going to have a very, very strong global performance in 2008. Again, the diversity of the book and the global economies is what we have strived to have to help us offset individual issues that we may have on a country-by-country basis.

Then just my other question is with regard to capital. The commentary about spread, annuity, life insurance for potential capital redeployment, could you give us a sense of how much capital you're thinking in aggregate of unlocking and what the likelihood is there?

Well, Andrew, as we talked about at the investor day, we were looking at some blocks that in total add up to about $1.4 billion across some of the life and annuity lines. Then we will have to look within those and see what portion of those were -- Pat, any more specifics on that?

No, that is exactly right.

You feel like there is some high likelihood this year of your unlocking some of this?

Well, again, as you know, we unified Retirement and Protection and put them all under single leadership early last year. As we did that and integrated all of the teams and the functions, we just took a fresh look, a fresh reassessment of where do get relative return and where are our opportunities.

As we completed that in the fall time frame, that is where we identified this. So yes, we will work intensely on attacking a portion of that.

Super, thanks a lot.

Darin Arita with Deutsche Bank.

Morning. Just a question on Canada and Australia. It sounded like Genworth is tightening its underwriting there. I was just wondering if that is a reflection of seeing any fundamental deterioration in those markets. Or is it really a response to what is happening on a macrolevel?

Tom, you want to take that?

Sure. Darin, it is entirely precautionary. We have not seen a material deterioration in any way, shape, or form really in the Australian or Canadian economies.

In fact, Australia, the consensus in Australia is it going to continue to perform very well despite what may happen in the United States environment. But again, when we look at the regional concentrations that we have there and also particular areas around New South Wales, we want to make sure that we are precautionary.

And it's really the same story in Canada as well. Canada is a little bit more directly linked to the United States. In other words, when we do have slowdowns in the U.S., you'll see it find its way to Canada a little bit more directly. But again, the consensus in Canada is for a degree of slowdown, nothing material, but the moves are entirely precautionary.

All right, thank you. Just a question on capital. It sounds like we are slowing the growth appetite in International here at least on the mortgage insurance side. So can we take that to mean that there will be increased excess capital generation in 2008?

Pat?

At this point in time, you know, we are seeing a bit of a slowdown as you describe. But at the same time, we are seeing some uncertainty in kind of looking at the U.S. economic environment. So we haven't updated our projection at this time; and we will give you a more complete view or more updated view at the first quarter.

Great, thank you.

Ed Spehar with Merrill Lynch.

Thank you. Good morning. I have a few questions. I guess, I'm sorry if I missed it, but in terms of capital I think you said you were going to update projections at the end of the first quarter. What about what you have said about share buyback? The [500] per year for the next couple years, is there any change there?

Ed, let me give you a couple perspectives on capital. Again, we ended with about the same capital capacity we talked about at investor day of $900 million overall. Going through where we are right now, that is probably roughly $800 million.

Now, when we look at capital deployment, of course we are going to be selective, as I have talked about, in growing new business where we think it makes sense. So, it will first go there.

When it comes to the share buyback, we bought back at this point probably about $100 million worth of shares. We will do that gradually as we see it making sense in the market. I would rather use, for example, capital from lower-return blocks of business to buy back shares with. This is not a market, when you look at the pricing, where you would use things like debt or hybrid financing and redeploy that to share buyback. I just don't think that is prudent. I don't think that is very economically attractive given how some of the debt and the hybrid markets are priced as well.

So we will stay looking at this on a gradual basis, preferring to redeploy capital from low-return blocks to fund any buybacks as we move through the year.

So just to be clear, the $100 million, is that sort of what you are saying you have done in January?

I'm just saying that is from December, which we had 24, plus an incremental amount that would bring total to date, since we announced the two-year $1 billion authorization, to $100 million.

Okay. Then, the other question I have is I wanted to get some clarification, Mike, on the comment you made, I think upfront, about something like -- we may serve as a conduit to bring capital to the industry as a whole. Could you talk about what you mean?

Sure. In fact, Kevin, why don't you take that, since you have been looking at this area?

Yes, good morning, Ed. Mike's comment, I think given the current credit environment and the potential for higher-quality business growth that we see out there, as guidelines get firmed up and tightened and pricing improves, there is obviously some discussion that the mortgage insurance industry could be looking for some capital.

At the same time, there are others looking to provide capital in that same type environment as they look at the same opportunity. Since Genworth is generally viewed as a good manager of risk and of capital, we could provide the expertise to more effectively deploy some of that capital.

That could be accomplished in a couple of different ways. It could be accomplished through reinsurance entities. It could be accomplished through ventures. So we are exploring a number of things there and will remain -- we will update as we proceed on that.

Ed, just to be clear, it doesn't change our capital allocation. It just -- we see new interest, new capital interested in coming in. So again, we can serve as an avenue.

Okay, that is what I wanted to be clear on. Then the final question is, we have sort of seen how the U.S. MI business can deteriorate in a very challenging environment. Can you help us understand? If you had a really bad year in International, and let's say your geographic diversification did not work as you would expect it to over time, can you give us any sense of what a really bad year in International is, in terms of loss ratio deterioration?

Is it possible for it to be up 10 points in a year, 20 points in a year? Just anything on that I think would be helpful.

I guess, Ed, let me ask you a clarifying question. Is, when you point towards a really bad year, I think you are pointing towards -- are you talking mild recession, deeper recession on a global basis?

I would say, let's just say a deeper recession. Mild to deeper recession on a global basis, and we don't have the benefits of diversification that maybe you would assume.

Let me and then just give you a general perspective on a recession. I think that might be a way for you to think about it.

First of all, we look past technical definitions of recessions and look at what I will call practical definitions of recessions. So you look at corporate performance, what does that mean to equity markets and credit performance and investment portfolios. You look at employment levels. You look at consumer buying and payment behaviors, because either it impacts spending or their investing and protecting behavior, or the default risk on forms of loan.

We of course look at interest rates. And then we look at real estate markets, both residential on the one hand and commercial on the other. Residential for mortgage insurance; commercial saying -- how do you feel about your investment portfolio? Though I think Pat made it quite clear that we feel just fine on that basis.

When you put that all together, if you cut across International you would see sort of something like on a mild scenario about $0.07, $0.075 of pressure. In a heavier scenario you might be looking at $0.13 of pressure in International with a severe global recession and how that would play through.

I think that might be one way to look at it. Tom, you want to provide any more specific color?

Yes, Ed, this is Tom. I would like to go back to something there I also pointed out on the first-quarter earnings call. I think it is very important to remember that the global housing markets are virtually nothing like those that we do have in the United States. The nominal amounts of nonprime originations globally with the exception to that would possibly be the United Kingdom.

The global markets are categorized by larger banks. There has been some reliance on the capital markets, but much less on the mortgage-backed security markets. As of this moment we are seeing some liquidity impacts, but very, very manageable in Australia and Canada and a little bit deeper in Europe.

When you think about the fact that it is the liquidity issue that is driving the issues in the United States, that to me gives me a relative degree of comfort when I look globally. Now there is a question that if you have US slowdown, what is the contagion impact globally. Again, I want to keep reminding everyone that we have already reflected some economic slowdown in the projections that Mike and Pat gave you earlier.

I want to continue to point out that about 95% of our risk in-force is in Canada and Australia. If I burn down, work through those for you very quickly, the Australian economy, while historically somewhat linked to the United States, has not been linked in a big way. We do expect and I think Australia expects a very limited impact. Home price appreciation actually accelerated in 2007, and the bias in Australia today is actually towards raising rates, and that is what we have seen. In other words, there are growth and inflation concerns.

So we are watching what is in Australia because it is commodity based. As I said earlier, we are watching some areas of New South Wales and we are taking precautionary actions. But I do believe that, despite what may happen in the United States, Australia is going to be reasonably solid.

Canada is a little more directly linked to the United States as I talked earlier. We do expect home price appreciation to moderate. We do expect interest rates, however, in Canada to begin to fall back next year, which would be a benefit to their economy, similar to what you are seeing in the United States.

We continue to watch their economically based regions, particularly the Pacific region and Alberta as well, and some selected areas around Ontario that are uniquely linked to the United States manufacturing or exports to the United States, particularly in the automobile industry.

But the linkage in Canada I think is a little bit more pronounced; but we feel very, very good about it.

The area that we're being very careful about is Europe, which as I said earlier is about 5% of our risk in-force. So that is not giving you any specific loss ratio sensitivities. I think Mike covered that. But again I think when you look at our International businesses, terrific revenue growth next year reflecting those unearned premium reserves; strong diversity; and two large economies that we think will do pretty well in 2008.

Thank you. Very helpful.

Steven Schwartz with Raymond James.

Hey, good morning, everybody. I had three questions. First, just looking at the revised outlook, Mike or Pat, I'm kind of interested. In the investor day you provided a split-off between U.S. MI and the rest of the businesses. Do you see both segments down at the lower end of the range? Or do you see it as being much more driven by U.S. MI?

Well, we have seen two things. One is, as I said, we would see U.S. MI at a moderate loss. In other words, that could be between -- someplace between a breakeven performance and the down side scenario of losing about $100 million that we showed at investor day.

I would say it is too early to call that. You have to look at the market factors, and then the other factors, interest rates, some slowing economies. You look at the equity markets here; that has had some moderating impact. You have to put those all together, and that is why we talk about the lower end of the range.

Okay, fair enough. Pat, what are you using for the base for International to come up with that 10% number?

Well, we basically took out the FX. If you look at year over year, we had -- first of all, we of course had some pickup with the earnings curve adjustment.

No, no, I am talking about -- excuse me, I'm talking about '08 versus '07. Presumably you are not assuming or -- FX?

That is my point, though, if you're looking at the 10% V, first of all you have to say -- what is it coming off of? It is coming off of '07.

Right.

So when we take out the FX, and '07 came in a little higher with the earnings update. So then the assumption then is basically a little slower growth from 14% to 10% on a comparable basis when you strip out the FX impacts and recognize that we were a little heavier in the fourth quarter than anticipated, as far as delivering profits with the earnings curve update.

Got you. Then --

Hold on, Pat may have some additional color on it.

If you're just looking for a number, we are looking for the growth off $585 million.

Okay, that's good. Then, Tom, you just touched upon with Ed the market is so different in Europe; they don't have the products, maybe even the same products that we have here in the United States.

So what entails slowing your business down in Europe? What kind of steps do you have to do to make that happen?

Steven, again, a great question. It is very important as you said to remember that the products around the world are very different than the United States. You have got to remember that our European growth has been recent, and therefore we have been growing the business over the past two years in face of some very nice economies.

What we are seeing in Europe, particularly in Spain, is a slowdown. We are expecting some upward pressure on unemployment. We do believe that Spain is going to experience and is experiencing a more material liquidity impact than the rest of Europe and certainly the rest of the world. We have seen home values soften in the fourth quarter, and we expect them to fall next year as well.

So we have attempted to be proactive in that regard. Some of the items, the areas that we have focused on is very similar to what you have seen in the United States. It is significant reductions in the high loan-to-value product levels. For instance recapping those at 95% max and limiting to 90% in many of the areas of Spain and Italy. We have tightened underwriting guidelines. We are working to reprice many of our products there as well.

So I think as I believe Pat mentioned to you earlier, those are the actions that we are taking and will continue to take. It did result in a 50% reduction of our new insurance written in the fourth quarter. Again that is a measure of the effectiveness of those actions.

In addition to that, based on the actions that we are taking and/or will take, we do expect that, for instance, our Spain new insurance written levels to decline approximately two-thirds in 2008.

So in summary, it is really loan-to-value differentiation, underwriting, and regional dispersion of your product.

Okay, great. Thank you.

Dan Johnson with Citadel.

Just a clarification to go back to this 10%. Was this referring purely to the International MI outside of Canada and Australia? I am still trying to tie what the base is that we're talking about.

This is Pat. It is total International.

Total International? Got it. Got it, okay. Let's see here. On the portfolio, what were you seeing in the Alt-A environment? I can't recall exactly what other people have done. I haven't seen a whole lot of write-downs, I think, of Alt-A.

But what are you seeing in the marketplace that -- and this is on the investment side -- that led you to revalue those assets?

Let me turn it over to Vic Moses, who is our Chief Actuary and leads our risk management organization.

Dan, this is Vic. In looking at Alt-A, we think actually the performance on Alt-A has held up fairly well to date. We are seeing some slowdown in prepayments and some rises in delinquencies. We cash-flow tested any of our securities that were below investment-grade, and actually tested many that were above investment-grade for performance.

In the end in the Alt-A portfolio, we took year-end impairments of only about $34 million pretax. That number reflects some securities that actually didn't show principal impairments; they just showed cash flow failure due to the timing of the actual receipt of funds. Securities purchased at a premium, for example, that are extending in this environment.

So overall, Alt-A still continues to perform reasonably well, and we hope it continues to do so.

When you look at the actions of the rating agencies, they got somewhat busy in the fourth quarter, but got really busy here in January. Can you tell us within the subprime portfolio how much of that portfolio got downgraded during the fourth quarter?

Then how much of it has been downgraded since the fourth quarter? Since that looks like where most of the action has happened.

I don't have the actual numbers for downgrades in the fourth quarter. That is already kind of factored into the year-end analysis that we have done.

We did take a hard look at securities that were downgraded in the first quarter, and S&P took actions in January. Those actions affected 22 of the securities in our portfolio.

Looking back at the impairment analysis we did on those, we had impaired 12 of those; I think three or four of them were already non-investment-grade. That amounted to about $42 million of our write-downs for the quarter.

There were 10 securities we didn't impair; and the book to market on those 10 securities is about $37 million.

The underlying value of those securities?

Book values?

Yes, roughly.

On the portion that we impaired, about -- on the total population about $125 million of book value.

Can you remind us of what your OTTI policy is? How long do things have to stay down before you have to take it through the income statement? If it is at all mechanical.

I think I can -- I am not the accountant here, but let me just give you my take on it. We don't impair these on a time and distance basis. These are impaired on a cash flow testing basis.

So any security that goes below AA we will cash-flow test each quarter. So we're actually looking at our best estimates of the return on the cash flows.

Great. Then one last one on the mortgage side of the -- the HPA outlook. What are we -- what is our best estimate now in light of all the economic data we have seen? What are we thinking about HPA for '08 and '09? Thank you very much for taking the question.

Yes, Dan, first I just wanted Pat to finish answering your question on the valuation approach and then we will go to HPA. Okay?

I just wanted to give you a very specific answer. We don't have a bright-line test with respect to looking at those securities that Vic was talking about. But we take a very hard and detailed look at everything that is significantly impaired beyond a six-month period.

Okay, Kevin, do you want to pick up on Dan's HPA question?

Yes, I think the best way to think about HPA continues to be to think about it in terms of sort of peak-to-trough declines. We had last thought that the total run in that peak to trough was going to be about in the 12% range. Our current view is that is going to continue to extend out to about 14%.

So as I think about that, it is about 3% that we realized in 2006; roughly another 6% that we realized in 2007, really from the end of '06 to '07. So another 6% or so to go. That continues to be a fluid number and be updated accordingly as inventory supplies seem to continue to grow in the market.

You would expect that remaining 6% mainly, or I guess exclusively, to fall into '08 at this point?

I would take that 6% is primarily '08, with some recovery beginning to recover in '09; but obviously there's pressure on that 6%.

Yes, understood. Thank you very much.

Mark Finkelstein with FPK.

I have got a few questions. Just to go back to International, I think you covered the MI side. I am actually curious about payment protection. I guess what is the historical sensitivity to earnings from changes in the economic environment? That is my first question.

Tom, do you want to take that?

Sure, I will. I would be happy to. Let me just step back for a little bit and remind you that in our payment protection business the coverage that we provide is triggered by several events if you will -- death, accident, disability, and, very importantly, involuntary unemployment. Also remind you that of our portfolio insurance in-force, if you will, only about 25% of that is dependent on unemployment.

The other reminder is that as part of our risk management process, as we have discussed, we use exclusions, waiting periods, and our claim payments are also capped, typically on unemployment base, to six to 12 months. We also enjoy lender risk sharing arrangements.

So as you look to next year, we have reflected slowing unemployment in the European market. I guess a broad rule of thumb for you on that is per 1% to 2% changes in unemployment, it would impact earnings next year as Mike said about $0.01 to $0.02.

Okay, great. Just going over to traditional life real quick, you talked a little bit about the lapsation in some early to mid '90s blocks of term business.

I guess just looking at the earnings impact in this particular quarter, where are we at in terms of that lapsing? Are we kind of past the trough? Or what can we expect going forward? And I guess what remediation efforts are you looking at right now?

We have Bill Goings here who leads our Life business. Bill, do you want to take that?

Yes, just stepping back a little bit, over the past several years we have seen declining retail prices on the term business. We have also see consumer shift to universal life, and probably some recent potential recessionary pressures.

We are experiencing higher lapses versus pricing in certain business underwritten in the early '90s as it enters the post level term period. Overall, lifetime persistency remains in line with or better than pricing. So this is really a timing issue in terms of when the profit actually emerges on this book.

We experienced some pressure in the fourth quarter of about $10 million versus the prior year. These blocks are still in the very early periods of coming out of the post level period. If the trend continues, we could see pressure, further pressure, in 2008.

We are proactively monitoring these blocks. We are evaluating options to reduce the impact should the trend continue, such as further conservation efforts or exchange products or pricing adjustments.

Okay, great. I guess if you're going to address this on the call later today, that is fine. I'm just curious about in the U.S. MI business, I mean just the more kind of cautious outlook and kind of updated thinking in terms of delinquency experience, severity, etc.

Does that have any impact or any changes on how you thought about the sensitivities on '09 earnings that you conveyed at the December investor day?

Well, I will just give you a general perspective, and I would encourage you to look at all of the levers Kevin will lay out on the 11 AM call. Is, I think the real dynamic is we still see that value of the captives coming late in the year and then providing a positive impact in '09.

As Pat stated, as I have stated, and Kevin as well, is -- if you see loss acceleration, the captives are simply going to attach earlier; and that provides more of an '09 impact. So we will have to see how the next couple quarters play out. But if you go back over several quarters even you are seeing an accelerating trend towards attachment.

Okay, thank you.

Eric Berg with Lehman Brothers.

Thanks very much. Good morning, Mike, and good morning to everybody else in, I guess, Richmond. So, can you hear me, by the way? Great.

First question relates to domestic MI. Tom has made very clear over the last couple of years how different your book of business is from that of competitors. But one of the things we calculated last night is sort of how much you're holding in reserves per dollar of delinquency. It does appear to be -- I would not say dramatically less, but noticeably less than your competitors.

My question is, my first question is, I have a couple more after this. What could cause your reserves per dollar of delinquency to be less than competitors?

Kevin, you want to take that?

Really in my mind there's a couple of things, Eric. One is when you look at our reserve for delinquency, it probably has -- is much less impacted due to the business we have done in our bulk channels than some of our competitors. Having not done the bulk subprime and some of the other products, I believe that is probably reducing the number.

Additionally, we have experienced nice growth over the past two years off of a lower insurance in-force base. As the delinquencies develop through a normal seasoning pattern on that new production, as those are new, younger delinquencies they come on line as would be expected. And generally, based upon our reserving process, those are -- as they hit the number -- are being reserved at a lower level until which point they might age through the delinquency channel.

Okay. A couple of questions, related questions, for Pat to finish up here. When you talk about loan-to-value calculations, or loan-to-value on CMBS, is this the original loan-to-value on the underlying loans? Is it sort of an average of the loan-to-value, a weighted average? Just what exactly are we talking about here in terms of timing and calculation when you talk about loan-to-value ratios?

Pat?

Yes it is original, and yes, it is basically a weighted average.

Why would it then be -- why is it a helpful statistic if -- I mean, let's say there had been significant depreciation in the value of properties. I would think you would be much more interested in current loan-to-values.

Not all securities reporting, particularly on CMBS-type investments, provides that information as part of the package. So we were trying to give you consistent measures which would be useful in helping you to understand the risk profile of the portfolio.

Eric, I will just add to that. As you may know, I am an old commercial real estate guy from the '90s. We have always taken a very conservative stance in how we wanted to approach commercial real estate lending. How we underwrite the cash flows, wanting to have good equity cushions.

So the fundamental principle there is to give you an idea how much cushion you were starting at. With again not all of these being like just recent CMBS; we have layered them in over the years. So in a number of these markets you had appreciation. So even if there is an adjustment over time in the commercial market, it gives you a sense of how much buffer is there in a debt structure.

That is the only point that we tried to convey on that. As Pat said, if we could have current -- [while] the service has provided current information, that would, of course, be a statistic that could be valuable and aggregated as well. But we do monitor that; we just don't have that added up from an individual monitoring standpoint for you.

Fair enough. Last question for Pat again. When you talk about, with respect to the monoline guarantors, financial guarantors, and how you are not only looking to -- of course you are not only looking to their guarantee and are doing underwriting of the underlying securities, and they are rated -- I don't remember the percentage that is rated A or AA.

Whose ratings is this? Is this Genworth rating this single-A? When you talk about the underlying rating being A, is this in almost every instance coming from an independent source? Or is this your assessment of the credit risk of the underlying credit?

Well, the numbers that I reported are coming from kind of an independent kind of rating service. But what I would also say is that, consistent with kind of the analysis of how we price these securities and value them, that we shared with you kind of in, I guess, prior disclosures, the important thing to kind of highlight is that we do underwrite each of these securities. We make our own evaluation of value. Then we take a look at what we are being paid and how the security is rated. And we only make those investments where we think they make economic sense. Okay?

Yes, I got it. Thanks very much.

Tom Gallagher with Credit Suisse.

Good morning. A couple more on U.S. MI and then one on long-term care. The first one is -- and I think you're going to talk about this a bit in your call later, but I don't know if you can simplify and put it in kind of higher-level terms.

In light of the deterioration that you're seeing in U.S. MI, can you talk a little bit about the sensitivity and the probability of loss ratios piercing through the back end of some of this captive reinsurance? Not so much on the 4 to 14 coverage, but more on the 5 to 10. Is there -- even under stress scenarios do you still have a very good buffer as it relates to your expectations there? That is my first one. Thanks.

All right, Tom, this is Kevin. You are correct, we will cover that in detail at 11 o'clock. However, I think a simple way of thinking about it is when we looked in aggregate and sort of average the attachment point in and the attachment point out, for both the 40s and the 25 excess of loss agreements, and all the various other similar structures, our view basically is you would have to run at sort of a 15 type frequency rate for the entire 2005 to 2007 books to pressure you to sort of come out the back end of the collective aggregate captive tier.

We view that as highly unlikely and that there is a lot of room between where we are today and what it would take to experience that. I will drill down on that further with additional sensitivities at 11 o'clock.

Okay, and that 15%, Kevin, relates to a delinquency or a default?

No, let me try and clarify that. It doesn't relate to a delinquency. It is ultimate claim frequency. So, we will also talk about the distinction between delinquencies, defaults, and frequency this afternoon.

Delinquency is sort of an early indicator of loans that are behind on the payment. Claims frequency is a loan on which we would make a claim; and that would be talking about claims frequency when we talk about that 15% number.

Okay. Just, I don't know if there is any historical context you can put on the 15% number. Is that --?

I can, it is a great question. The last time we saw a 15% claims frequency from any individual book year of business was back, I think, in '82 during the oil patch crises. So in one year back then that -- or excuse me, one book year that aged through the oil patch crises grew to a 15%.

And that was the worst we have pretty much seen; and that was in '82; and that was just one book year?

We never had three book years in a row, I don't think. What I was talking about was three collective book years all hitting 15% in that sensitivity.

Great, okay. Then the other question is did I hear you or someone else on the call had mentioned, I think, that you're seeing more deterioration in your prime book? Just curious as you think about that experience and if you're seeing a real change there.

No, what we are pointing towards was the Florida delinquencies, and that Florida delinquency and Florida in general was one of the clear pressure markets. And that the delinquency you would see in Florida would be high for a prime book when you look on a national basis.

But beyond that, when you look nationally, as Kevin said and will walk through, we should expect Florida to be an exceptional market, as it is showing it has been. So that was the context.

Okay, so it was very much a regional comment as opposed to across the book.

I mean that was a specific state comment, explaining again where have we seen a disproportionate level of the pressure coming from.

Okay, all right. That's helpful. The last question I had is just long-term care run rate, if I understood the numbers correctly, was in sort of the high $20 million range for the quarter. I don't know if that -- I guess there were a lot of true-ups, so I just want to make sure I am understanding this one.

That was below the run rate we had had for the prior nine months. So as you look toward '08, should we assume 4Q is more of a run rate? Should we average them all? Is your 10% to 15% growth guidance still pretty much intact for long-term care?

Let me turn that over to Buck Stinson.

Yes, Tom, the core business is going to be in that high 20, 30 range for the quarter. But what we are going to benefit from in 2008, obviously, is the rate action on the in-force blocks, and so you will have the additional premium.

We have also got continued strong growth across our individual and group lines in the linked benefits, so you'll start to see the benefit from that as well. So the 10% to 15% growth guidance that we gave you is still intact.

Okay. Buck, would that to be off the -- it would be 10% to 15% off the full year, not kind of where we ended the year?

Yes, off the full year.

This is Pat. I would add that -- use the full year and use the averages. Because when we look at this, we see that kind of lapse rates on the block, termination rates on the blocks, tend to bounce from quarter-to-quarter. So you have to look at it over a series of quarters.

Great, thank you.

Great, well, thank you all for joining us this morning. We look forward to your participation in our call at 11. The materials for that call are posted on our website now, if you wanted to take a look at them early. Again, thank you for joining us.

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