Download - Merrill Lynch Conferences2.q4cdn.com/240635966/files/doc_events/021208_Merrill.pdf · 2015. 10. 16. · Merrill Lynch & Co., Inc. Conference – February 12, 2008 1 Forward-Looking

©2008 Genworth Financial, Inc. All rights reserved.

Merrill Lynch Conference

Michael FraizerChairman and CEO

February 12, 2008

1Merrill Lynch & Co., Inc. Conference – February 12, 2008

Forward-Looking StatementsThis presentation contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,”“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” or words of similar meaning and include, but are not limited to, statements regarding the outlook for the company’s future business and financial performance. Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to global political, economic, business, competitive, market, regulatory and other factors, including those discussed in the Appendix and in the risk factors section of the company’s Form 10-K filed with the SEC on February 28, 2007, the company’s Form 8-K filed with the SEC on April 16, 2007 and the company’s Form 10-Q filed with the SEC on October 26, 2007. The company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Non-GAAP and Selected Operating Performance Measures

All references to EPS, income, and ROE refer to net operating earnings per diluted share, net operating income and operating return on equity. All references to ROE in the business segments are levered, assuming 25% debt to total capital at the product line level.

All financial data as of 12/31/07 unless otherwise noted. For additional information, please see Genworth’s Fourth Quarter of 2007 earnings release and financial supplement, as well investor materials dated February 8, 2008 regarding Genworth’s U.S. Mortgage Insurance business, posted at www.genworth.com.

For important information regarding the use of non-GAAP measures and selected operating performance measures, see the Appendix.

This presentation should be used in conjunction with the accompanying audio or call transcript.

http://www.genworth.com/


9.5%11.0%

20041 2007

Retirement & Protection

50%

2007Percentages Exclude Corporate And Other

13 - 14%

2010 – 2011Target

Retirement & Protection

50%

U.S. Mortgage Ins. 11%

International39%

2007 PerformanceOperating EPS Operating ROE

$3.07

1 Pro Forma - See Genworth’s Q4 2005 Earnings Release (Dated 1/26/06) For Reconciliation. Adjusted For Earnings From Discontinued Operations Of $36MM


Genworth Strategy

Mortgage Insurance

ProtectionWellness &

Care Services

AccumulationManaged Accounts

Homeownership Life Security

Wealth Management

Your Financial Security Company

Retirement Security

IncomeLTC

Liquidity

25 40

5570Age

Delivering Financial Security


U.S. MI 61% Mid Teens

Int’l MI 34% High Teens

Int’l PPI 23% High Teens

Fee Based 84% High Teens

New Life 33% Low Teens

New LTC 17% Mid Teens

Opportunistic Spread (13%) Low Teens

Positioning For The Future

2008E

Operating Income Mix

2007

Repositioning

Growth Engines

Driving Growth/ROE Expansion

2010/11E

~80%

~85%+

Fee Based Includes Fee Based Retirement Income & Managed Money. Spread Includes Spread Based Retirement Income & Institutional

2005-2007 Sales CAGR

New Business ROE

Old Life/Spread Extract Capital

Old LTC Improve ROE/Extract Capital

~90%

Redeployment


Today’s UpdatesPriority Growth Opportunities– International

– Fee Based Wealth Management & Retirement

U.S. Mortgage Insurance

Investment Portfolio

Capital Optimization & Deployment


Strong International Platform

($MM)

25+ Countries

600+ Distribution Relationships

1,900+ Associates

Global Risk Management

Double Digit Growth

Operating Income~50% GNWOp Income

Australia

22% 2007 Operating ROE$3.4B Mortgage Insurance Unearned Premium Reserve (12/31/2007)

Europe& Other

Retirement Products

2010-2011E2007

585

Canada

PPI


200+ Financial Institutions Globally

Distributor Branded

Direct or Reinsurance

Sickness/Accident ~50%

Life ~25%

Unemployment ~25%

3 - 5 Year Average Life

PersonalLoan

Mortgage

Other

AutoCredit Card

Protected By:– Waiting & Exclusion Periods– Capitated Claim Payment Period– Maximum Limits

Payment Protection OverviewCoverage2007 Sales By Obligation

52%

16%

8%

13%11%

Mix


Structured

1.4

.7

.2

.5

New Markets

U.K. & Ireland

ContinentalEurope

2.8($B)

Penetrate Significant Customer Base

New Products & Customers

Lender Structured Transactions

New Markets

Transfer Product/Risk Expertise

Leverage Global Client Base

Mexico, Poland, South Korea, Others

Payment Protection OpportunitySales By Region Established Markets

2007


Global Mortgage Insurance EnvironmentDemand Drivers: Homeownership Initiatives, Capital

Regulation, Economic Environment

Economies Generally Healthy

Slowing Global Housing Finance & Appreciation Trends– Most Pronounced in Spain, Ireland & U.K.

Some Liquidity Impact On Global Housing Finance

Significant Structural Differences vs. U.S.

New Markets Develop Gradually


Comparing Mortgage MarketsU.S. AustraliaCanadaRisk Management Europe

Credit ScoringExternal Yes Yes No U.K. OnlyInternal Yes Yes Yes U.K. Only

Sub-Prime, Reduced Doc And Second Liens Based On Company Estimates

Reduced Documents ~13% Self Self LimitedEmployed Employed

Sub-Prime Products ~20% Limited Limited Limited

Property Appraisals Yes Yes Yes Yes

Second Liens ~14% Limited Limited Limited

Borrower Underwriting Yes Yes Yes Yes

Premium Payment Monthly Single Single Single


151

Canada

Europe / Other

Australia

Canada & AustraliaCustomer PenetrationUnderwriting & Pricing DisciplineEnsure Exposure ManagementExpand Support Services

($B)

12/31/2007See Appendix For Details Regarding Global MI Risk In Force

International Mortgage Insurance StrategyPrimary Risk In Force

Europe & OtherSlowed ExpansionSelective Geographies / LendersBuild Gradually For The Future


Expanding U.S. Wealth ManagementAssets Under Management

AssetMarkAcquisition

Existing Platforms

2007

22

3 YrCAGR

($B)

Strong Organic & Acquisition PerformanceAdvisor Expansion & PenetrationLeveraging Practice Management Services~ 36%

~ 33%

~ 34%

Total Market AUM Outlook

Independent

Other Channels

2010E

2.8

($T)Expect Future Growth Ahead of Market– Product Innovation/Income Guarantees

– Expanded Services Offerings

– Acquisitions

~ 12%

3 Yr CAGR1

~ 11%

~ 17%.7

1 Cerulli & Management Estimates


Early Mover

9%

2.8

15%+

1.7 2.7

Positioned For Income Guarantee Market

Market Size1

Market Growth1 15%+

In Process

~ 5.6

✓ Established

5 - 8%

~$10 Trillion Opportunity for Income Guarantees

401(k) /403(b)

ManagedMoney

Mutual Funds

Individual VA(Retail + Rollover)

1 Company And 3rd Party Estimates. Market Size In Trillions

GenworthPosition ✓ Established


U.S. Mortgage Insurance Overview

Industry Represents MGIC, PMI, UGI, ORI, and Triad Based on MICA Reports. Delinquency Rate Represents Number of Lender Reported Delinquencies Divided by Number of Remaining Policies Consistent with Industry Practices

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Genworth

Industry

Dec ‘05 Jun ‘06 Dec ‘06 Dec ‘07Jun ‘07

Primary Delinquency Rates

Risk Mix Of Book An Important DifferentiatorCaptive Reinsurance Protects DownsideProduct, Price & Guideline Actions In 2007/2008Quality Revenue Dynamics


U.S. Mortgage Insurance Portfolio

70-75%

25-30%

Risk In Force

Performing

Under-Performing

Portfolio Mix

91% Prime Book

Avoided Sub-Prime Bulk & Second Liens

Worked to Minimize Stacked Risk Factors

Moved Actively On Risk & Pricing Guidelines With Market Shifts

2004 & Prior Books – Appreciation Benefit

2005-2007 Books – Blended Performance & Reinsurance Protection

Under-Performing Refers To Selected Product, Geographical and Book Year Combinations Where Ever-To-Date Actual Loss Ratio Performance Exceeds Ever-To-Date Pricing Expectations. Select Geographies Include CA, FL, AZ, NV and Great Lakes, Select Products Include Alt-A, A Minus and Sub-Prime.


40% Cede Excess of Loss Example

GNW

Lender

Premiums

60%

40%

GNW

Lender

Losses

1st Loss (0-4 Claims Layer)

GNW

2nd Loss(4-14 Claims Layer)

RemainingLosses

Lender Captive Reinsurance Protection

25% Cede Excess of Loss Example

GNW

Lender

Premiums

75%

25%

GNW

Lender

Losses

1st Loss (0-5 Claims Layer)

GNW

2nd Loss(5-10 Claims Layer)

RemainingLosses

Captive Reinsurance Liability Limited to Funds in Trust, Not Subject to Lender Bankruptcy.Trust Balance Impacted by Future Premiums Received, Payment of Claims and Dividends.Percentage of GNW Portfolio in Captive Reinsurance Arrangements As of 12/31/07.

63% GNW Flow Portfolio Has Lender Captive Reinsurance Coverage– Protects Downside Risk

Written on a “Book Year” Basis By Lender

Attachment Points Are % of a Book Year’s Original Risk In Force

Reinsurance Premiums Deposited in 3rd Party Trust


Lender Captive Attachment Progression

0 – 50% .7 1050 – 75% 1.8 5575 – 100% .8 31100%+ (Captive Benefit) .1 5

3.4 $101

2006 Book Year Example

% Progression to Specific Lender

Attachment Point

RIF Remaining

($B)

Ever to Date Incurred Losses

($MM)

$4.3B Original Risk In Force With Captive Reinsurance Coverage$173MM Losses = Sum of All Attachment Points 46 Lender Captives Comprise Total – Actual Attachment Will Vary By Lender

2006 Attachment Trend As Of 4Q07

58% Progression to Aggregate Attachment Point

Includes ~$1MM of Captive Reinsurance Benefit

Aggregate Book Year Analysis Provided To Illustrate Directional Progression Toward Attachment. Data Presented in Aggregate For All Trusts. Actual Trust Attachment Will Vary By Individual Lender Contract. Additional Book Years Included in Appendix.Incurred Losses = Change in Reserves + Paid Claims. Information Excludes Quota Share Captive Arrangement Data.


Product Actions Taken For 2008

Alt-A > 90% LTV, < 660 FICOA Minus Above 95% LTV, < 575 FICO100 LTV < 620 FICO And Interest Only

Price Increases

Prime≤ 95% LTV

Prime> 95% LTV

A-MinusAlt-A

Flow New Insurance Written

80%

1%5% 2%

Products Not Insured By GenworthSub-Prime Bulk Alt-A >95% LTV

Guideline Restrictions

2008E

Alt-A Primary & 2nd, Purch. & Rate TermA Minus Primary Only100 LTV 95% LTV In 85 Declining Markets

Alt-A ~43% In 660 – 699 FICO BucketA Minus ~18% Price Increase100 LTV ~50% Increase For 56% of NIW

Sub-Prime

12%

100%

Genworth Alt-A Consists Of Loans With Reduced Documentation Or Verification Of Income Or Assets And A Higher Historical And Expected Default Rate Than Standard Documentation Loans.

Product Exits


U. S. Mortgage Insurance – Looking AheadMarket Returns To MI Book Value Supported

12/31/07 12/31/12E

$2.6$0.5

$0.7

($B) @ 100% Loss Severity

ExistingBusiness

UnderwritingMargin

NewBusinessInvest.

Income

2008E Book Value $2.5 to $2.6B

$3.9+

2006 2007

Quality New Business$3B Investment PortfolioCaptive Reinsurance Coverage

174

287

($B)

1 Inside Mortgage Finance As Of January 31, 2008

U.S. MI Flow NIW Market1

See February 8, 2008 Investor Update In Its Entirety For Scenario Details

Investor Briefing Scenario

65%


Investment PortfolioQuality Assessment~50% Investment Grade BondsCommercial Mortgages LTV ~52%Commercial MBS 98% Investment Grade

– Original Average LTV ~69%Avoided RMBS CDOsSecurities Lending A-1/P-1Municipals Underwritten to Underlying Credit

4%

7%

$74

CMBS & ABS

Equity & LPs 2%

Non-Inv GradeMunicipal 3%

Policy Loans 2%

Sec Lending 3%

12/31/07

($B)

RMBSCash & ST

Risk Considerations$2.9B Remaining Sub-Prime / Alt-A RMBS –Substantial Markdowns TakenBelow Investment Grade Under 4%Equities Less Than 1%

49%

12%

4%

12%

LTC Hedges/Others 2%

CommercialMortgages

Investment Grade Public &Private Bonds


Sub-Prime Securities Update

A

BBB/BB/B

AA

AAA

Market Value 12/31/07

Sub-Prime RMBS

($284) Change In Market Value Since 9/30/07

($MM)1,486

95% Level 2 Pricing

Regular Performance Monitoring

$71MM After-Tax Impairments 4Q ’07 – Primarily 2006 Vintage

– 75% < BBB

– 25% Single A


+++

++ ++- +

Neutral/+

Neutral

+

++ +

+ +

+ ++

++ ++ ++

Five Levers to Drive Shareholder Value

Core Growth & Improving Returns

Capital Management & Redeployment

Cost Efficiencies

Investment Performance

Smart Use Of Capital Markets

2004 – 2007 2008E 2009/10E

Impact

International/Retirement & ProtectionU.S. Mortgage Insurance


Focus On Redeploying Low Return Capital

2.8

12/31/2007

Life / Annuities

Old LTC

($B)

Reassessed Blocks Under Integrated Retirement & Protection Organization

Assessing Reinsurance, Capital Markets and Closed Block Options

8 to 12 Percent Pricing Action

Pursuing Extraction Options– Individual Or Blended Blocks

Select Blocks Targeted


The Case For Genworth

13%-14%

11.0%11.0%10.7%

1 See Genworth’s 4Q ’05 income press release (dated 1/26/06) for reconciliation

Shifting Mix For Growth & Returns

Expanding International & Wealth/Retirement Platforms

Capital & Risk Management Discipline

ROE Expansion Path – Manageable Disruption In 2008

1 2010 – 2011 Target

2005 2006 2007

Appendix

©2008 Genworth Financial, Inc. All rights reserved.


Captive Reinsurance - Disclosure

Aggregate Book Year Analysis Provided To Illustrate Directional Progression Toward Attachment.Data Presented in Aggregate For All Trusts. Actual Trust Attachment Will Vary By Individual Lender Contract.Incurred Losses = Change in Reserves + Paid ClaimsInformation excludes Quota Share Captive Arrangement Data.

Book Year RIF ($B)

Sum of Loss Attachment

Points ($MM)

Progression to

Attachment Point Current RIF ($B)

Ever to Date Incurred Losses

($MM)

Additional Losses to Reach Aggregate Attachment ($MM)

Aggregate % to

Attachment2005 Total 3.0 125 2.0 61 64 49%

0 -50% 0.8 1650 -75% 0.8 2875-99% 0.4 15Attached 0.0 2

2006 Total 4.3 173 3.4 101 72 58%0 -50% 0.7 10

50 -75% 1.8 5575-99% 0.8 31Attached 0.1 5

2007 Total 7.2 289 6.9 56 233 19%0 -50% 6.9 56

50 -75% 0.0 075-99% 0.0 0Attached 0.0 0

Captive Benefit in Quarter ($MM) 1

Captive Disclosure Q4 2007

Original Book 4Q07


A 5-Year View

Existing Portfolio

Book Value ProfileKey Assumptions

12/31/07 12/31/12E

$2.6$0.5

$0.7($B) @ 100% Severity

ExistingBusiness

UnderwritingMargin

NewBusinessInvest.

Income

Claim Frequency Expectation for Every 100 Loans

Company Estimates; Captive Attachment Based on Aggregate Analysis – Actual Results Will Vary By Lender

Lifetime Loss Ratio Reflects Weighted Average Lifetime Expected Loss Ratio For Total Portfolio

Existing Business and Investment Income Are Net of Income TaxesExisting Business Includes After Tax Premium From International Support ArrangementsProjected Book Value Excludes Impact of Dividends From Our U.S. Mortgage Insurance

Subsidiaries to Genworth

Portfolio

’04 & Prior

’05 – ’07

’08 & Forward

Ever-To-Date

1.4

0.3

-

CaptivesAttach?

No

Yes

No

Lifetime

2

8

4

Claim Frequency

2005-2007 Books @ 115% Severity: $.1B Additional Losses By 2012

Performing Well 5Under-Performing 13

2007 2012E2010E2008E 2009E 2011E

$2.6

($B) @ 100% Severity

Book Value Progression

$2.5-2.6

$3.9+

$3.9+


Exhaust Captive CoverageClaim Frequency Assumptions for Every 100 Loans

Portfolio

’04 & Prior

’05 – ’07

’08 & Forward

Ever-To-Date

1.4

0.3

-

CaptivesAttach?

No

Yes

No

Lifetime

2

15

4

Claim Frequency

Scenarios: Exhaust Captives or Eliminate Book Value

U.S. Mortgage Ins. Book Value To 0Claim Frequency Assumptions for Every 100 Loans

Portfolio

’04 & Prior

’05 – ’07

’08 & Forward

Ever-To-Date

1.4

0.3

-

CaptivesAttach?

No

Yes

No

Lifetime

2

40

4

Claim Frequency

Performing 8Under-Performing 25

Performing 10Under-Performing 81

Company Estimates; Captive Attachment Based on Aggregate Analysis – Actual Results Will Vary By LenderExisting Business and Investment Income Are Net of Income TaxesExisting Business Includes After Tax Premium From International Support ArrangementsProjected Book Value Excludes Impact of Dividends From U.S. Mortgage Insurance Subsidiaries to Genworth

12/31/07 12/31/12

$2.6 $(0.3)$0.6

NewBusinessInvest.

IncomeExistingBusiness

UnderwritingMargin

($B) @ 100% Severity

2005-2007 Books @ 115% Severity: $.2B Additional Losses Incurred By 2012

Book Value Profile$2.9+


U.S. MI Portfolio – Delinquency Rates($B)

Total FICO > 660 FICO 620 - 659 FICO < 620Primary Risk In Force 3Q 07 4Q 07 3Q 07 4Q 07 3Q 07 4Q 07 3Q 07 4Q 07

Primary Risk In Force $28.1 $19.7 $5.9Default Rate 3.4% 1.9% 6.3%

2007 Policy Year $8.1 $5.5 $1.7Default Rate 1.4% 0.9% 1.7%

2006 Policy Year $6.0 $4.2 $1.2 $0.6Default Rate 3.8% 2.2% 6.0% 12.6%

2005 Policy Year $4.4 $3.1 $0.9 $0.4Default Rate 4.0% 2.4% 6.6% 12.2%

2004 & Prior Policy Years $9.6 $6.8 $2.1Default Rate 4.3% 2.2% 8.8%

Fixed Rate $26.2 $18.2 $5.6 $2.4Default Rate 3.3% 1.7% 6.2% 10.3%

ARMs $1.9 $1.5 $0.3 $0.1Default Rate 4.1% 3.0% 9.0% 17.1%

LTV > 95% $7.9 $4.7 $2.1Default Rate 4.6% 2.1% 6.4%

Alt-A $1.9 $1.5 $0.3 $0.1Default Rate 4.1% 3.3% 7.9% 13.2%

Interest Only & Option ARMs $3.6 $2.9 $0.5 $0.2Default Rate 3.1% 2.6% 5.7% 9.9%

$0.95.0%

$2.510.5%

$0.714.0%

$1.111.6%

Loans With Unknown FICO Scores Are Included in the FICO 620 – 659 CategoryDelinquency Rate Represents Number of Lender Reported Delinquencies Divided By Number of Remaining Policies Consistent With Mortgage Insurance Industry PracticesGNW Alt-A Consists of Loans With Reduced Documentation or Verification of Income or Assets And a Higher Historical And Expected Default Rate Than Standard Documentation Loans.

= Significant Increases in Delinquency Rates

$31.34.3%

$12.12.8%

$5.95.4%

$4.25.2%$9.14.7%

$29.44.0%$1.97.2%

$8.85.8%

$1.96.2%

$4.05.6%

$22.12.5%

$8.51.7%

$4.13.6%

$3.03.2%

$6.52.4%

$20.62.1%$1.55.9%

$5.42.6%

$1.65.1%

$3.35.0%

$6.47.5%

$2.43.8%

$1.28.3%$0.98.5%

$1.99.5%

$6.17.2%$0.312.0%

$2.38.0%

$0.311.7%

$0.59.2%

$2.912.8%

$1.39.4%

$0.615.4%

$0.314.4%

$0.715.3%

$2.712.5%

$0.123.2%$1.215.3%

$0.118.2%

$0.216.8%


Europe

Comparing Global MI Risk In Force

U.S. AustraliaCanada

66

2007

20062005

22

9

13

7

2004& Prior

31

($B)

9

5

12

4

77

27

14

16

10

8

86%

77%

71%

~60%

Effective LTV1

75%

71%

63%

~60%

92%87%

94%

93%88%

<80%

Canada and Australia – Solid Embedded Home Price Appreciation

Effective LTV

Effective LTV

Effective LTV

Vintage

Bulk 1

15 ~50% 10 ~50%~70%~75%

1 Book Year Risk In Force and Effective LTV Based on Flow; Total Bulk Shown Separately Primary Risk In Force as of 12/31/07


Stress Test Prior To InvestmentAvoided Riskier Originators & 2nd LiensUnderlying LTVs ~ 80%~4 Year Average Life2007 Impairments: $78MM; 77% BBB & Below

2004 & Prior 2005 2006 1st Half 2006 2nd Half 2007

163

618734

166

112

14743

130

5281 13

19891

102

345468

265215 193

Sub-Prime RMBS Holdings($MM)

AAA 51%

AA 22%

A 21%

<BBB 6%

24

Ratings Reflect Levels As Of 12/31/07

Total = $1,486


2004 & Prior 2005 2006 1st Half 2006 2nd Half 2007

~85% Fixed Rate Mortgages (> 5 Year)Weighted Average FICO ~710Underlying LTVs ~73%2007 Impairments: $26MM; 73% BBB & Below

214

3271

262

274

13016

126

9961 7

103618

81

10

682

293

46101

327

2

Alt-A RMBS Holdings($MM)

AAA 50%

AA 29%

A 19%

<BBB 2%

Ratings Reflect Levels As Of 12/31/07

Total = $1,449


Capital Generation

U.S. Stat EarningsAnd Capital Release

International

Capital Markets Efficiency

Block Extraction

Other Capital Mgmt.

Actions2007E 2008E

1.3 1.4

0.6 0.4

0.9 1.1

0.3 0.4

0.9 0.2

Retirement & Protection GrowthU.S. Mortgage Insurance Decline

2007 Group Sale Selective Reinsurance

Increase Reflects Growing In Force

Life XXX and AXXX Securitizations

Contingency Reserve Release2007 Equity Unit ConversionDebt Capacity & Service

($B)

4.0 3.5


Capital Deployment

New Business Funding– Statutory Strain– Required Capital

Bolt-On Acquisition Pipeline

Repurchases/Dividends

2.6 2.8

Ending Deployable Capital

1.3 .3 - .7

.8 .3 - .6

International, Annuities & LTC Growth

$1B Authorization Through ’09: $100MM Repurchased Through January

Pipeline Maintained Target Fee Based & International

Actions2007E 2008E

4.0 3.3 - 4.0

.1 .2 - .5

($B)


Use Of Non-GAAP MeasuresThis presentation includes the non-GAAP financial measure entitled "net operating income." The chief operating decision maker evaluates segment performance and allocates resources on the basis of net operating income. The company defines net operating income (loss) as income (loss) from continuing operations excluding after-tax net investment gains (losses) and other adjustments and infrequent or unusual non-operating items. This metric excludes these items because the company does not consider them to be related to the operating performance of its segments and Corporate and Other activities. A significant component of the net investment gains (losses) is the result of credit-related impairments and credit-related gains and losses, the timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) are often subject to Genworth’s discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Infrequent or unusual non-operating items are also excluded from net operating income if, in the company’s opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income in accordance with GAAP, the company believes that net operating income, and measures that are derived from or incorporate net operating income, are appropriate measures that are useful to investors because they identify the income attributable to the ongoing operations of the business. However, net operating income should not be viewed as a substitute for GAAP net income. In addition, the company's definition of net operating income may differ from the definitions used by other companies. There were no infrequent or unusual non-operating items excluded from net operating income for the periods presented in this press release other than a $14 million after-tax expense recorded in the first quarter of 2007 related to reorganization costs. The tables in the appendix of this presentation reflect net operating income (loss) as determined in accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, and a reconciliation of net operating income (loss) of the company’s segments and Corporate and Other activities to net income.

Due to the unpredictable nature of the items excluded from the company's definition of net operating income, the company is unable to reconcile its outlook for net operating income to net income presented in accordance with GAAP.

In this presentation, the company also references the non-GAAP financial measure entitled “operating return on equity” or “operating ROE.” The company defines operating ROE as net operating income divided by average ending stockholders’ equity, excluding accumulated other comprehensive income (AOCI) in average ending stockholders’ equity. Management believes that analysis of operating ROE enhances understanding of the efficiency with which the company deploys its capital. However, operating ROE as defined by the company should not be viewed as a substitute for GAAP net income divided by average ending stockholders’ equity. The tables in the appendix of this presentation include a reconciliation of operating ROE to GAAP net income divided by average ending stockholders’ equity. Due to the unpredictable nature of net income and average ending stockholders’ equity excluding AOCI, the company is unable to reconcile its outlook for operating ROE to GAAP net income divided by average ending stockholders’ equity.


Consolidated Net Income by Quarter(amounts in millions, except per share amounts)


Reconciliation of Operating ROE(amounts in millions)


Selected Operating Performance MeasuresThis presentation also contains selected operating performance measures including “sales,” “assets under management”, “insurance in-force” or “risk in-force” which are commonly used in the insurance and investment industries as measures of operating performance.

Management regularly monitors and reports sales metrics as a measure of volume of new and renewal business generated in a period. Sales refers to (1) annualized first-year premiums for term life insurance, long-term care insurance and Medicare supplement insurance; (2) new and additional premiums/deposits for universal life insurance, linked-benefits, spread-based and variable products; (3) gross flows and net flows, which represent gross flows less redemptions, for our managed money business; (4) written premiums and deposits, gross of ceded reinsurance and cancellations, and premium equivalents, where we earn a fee for administrative services only business, for payment protection insurance; (5) new insurance written for mortgage insurance, which in each case reflects the amount of business the company generated during each period presented; and (6) written premiums, net of cancellations, for our Mexican insurance operations. Sales do not include renewal premiums on policies or contracts written during prior periods.

The company considers annualized first-year premiums, new premiums/deposits, gross and net flows, written premiums, premium equivalents and new insurance written to be a measure of the company’s operating performance because they represent a measure ofnew sales of insurance policies or contracts during a specified period, rather than a measure of the company’s revenues or profitability during that period.

Management regularly monitors and reports assets under management for the company’s managed money business, insurance in-force and risk in-force. Assets under management for the company’s managed money business represent third-party assets under management that are not consolidated in our financial statements. Insurance in-force for the company’s life insurance, international mortgage insurance and U.S. mortgage insurance businesses is a measure of the aggregate face value of outstanding insurance policies as of the respective reporting date. Risk in-force for the company’s international mortgage insurance and U.S. mortgage insurance businesses is a measure that recognizes that the loss on any particular mortgage loan will be reduced by the net proceeds received upon sale of the underlying property. The company considers assets under management for the company’s managed money business, insurance in-force and risk in-force to be a measure of the company’s operating performance because they represent a measure of the size of the company’s business at a specific date, rather than a measure of the company’s revenues or profitability during that period.

These operating measures enables the company to compare its operating performance across periods without regard to revenues or profitability related to policies or contracts sold in prior periods or from investments or other sources.


Cautionary note regarding forward-looking statements

This presentation contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will,” or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to global political, economic, business, competitive, market, regulatory and other factors and risks, including the following:

• Risks relating to our businesses, including interest rate fluctuations, downturns and volatility in equity and credit markets, defaults in portfolio securities,downgrades in our financial strength and credit ratings, insufficiency of reserves, legal constraints on dividend distributions by subsidiaries, competition, availability and adequacy of reinsurance, defaults by counterparties, regulatory restrictions on our operations and changes in applicable laws and regulations, legal or regulatory investigations or actions, political or economic instability, the failure or any compromise of the security of our computer systems, and the occurrence of natural or man-made disasters or a pandemic disease;

• Risks relating to our Retirement and Protection segment, including unexpected changes in morbidity and mortality, accelerated amortization of deferred acquisition costs and present value of future profits, goodwill impairments, reputational risks as a result of our plans to file for an increase in the premiums on certain in-force long-term care insurance products, medical advances such as genetic mapping research, unexpected changes in persistency rates, increases in statutory reserve requirements, and the failure of demand for long-term care insurance to increase as we expect;

• Risks relating to our International segment, including political and economic instability, foreign exchange rate fluctuations, unexpected changes in unemployment rates, deterioration in economic conditions or decline in home price appreciation, unexpected increases in mortgage insurance default rates or severity of defaults, decreases in the volume of high loan-to-value international mortgage originations, increased competition with government-owned and government-sponsored entities offering mortgage insurance, changes in regulations, and growth in the global mortgage insurance market that is lower than we expect;

• Risks relating to our U.S. Mortgage Insurance segment, including the influence of Fannie Mae, Freddie Mac and a small number of large mortgage lenders and investors, decreases in the volume of high loan-to-value mortgage originations or increases in mortgage insurance cancellations, increases in the use of simultaneous second mortgages and other alternatives to private mortgage insurance and reductions by lenders in the level of coverage they select, unexpected increases in mortgage insurance default rates or severity of defaults, deterioration in economic conditions or a decline in home price appreciation, increases in the use of reinsurance with reinsurance companies affiliated with our mortgage lending customers, increased competition with government-owned and government-sponsored entities offering mortgage insurance, changes in regulations, legal actions under Real Estate Settlement Practices Act, and potential liabilities in connection with our U.S. contract underwriting services; and

• Other risks, including the possibility that in certain circumstances we will be obligated to make payments to GE under our tax matters agreement even if our corresponding tax savings are never realized and payments could be accelerated in the event of certain changes in control, and provisions of our certificate of incorporation and by-laws and our tax matters agreement with GE may discourage takeover attempts and business combinations that stockholders might consider in their best interests.

We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.