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Genworth Financial, Inc. (NYSE:GNW)

Q1 FY08 Earnings Call

April 25, 2008, 9:00 AM ET

Executives

Alicia Charity - VP, IR

Michael D. Fraizer - Chairman, President and CEO

Patrick B. Kelleher - Sr. VP and CFO

Kevin D. Schneider - President, U.S. Mortgage Insurance

Thomas H. Mann - EVP, Genworth

Victor C. Moses - Sr. VP, Actuarial & Risk

Analysts

Andrew Kligerman - UBS

Mark Finkelstein - Fox-Pitt Kelton

Dan Johnson - Citadel Investment Group

Edward Spehar - Merrill Lynch

Jamminder Bhullar - J.P. Morgan

Josh Smith - TIAA-CREF

Al Copersino - Madoff Investment Securities

Suneet Kamath - Sanford Bernstein

Darin Arita - Deutsche Bank Securities

Thomas Gallagher - Credit Suisse

Steven D. Schwartz - Raymond James & Associates, Inc.

Jeffrey Schuman - Keefe, Bruyette & Woods

Mark R. Patterson - NWQ Investment Management, LLC

Amanda Lynam - Goldman Sachs

Eric Berg - Lehman Brothers

Operator

Good morning, ladies and gentlemen, and welcome to Genworth Financial's First Quarter Earnings Conference Call. My name is Stacy 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.

As a reminder, the conference is being recorded for replay purposes. Also, we ask that you refrain from using cell phones, speaker phones, or headsets during the Q&A portion of today's call. I would now like to turn the presentation over to Alicia Charity, Vice President, Investor Relations. Ms. Charity, you may proceed.

Alicia Charity - Vice President, Investor Relations

Thank you, operator and welcome to Genworth Financial's first quarter 2008 earnings conference call. As you know, our press release and financial supplements were both released last night and are posted on our website.

This morning you will first hear from Michael Fraizer, our Chairman and CEO; then Pat Kelleher, our Chief Financial Officer. Following our prepared comments we will open up the call for a question-and-answer period. Pam Schut, Executive Vice President of our Retirement and Protection segment; Tom Mann, Executive Vice President of our International and U.S Mortgage Insurance segment, 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 today's 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 on Form 10-K filed with the SEC.

Today's discussion 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 finally, when we discuss our international segment, please note that all percentage changes exclude the impact of foreign exchange. And with that let me turn the call over to Mike Fraizer.

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Thanks Alicia. Genworth had a difficult first quarter delivering net operating earnings at $0.56 per share reflecting tough housing market conditions that hurt the U.S mortgage insurance and volatile financial markets that impacted some lines within our retirement and protection businesses. At the same time the international segment performed very well with 10% operating earnings growth excluding foreign exchange. As we said on our last earnings call, 2008 will be a challenging year from an earnings perspective and developments of the past several months have only reinforced our cautious stands. U.S housing market conditions have rapidly deteriorated.

Domestically, we expect unemployment to move up as recessionary factors take hold. Equity markets and interest rates remain volatile and as expected we are seeing a gradual slowing in global economies. These developments influence the quarters year-over-year decline and we expect them to continue for the remainder of the year. With the benefit of additional monthly sets of data we see 2008 net operating earnings per share coming in lower in $2.25 to $2.65 range with the high end of that current range at the lower end of the prior range, a downward trend we noted in February.

While we managed through this difficult period, we focused our execution around five key priorities that will position Genworth for improved future performance. So, let's look at our progress around the five areas I laid out in February.

First, we are navigating the storm in U.S mortgage insurance with four specific strategies. We are actively managing our existing portfolio. Our portfolio is relatively well positioned because of the risks that we avoided like sub-prime bulk and stock risk factors in our flow book. But, we are not immune to the current market downdraft and are managing our risk through loss mitigation efforts like early outbound borrower calling and expanded workout efforts. Lender captive reinsurance is beginning to attach on several books providing the support we expected. Captives absorb $19 million of pre-tax losses in the quarter and the benefit of lender captive reinsurance is expected to accelerate through the year and into 2009.

We have taken a leadership role to implement even more stringent product restrictions, underwriting standards, and pricing moves. These will have important impacts on the risk profile of the 2008 book that is already evident in new insurance written this quarter. And we will continue to take steps like the 20% price increase on our flow mortgage insurance product. We will evaluate additional steps in order to make this business a more attractive risk and return proposition. This can include further narrowing the focus of this business line where we deem appropriate.

There are a number of pending public policy initiatives around the U.S housing market and we are actively working on these with the GSEs, policy makers and legislators along with the industry. While the eventual outcome of all the efforts remains unclear at this point, we will continue to take and engage drill [ph].

Our second area centers on expanding wealth management and retirement income which remained high priorities for execution and capital deployment. Our focused retirement income distribution strategy is working well with 43% growth in retirement income annuity products had our targeted distribution partners who we have dedicated additional resources. For example, we increased wholesaling by 24% and these investments are paying off with the significant sales left and increase in repeat producers.

Given the current market conditions, the wealth management business is helping independent financial advisors as they manage their clients through these volatile times. We believe these efforts will support continued net flows as reflected in the year-over-year 9% growth in assets under management.

Our third priority is to responsibly grow our international platforms and deliver solid earnings growth and this is on track. We are seeing some slowdown in global economies and are being proactive in taking appropriate actions to manage risk in these conditions. Overall, international double digit earnings growth is expected to continue because of our three significant platforms of mortgage insurance in Canada and Australia and payment protection in Europe plus the attractive financial model of having a $3.4 billion unearned premium reserve for mortgage insurance that amortizes into revenues each quarter and limits earnings volatility. We will remain prudent and gradual about expansion in other new markets, and as you saw remain breakeven this quarter in these markets.

Fourth, we are focused on transitioning our long-term care and life insurance businesses each in different ways. In long-term care we had good growth in new business as we are leveraging our career sales operation with our new 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. UL sales slowed a bit this quarter, coming off a very strong year-end and I am encouraged by upward trends and submitted volume. Term life market pricing remains extremely competitive and this is reflected in sales levels as we maintain pricing discipline. We are working to position our term life platform increasingly around the middle market, a more attractive segments given these dynamics.

Fifth, we remain focused on strong capital and risk management and Pat will provide some additional color in this important area. To wrap up, we are executing on our priorities for 2008 to position Genworth for improved future performance. The current environment in the U.S, in particular is difficult and impacted the quarters results and our outlook for the year. We are managing through this period, and our main focus on strategy is to set the stage for our ongoing mix shift towards more profitable and high return business lines.

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

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

Thanks Mike. This morning, I will focus on four areas. First, review how market conditions are impacting business performance. Second, look more closely at the quarter's result and how that impacts our outlook for 2008, and what we are doing to position for the future. Next, I will review trends in the investment portfolio and finally share some perspectives on capital management.

We see five key trends influencing business results in 2008. First, U.S housing market conditions have worsened and liquidity remains constrained. At year end we shared the view with many in the market that the magnitude of the house price declines from the peak in Q4 2005 would be 13% to 15%. Based on what we've seen to date, we now expect the decline to be in the 20% to 25% range with significant regional variation.

Second, our outlook for U.S unemployment worsened from 5% in December to closer to 6% by year end 2008. In addition, the probability that we will see a recession in the U.S is now higher, however, it is unclear whether the down term will be mild for more severe.

Third, short-term interest rates declined about 200 basis points with a more modest decrease in longer-term rates. Thus increases are carrying cost of cash positions, but it also provides opportunities for our spread based retirement income business where we've recently seen the improved individual annuity product sales and persistency.

Fourth, in Canada, Australia, and Europe we see slowing levels of mortgage originations. Looking forward, we expect slowing economic growth and lower home price depreciation in some markets with certain European countries expecting... experiencing declines in home prices.

Finally, credit and equity market volatility has increased. In the first quarter, the S&P 500 index was down nearly 10%, versus our prior expectation of a 2% quarterly increase through the year. Currently, we expect continued volatility and that a portion of the decline will be recovered over the balance of the year. And with this as context, let's look at each business segment's current results, the outlook for 2008, and how are we positioning for the future.

Retirement and protection segment earnings reflected both the market conditions and some specific business issues. Wealth management and fee-based retirement products delivered solid sales growth building assets under management that will drive future earnings. Wealth management earnings are expected to grow for the year, while in fee-based retirement, the first-quarter equity market declines and lower third-party service fees will pressure 2008 results. Looking ahead, these businesses are poised to become an increasing portion of earnings.

In Life Insurance, we face higher funding costs for U.S statutory reserves, lower persistency from term policies coming out of the level term period, and lower term sales. As a result, we expect life earnings to decline moderately and we are shifting emphasis to universal life to drive future earnings growth. The transition in long-term care is well underway. We've made strong progress in new business sales and we are seeing solid premium revenue growth overall. The in-force rate action will supplement this growth, and we expect to see the full premium benefit of these rate actions by the end of 2009.

In view of this recent trends, our outlook for the retirement and protection segment overall is for a 3% to 8% operating earnings decline from 2007, below our original target of 2% growth. The biggest variables contributing to this range relate to equity market performance, interest rates, and persistency on term life insurance.

The International segment remains on track with 10% earnings growth for 2008, excluding any additional benefit of foreign exchange. On a reported basis, full-year earnings would benefit by an additional $30 million if foreign exchange rates remain at March 31st spot rates. In payment protection insurance, we're seeing good growth overall with stable margins.

In the international mortgage insurance, we see sound growth in revenue and net operating income in Canada and Australia. We've seen expected declines in new insurance written in concert with declines in mortgage originations. However, revenue growth remains strong overall as the recent large book year's season and loss experience is in line with expectations. We are actively managing risk in markets where home prices are slowing or declining, taking appropriate actions where conditions are changing.

In U.S mortgage insurance, we are reducing our earnings outlook to incorporate the worsening housing market trends we are seeing, primarily in our 2006 and 2007 books. This quarter we saw a significant deterioration in the 2007 flow book with 2007 reserve increases accounting for more than half of the build in total loss reserves. Delinquencies remain concentrated in alternative products like Alt-A and A minus as well as in high loan balance states, particularly in Florida. At this adverse early development of the 2007 book continued over multiple years. We could see lifetime losses with certain lenders, exhaust captive coverage, particularly those with relatively higher concentrations of Alt-A and A minus products and exposure to high loan balance space.

However, it is too early to make such a determination and we are monitoring the situation while actively working on loss mitigation. Lender captive reinsurance has now begun to play a more meaningful role in the financial results adding $19 million pre-tax benefit to the quarter from several lender captives. We expect the benefits from reinsurance to grow and become a more meaningful contributor to earnings as the year progresses. Within the last month, we have further tightened underwriting guidelines, part of a series of such changes started in mid 2007. Including exiting Alt-A, A Minus and reducing our insuring of greater than 90% loan to value loans in declining markets. We expect these changes to further improve the quality and risk profile of the 2008 book.

In addition, we announced yesterday a 20% price increase on our floor mortgage insurance product. Our change in U.S mortgage insurance loss outlook also reflects higher delinquency trends in the prime book product which added about $26 million to reserves. We are taking steps to mitigate losses, add high quality new business at favorable pricing, and we will take further steps to improve the risks and return profile of this business as necessary.

Based on developing trends, we observed in the first quarter, we now expect about a $100 million net operating loss for the full year in U.S mortgage insurance. Given the high degree of market uncertainty and the potential for trends to accelerate including further constrained liquidity, unemployment reaching above 6%, more and more severe decline in home prices we could see additional pressure of $50 million to $100 million. Based on these trends, we are also more cautious about how 2009 will play out for U.S mortgage insurance and we will carefully assess the next few quarters before providing any specific view on 2009.

In sum, we expect 2008 remain challenging with some difficult conditions impacting our U.S businesses offset by good international earnings growth. We will evaluate how the current challenges impact the timing of reaching our longer-term financial goals including return on equity, and we will provide an update later in the year.

Let's turn to the investment portfolio. First in light of the recent housing market trends, the underlying collateral in our RMBS portfolio is showing expected increases and losses and slower prepayment. As a result, we incurred $75 million of RMBS net of tax in the quarter, $28 million related to sub-prime securities and $47 million related to Alt-A securities. Nearly all of these impairments related to securities rated single A and below and $37 million of these impairments were taken on securities due to expected delays and recovery of principles. These results are consistent with markets trends and we will continue to monitor performance in this area. Second, we incurred $32 million of corporate bonds, most of this amount related to two securities and overall this portfolio is performing well.

I will wrap up on capital management. To-date plans to free up cost capital and low return blocks through securitization have been delayed by capital market conditions. We are now concentrating on opportunities to free up capital through reinsurance of select blocks of low return life insurance and annuity business. In U.S mortgage insurance we have flexibility to maintain strong capital ratios and even to free up capital through asset shifts and changes in reinsurance treaties. We repurchased $76 million of shares early in the quarter. Going forward we will carefully monitor market conditions and our excess capital levels. We may resume share repurchase if we are able to extract capital from low return blocks of business.

In sum, Genworth is focused on executing through a difficult market environment in 2008. We are actively managing business and market risks prudently building our businesses for the future. With that I will open it up to questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. We will go first to Andrew Kligerman with UBS.

Andrew Kligerman - UBS

Hi,good morning. Just maybe a little more color around the sensitivity in the U.S mortgage insurance. I guess you are saying that your $100 million maximum likely loss for 2008 could even be $50 million to $100 million lower and then you are more cautious around '09, so may be you could give a little color around those recent sensitivity models that you provided and whether they are valid, and it sounds like this prime bulk book too is having some impact. So maybe you can talk about the potential losses in that portfolio. And I know, you can't be too specific, but some color would be helpful?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Andrew its Mike, good morning.

Andrew Kligerman - UBS

Good morning.

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Let me give you a couple of perspectives, given sort of what takes you towards the $100 million loss and U.S mortgage insurance, versus what could take it towards the lower end of the range that Pat described. What we've tried to do very carefully is make everything that we see in the market right now into that loss of $100 million figure. That would include for example just within the year, just within 2008, 12%, 13% type of decline in home prices again with regional variation. It will also see unemployment moving up towards 6% by the end of the year. So, again, I know yesterdays unemployment report was little better directionally than that. But we've tried to look forward on that front.

Now, what could take you to the lower end where you see that $50 million to $100 million of pressure and a lot of it is driven by further deterioration of the macro economic and environment. I mean, we would expect adapt [ph] to see a scenario where just within 2008, home price drops were in the 13% to 20% range for the year. We'd also see a more stress than employment scenario to over 6% which would even bring your average for the year up very near 6%; so long ways to go there. And of course you have some different mix impacts depending what loss pressure comes through what captive. So, that's what you could take you to that 50 to 100 pressured. So, we tried to show the factors that would drive you there.

Now, separately asked about the dynamics around the prime bulk business; Kevin Schneider you want to provide a perspective on that?

Kevin D. Schneider - President, U.S. Mortgage Insurance

Yes, Andrew. There has been delinquencies in our bulk business and the bulk business in aggregate represents above $1.5 billion of total risk in force or only 4% of our total risk in force. Those delinquencies increased in this quarter. Our delinquency rate grew on this combined business from 2.8% to 4.3% sequentially over the fourth quarter. And these increases were driven in both our lender portfolio and our GSE Alt-A business, that combined represents about 3% of total risk in force. Given the benefit of deductible structures that we have in our GSE Alt-A business, predominant bulk reserve development was really driven through that portfolio book of business.

Again, given the high FICO nature of this business, the low LTV nature of this business, it's really too early to call the ultimate loss development that we'd expect from these delinquencies. But in any of that we continue to manage through that loss development to our active loss mitigation were based upon what we've seen so far, that is included again in the minus 100 downside expectation for the year. But there could be additional pressure from that bulk development going out into the minus 50 to a 100 as well.

Andrew Kligerman - UBS

And just the kind of hopeful circle, I miss the '09, '10 numbers were you were thinking north of $200 million would likely be the earnings scenario, north of 300 likely earnings scenario in '10. Are those numbers of the table at this stage?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Andrew, the way we looked at it is the one thing that we've seen in 2008 and even towards the end of 2007 is a lot of uncertainty on where their markets are headed. And as I also mentioned we have a lot of different public policy as well as vendor initiatives out there and those impacts are uncertain. So, at this point we think it's more prudent to get the data, let the quarters play through a bit here and give you a real sharp view point, then try to estimate our trajectory given market conditions.

Andrew Kligerman - UBS

Okay. Thank you.

Operator

And we move next to Mark Finkelstein with Fox-Pitt Kelton.

Mark Finkelstein - Fox-Pitt Kelton

Good morning. I have a few questions. I guess just, to kind of back to the prior question, does the low end of the revised range incorporate the potential for $50 million to $100 million worse than an expected performance in USMI?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Yes.

Mark Finkelstein - Fox-Pitt Kelton

Okay, so that's in there. Secondly, just on the price increase in the U.S, I guess just can you talk about your expectation of whether competitors will follow your rate increase and if they don't I guess what is that mean from for your competitiveness and how would think NIW would play out?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

I have no idea what my competitors will do. We raised that price increase because we view it as the appropriate thing to do in this environment based upon the uncertainty and volatility in the housing market, as we've reduced our volatility and our product going forward and restricting insurance and higher risk products. This price increase will improve the long-term returns of our business. So, we made the announcement yesterday. You will have to talk to my competitors, but I have no idea what they'll do but we think it's a prudent thing to do for Genworth mortgage insurance.

Mark Finkelstein - Fox-Pitt Kelton

Okay. And then just moving to Canada real quick, loss ratio trends did pickup, can you just go through what you're seeing and whether or not it's a little bit of quicker deterioration in the favorability that you've seen then what you had expected and maybe just talk about how you think that could play out for the rest of the year?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Let me give you just a perspective before I talk down; give it to Tom for a little more color. I think we've been very consistent in telling investors that we would expect to see the Canadian book season after some long periods of extraordinarily low levels of losses, and that's exactly what we're seeing. Tom, you want to go into some details on that?

Thomas H. Mann - Executive Vice President, Genworth

Thanks Mike. And I would really offer a similar response. The first quarter loss ratio, you are right, was at 26%, exactly [ph] about 4 points above what we saw in the fourth quarter of last year. If you adjust the fourth quarter ratio for the unearned premium reserve adjustments that we made. And again, I will give my normal reminder that Canadian market is very different from the United States. There is very limited use of non-prime products as an example very lower reliance on the capital markets; but that being said, the Canadian economy does in fact mirror to a lesser degree of the impact that you see in the United States, and the later part of 2007 we began to see some of those unemployment pressures and the slowdown in home price appreciation. So, as Mike just indicated, we have set on our product cost and our losses will return to more normalized levels. The loss levels, excuse me, the loss ratio levels we have in Canada, they are materially below pricing. So, we would expect that our '06 and particularly in '07 books will return to more normalized loss ratio levels are again consistent with pricing in that 35% to 40% level.

So, we were watching Canada very carefully and indeed if there is deeper recessionary issues in the United States, you will see some spill over in Canada. And yes, that could impact loss environment going forward. But I would like to remind you that our revenue growth there is very, very strong. We got a 16% year-over-year performance in the first quarter and we will continue to see very strong revenue growth in the Canadian markets given the size of the '05 and '07 books that we put into place.

Mark Finkelstein - Fox-Pitt Kelton

Okay, great. Thank you.

Thomas H. Mann - Executive Vice President, Genworth

Thanks.

Operator

And we move next to Dan Johnson with Citadel Investment.

Dan Johnson - Citadel Investment Group

Great, thank you very much. I guess the question was somewhat already asked about what's the growth in the flow book look like, but I guess that's going heavily dependent upon the price increase reactions. But, even holding that aside if you look at the book written in '07 and then you look at your underwriting changes all of these things being equal, how much would the '07 book change if we carved out the states products risk levels that were no longer, looking to write?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Dan, just to be clear on your first question because I know there was some dialog around it. I mean we expect and I dub you to be pretty flat. If you go '07 to '08, but Kevin we provide some detail perspectives for Dan on the question?

Kevin D. Schneider - President, U.S. Mortgage Insurance

Sure, Dan. I think the real change we're going to see is the change in concentration of that business that's written. It started sort of the overall level, top level, mortgage originations in '08 are expected to be down about 18% to 20% over '07. The mortgage insurance market will sort of follow that trend downward and will be down, probably off about 20% as well. But when you think about the composition of that business if that was written, based upon the multiple guideline changes Genworth, and ultimately industry made last year, it's feathering into a much different composition of business that we are seeing materialize in 2008.

Specifically, we have exited the Alt-A, we have exited the A minus, we have exited above 95 LTV in many markets, we restricted in declining markets LTVs to 90% going forward. All of this is manifesting itself in terms of actual production we see coming into our business and really, predominantly a core product type composition of the business.

In fact, through the first quarter of '08, our core product represented about 82% of our overall business and all the other specialty products were really being driven down materially. So, the way to think about it is we could have a smaller overall market. The risk characteristics of that market will be significantly improved over last year. Some of that product, higher risk product will be running away and perhaps going to the FHA. We think that is appropriate for our position. We reduce the volatility of our market and based upon some of our share progression... progress that we've made, we'll end up with a NIW level to Mike's point very consistent with what we did last year.

Dan Johnson - Citadel Investment Group

Great. And then two others in terms of the mix of this must put on in the quarter in the performance, I know in prior calls you've had a slight near the end on your deck, sort of a grid if you will, vintage, your product category type and different metrics along the top. Is that in the supplement now or did I miss the slides?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

What we try to do is incorporate more and more data in the supplement over time. We'll take another look to see if there is some additional data that could be helpful.

Dan Johnson - Citadel Investment Group

Well, for example, I guess the thing I had been looking at was how much business was still being written in the plus 95 category. Is that information in the supplement?

Unidentified Company Representative

I have to verify the supplement, if we have it split by LTV. I don't believe it is, Dan, but we will get back to you on that.

Dan Johnson - Citadel Investment Group

Okay, great. And then finally and rather importantly, 2008 business obviously you said it's going to be fairly meaningful in terms of size. At what point do you think we'll have a sense as to the relative profitability of this book of business, compared to say more traditional years of say '03 or '04 and how important is it going to be to distinguish between the business written in the first quarter of '08, versus those in the remaining three quarters? Thank you.

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Dan, on that question, great question. Let me just give you a principle that we've always used, every time that we've made one of these guideline changes, underwriting changes, even pulling out of a product or reprising a product that Kevin walked through. And every time that we've taken one of those steps, we do a significant amount of what we would call back testing. So we go back through the book and say, what would that change has done, not only to '07, but even things coming through '06 and also as we go into '08. And we also do that in view of the trends we've seen and see going forward in specific, very local levels of markets as far as the downward pressure on values in many of those markets.

Based upon all of that act testing work, which as you've also seen this resulted more than one move on the guidelines and products, is we would expect that what we are putting on the books will perform at better than the prior pricing return on equity targets. And we've left ourselves in cushion which we think is appropriate. In addition, as we've said, we think this is a business model that deserves higher return and therefore have taken the actions such as we did in the pricing area. So, that will give you a perspective on why we look at the '08 book or how we look at the '08 book and why we think the '08 book should be sound.

Dan Johnson - Citadel Investment Group

And in terms of the issue of sort of given the timeframe of your guideline changes that the real benefit is that does it come on instantaneously or is it more of a second half benefit?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Well, you see two perspectives. One thing that we did early and I think was good was put on certain geographic restrictions. We called it the declining markets policy. I think it's pretty common in the industry right now. So, I think that was very helpful as far as looking ahead at where the markets were going, not just reacting to where they were today and building that into your risk profile. The fact is though that when you make a change there is a period to clear the pipeline, which can be two or three months when you make the change. So, you would say, with all of the changes that have been made, you'll see a compounding effect in the second quarter and a real big sort of clearance effect in the third quarter of anything that were in pipelines. And Kevin any more color on that?

Kevin D. Schneider - President, U.S. Mortgage Insurance

Yes. We've already seen a material impact in the composition of the business. It will continue to improve as the last round or so these guideline changes, they are fully implemented given their requirements for the pipeline clearance. But the pricing impact that was announced yesterday will really become evident in the second half performance because it will go into effect mid July.

Dan Johnson - Citadel Investment Group

Thank you very much.

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Thanks Dan.

Operator

We'll move next to Ed Spehar with Merrill Lynch.

Edward Spehar - Merrill Lynch

Thank you, good morning. I have a question on the retirement protection. Pat, I think you said that the outlook was for 3% to 8% earnings decline in '08 results, is that correct?

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

That's correct.

Edward Spehar - Merrill Lynch

Okay. I guess the question is if I look at 2007 and I assumed an 8% earnings decline and I consider what you earned in the first quarter, you'd have to be about a $180 million a quarter run rate for the balance of the year, quarterly run rate to get to that down 8% and I guess I'm having a hard time understanding how we get from the current earnings run rate of a little over a 160 to a 180, given that the trends in the number of these businesses don't seem particularly good right now. Could you help me out on that?

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

I can help. The trends in particular in the fee-based retirement income line are really very positive because of the development of new sales and growth in AUM. What we saw in the first quarter associated with the market volatility with some reserve strengthening for guaranteed benefits. When you take that out, the trend looks much more favorable. The second item would be long-term care. We are seeing good results and we should be seeing the impact of our rate actions take effect over the balance of the year.

Edward Spehar - Merrill Lynch

And the guidance range, does it contemplate as you said with U.S mortgage insurance? As you said I think an expectation of $100 million loss, but the guidance range contemplates to $150 million to $200 million. Does the guidance range contemplate a worse outcome for retirement protection and down 3% to 8%?

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

Here is the way to look at that one Ed. Let me give you the same type of walk perhaps if that's helpful that I provided on U.S mortgage insurance. First, what would you see to be towards the top end of the range, but we already have seen some recovery in the equity markets, and you would probably see a 2% quarterly increase gradually towards the end of the year. You would see a stable level of persistency pressure that we've seen on the life side and we've talked about. It also see interest rates at today's levels because, of course, that impacts some of the spread based alliance any of your cash positions.

What could take you to the lower end of the range as it relates to retirement and protection well, first we would expect further deterioration and towards the equity markets would go back to sort of the lows, down towards the 11,000 area. And if you did that and took it through that cost you about $0.05 a share. And then we basically left room of about $0.04 for any other negative impacts from interest rate reductions, if we saw any more pressure that we think we have that accounted for well in the lifeline. And that would be in that additional $0.04 I had mentioned.

Edward Spehar - Merrill Lynch

And Mike, so those items then would be beyond this 3% to 8% as you talk about, for the segment correct?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Those items would be the ones that get you down to the 8% decline.

Edward Spehar - Merrill Lynch

They would get you 8%. Okay, thanks.

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Alright.

Operator

And we'll move next to Jimmy Bhullar with J.P. Morgan.

Jamminder Bhullar - J.P. Morgan

Hi, and thank you. I have a few questions. The first one I realize on domestic and [ph] I've realized you are not discussing outlook for 2009. But can you comment on whether you still expect 2008 to be a drop year in terms of earnings to that business or under what scenarios the 2009 be even worse than 2008? And then I have a few more.

Michael D. Fraizer - Chairman, President and Chief Executive Officer

I just want to stay with my previous explanation that we've seen uncertainty out there and if anything as we look at the fourth quarter and into the first quarter, we want to have all of the data to give the best number we can on 2009 because there are so many dynamics. You do have more captives attaching and as I'd expected we'd expect to see more benefit. You have the production levels that Kevin talked about on NIW though you see the overall of mortgage origination market down. And then you have all the public policy interactions. So, we are going to get that data and then we are going to give you a look later in the year.

Jamminder Bhullar - J.P. Morgan

Okay. And the secondly on, I think in your comments, I think it was Pat who mentioned that some loss in the 2007 book that exhaust our captive coverage, could you elaborate on that and does this pertains specifically to 2007 or do you see this happening with business written in early '08 and in 2006 as well?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

In Pat's comments Jimmy, he mentioned that under various scenarios you could see situations where perhaps some of the individual lender captives could pressure the backend of their attachment point. And it's just so early to definitively forecast that and such a young book in this environment; but based upon the rapid acceleration that we witnessed in the first quarter, particularly in the 2007 books. And you could run some scenarios that would lead you to believe that some of those could exceed the last year.

The ultimate developments really going to depend around continued delinquency progression, what ultimately happens in terms of lapse rates and care trends and the impact of weather lost mitigations efforts. But you got to remember, this book is on average six to eight months old. So, we are cautious about its ultimate outcome. I think Pat's comments were prudent and then going back to what we told you, back in February, we did indicate that it will be unlikely that all three book years '05, '06, and '07 would in the aggregate exceed their tier levels, and we still think it would take multiple years of poor development to exhaust the coverage in all three of those book years. But Pat's comments just said that 2007 could be pressured.

Jamminder Bhullar - J.P. Morgan

Okay. And the last one I have is on international MI, if you could just with the new insurance written being down. Could you comment on how much is the decline is because of tightened underwritings standards on your part and how much of it is because it's just the market shrinking, because of lower high loan to value originations; and then just generally your comfort with the bulk business that you wrote internationally in 2007?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Tom, do you want to take that, please?

Thomas H. Mann - Executive Vice President, Genworth

I sure will Jimmy. Let me use the first quarter as a method of answering your question because their flow production was down about 30% on a foreign exchange adjusted basis, and I think you can take that production and put in three buckets. The first is that last year, the first quarter of last year, we had about a $1 billion of Australian production that was actually catch up with some client reporting issues. And without that we would actually be down 24% in the first quarter, and then you take that remaining 24% and really put it into two buckets almost split evenly. And the first one is that we are seeing the slowdown at origination markets that you have mentioned, particularly in Canada and Australia and toward a reasonable degree in Spain as well.

And that was about 12% of the decline and the other 12% if you will did relate directly to the underwriting restrictions that we have put in place, again particularly in Europe. And so it's really those three items that have contributed to that shortfall and I will add another comment as you think about this going forward that we don't anticipate being down with our production levels or full year basis by that 30%. So, because we expect to see some recovery in the Canadian market since we've seen a rate decrease there.

Your second question was about our bulk performance. Our bulk performance as of this point in time continues to perform very well internationally.

Jamminder Bhullar - J.P. Morgan

Thank you.

Operator

And we will move next to Josh Smith with TIAA-CREF.

Josh Smith - TIAA-CREF

Hi, thanks for taking the question. On the delinquencies, typically we see a favorable movement from fourth quarter to first quarter with seasonality. Obviously that's being overwhelmed by other factors. So, on the flow book it was up 8%. So, can you characterize exactly what's driving that mostly just home prices or how would characterize that increase?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Kevin you want to take that please?

Kevin D. Schneider - President, U.S. Mortgage Insurance

Sure Josh. The if you think about seasonality we usually see in that first two quarters of the year, compared to what we saw in terms of delinquency development in the second and... third and fourth quarter of '07 we did see the impact of a little bit of seasonality, certainly not to the same extent that we have in prior periods because of the development of these books. I think what you are saying.

I think what you are seeing here with that 8% flow delinquency development arise, is you are seeing the effect of slower cure rates on some of those '07 books. So, you are seeing the 2007 book which had higher concentrations of again the Alt-A and the A minus product, particularly in some of those higher loan balanced states, they are just slowing down in terms of their ability to be cured and their ability to mitigate them. So, we did see some evidence of some seasonal adjustment. It's a little too early to get optimistic about that. We'll continue to trend that, but that's we're seeing in that first quarter development.

Josh Smith - TIAA-CREF

Okay. And the only other question I have was on the investment portfolio. Can you characterize you got a benefit of derivatives qualifying as hedges of; I don't know $150 or so to mitigate the increase in unrealized losses. Can you characterize what those are?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Let me turn that over to Vic Moses.

Victor C. Moses - Senior Vice President, Actuarial & Risk

Yes. This is a hedging for our variable annuity product and that hedging program it's a three Greek hedging program. However, it's not perfect and it's designed to attract the industries long-term, we expect some volatility on that on a quarterly basis. I think once standard deviation numbers are about $3 million per billion of imports, and so the numbers we are seeing here although a top quarter or not out of line, I think if you look at our cumulative position on those hedges, we are pretty close to the breakeven.

Josh Smith - TIAA-CREF

Thanks a lot.

Operator

And we'll go next to Al Copersino with Madoff Investments.

Al Copersino - Madoff Investment Securities

Thank you very much. Just wanted to confirm you guys have no exposures to HELOCs second lien and that sort of thing in the DMI business, is that correct?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

We have less than a $1 million dollar of total exposure to second lien business.

Al Copersino - Madoff Investment Securities

Okay,growth. My other question it's a very difficult time to understand exactly which trend is describing what. But I'm struggling with the combination of two trends and I'm wondering if you could help me out with that in the USMI business. You have in the one hand the seasonality where in most years we expect to see all metrics improve fourth quarter to first quarter whether it's loss ratios or delinquencies or what have you.

On the other hand of course, we're still in the midst of a very unusual and very difficult cycle right now. And I'm curious if you can maybe give us a sense for what the interplay was between those two factors, the normal fourth to first quarter seasonality versus the current environment we're in as it relates to loss ratios or delinquencies or what have you. I hope my question's clear. I understand I'm talking I guess two different trends going on, I'm trying to separate them out a little bit?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Kevin do you want to take that?

Kevin D. Schneider - President, U.S. Mortgage Insurance

I will take it, a shot [ph] at taking it. As we shared both through our investor update in December as well as in our fourth quarter call in February, this is simply a difficult environment in which to predict normal development of losses. What you see in the first quarter is simply that the development of that 2007 and 2006 books which had a higher concentration of those specialty products we discussed is simply overwhelming the traditional seasonality effects that you see in the first quarter. Beyond that, in terms of being more refined, in terms of the exact drivers, we have an economy that is deteriorated; we have unemployment that has moved up; we have home price declines that are driven by higher inventory levels of homes in the marketplace.

With those declines there is less opportunity to mitigate those losses and for the borrowers to cure. There are tightened liquidity standards in the marketplace, higher underwriting standards in the marketplace, which basically present less refinance opportunities for a number of those troubled borrowers. So you have a number of different environmental factors coming together, but the bottom line is those books are not carrying as fast as one would expect in the first quarter seasonality and it's overwhelming the first quarter seasonality development.

Al Copersino - Madoff Investment Securities

Let me take one other slice at this issue if I could. I am guessing you would think it is not appropriate to take a look at what your historical seasonality has been fourth quarter to first quarter. Strip that out this time and say that that is the underlying worsening that we have seen in the last three months, is that not an appropriate exercise or is that an appropriate exercise?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Well, we have, over the last several quarters, tracked our traditional seasonality development and have tracked how we have performed against that in excess of the traditional range of seasonality outcomes. If you take a look at that for the first quarter, traditionally in the first quarter, we end up going down in terms of our delinquency development roughly 5%. What you have here is we went up about 8%. Taking it back to the fourth quarter, fourth quarter traditionally is up in the neighborhood of about 5% and I want to say it was in excess of 20% some in the fourth-quarter development. So what we have attempted to do is continue on a month by month basis and a quarter by quarter basis to monitor that development and attempt to layer that in to our forecast going forward and I take you back to where we ended up with providing the range of outcomes on the range of between 100 and 200. That's what we are baking into that 100% downside number we are looking at right now.

Al Copersino - Madoff Investment Securities

Thank you very much.

Operator

And we'll go next to Suneet Kamath with Sanford Bernstein.

Suneet Kamath - Sanford Bernstein

Thank you, just two questions. First, clarification in terms of Pat's comments. Pat, I thought you said that, in terms of share repurchase, that you may resume share repurchase if you can execute on some of these capital freeing reinsurance transactions. Does that mean that, assuming doesn't happen, the $500 million base case that you talked about in terms of your guidance is off the table? And then second, if I look at your supplement, I guess it is pages 55 and 56 that show your sub-prime and Alt-A exposure. I am just looking at the net unrealized losses in total, comparing that to the fair value numbers and it looks like, in the aggregate, you have an unrealized... the stuff on the sub-prime side is trading it about 49% of book and the Alt-A is trading at 68% of book. So I just want to understand, as you think about other than temporary impairment charges, is this something that we should be concerned about?

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

Okay, your first question was on share repurchase and I would tell you that we are actively working on those programs to free up capital and our life insurance and annuity product lines and I meant what I said, that we are going to wait till we see progress on that front before resuming the share repurchase program.

On your second question relating to the unrealized loss position, we did a very thorough job of going through, doing the cash flow testing, taking into account the current trends and experience that we are seeing in the U.S. housing market and in the financial markets and looking at kind of the cash flows on the underlining collateral and where we expect to recover and where we don't expect to recover on securities. The impairments that we took reflect those expectations and I would suggest that and my view is that the unrealized gains and losses that exist on securities where we have not taken impairments simply reflect risk premiums that are out there in the market due to the current situation. But we expect to recover principal and interest on those securities as we hold them to maturity. Now changed... circumstances can change in the future but we have taken into account our best estimates including all these trends.

Suneet Kamath - Sanford Bernstein

Okay, thank you.

Operator

Next, Patricia Jackson [ph] with Columbia Management.

Unidentified Analyst

Thanks for taking my call. I just have a quick question and I know there is still uncertainty as to what Congress will do. But in terms of like what's on the table now with them saying that banks could have the option of reducing a borrowers mortgage to 85% of current value. And then moving along to FAJ, what would mortgage insurer's obligations be in that case. If the bank voluntarily takes the loan down, is the mortgage insurer still on the hook?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Alright Kevin, do you want to take that?

Kevin D. Schneider - President, U.S. Mortgage Insurance

Patricia [ph] unless there is a claimable event we would not be on the hook. The way with all the different rescue programs that are being debated and offered up in the market... in Congress today. Most of those assume a refinancing.

Unidentified Analyst

Okay.

Kevin D. Schneider - President, U.S. Mortgage Insurance

That would provide an opportunity for the borrower to get refinanced into a FAJ's insurance supported loan. Under that refinance option there wouldn't be a claimable event.

Unidentified Analyst

Okay, great. Thank you very much.

Operator

We'll go next to Darin Arita with Deutsche Bank.

Darin Arita - Deutsche Bank Securities

Thank you. Just a question on the capital deployment in 2008 looking at the slide from the December Investor Day, the new business funding estimate was $2.8 billion, how flexible is that number to move either up or down?

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

With respect to our capital planning, we started the year with about $800 billion of excess capital. We've seen some good growth in retirement income lines and we've seen moderating growth in some other lines. We've also taken some impairments in the first quarter. The way we are looking at it, we have an expectation at this point in time of $300 million to $600 million of excess capital at the end of the year and we are kind of working our capital management plans to target that result. That gives us flexibility that we need to take advantage of opportunities that come along through the year.

Darin Arita - Deutsche Bank Securities

Alright, that's helpful. And so, is it fair to assume that the GAAP impairments taken to fund the investments, those are flowing straight into the statutory net income?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Vic, you want to walk through that please.

Victor C. Moses - Senior Vice President, Actuarial & Risk

Yes, I think in general statutory impairments are usually lower than the GAAP impairments and there're a couple of reasons for that. It's easier to fail all GAAP tests, 99-20s is a discounted cash flow test and the statutory test, there's a nominal cash flow test, and when the security fails the 9920 test with market-to-market, if it fail the statutory test, we just take the cash flow drops. So, statutory loss is generally lower than GAAP loss.

Darin Arita - Deutsche Bank Securities

Can you just give us an idea out of the $121 million of impairments in the first quarter indeed [ph] stat of that?

Victor C. Moses - Senior Vice President, Actuarial & Risk

Yes, the stat number was $83 million.

Darin Arita - Deutsche Bank Securities

Alright, Thank you.

Victor C. Moses - Senior Vice President, Actuarial & Risk

Yes.

Operator

We will go next to Tom Gallagher with Credit Suisse.

Thomas Gallagher - Credit Suisse

Hi, couple on U.S MI and then one on international. On the U.S, I just want to get a better sense for some perspective on the commentary about the risk of piercing through the back-end of the captives for the '07 book. Are we talking about small pieces or is it broader based potentially, if you could just comment on that and then also can you just update us on thoughts on capital in U.S MI with the risk to capital ratio now at 12.4%?

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

Tom, I will just give you a general comment and hand it up to Kevin. I think he covered it thoroughly, its very lender specific, it is very multi-year dependent as far as what happened over multi-years and also then various multiple assumptions as he walked through. So Kevin, if you want to add anything, but otherwise hit the second half of Tom's question.

Kevin D. Schneider - President, U.S. Mortgage Insurance

Yes, I really don't have anything to add in terms of the captive tax on 2007 book. And then perhaps this perspective, the 2007 book based upon yearly development of that book; again you could run scenarios that would pressure some of the captives. But again it is far too early on some of the products that is pressuring the development in those captives, has deteriorated initially on a trend that literally could burn out and you could have it moderating back to more traditional delinquency development ultimate loss level.

So Thomas, it's just too soon to be able to call that. In terms of the U.S capital or the capital requirements for the U.S business, we still think we are sufficiently capitalized for this business. The rating agency have basically said that we have adequate capital for our claims paying obligations and we think we are in a good position to take advantage of the growth opportunities that present themselves to us in this environment as well.

Thomas Gallagher - Credit Suisse

Okay. And I appreciate the comment about the captives and I know it's very situation and lender specific. I just, I am trying to come back at this in this way. So when I look at your disclosure showing where you are at in terms, I guess, whether you have attached or not in that various disclosure on the bucket, it shows for the '07 book, zero to 50% is 4.3 bill. So in other words, that bulk of it. It's still fairly far away from attachment. Would something like this be a reasonable way to think about the books that may be at risk of piercing through the back end this disclosure, in terms of that which is attached might be more at risk?

Kevin D. Schneider - President, U.S. Mortgage Insurance

Yes. We provided an updated way to look at this in our disclosure. I think it's on page 49, because previously we provided an aggregate percentage to attachment for each book to try and demonstrate that progression and that's how talked about it in February. But given the variance of attachment across the captives and book years, I think a better way to look at it and to understand that progression is through that grouping of lenders and quartiles that we present on that in our quarterly financial supplement.

Thomas Gallagher - Credit Suisse

Okay, thanks. And then, just one of international MI. Can you give us, and I think you had done this in the past, I forgot when it was. But can you give us some sensitivity of how much premiums can still grow even with a substantial reduction in sales, just due to the unearned premium amortization?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

Tom, you want to take that?

Thomas H. Mann - Executive Vice President, Genworth

Tom, thank you very much for the question. This is Tom Mann and thank you very much for the question. A couple of perspectives in what you think about that is. When you're looking at any one year's earned premium recognition, only about 10% of that would be impacted by your current levels of new insurance written. So, the second point that I asked you to remember is the unearned premium nature of our business, in other words, as we've discussed, it is a single finance premium product. We have rather large unearned premium reserves, $3.4 billion. Our unearned premium reserves continue to grow and as we look forward, given the size of the 2005, 2006 and 2007 books that we have written, we are very comfortable about the continued solid revenue growth that we will have in this business because those are rather large books. We'll continue to roll through the earned premium statement of our operating statement for the rest of the year and into the future years as well.

Thomas Gallagher - Credit Suisse

And Tom, just one quick follow-up. So when I looked at that type of analysis and I assumed the amortization of the unearned premium was something like five years. I don't know if that sounds about right. But I had looked at it, if sales are down, even 30% or 40%, it would still grow revenues double digits. Does that sound roughly right to you?

Thomas H. Mann - Executive Vice President, Genworth

That sounds very roughly right.

Thomas Gallagher - Credit Suisse

Thank you.

Thomas H. Mann - Executive Vice President, Genworth

It's exactly right.

Thomas Gallagher - Credit Suisse

Okay.

Operator

We'll move next to Steven Schwartz with Raymond James.

Steven D. Schwartz - Raymond James & Associates, Inc.

Hi, good morning everybody. A few questions, first just a quick follow-up. Pat, I what... I missed that, I am sorry. What was the guidance that you've given on the international side?

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

For international... the guidance?

Steven D. Schwartz - Raymond James & Associates, Inc.

Yes, the growth and operating --?

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

Yes, the growth was 10% excluding the impact of foreign exchange and then I said that on a reported basis, if the foreign exchange rates remain at the first quarter end spot levels, it would be an additional $30 million.

Steven D. Schwartz - Raymond James & Associates, Inc.

Okay, great. Thank you very much. A few questions here. One thing, Kevin may be you can touch on. The issue of home price depreciation and the possibility of greater home price depreciation what that might do. What severity are you reserving at? It's still... I am asking this right, is still 115% or something lower?

Kevin D. Schneider - President, U.S. Mortgage Insurance

Even if what we have, what we are seeing in our severity development on the year is basically exactly what we expected to be assuming. We have had severity on the quarter that's trended basically flat sequentially from the fourth quarter of the first quarter, at roughly 102%, and what you see going on there is we continue to see higher severity regions such as the Great Lakes, which is probably running upwards about 110ish, offset by lower severity regions. So and as we discussed, we really have... severity has a structural cap in our business because it is driven by our full guarantee claims payment obligation, and that actually went down a little bit in the fourth quarter as a percentage of ultimate settlement. So, what we... what is assumed in our reserve development is what we are seeing in our actual severities.

Steven D. Schwartz - Raymond James & Associates, Inc.

Okay, alright. Fair enough. May be you can touch on loans Patrick. The change in captive reinsurance programs, what that might be? I think Fannie and Freddie, have both said starting in the second half of the year that they will no longer accept 40 actuarial [ph] business, what that might mean to you?

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

Yes, that's a great question. Fannie and Freddie effective January first will no longer be accepting loans in a 40% seat as a result a number of our lenders will be rolling back to 25% seats. As we think about that based upon the quality of the book we were writing in 2008 and in particular based on the... that it will... impacted by our pricing and all the guideline change we've announced and discussed earlier, we are going to have a solid book of business going forward and the reduction in those ceded premiums to the cap is, we view as a good outcome. We are less dependent and have less need for that reinsurance protection. Going forward, given the improvement in underwriting guidelines and the improvement in pricing and we have to view that as a net positive and providing additional earned premium to our margins.

Steven D. Schwartz - Raymond James & Associates, Inc.

Okay. And then, you said January 1, is it...

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

Pardon me, excuse me. If I did, I meant to say June 1.

Steven D. Schwartz - Raymond James & Associates, Inc.

Okay. And then one last question for you. In the guidance that you are giving, the potential for $100 million to $200 million loss and you assuming [ph], how much are you assuming in terms of recoveries from captive reinsurance programs in that number?

Steven D. Schwartz - Raymond James & Associates, Inc.

That number is going to move around Steven depending on how the ultimate growth loss development place through, depending on the individual book year, depending on the individual captive development, so, we are not providing a range of guidance on that right now.

Steven D. Schwartz - Raymond James & Associates, Inc.

Okay. And then, Tom, Magic in its conference call indicated they might be having some difficulties in Australia because of the downgrade in the rating. I would assume that anything there could we down to your benefit?

Thomas H. Mann - Executive Vice President, Genworth

We are very well positioned in Australia.

Steven D. Schwartz - Raymond James & Associates, Inc.

You'll leave it at that?

Thomas H. Mann - Executive Vice President, Genworth

I am going to leave it at that.

Steven D. Schwartz - Raymond James & Associates, Inc.

Alright, thank guys.

Operator

We'll go next to Jeff Schuman with KBW.

Jeffrey Schuman - Keefe, Bruyette & Woods

Good morning. I was wondering if we could follow-up a little bit with Pat on the nature of the reinsurance programs that you are looking at. I mean just... on the surface just reinsuring some business and then redirecting that capital share repurchase wouldn't automatically drive in that benefit unless there was something arbitrage, whether it's reserve redundancies or regulatory arbitrage, what kind of is conceptually the basic opportunity that you are looking over there?

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

With reinsurance, there is a different costing structure for reinsurers both domestic... particularly, international reinsurers and we would look to arbitrage that structure.

Jeffrey Schuman - Keefe, Bruyette & Woods

So essentially cost of capital arbitrage, is that what you are looking for?

Patrick B. Kelleher - Senior Vice President and Chief Financial Officer

Yes it is.

Michael D. Fraizer - Chairman, President and Chief Executive Officer

This is Mike. Let me also add, we have a redeployment opportunity too because, as we have split out for you, there is a series of blocks of business we've looked at in the sector and we laid this out also at our last Investor Day. That includes about $1.4 billion of capital associated with lower return life and annuity blocks. Taking the step beyond what Pat described and taking that capital and using it for a higher returned purpose, including what we think is an opportunity in the repurchase area is a capital deployment opportunity.

Jeffrey Schuman - Keefe, Bruyette & Woods

If the returns are low on some of these blocks, I mean does that create the possibility that you would realize a loss in that transaction or not?

Michael D. Fraizer - Chairman, President and Chief Executive Officer

One of the things we are looking at and it is very situation-dependent as Pat described on various factors, but also we may find that it's optimal to blend some blocks of business too.

Jeffrey Schuman - Keefe, Bruyette & Woods

Okay. Thank you very much.

Operator

We'll go next to Mark Patterson with NWQ Investment Management.

Mark R. Patterson - NWQ Investment Management, LLC

Hi, thanks. Mike, I guess a question for you. Since it seems like the Q&A of this call has been 80% or 90% based on your U.S MI business. I'm just curious if you've been exploring any alternatives for that business. You guys mentioned in the past may be working with some third parties to put money to work, but I don't think that really was associated with may be considering some different alternatives you might have with your own business.

Spinning it out [ph], but some other peoples' investment into that business in a joint venture, and the reason I bring this up and I would like to get your comments on it is because the way that I look at this, you've less than $6 of book value associated with that business right now and if I took it all out of your book value, you are down to $23.5. I here you talk about $100 million to $200 million of losses in that business. So if I back that out of your new guidance range, you kind of midpoint somewhere around 280 on a $23.50 book if U.S MI's worth zero. So you're getting somewhere around to 12% ROE on the business. The rest of businesses is that, many of them which facing very challenging markets themselves, so it's not like they are over-earning. And the investment community is obviously very troubled by what's going on with domestic MI. I think your business is better positioned than your peers and I think you are getting negative value for the business.

Michael D. Fraizer - Chairman, President and Chief Executive Officer

I'll give you a few perspectives and you also have asked sort of a series of questions, so let me walk down some thinking. First of all, I would agree that there is no little or no value. Some investors would argue a negative value attributed to that specific business line right now. Largely, because of the environment that's out there, the uncertainty and we see now whether it's on the lender side or even on the competitor side to that U.S MI business, some very challenging performances out there. So that's just the reality.

So, the first priority we have is to rebuild the value in the business as opposed to looking at where that business is in a trough of a cycle. I think the team has a good plan to do that. We have outlined and been a leader in taking the number of moves down that path. I don't think you would do all of the work that Kevin has outlined just to get back to the same business model that we had 24 months ago. I think this is a business model that deserves a higher return. I think this is a business model that has to be characterized by conservative underwriting and it needs to be characterized by a lending partner environment and a regulatory environment that doesn't let bad practices return.

I think this is a business that needs to have more blend of a single premium characteristic that can be quite positive, that you have seen the benefits of internationally. I think this is a business also that in some cases needs to provide some other ways to help consumers in addition to the underlying mortgage product because it helps broaden the value proposition and how the products sold. And, those have to come together to think of this as more of a 15% to 20% ROE business line, not what depending on your mix of business in the industry, ran between 11% and 15%.

It's also a business that I think over time I'd like to see characterize by less captive reinsurance, coupled with a very stringent underwriting guidelines that are out there. So we are diligently focused on putting that new business model in place with the latest move that we've made on the pricing being indicative of that. Then there is the bridge opportunity as you describe and I have commented on to be opportunistic in this market.

In the last call, I suggested that we could be a conduit of capital for the industry. I think our discipline has been respected in the industry. We have narrowed down a number of ways to be opportunistic. I think a type of approach such as a sidecar structure is the most attractive, and if you move down a path like that, the minimum level of a sidecar is probably around $400 million but most sidecars that you would see in this area would be in the $400 million to $700 million range and we've diligently worked on that area.

So now let's take the step beyond executing the plan the team has and being opportunistic and say, how do we look at any of our business lines. I think when you look at a business line, you have to say, do you like the markets in the industry... including the growth characteristics? Do you like the strategies and capabilities and competitiveness of what you bring to that market? Can you deal with or do you like the regulatory framework? Do you like the business model and the returns on capital, including any volatility characteristics? Are you performing or not? And finally, do the equity markets reward, excuse me, the performance that you deliver?

I look at U.S MI right now and I say the markets are attractive. I think we have the right strategies, capabilities and competitiveness. We certainly understand the regulatory framework and are working actively to improve it back to the underwriting discipline. It's fair to say we are not happy with the results we are delivering, even though they are better than others. And that we understand the absolute level of performance for our shareholders and we need to do better than that, so that needs improvement.

And when it comes to the returns on capital, along with the business model as I said, you don't want to go through all of this and not get to a new business model, so that needs improvement. And, we have to see a path that the equity markets will reward us for our performance. So that's how I would evaluate the situation. I will just close the same way that I got to ask this question actually back in May of last year, and I said we are active managers of our portfolio for shareowner value. And on that front, we have made moves where we don't see a path going forward such as structured settlements.

We went public, so we had a travel insurance business. We had a small group benefits business and we worked on for a number of years and then decided that capital is best to use elsewhere. So we take a very disciplined approach to managing our business line. So, that's how I think about it. This team has a good game plan in place, but we will continue operating, allocating capital for shareowner value in a disciplined fashion.

Mark R. Patterson - NWQ Investment Management, LLC

Thanks.

Operator

We'll go next to Amanda Lynam with Goldman Sachs.

Amanda Lynam - Goldman Sachs

Hi, thanks. Our question is actually already answered. Thanks very much.

Operator

And we have time for one final question. We'll go next to Eric Berg with Lehman Brothers.

Eric Berg - Lehman Brothers

Thanks very much. Just a couple of questions; one narrow and one broad, both, yes on MI. Kevin, if you have made all the changes that you did many months ago all day out, minus out high loan-to-value in certain markets exited. Why was the business as strong as it was in the March quarter in terms of new risk produced or added to the books and new premiums written and so forth?

Kevin D. Schneider - President, U.S. Mortgage Insurance

Hi, excuse me. If we had made all of those changes back in June of last year across the board, we would have a little bit less content of that in the first quarter. But the simple reason is that it was strong in the first quarter is, that's what's getting originated in the marketplace today. The market has reacted and is severely turned [ph] back on that, and we've made some progress ourselves in terms of our own share progression.

Eric Berg - Lehman Brothers

My final question is purposely general. But, it's this; I'm sure Kevin you've been surprised by many things as you looked at the page after page of data of the housing markets. But, is there anything that sort of stands out in this whole experience? Whatever inning we are in here, whether it is... what's happening in California, what's happening... what the extent of the decline in Florida, the willingness of certain high FICO score borrowers to walk away, if there is one or two things that has really jumped off the pages of data that you've looked at and have led you to say, wow, I never would have expected that, what has surprised you the most about? Let's say, what's going on our customer behavior in this whole complicated situation?

Kevin D. Schneider - President, U.S. Mortgage Insurance

Eric,that is a broad one.

Eric Berg - Lehman Brothers

It is purposefully broad. And I am... I continually get surprised every day. So, the biggest change to me has been the rapid deterioration of both the Florida and the California experience. Nobody ever would have predicted the extent of the home price downgrade in those markets. But if I step back from that, the other thing that we've all learned through this period is it gets back to the fundamentals of sound, prudent underwriting. If you are underwriting properly, and loans are getting originated to those standards and you had good linkage between those underwriting standards and what the investors are paying for those loans in the secondary markets, it's all about liquidity. When the liquidity dried up and went away, things jumped off the charts, and I really think at the end of the day, that is probably one of the biggest drivers of this. Once liquidity exited the market, everything accelerated or decelerated or whatever you want to call it.

Eric Berg - Lehman Brothers

I understand your answer. Thanks very much.

Operator

Ladies and gentlemen, this will conclude Genworth Financial first quarter earnings conference call. We do thank you for your participation and at this time, the call will end.

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