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Executives

Georgette Nicholas

Martin P. Klein - Acting Chief Executive Officer, Acting President, Senior Vice President and Chief Financial Officer

Kevin D. Schneider - President of U S Mortgage Insurance

Patrick B. Kelleher - Executive Vice President

Analysts

Sean Dargan - Macquarie Research

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Ryan Krueger - Dowling & Partners Securities, LLC

Suneet L. Kamath - UBS Investment Bank, Research Division

Mark Palmer - BTIG, LLC, Research Division

Genworth Financial (GNW) Q3 2012 Earnings Call October 31, 2012 9:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Genworth Financial's Third Quarter 2012 Earnings Conference Call. My name is Hewey, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to Georgette Nicholas, Senior Vice President of Investor Relations. Ms. Nicholas, you may proceed.

Georgette Nicholas

Thank you, operator. Good morning, and thank you for joining us for Genworth's third quarter earnings call. Our press release, financial supplement and third quarter 2012 investor materials were released last evening. Earlier this morning, additional information regarding our vision and strategy was posted to our website.

Today, you will hear from Marty Klein, acting Chief Executive Officer and Chief Financial Officer. Following our prepared comments, we will open the call up for a question-and-answer period. In addition to our speaker, Pat Kelleher, President and CEO of our Insurance and Wealth Management Division; Kevin Schneider, President and CEO of our Global Mortgage Insurance Division; Jerome Upton, Chief Financial Officer of our Global Mortgage Insurance Division; and Buck Stinson, President, Insurance Products for our U.S. Life Insurance segment, will be available to take your questions.

With regard to forward-looking statements and the use of non-GAAP financial information, during the call this morning, we may make various 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 and the Risk Factors section of our most recent annual Form 10-K and quarterly report on Form 10-Q, each as filed with the SEC.

This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement and earnings release, non-GAAP measures have been reconciled to GAAP where required, in accordance with SEC rules.

And finally, when we talk about International Protection and International Mortgage Insurance results, please note that all percentage changes exclude the impact of foreign exchange.

And now, let me turn the call over to Marty Klein.

Martin P. Klein

Thanks, Georgette, and good morning, everyone. Before we get started, I'd like to say that we wish the best for all the people who are dealing with the aftermath of Sandy.

This morning, we'll provide an overview of our corporate strategy, give an update on the holding company, including our credit rating situation and review third quarter results in our businesses.

In developing a strategy, our highest priority has been to rebuild value for shareholders. Working with the Board of Directors, the management team has developed and begun executing specific plans to both safeguard and maximize the value of the company for shareholders. We intend to accomplish that goal by achieving return in equity in each of our core operating businesses in excess of its related cost of capital, generating significant cash flow to the holding company from core business dividends and realizing value from our non-core businesses and enhancing financial flexibility by: first, managing the core businesses to enable them to be standalone on an operating and debt basis; and second, deleveraging to enhance cash flow, reducing the burden on the holding company and placing the company on better footing with rating indices in the credit markets.

As part of this process, we have identified 2 core sets of businesses: the U.S. Life Insurance businesses, that which include life, long-term care and fixed annuities; and Global Mortgage Insurance, which includes the U.S., Canada, Australia and other markets.

The businesses we have identified as non-core include International Protection, Wealth Management, and of course, the Runoff segment, which includes primarily variable annuities. Each of these 2 core businesses, U.S. Life and Global Mortgage Insurance, has been evaluated on its potential to provide significant competitive advantages, deliver new business returns above its related cost of capital while covering its full expense base and ultimately, produce capital and employable cash that covers the cost of its appropriate share of debt and supports its desired ratings.

Managing our core businesses with these goals will reduce interdependencies and subsidizations among businesses in order to improve financial performance and flexibility. The performance of each of business will be regularly evaluated against these criteria. For example, if a business is not delivering acceptable new business returns, we will evaluate available options to address this issue and ensure it does not continue.

As performance in the core businesses improves, we believe our financial strength and flexibility will improve as well. This flexibility should provide potential opportunities to take additional steps, for example, through the sale or spinoff of businesses if that would further increase shareholder value. Our core businesses have significant opportunities to leverage their strengths to earn attractive returns, given the underserved middle market for life insurance, the growing consumer need for long-term care, the developing U.S. housing market recovery and the continuing development of the housing markets in various international countries.

However, we also recognize that we are operating in an environment with macroeconomic headwinds and regulatory and writing industry challenges. We're also working to overcome underperforming in-force portfolios, a relatively high cost of capital and interdependencies among the individual businesses and with the holding company that impede flexibility.

In each core business, we have 4 key areas of focus: rebalancing the business risk profile, writing profitable new business, improving returns on the in-force portfolio and supporting holding company liquidity and flexibility.

In Global Mortgage Insurance, we are working to rebalance the business risk through the partial sale of our Australia MI company and narrow our footprint in Europe given the uncertain economic outlook and increase the use of third-party reinsurance.

In the U.S., Australia and Canada, we are prudently managing our capital and pursuing various ways to utilize that capital in the most efficient and productive way possible.

In Europe, we are writing new mortgage insurance business in only 4 countries where business conditions enable us to achieve attractive returns. We're encouraged by the continued improving trends in U.S. housing market, and we continue to expect that the U.S. Mortgage Insurance business will return to profitability during 2013. We remain focused on executing loss mitigation strategies, maintaining our distribution network and writing profitable new business through waivers, GRMAC or a potential new code-type options. At the same time, we are actively pursuing solutions to reduce linkages with and dependencies on the holding company.

Our businesses in Canada and Australia continue to write profitable new business and deliver dividends to the holding company. While smaller books of new business are utilizing less capital on these platforms, we are working with the regulators as they evaluate capital levels more cautiously in this economic environment.

In our U.S. Life Insurance business, our primary focus is on improving the performance of the in-force business through long-term care in-force price actions, life block transactions and refinancing of life reserves. We're also working to improve the new business profile of both life and long-term care by managing portfolio sales, as well as redesigning products to reduce risk, to improve profitability and to maximize capital efficiency. The goal is to provide regular ordinary dividends to the holding company beginning in 2013.

In our non-core businesses, we will manage new business to enhance the value that can be realized, while generating cash and capital, for example, through an ultimate sale. Our priorities in managing our non-core businesses are as follows: In International Protection, we will maximize the embedded value of the overall business through resizing the current European franchise while continuing to execute on growth opportunities in new markets. We are significantly narrowing the focus in Europe to key relationships and using appropriate pricing to protect margins during the prolonged financial crisis. This will enable us to reduce corresponding infrastructure costs. These changes will add to the embedded value of the business while maintaining significant dividends to the holding company, enhancing our ability to realize increased value from a potential sale of the business in the next 2 to 3 years and as economic and business conditions permit.

Wealth Management is an attractive business with a strong competitive position and continuing growth potential, and we believe it can also be a significant source of capital. We continue to invest in investment solutions and new capabilities to support the financial advisers we serve and to increase the value of the business. We will also be evaluating opportunities to ultimately realize that value at the appropriate time.

All of these actions support our goals of building strength and flexibility at the holding company. We are positioning our core businesses to pay consistent dividends while generating cash and capital from our non-core businesses. While our current leverage ratio of 25% is appropriate for a diversified set of businesses, we are moving to a medium-term leverage target of 20% to 22%. This reduced leverage target is more appropriate for the core businesses on a standalone basis and will increase our financial and strategic flexibility and should also benefit our ratings over time.

As additional capital is generated, we will evaluate how best to deploy it. These options include: first, strengthening the balance sheets and performance of our businesses, where appropriate; second, reducing leverage to increase flexibility; and third, returning capital to shareholders such as through share repurchases. These options will be viewed through the lens of how best to increase shareholder value at the time.

Successful execution of this turnaround strategy should increase the earnings and ROE in our core insurance businesses while also generating cash and capital that will increase financial strength and flexibility. I should also note that the board continues to be actively engaged in the CEO search process, working with Russell Reynolds, and has made good progress.

Let me now cover some topics of the holding company. We continue to generate and to maintain significant liquidity. At the end of the third quarter, cash and liquid securities at the holding company totaled about $1.4 billion. During the fourth quarter, we will payout approximately $375 million to the operating companies related to tax-sharing agreements with them. This includes the $230 million of temporary tax benefits being held at the holding company which we noted last quarter.

After reflecting those upcoming payments, the holding company has about $1 billion in cash and liquid securities, in line with our target of 2x debt service coverage, which is about $600 million, as well as an additional buffer of approximately $350 million for stress scenarios that might impact the dividend sources to the holding company over the next 18 months. We expect the year-end cash balance to also be in line with that target.

Regarding dividends to the holding company, the Insurance and Wealth Management Division remains on track with the 2012 goal of $300 million, having paid $236 million through the end of the third quarter.

In Global Mortgage Insurance, we continue to expect dividends from the international mortgage platforms in the range of $50 million to $110 million for 2012, with $30 million paid year-to-date from the Canada ordinary dividend.

Also, the company signed an agreement this month to sell its home equity access business for $22 million. This transaction is expected to close in early 2013 with no significant gain or loss from the sale impacting corporate or other activities.

Now I'd like to touch on the actions of the rating agencies during the quarter. First in our view, Moody's recent decision to extend the review of our holding company and of the U.S. Mortgage Insurance recognizes the plans that we have developed to increase our financial strength and flexibility. While S&P also acknowledge this, we were disappointed that they chose to take ratings actions before we had made further progress in our plans. We believe that as we execute our strategic plan, our financial strength and flexibility will improve which should stabilize and ultimately improve our ratings. However, in the meantime, we took steps to prepare for potentially adverse ratings actions. We do not believe the downgrade by S&P or the potential action by Moody's will have a material impact from a commercial liquidity or financial perspective.

From a commercial perspective, there has been no significant change in the ability to write new business or on the capacity or willingness of counter-parties to enter into hedging transactions. The holding company does not have any long-term debt maturities until June of 2014 when $600 million of long-term debt matures. We plan to address this debt well in advance of its maturity date.

Along with the strategic plan discussed earlier, we continue to work with regulators and rating agencies to develop comprehensive solutions for U.S. MI. We are seeking to address rating agency concerns and fulfill our commitment to pay all our valid claims, while safeguarding the liquidity, capital and shareholder value of Genworth by: first, increasing financial flexibility for Genworth and U.S. MI by reducing U.S. MI's dependency on the holding company; second, preserving the holding company liquidity buffers and other liquid assets; and third, sustaining U.S. MI's access to profitable NIW markets.

Alternatives under consideration include internal reorganizations and potential new cost structures. These alternatives could require some form of capital contribution, none of which is expected to be material to holding company target liquidity or buffers. These alternatives also do not rely on our capital generation plans, nor do they rely on additional contribution of mixed shares. We believe that a runoff, spinoff or sale of U.S. MI or the amendment of our bond indentures are not the most beneficial options for shareholders at this time. We will provide updates as we move forward further on these plans.

Now let's turn to third quarter results, where we reported operating income of $121 million for the quarter and net income of $34 million, which reflects the goodwill write-off in the International Protection.

In Global Mortgage Insurance, we saw continued progress in the division, with reported net operating income of $56 million compared to income of $51 million in the prior quarter. There was stable performance in Canada, stronger results in Australia as the performance in the portfolio continues to improve and consistent performance in the U.S. Mortgage Insurance.

In Australia, operating earnings were $57 million. Unemployment was stable and home prices were up slightly from some continued regional variation. Lower interest rates have improved affordability and consumer sentiment. The loss ratio for the quarter was 47%, which is down 7 points sequentially.

Overall delinquencies were down 10%, with new delinquencies in cures improving across all major states. While paid claims are elevated, reserves remain largely in line with the trends we had anticipated following the first quarter reserve strengthening. We continue to manage capital against the backdrop of increasing regulatory capital expectations given the uncertain global environment. We were evaluating additional reinsurance treaties to manage the capital levels, while balancing the increased cost on an impact on overall returns.

Executing a partial sale of our Australia MI platform remains a key goal in reducing our exposure to mortgage insurance risk and generating capital. While the performance of the business is recovering, the increasing regulatory capital expectations and uncertain market conditions on Australia for initial public offering can impact both valuation and timing. We remain committed to a partial sale, but given our liquidity at the holding company and the other leverage that we have to generate cash and capital, we'll execute a transaction when it makes the most sense for shareholders. Execution of an IPO is subject to market valuation and regulatory considerations, and we do not now expect an IPO to occur prior to late 2013.

Turning to Canada, operating earnings were $42 million for the quarter, unemployment was stable sequentially and home prices were down slightly. The loss ratio decreased to 2 points sequentially to 30%, as overall delinquencies were down 9% from the prior quarter. Improvement in the Alberta region continues, and the changes to eligibility rules for government guarantee mortgages that went into effect in July of this year are likely to reduce the size of the high loan-to-value mortgage insurance market. Our capital position remains solid in Canada.

The operating loss of other countries in the international mortgage segment improved somewhat to $5 million sequentially, driven by a reduction in losses, primarily in Ireland.

Moving now to U.S. MI. We had a net operating loss of $38 million in the quarter, effectively flat sequentially after adjusting for a $12 million benefit from the termination of an external reinsurance contract in the second quarter. We're seeing a slow recovery in the housing market, and the mortgage insurance market is improving. And we have seen strong growth, driven by a larger mortgage origination market and higher mortgage insurance purchase penetration in the quarter, the highest since 2008.

Total losses were flat sequentially, as a seasonal increase in new delinquencies and lower self-cure activity was offset by loss mitigation and modest changes in aging.

Our total flow delinquencies fell by 19% from the prior year, with new delinquencies up 5% sequentially from seasonality, but down 24% year-over-year, reflecting the continued burn-through of the 2005 to 2008 books and the new better performing books becoming a larger portion of our overall portfolio.

With the extension of the waivers, we anticipate continuing to write new business with risk-to-capital ratios above 25:1 in GEMICO.

Finally, during the quarter, the GSEs granted GRMAC an extension of the ability to write new business in non-waiver states through 2013. Considering these improving macroeconomic fundamentals, the continuation of government programs, loan modifications, the continued burn-through of the unprofitable books of business and a growth of new books with a 20% plus ROE, we expect U.S. MI to return to profitability during 2013.

Moving to the Insurance and Wealth Management Division, reported operating earnings were $104 million. Life Insurance earnings were $22 million for the quarter. We saw higher term life mortality experience in the quarter, which is the third straight elevated quarter after 3 quarters of more favorable experience when compared to pricing assumptions. Fluctuations in mortality can occur, but we have not identified any systemic trends.

Life Insurance sales were down sequentially and year-over-year, consistent with the pricing and product actions taken this year as we managed sales volume and improved statutory performance. We expect to complete our second life block transaction in the fourth quarter of 2012. The initial phases of the transaction began in the third quarter, and we recorded an associated GAAP loss of $6 million this quarter. We expect the capital benefit to be in excess of $100 million in the fourth quarter when the transaction is completed.

On October 22, we announced changes to our Life Insurance portfolio, designed to update our product offerings and further adjust pricing to reflect the current low interest rate environment and regulatory changes. Under the new AG 38 guidelines, we have determined that approximately 7% of our universal life insurance reserves are subject to the new regulations, which require additional reserve adequacy testing. While our analysis is not yet complete, we do not expect a significant financial impact related to the new reserving requirements on our in-force reserves subject to the new guidance.

Long-term care earnings were up for the quarter at $45 million. We had $29 million of favorable reserve adjustments impacting results for both active life and disabled life reserves, primarily as a result of the continued multistage system conversion. As of the end of the third quarter, reserves for both GAAP and Stat are adequate.

After adjusting for the reserve items, the loss ratio was approximately 74%, which is flat to the prior quarter. Our previously announced 18% premium rate increase on the majority of the older-issued policies continues to take effect. With respect to the recently initiated in-force price actions, through October 26, we have met with 20 states and recently submitted filings in 18 states. We also have approval from 2 states to begin implementation in the fourth quarter of this year.

Fixed annuity earnings were $19 million, and sales in this line were up from the second quarter even as we continue to take actions to maintain margins. International Protection earnings were $8 million for the quarter. The business continues to navigate the tough consumer lending environment. New claim registrations in Europe decreased 18% versus the prior quarter and 6% year-over-year. Given the impact of the continued challenging economic environment in Europe on the goodwill analysis in the quarter, we recorded an after-tax goodwill impairment of $86 million, which was all of the goodwill related to this business.

As part of the plans to increase value through growth in new markets, we commenced a relationship with MAPFRE, a leading insurer in Latin America, to utilize their distribution to access markets in South America. Wealth Management earnings were $10 million and the business continues to provide steady earnings and dividends, including dividends of $30 million year-to-date.

Turning to capital. The U.S. Life company's risk-based capital ratio is estimated to be about 420%, up from the second quarter. RBC benefited from favorable taxes as well as positive statutory income in the quarter. The ratio also reflects the extraordinary $50 million dividend paid to the holding company in the quarter from the Medicare supplement sale.

At the end of the third quarter, unassigned surplus was approximately $180 million and statutory operating income was approximately $590 million year-to-date. We still expect to achieve the 2012 unassigned surplus target of $250 million to $300 million that we laid out in February. These goals were a high priority as we work to reestablish the regular ordinary dividend capacity of our life companies in 2013.

Finally, in the Corporate and Runoff Division, results in our Runoff segment improved from the prior quarter and the prior year from variable annuity results, driven by favorable market conditions.

Shifting to investments, the global portfolio continues to perform well. We have updated the analysis we gave back in our February 3 investor call regarding the impact from an extended low-rate environment on earnings per share. The updated analysis shows an additional impact of $0.01 to $0.02 per share in 2013 and 2014, primarily due to lower projected earnings in Australia related to the rate cuts made throughout 2012.

Let me wrap up so we can take some questions. The last few years have seen several challenges for Genworth. We are now tackling those challenges head on, and we'll put them behind us. We must turn our company around and turn the page to the next stage for Genworth. With our competitive strengths and with our talented team of employees who provide valuable products and services to our customers, we are working to realize the many opportunities that we have to rebuild shareholder value. In doing so, we will build a stronger company which will benefit all of our stakeholders. We are moving quickly and urgently on our action plans and look forward to updating you of our progress.

And now, let's turn it over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first phone question comes from the line of Sean Dargan with Macquarie.

Sean Dargan - Macquarie Research

I have a question about your targeted debt-to-total capital ratio. You mentioned the medium-term goal is 20% to 22%. That's a bit higher than, I think, the 18% to 20% you talked about last quarter. What -- how long will it take to get to that medium-term goal and what steps will you take to get there?

Martin P. Klein

Sean, it's Marty. Thanks for the question. As we look at how we project out our earnings and look at the debt ladder and how it matures, we think that we'd sort of move into the 21% to 22% range in about 3 years from now. That assumes that with the $600 million maturity in 2014 that we'd only really refinance, about $250 million of that at some point in time, and the rest really comes from the delevering that happens along the way and as well as retained earnings. So it really is going to take about 3 years to get to the 21% to 22% range. Then obviously, as we generate capital from some of the things that we've talked about earlier, that would obviously give us the opportunity to accelerate that.

Sean Dargan - Macquarie Research

Okay. And just one follow-up about the Australian partial IPO. I mean, what has changed to push it back another back half of the year, I guess? And what's changed in the Australian market that's led you to push back the timeframe?

Kevin D. Schneider

Sean, this is Kevin. As you think about our performance down there, we feel good about a return to profitability. And the stability that we've seen, now a couple of quarters in our results. I think what continues, not so much to change, but to evolve down there, is some of the capital pressure from a regulatory capital standpoint. And basically, the regulator in this environment, as Marty mentioned in his opening remarks, the regulators are cautious in these markets right now. The other thing that I think we all need to be cognizant of is just what's going on in the overall market for IPOs in Australia. There's simply been no material IPOs of any size down in that market this year. And that's why I think there remains some uncertainly in that market regarding the stability to tap into the market from that standpoint. We do remain committed to a partial sale. I think the thing that's most changed for us though, as we think about it is, is we're going to do what it makes the most sense for our shareholders. And in our view, at this point in time, is that our valuations should improve in that market as we move towards the end of the year. Moving performance, subsequent quarters of improving performance will continue to help that, will continue to help the valuation improvement. And again, that's one we're targeting at this point because we think it will be the one that will generate the best outcome for our shareholders.

Operator

Our next phone question comes from the line of Jeff Schuman, KBW.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

I was wondering if you could help us just tick and tie a little bit on the holding company cash numbers. I think you said pro forma for the $375 million, it goes to the OPCOs, hope it would have about $1 billion. Then I think you said you would end the year around that level, but there would also be some dividends this quarter. So I wasn't sure if there were some uses for those dividends or how we kind of true-up that arithmetic.

Martin P. Klein

Yes. Thanks for the question, Jeff. I mean, we're at right around our liquidity target at the end of the quarter, maybe just barely in excess once you adjust for that $375 million that will go down to the operating companies, mostly the life companies during the fourth quarter. But then the fourth quarter, we have a few different things moving. We do have some dividends coming in, but we also have debt service that's going up the other way. So with our projections, we kind of assume that will all land at around $1 billion by the end of the year.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, that's helpful. And just one other thing, if I may. Long-term care continues to have some issues around performance to the legacy block, but there was a reserve released this quarter, which I guess, you made them for technical reasons, but it seems kind of counter-intuitive. Can you kind of help us understand the nature of the reserve released recently?

Patrick B. Kelleher

This is Pat Kelleher. I'd be happy to do that. We are nearing the completion of our implementation multistage update in the reserving system. What we did complete in the third quarter was claim reserve updates. And we actually had some reserve adjustments, some components of the reserve increased like on certain facility claims. Other components of the reserve decreased because we found that the reserves were redundant. So the first thing that's important there is in that component of the changes, we found that our reserves were approximately right in aggregate, and our total claims reserve was sufficient. So it didn't change materially. We did have about $15 billion of active life reserves we're holding on that business a set of minor adjustments, which resulted in a favorable impact to earnings of $29 million after tax. And we do not expect a material impact since the remaining work is completed. We also did some work updating our GAAP loss recognition testing and our staff reserve adequacy analysis. And consistent with earlier periods, we've concluded our reserves are adequate and appropriate, so it made sense to make the technical adjustments. Does that help?

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

That helps a lot.

Operator

Our next question comes from Geoffrey Dunn with Dowling & Partners.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

I have a question on the MI side then Ryan has one on life. On the MI side, can you update us where we stand with respect to the IBNR cushion from the previous reserve charge? And then in the quarter, can you talk about the sequential decline in the reserve for loan and defaults? Was there a mix shift occurring in the payouts incurs or any detail behind that?

Kevin D. Schneider

Yes, Jeff, when you -- this is Kevin. I would just tell you our overall view of the -- the reserve that we put up in the second quarter of last year that included that additional provision you're talking for with an expectation of additional losses, it's a long way away from looking at the delcs [ph]. But that -- those reserves were put up with to tell you where we're at in terms of the consumption of that total provision. I will tell you our reserves continue to hold up quite well. In the aggregate, we think we remain on track, as any pressure we've continued to experience from aging has been offset from the severity improvement we've been seeing in our actual claims. So we -- basically, we think we're on track with it and that our reserves are adequate at this point in time.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Okay. Was there any notable benefit from releases related to the curtailment activity over the last several quarters?

Kevin D. Schneider

Nothing significant. It's just the ongoing curtailment benefit we're actually achieving on the individual loans, as we perfect those claims and as we process those claims. So no big release or something like that, if that was your reference.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Okay. And then Ryan has a question on the life side.

Ryan Krueger - Dowling & Partners Securities, LLC

I have a couple of quick ones. What's the expected earnings impact going forward from the life block transaction?

Patrick B. Kelleher

This is Pat. The impact that we would expect going forward would be that life earnings would be lower on an annual basis by about $5 million a year, it's about $1 million a quarter. And that's on a transaction that generates in excess of $100 million of capital when completed.

Ryan Krueger - Dowling & Partners Securities, LLC

And then what's the regulatory capital that is held in the international protection entities?

Patrick B. Kelleher

We'll look that up. My estimate would be in the $800 million to $900 million range, and we can confirm that later as we look that up.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay. And then just one clarification. The comment on statutory reserves, the long-term care being adequate. Does that also incorporate your expectations for year-end statutory cash flow testing?

Patrick B. Kelleher

At this point in time, we've done the work relating to third quarter, and we'll update you on the fourth quarter analysis when that work is completed. And to your point on the statutory capital, as of the end of the third quarter, it's about $770 million of statutory capital in the international protection entity.

Operator

Next questioner is Suneet Kamath with UBS.

Suneet L. Kamath - UBS Investment Bank, Research Division

Had a couple of questions. First, just a follow-up, I guess, on Sean's line of questioning on the debt to capital. There's the 3 years that it takes to get to the, I guess, 21% to 22%. Does that incorporate any of the strategic transactions that you're talking about, be it Australia IPO or any of these other additional life block transaction?

Martin P. Klein

Suneet, no, it does not. I was attempting to clarify that, but maybe I was not successful. So we get down to that 21% to 22% range in about 3 years, with just sort of the natural progression of our debt ladder and retained earnings. And assuming that with that $600 million of debt that comes due in 2014, that we'd refinance just about $250 million of that. All of that excludes the impacts of any capital generation actions, which should give us the opportunity to accelerate that deleveraging if we chose to.

Suneet L. Kamath - UBS Investment Bank, Research Division

Got it. Yes, you might have clarified it, I just -- maybe I missed it. And then, I guess, follow-on to that, can we assume, given the priority set that you established, that probably not going to see anything material in terms of share repurchase until that leverage ratio gets to your target level?

Martin P. Klein

Good question. I think that we're going to look at it at the time. Obviously, creating financial flexibility is a very important objective of ours, and deleveraging is certainly one of the ways we're going to do that. But we're also very mindful of where our shares are trading and will be trading, and we'll look at that as well, and we'll make the assessment at that time.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. And then I guess my second question is on your presentation, you mentioned a couple of times I guess one of the challenges is the interdependence of your businesses. Can you just talk about some of the key aspects of that comment and what actions you could take to reduce those interdependencies?

Martin P. Klein

Sure. We do think it's very important as we improve our business performance, as well as our financial flexibility that we manage the businesses on that kind of standalone basis that we talked about. And I think there's a few different things that we want to look at. We want to make sure that as we have goals for the businesses with respect to the returns, return on equity, particularly as we're writing new business, for example, that we look at that expected ROE when we're pricing and developing products. And we want that to be in excess of the appropriate cost of capital for that particular business line. As you can imagine, different businesses have different risk profiles, different tenures, so obviously, their cost of capital should vary -- or rather, their return on equity should vary along with that. And also, different businesses have different amounts of debt, or different amounts of leverage that they can carry. For example, a stable portfolio, life insurance businesses could really have a leverage of 22% to 25%, maybe 26%. For mortgage insurance platforms, that's a lower type of range. You're looking at probably typically around 15%, maybe as high as 18% and as low as 12%. So you've got different amounts of leverage. So we want to make sure that each of our operating businesses is being run in a way that can support its specific debt leverage, as well as an appropriate target for it. And then finally, we want to make sure that we're covering all of the expense loads in our pricing, and that there's not any kind of reliance and support from other businesses or from the holding company to do some things that aren't priced in, into our products.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. But from a capital perspective, is there any sort of cross-subsidization of these businesses that needs to be unwound or anything like that? I get the whole standalone profitability and cost of equity idea. I think that's a good one. But just in terms of cross-subsidization of capital, is there anything that we need to think about there?

Martin P. Klein

Well I just think, for example, that as we're managing our debt, we're going to be looking at it and managing our individual businesses, so they're carrying their appropriate share of debt loads. For example, as we're pricing mortgage insurance, we're going to assume that we are able to lever it at 15% number instead of an overall 25% number, which has been what we've been doing. We've been operating at a combined leverage ratio of 24% to 26%, which for a diversified set of businesses, we think is entirely appropriate. But we want to make sure for pricing and those types of returns that we're really looking at the businesses to be priced for their particular debt load that's appropriate. So in case of MI's, for example, we'd be looking to price more of the 15% leverage assumption as opposed to the 24% or 25% leverage assumption. Similarly, we want to look at -- on the other side of the coin, we look at, for example, long-term care returns. And while the overall diversified set of life businesses, you might want to have a cost of capital looking at 11% or 12%. We realize that for long-term care particularly, it's a higher number. It's been a riskier product, but we're working to change that risk profile through underwriting and pricing and product design. But we think long-term care, for example, has a cost of equity that's probably 13% to 15%, maybe even 16%. So we need to make sure that as we're pricing it, that it carries -- or it covers that particular cost of equity. Does that help you?

Suneet L. Kamath - UBS Investment Bank, Research Division

Yes.

Operator

Our next questioner is Mark Palmer with BTIG.

Mark Palmer - BTIG, LLC, Research Division

You mentioned during the strategy overview that there was the potential for new code-type options for the U.S. Mortgage Insurance unit. Could you provide some more color on what you're thinking along those lines?

Kevin D. Schneider

Mark, this is Kevin. I'll provide the extent of the color that I can, given where we are in these discussions with the various stakeholders. I think the way we think about U.S. MI and what we're really trying to drive there is, number one, we're going to continue to write as much of that profitable business as we can under the waivers that have currently been granted to us by our home domiciliary state regulators, as well as the other state regulators across the country. Secondly, we have the additional potential to write business through another subsidiary that we've talked about, our GRMAC subsidiary. And we're only writing in a very narrow handful of states there right now that haven't provided the waivers. So in the next possibility you could do there is just think of that as it's got enough capital in it to write sort of 50-state-type production for about 6 to 12 months. So that's another opportunity. Then you start getting to -- I think, your real question, which is what are some of these other structural alternatives? And I'll just say that we're on ongoing discussions with our regulators, with the GSEs to consider various alternatives that we could -- really when we -- they're really in confidential in discussion right now. But as we get closer to the point that we can bring back and talk with you about them, we'll be glad to do that. One example could be an alternate use of the GRMAC entity and doing something with that structurally. So all on track, these are good potential structural alternatives for us. But really, I'd say where we start with is where -- with our current waivers, we're in good shape and be able to continue to write in the places where we were writing. The last thing I'll just add on to that is when we think about some of these new code structures or alternative structures, one of the things they might give us the ability to do is to prevent an avenue to bring in some external capital outside of Genworth in the event that, that's the alternative that we needed to be able to write the new business, and it wouldn't be reliant then at that point at our own internal capital.

Mark Palmer - BTIG, LLC, Research Division

Okay, very good. One other question with regard to Moody's, as you mentioned the extent of the review, could you give us a better sense of where things stand with regard to Moody's? Were they waiting for a release of your strategic plan? Are they holding off until they see what happens with regard to execution of that plan? Just a general sense of where things are.

Martin P. Klein

It's Marty. Let me take that one. Obviously, with the rating agencies, it's a different type of relationship, so we had the opportunity to give them a lot of detail that's not publicly available. So we spend a lot of time with the agencies, Moody's and S&P, for example, talking to them well in advance of this call about the strategic plan, as well as some of the alternatives that we're looking at in U.S. MI that Kevin was just talking about. So they've had a chance to see that. We do think that if we're making very good headwinds, strategic plan and also able to implement a number of these alternatives with regarding to the U.S. MI, they will be very, very helpful to the Moody's process. So we're working very urgently and diligently to move these things along.

Operator

Our next question comes from Geoffrey Dunn with Dowling & Partners.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Kevin, can you provide some of the key macro and operational assumptions behind your projection for return to profitability in domestic MI next year?

Kevin D. Schneider

Yes, Geoff. I'll hit sort of some macro assumptions, as well as just I guess point to some of the trends that we're seeing right now and how we feel about those. Back in -- when we gave sort of our expectation that we had a path to profitability back in February, we said we're going to have a burnout of the 2005 to '08 books. Well, we're seeing that. We thought we're going to have -- and that was all based upon an adequacy of our reserves. We're seeing that. It was based upon -- eventually, the referent [ph] performance of the new books of business starting to outweigh the bad books of business, and we're seeing that happen today. The market that we're seeing for mortgage insurance is coming back for us to be able to operate and participate in is in excess of what we had expected back in February at that time. Our share levels are generally holding up, so our -- the combination of that improvement in purchase penetration that's creating the bigger mortgage insurance market, the good pricing we have and the -- and our share performance is helping us. We said we were going to continue to expect loss mitigation benefits at that point. I think we'd see about $300 million and $400 million where we're coming through, and we're going to be exceeding those targets. So we feel good there. When you sort of bring it back all those things and bring them together, we're just on the glide path towards hitting that profitability as we expected back in February. We -- the last thing I think we said at that time is our overall delinquencies and new delinquencies were going to go down about 20%. We're on track. Year-to-date, it's down 23%. So all those trends are heading in the right direction. Getting back to your macro question, we're still expecting, we're going to have -- unemployment is not going to change materially from here on out. We're still going to be operating -- not much help from the growing employment base. Anything that accelerates that right now from the current level could be a good tailwind for us. But we're not expecting any material improvement in unemployment. And in fact, we expect to be sort of elevated throughout 2014. On the peak -- on the HPA basis, we think we've sort of troughed and we've hit the bottom at about a total 20% downturn from the high in the FHFA index. And we really expect that to have slow and gradual growth going forward from here, and we're starting to read more about that and hear about it more in the press today as it materializes out there. So just directionally, all our trends are really heading in the right direction. We feel good about it. The new books are about to get to that inflection point when they start to tip over the experience on the old legacy books, and we're encouraged by what we're seeing.

Operator

Our next question comes from Jeff Schuman with KBW.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Can you help me better understand the nature of the Australian regulatory concern? It seems like if you do an IPO and transfer some of your shares to the public market, that doesn't directly impact the balance sheet or capital of the Australian entity. And in fact, it gives that entity sort of a new avenue to access some capital. So what kind of is the reason for their pushback on the IPO?

Kevin D. Schneider

It's not really a regulator pushback on the IPO. If you just think about our regulatory capital levels that we're holding to, as you saw in the quarter, our MCR levels came down a bit from where they were in the previous quarter. We had told you that, that was going to happen after our second quarter call, largely the result of the elimination of some reinsurance, affiliate reinsurance that we had in the system that was being provided by the U.S. MI business. So one of the things we're working through is rebuilding and building that MCR back up into a level that we think will be more appropriate in that regulatory environment. And so think of that in the low end 40s to a higher maybe 150 MCR-type level. So we're doing that through the continued improvement in our business performance. We're doing it through looking at other ways of managing the capital, perhaps by the usage of some reinsurance. And so you got to -- we're working through those things with the business right now. They have implications to ultimately the ROE of the business. How much capital you hold is really driving what's the ROE of that business, what's the ROE of that business over a forecasted period of time that you could disclose. When you're doing in some type of public -- some type of IPO-type process, and that all drives valuation. So at the end of the day, it all comes back to valuation. And we just think, as I mentioned earlier, that those valuations will improve as we get deeper into 2013, allowing us to hit a higher valuation and deliver more value to our shareholders.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. That's very helpful, Kevin. And I was wondering if I could ask you about long-term care, that I think you mentioned possibly looking at a reinsurance maybe of in-force long-term care. I was wondering if you could comment on market capacity there. I know there's some reinsurers who publicly said they're interested in reinsuring new business, but not so much legacy books.

Patrick B. Kelleher

Yes, we certainly have a market, and we do reinsure our new business, and we're benefiting in our capital plan and our risk management plan from that. With respect to the existing business, I really think that the path to building value is proceeding with the announced rate increases and rating changes, particularly on the older book. Because if you were to look at the reinsurance support, it potentially would be a lot better after we complete those re-rating processes rather than before. So while right now, our existing business plan is looking at the re-rating processes as the means of mitigating the losses on the older book and thereby, improving profitability of the book overall. As we finish that, we will, of course, look at reinsurance markets and support and how we're using capital to support that business and as well how to produce the best valuation of the business over time for shareholders.

Operator

And we do have time for one final questioner. Our final question for today's event will come from the line of Suneet Kamath with UBS.

Suneet L. Kamath - UBS Investment Bank, Research Division

Just a question on interest rates. Last week, we saw a couple of companies take some pretty sizable charges related to reducing long-term interest rate assumptions in their DAC models and I guess in their reserving. And I know you had a modest adjustment in 3Q. But just curious if you're seeing any pressure in terms of having to take an action like we've seen from other companies at some point down the road if rates remain low and if there's any way you could help dimension the size of that potential action.

Patrick B. Kelleher

This is Pat, Suneet. I'll take that. The characteristics of our portfolio are important here. If you look at our Life Insurance business overall, our total liabilities on UL products are only in the neighborhood of around $7 billion, relatively -- relative to a much larger and general account balance with reserves on FAS 60-type products like long-term care and also like term life insurance. And when you look at the secondary guarantee universal life portfolio, where you'd probably be most concerned about that, those reserves are only 7% of our total UL reserves. So we did take a close look at our emerging yields. They're actually consistent with prior periods. So while there is exposure to low interest rates, we haven't really seen that impacting our core yields to date. We did make some changes in assumptions, making the projected interest rates for reserving purposes more conservative, and that's what resulted in the change. But that's why perhaps it's different for us than you've seen from some other companies in the space with much larger UL portfolios.

Suneet L. Kamath - UBS Investment Bank, Research Division

Got it. So you're not anticipating anything if rates stay low, I guess, over the next year or so in terms of...

Patrick B. Kelleher

If rates stay low and consistent with our forward-looking assumptions, we think we'll be fine. If rates stay low and get worse than those assumptions, then we'll reevaluate every quarter. But again, that's a relatively small proportion of our overall portfolio from a reserving perspective.

Martin P. Klein

And Suneet, I would just add that, as I mentioned in the script, that we do expect next year and the year after rates and really for us really what's more important is our investment yields to stay at the current levels that we'd expect maybe $0.01 or $0.02 of pressure over the next year or 2. Some of that over the course of really we're seeing a bit of this year and next year really comes from what's happening in Australia, which is largely a floating-rate market. So as rates there have dropped really about 1.25% roughly now from where they were at the beginning of the year, that sort of changed over that forecast. That chart that we sent out in February, so just relate down, $0.01 or $0.02, to that chart. And what we can do in the fourth quarter is really provide an updated view of where we are at that point in time going forward.

Operator

Thank you, sir. And that does conclude Genworth's Financial Third Quarter Earnings Conference Call. Thank you for your participation. At this time, this will end the call.

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