Genworth Financial Inc

NYSE:GNW

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to Genworth Financial’s Second Quarter 2020 Earnings Call. My name is Greg 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 the call. As a reminder, the conference is being recorded for replay purposes. Also, we ask that you refrain from using cell phones, speakerphones, or handsets during the Q&A portion of the call.

I would now like to turn the presentation over to Tim Owens, Vice President of Investor Relations. Mr. Owens, you may proceed.

[Tim Owens, Vice President, Investor Relations]

Thank you, Greg. Good morning and thank you for joining Genworth’s second quarter earnings call. Our speakers are once again remote this morning, so please excuse any sound quality or technical issues that may arise. Our press release and financial supplement were released last night and this morning our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all of these materials.

Today, you will hear from our President and Chief Executive Officer, Tom McInerney, followed by Kelly Groh, our Chief Financial Officer. Following our prepared comments, we will open up the call for a question-and-answer period. In addition to our speakers, Kevin Schneider, Chief Operating Officer and Dan Sheehan, Chief Investment Officer will be available to take your questions.

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 notes regarding forward-looking statements in our earnings release and related presentation as well as the risk factors of our most recent annual report on Form 10-K as filed with the SEC. This morning’s discussion also includes non-GAAP financial measures that we believe maybe meaningful to investors. In our financial supplement, earnings release and investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Also, when we talk about our results of our Australia business please note that all percentage changes exclude the impact of foreign exchange. And finally, references to statutory results are estimates due to the timing of the filing of the statutory statements.

And now, I will turn the call over to our President and CEO, Tom McInerney.

[Tom McInerney, President and Chief Executive Officer]

Thank you, Tim and good morning everyone. I wanted to start my prepared remarks today by acknowledging the leadership announcement we made earlier this week. First, I would like to thank Kelly Groh for her many contributions to Genworth and our predecessor companies over the course of her 24-year career. Genworth Board and I believe Kelly has done an excellent job as CFO since assuming the role in October 2015. She has been an invaluable partner to me as we navigated Genworth’s challenges, particularly the many regulatory hurdles we faced to receive all required Genworth’s regulatory approvals for the China Oceanwide transaction.

While I understand that investors and outside observers sometimes view senior management changes with skepticism, in this case, the real story is exactly what we said in the press release on Tuesday. COVID-19 pandemic has changed how we view our professional and personal lives forever. In Kelly’s case, as she will note later in her remarks, having aging parents and family thousands of miles away on the West Coast led her decide to make a change in her professional and personal situation. She and I agreed that her stepping down as CFO of Genworth after the end of the second quarter when the financial reporting requirements were completed was the right time for her and for Genworth.

We appreciate that Kelly has agreed to remain available for a period of time to help Dan Sheehan as he transitions into his new responsibilities. Dan and Kelly have worked closely together at Genworth and GE Capital for 22 years. Dan has been an outstanding performer and he assumed the role of Genworth’s Chief Investment Officer in April 2012. Over my 40-year career in the insurance industry starting at Aetna, I have observed that putting the investment operations under the CFO can be very effective. It brings both sides of balance sheet together under single financial executive and point of view. This allows for very effective asset liability management, which will be crucial as all insurance companies navigate a sustained period of very low interest rates.

While we had other strong internal candidates to succeed Kelly, the Board and I believe Dan is the best choice to assume the CFO role. Dan has several strong lieutenants in the Genworth Investment Group, and they will now step up and assume additional responsibilities. To further support Dan in his new role, Jerome Upton, CFO of Global Mortgage Insurance and Interim CFO of U.S. Life Insurance will be promoted to a newly created position of Deputy CFO reporting to Dan. A significant part of Kelly’s finance, accounting, and actuarial teams will report to Jerome. Dan and Jerome have worked together at Genworth for over 20 years. We are very fortunate to have them both assume higher executive and financial responsibilities at this critical time for Genworth. With input and advice from Kelly during the transition, Dan and Jerome will further develop how they and their teams work together in the future. I expect that Dan will have a more external focus, including helping us oversee the debt and equity transactions we are considering, and Jerome will oversee the day-to-day activities of finance, accounting, and actuarial functions. Dan has also worked very closely with me throughout the China Oceanwide transaction process, and he is very well regarded by Chairman Lu and China Oceanwide’s executive team.

As part of our leadership transaction announcement, I am also pleased to announce that Brian Haendiges will be appointed Executive Vice President and Chief Risk Officer of Genworth effective September 8, 2020. Brian started his insurance career at Unum, then Unum Mutual in 1982 and has since had several leadership roles with pricing, risk, operational and actuarial responsibilities at large global insurance companies. This includes at Aetna and ING, where we worked together closely for many years. He most recently served as Senior Vice President and Head of U.S. Pricing and Product Management at MassMutual, where he spent 9 years in senior roles. He is an experienced Fellow of the Society of Actuaries, with significant experience in investments, fixed income products, life annuity, and long-term care. He will assume the CRO responsibilities from Kelly, who has been Interim CRO at Genworth since January of 2020.

Now, turning to the China Oceanwide transaction, please note that unfortunately we do not have an Oceanwide representative on today’s call. While we were not able to arrange for speaker on today’s call, we will still provide an update based on our knowledge of the latest update with respect to the funding plan. We are working very closely with Oceanwide to understand the process and timing for specifically identifying their sources of funding to complete the transaction. We continue to believe that the Oceanwide transaction is the best strategic option for Genworth, and based on the feedback we have received from investors, we believe that closing the Oceanwide transaction continues to have strong support from Genworth’s shareholders.

We have made it clear to Oceanwide that meeting the funding milestones set out in the 15th waiver of the merger agreement is critical to Genworth, our shareholders, and other stakeholders. To remind investors, we are seeking satisfactory evidence by August 31 that $1 billion of funding for the transaction from within Mainland China is available in a specified account. In addition, we also requested satisfactory evidence by that date that China Oceanwide has been able to secure an additional $1 billion or more from Hony Capital and/or potential third-party investors. We have received many questions regarding the delay in Oceanwide’s ability to certify they have secured these funds. We believe that $1 billion within Mainland China is available to fund the transaction.

We also believe the $1.8 billion of funding from Hony Capital was secured prior to the COVID-19 pandemic. Since the original Hony funding commitment was secured in 2018, the Hony commitment was extended each time Genworth and Oceanwide had to extend the merger agreement because of regulatory delays. It was only after the COVID-19 pandemic disrupted global capital and financial markets in February and early March that the Hony Capital $1.8 billion commitment became an issue. Oceanwide and Genworth are in close contact regarding progress on the funding from Hony Capital or other financial third parties, and we will provide updates on the progress in due course.

In the interim, Genworth is working on steps to address our near-term financial obligations, which include liabilities arising from the recently announced settlement with AXA as well as approximately $1 billion of debt maturing in 2021. As previously outlined, these steps include executing a potential debt financing in the near term and preparing to launch a potential 19.9% initial public offering of our U.S. mortgage insurance business subject to market conditions if the China Oceanwide transaction is further delayed or terminated. We are keeping Oceanwide informed of every step in the way regarding any potential steps we may take. Oceanwide has been very supportive of Genworth’s plans throughout these conversations.

Next, I would like to cover in more detail our recently announced settlement with AXA, related to liability for payment protection insurance, or PPI, mis-selling losses. Reaching this settlement with AXA has removed uncertainty around our near-term cash needs and has preferred the majority of our obligation to AXA to 2022 subject to certain prepayment events. Under the terms of the settlement, Genworth paid AXA $125 million on July 21, which was in addition to the approximately $134 million in our own cash payment we made to AXA in January. We also issued the secured promissory note to AXA, pursuant to which Genworth agreed to make deferred cash payments, totaling approximately £317 million in two installments, again, subject to certain prepayment events. The note is secured by pledging 19.9% of the outstanding shares in Genworth Mortgage Insurance Australia and 19.9% of the outstanding shares in Genworth Mortgage Holdings. These pledges will terminate upon the payment in full of all the obligations by the due dates.

Genworth will also pay a significant portion of all future mis-selling losses incurred by AXA currently estimated to be an obligation of approximately £170 million. These losses relate to PPI mis-selling complaints previously received, but not yet processed by AXA and will be added to the second of the two deferred installments. Genworth will also pay AXA quarterly interest on the deferred amounts. In connection with the settlement, Genworth incurred an after-tax loss of $516 million as part of discontinued operations in the second quarter of 2020. Kelly will go into more detail on this in her prepared remarks.

Under the terms of the sale and purchase agreement pursuant to which the businesses were sold to AXA as well as the settlement, in the event that AXA recovers amounts from third-parties related to mis-selling losses, including from the distributor responsible for the sale of the policies, Genworth have certain rights to share in those recoveries to recoup payments for the underlying mis-selling losses. There are numerous examples of distributors and banks paying for PPI mis-selling complaints. I believe that is where the ultimate responsibility should lie as it was the banks and distributors that sold the products, made the vast majority of the profit from the sales and it is their actions that are subject to the mis-selling complaints. While we have received many questions about the details and process for those potential recoveries, we cannot comment on this any further. The resolution of this litigation removes significant uncertainty as we now know the timing and amounts of our obligations to AXA and can therefore focus our attention on the actions that we need to take to enhance our near-term liquidity position.

Now, I would like to turn to our financial performance in the quarter, including COVID-19’s impact on Genworth before turning the call over to Kelly to provide more details. Our priority during this pandemic continues to be protecting the health and well-being of our people. Genworth successfully transitioned to a full remote work environment in March and I am very proud of how our employees have adapted to this new environment. The majority of employees are still working from home and we are continuing to serve the customers with the level of excellence they expect from Genworth. As cases have continued to surge in some regions of the U.S. and given the organization’s seamless transition to remote operations, we have made the decision to extend remote working conditions until at least January 1, 2021. We are constantly monitoring and evaluating the impact of COVID-19 and we will continue to act in the best interest of our employees and their families, while effectively addressing customer needs. The pandemic impacted our second quarter financial results primarily as a result of several macroeconomic factors, including higher unemployment, government stimulus, equity market improvement and higher mortality. The global mortgage insurance businesses were adversely impacted by higher mortgage delinquencies as a result of higher unemployment and increased mortgage forbearance rates.

USMI reported an adjusted operating loss of $3 million primarily driven by higher delinquencies. USMI achieved $28 billion in new insurance written during the quarter, up 80% versus the prior year driven by higher refinance originations due to lower interest rates, a larger private mortgage insurance market and higher estimated market share. At the end of the quarter, USMI’s PMIER sufficiency ratio was very strong at 143% in excess of $1.2 billion above requirements. While we are pleased with the current level of capital in USMI, we do expect our PMIER sufficiency to decrease over time as delinquencies increase. Our Australia MI business reported adjusted operating income of $1 million, down significantly and versus the prior year due to losses in the second quarter, down sequentially and versus the prior year due to higher losses in the second quarter. Capital levels remained strong, with approximately AUD$275 million above management targets. Due to elevated delinquencies and the resulting increase in capital requirements, we do not expect to receive further dividends from our MI businesses in 2020 as they prioritize capital preservation during this period of uncertainty and to comply with new regulatory guidelines for the GSEs, who have implemented temporary PMIER requirements that require approval of certain capital-related transactions. This underscores the importance of the steps you are taking to raise capital to meet Genworth’s upcoming cash needs.

Turning to U.S. Life Insurance, the segment delivered an adjusted operating loss of $5 million, driven by lower life insurance performance, partially offset by higher performance in the long-term care insurance business due to higher mortality attributable in part to the COVID-19 pandemic. Going forward, we will continue to manage the U.S. Life Insurance businesses on a standalone basis, with no plans to infuse or extract capital other than as committed in connection with completion of the Oceanwide transaction. We are closely monitoring macroeconomic indicators and conducting extensive scenario planning exercises to model the potential financial outcomes of different economic scenarios. While the severity and duration of the pandemic and related economic repercussions remain uncertain, Genworth is taking steps to maintain sufficient capital levels to ensure that our mortgage insurance companies can withstand a wide range of economic scenarios, while also addressing our upcoming holding company financial obligations.

In summary, we are focused on closing the Oceanwide transaction as soon as possible, while protecting shareholder value through the execution of prudent liquidity raising actions. We will continue to communicate as frequently as possible to keep you informed of our progress against those actions.

And now, I will turn the call over to Kelly.

[Kelly Groh, Chief Financial Officer]

Thanks, Tom and good morning everyone. Before I jump into our results for the quarter, I do want to acknowledge my personal news that was released Tuesday night. As Tom had mentioned, I am pursuing options that allow me to move back to the West Coast closer to my aging parents having lived on the East Coast for the last 23 years. Time is precious. And while there is never a perfect time to make a change, this was the right time for me. I have every confidence that Dan Sheehan will be able to seamlessly lead our finance and investments organization in this expanded role. He and I have worked together for 22 years and I look forward to seeing Genworth succeed going forward. I do want to thank Tom and the leadership team and each of our employees for what they do for our customers and shareholders everyday. I would also like to thank Genworth’s Board of Directors, our investors, and all of our stakeholders for the opportunity to serve you as Genworth’s CFO for the last 5 years.

With that said, I will move into our second quarter financial results, capital positions and holding company liquidity. I will also highlight some of the continuing direct and indirect impacts from COVID-19 on these items. Before I discuss segment financial results, I did want to provide some detail about the $520 million loss in discontinued operations in the second quarter. This loss primarily represents the pre-tax accrual of approximately $653 million, or $516 million after-tax for the active settlement that we disclosed last week. While the settlement was in pound sterling, we are translating it to U.S. dollars at June 30 for an exchange rate. This after-tax accrual included $125 million payment made on July 21, the secured promissory note amount of approximately $395 million, and the remainder related primarily to claimed mis-selling losses that are still being processed, estimated at approximately $133 million before taxes. I did want to note the interest expense on the AXA promissory note and true-ups to our initial estimates for unprocessed claim payments will continue to flow through discontinued operations as a period expense or adjustment in the quarters ahead.

Regarding liquidity in our holding company, we ended the quarter with $554 million in cash and liquid assets or approximately $180 million above our targeted 2x forward debt service buffer. Page 16 of the investor presentation provides the quarterly detail, including inflows for tax timing and intercompany items of $72 million and the release of pledged collateral of $11 million due to slightly higher interest rates during the quarter. Uses in the quarter include $21 million for debt service and $48 million of 2021 debt repurchases that were made during open windows during the quarter. These repurchases retired approximately $52 million of par value of our 2021 debt maturities.

Earlier this year, we have addressed two large near-term obligations with proceeds received from the sale of the Canada MI business, including $397 million for our senior notes due June 2020 and $200 million to the GLIC intercompany note. For upcoming holding company debt obligations, we have principal balances of approximately $355 million maturing in February and $660 million maturing in September of 2021. Our recent settlement with AXA allows us to raise proceeds to address those maturities while spreading the scheduled promissory note payments to AXA to as long as 2022. We are not expecting dividends from our mortgage businesses for the rest of 2020 to preserve capital in subsidiaries given the uncertainty of COVID-19.

To address these impacts, we are taking steps to prepare for a debt issuance out of our U.S. mortgage holding company in the near-term as well as preparing for a 19.9% IPO of our USMI business subject to market conditions if the transaction with Oceanwide is further delayed or terminated. Based on recent pure issuances and the underlying strength of our U.S. Mortgage Insurance subsidiary, we view these capital market transactions as available and at a reasonable cost of financing. The agreement with Oceanwide gives us flexibility to pursue these and other options in parallel with the ongoing transaction.

Last quarter, we spent considerable time discussing of roughly $78 billion cash and investment portfolio given the sharp disruptions in the markets from COVID-19. During the second quarter, the U.S. equity market rebounded considerably and credit spreads tightened, increasing our unrealized gain position to $8.7 billion, with less than 1% of our total fixed maturities trading at less than 85% of book value at June 30. Credit migration during the quarter has also been more favorable than we had anticipated last quarter given the strength in the markets driven by government stimulus. Despite this improvement, we are closely monitoring other asset classes such as commercial mortgage loans, which we continue to proactively work with our borrowers. We did make some minor modifications to loans and observed one delinquent loan during the quarter.

Turning back to earnings for the quarter, we reported a net loss available to Genworth’s shareholders for the quarter of $441 million and an adjusted operating loss of $21 million. The net loss in the quarter was primarily driven by the $520 million loss in discontinued operations, made up mainly from the AXA litigation settlement I mentioned before. In the U.S., we continue to closely monitor key macroeconomic trends, which will impact our mortgage insurance business, including historically low interest rates, elevated unemployment levels and uncertainties around the amount, pace and timing of future economic stimulus initiatives. We are also monitoring housing specific trends, including mortgage finance activity, forbearance uptake and home prices. During this period, we have conducted extensive scenario planning to better understand and tailor our actions to mitigate the adverse effects of the pandemic on our business. The ultimate financial outcome for USMI from the pandemic’s direct and indirect impacts is uncertain and may not be known for several quarters, if not longer.

USMI had an adjusted operating loss for the quarter of $3 million and a reported loss ratio of 94%. Performance was primarily driven by increased losses from hiring new delinquencies and reserve strengthening attributable to the COVID-19 pandemic. Many loan servicers have updated their reporting to us to include whether a loan is covered by forbearance. Servicer reported forbearance slid meaningfully during the quarter and ended this second quarter with approximately 7.7% or 68,800 of our active flow policies reported in the forbearance plan with approximately 62% of those in forbearance being reported as delinquent. Forbearance to-date has been a leading indicator of future new delinquencies. However, it’s difficult to predict the future level of forbearance and how many of the policies in a forbearance plan that remain current, will go to one client in the future.

During the quarter, we received notifications for 48,200 new flow delinquencies, of which approximately 87% are in forbearance plans, which may cure at an elevated rate. These new delinquencies contributed $170 million in reserve increases in the quarter. This was calculated by applying a claim rate or roll rate that is between our expected roll rate on prior early stage delinquencies and our past hurricane related roll rates, which were materially lower given the prior effectiveness of forbearance. Losses during the quarter also included a $28 million pre-tax incurred, but not reported or reserved for delinquencies expected to be reported in the future and a $28 million pre-tax reserve strengthening to reflect assumed deterioration in early cure emergence patterns and a modest increase in severity.

Flow new insurance written in USMI was $28.4 billion in the quarter, up 80% versus the prior year, primarily driven by refinancing activity and a larger private mortgage insurance market as overall housing fundamentals remain strong. We estimate our market share remains strong, but maybe modestly down sequentially. The strong refinancing activity drove lower persistency levels partially offsetting the insurance portfolio growth from new insurance written. It also drove an increase in single premium cancellations that benefited earned premiums by $20 million pre-tax on a sequential basis. In Australia, the economy continues to slowly reopen, but there are still significant challenges to the economic recovery, including newly implemented state border restrictions and lockdowns.

The Australian federal government and Australia’s large banks have put several programs in place to help those impacted by COVID-19. These programs include an initial 6-month home and business loan deferral program that was recently extended 4 months and will now run until at least January 2021 for borrowers in need of further assistance. Approximately, 11% of total Australia households are utilizing these programs. For Australia MI, approximately 4% of our insured loans or over 48,000 loans are currently participating in these forbearance programs and under Australia regulatory guidelines are not reported as delinquent. To account for this dynamic and anticipating some of these borrowers may become delinquent, following the forbearance period, the business strengthened its reserves by $18 million during the second quarter.

Financial performance for the second quarter reflected this reserve increase, with adjusted operating income of $1 million, down from $9 million in the prior quarter and $13 million in the prior year. The U.S. GAAP loss ratio for the quarter was 53%, which was higher than the prior quarter and prior year. Low interest rates and improved consumer confidence following the initial COVID-19 lockdown drove flow NIW levels up sequentially and versus prior year.

Before I discuss second quarter results in our U.S. Life business, I did want to discuss other aspects of low interest rates, which have a broad and generally negative impact on that business. The 10-year U.S. Treasury rate ended the quarter at 66 basis points compared to 192 basis points at year end 2019. We have seen an immediate impact to our fixed and variable annuity reserves and DAC amortization as a result of these lower interest rates reflected in our earnings in these products year-to-date. Credit spreads, which have widened in the early stages of the pandemic has since normalized given the magnitude of government intervention, reducing purchase yields and pressuring net investment income, particularly in future periods.

Our long-term view of interest rates as well as our portfolio yields will impact our assessment of our interest rate assumptions as we work to complete our actuarial reviews in the fourth quarter. Significant decreases in our interest assumptions could have a material negative impact on reserves and DAC amortization in our universal life products and loss recognition testing in our long-term care, term life and single premium immediate annuity products. Reductions in interest rate assumptions could also impact statutory cash flow testing, including standalone testing of universal life insurance products with secondary guarantees in our U.S. Life subsidiaries. In long-term care insurance, any updates to our assumptions, including those around the interest rates will likely increase the future amount of LTC premium rate actions needed to avoid a reduction in margin or strengthening of reserves. We have disclosed some of our discrete interest rate sensitivities in our Annual Report on Form 10-K, which I would encourage investors to review. We will continue to closely monitor the low rate environment as we move forward.

Our U.S. Life business experienced elevated mortality across all of our products in the second quarter in part attributable to the COVID-19 pandemic. We also experienced continued negative DAC and reserve impacts to our Life products as certain 10 and 20-year blocks enter the post level premium period. In long-term care, claim and active policy terminations were significantly higher in the second quarter versus the prior period and prior year in excess of the normal seasonal favorability. Although we do not require death certificates for LTC and cannot make a direct attribution to official causes of death, we do believe some degree of incremental terminations, were the result of COVID-19 and we are monitoring trends closely.

New claim incurrals on our newer LTC products, particularly Choice 1 and Choice 2, grew in the second quarter as we would expect as these blocks age. This experience was partially offset by continued favorable development on incurred, but not reported claims. However, during the second quarter, new claim submissions decreased on our older LTC products, coinciding with the timing of the COVID-19 pandemic. We do believe that this decreases temporary reflecting delays in reporting of claims due to social distancing and shelter-in-place protocols and that our incidence experience will ultimately resemble previous trends. As a result, we strengthened our incurred but not reported, or IBNR reserve for this phenomenon during the quarter.

The overall benefits of the in-force rate actions for LTC were modestly higher than the prior year, but flat sequentially as illustrated on Page 11 of the investor presentation. As we have discussed in the past, the benefit reductions from in-force actions can fluctuate from quarter-to-quarter and were very beneficial in 2018 and 2019 due to some large state implementations. Similar, large state implementations have not yet occurred in 2020. In 2020, our multi-year rate action filings are expected to be stronger in the second half of the year as has historically been the case. These will include newer product series, for which we have not requested rate increases in the past. These filings will include a variety of benefit reduction alternatives, which we have seen more and more policyholders select. We will continue to monitor policyholder behavior carefully in light of the potential COVID-19 impact on our policyholders.

During the quarter, Genworth received approvals impacting $127 million of premiums, with the weighted average approval rate of 25%. We have continued to stay actively engaged with state regulators throughout the pandemic on the importance of actuarially justified rate increases. In addition to the approvals we have received through the first half of the year, we have also built a strong pipeline of potential approvals. We have typically performed our annual claims review in either the third or the fourth quarter. This year, we expect to finalize the claims review concurrent with the active life reserve view in the fourth quarter. While work is still ongoing, current trends do not indicate a need to strengthen the claims reserve as assumptions look to be holding up well in the aggregate. Given the unusual year with the global pandemic, finalizing our review in the fourth quarter will help ensure we have adequately considered the appropriate potential impacts. We will be focused on several key claim areas, such as benefit utilization and claim termination rates in addition to the IBNR incidence assumption, which has performed favorably in recent years.

Turning to Life Insurance, overall mortality for the quarter was elevated versus the prior year and flat versus the prior quarter. The second quarter included an estimate of approximately $10 million in COVID-19 related claims net of reinsurance and tax based on death certificates received to-date. Absent the COVID-19 impacts, mortality would have been marginally better than the prior quarter and flat versus the prior year. The term life insurance business continues to be negatively impacted from shock lapses that are higher than our original locked in assumptions, especially with the large 20-year level premium term life insurance business written in the year 2000 that is entering the post-level premium period.

Term life insurance DAC amortization and non-cash impact primarily related to these term life lapses reduced earnings by $27 million after-tax, which is flat to the prior quarter. We expect amortization related to the business written in 2000 to remain elevated through 2020 as more policies enter their post-global premium period and lapses accelerate. Life insurance results also continue to be negatively impacted by an operating loss of $20 million in our term universal life product. As a reminder, this is driven by a dynamic of a GAAP reserve build on offsetting premium revenue due to premium grace periods. We expect this negative dynamic will persist throughout 2020 and into early 2021, after which the number of policies lapsing should exceed the number of policies entering the premium grace period. In fixed annuities, a rebound in equity market since March 31 helped our fixed indexed annuity products and higher mortality and single premium immediate annuities drove an adjusted operating income of approximately $28 million during this quarter versus $6 million last quarter. The one-off segment also benefited from equity market improvement during the quarter. Our adjusted operating loss in corporate and other was $38 million for the quarter. This loss was lower versus the prior quarter primarily attributable to lower expenses and interest as we have paid down debt.

Turning to capital levels, our U.S. and Australian mortgage insurance businesses maintained very strong capital positions at the end of the quarter. In USMI, we finished the quarter with a PMIER sufficiency ratio of 143% or approximately $1.275 billion above required assets as of June 30, 2020. Improvement in our PMIER sufficiency was driven by strong business cash flows, elevated lapses and credit from our new aggregate ‘09 to ‘19 book year excess of loss reinsurance transaction in the quarter, which more than offset the capital consumption from new insurance written and new delinquencies in that quarter. Our PMIER sufficiency also includes the effect of 30% multiplier for eligible delinquencies associated with COVID-19. This quarter we did provide a PMIERs capacity illustration on Page 8 of the investor presentation to help demonstrate to investors, the balance sheet strength of USMI under our hypothetical level of incremental new delinquencies required to consume the current PMIER sufficiency.

As the page reflects, USMI’s balance sheet could withstand a 32% delinquency rate or over 5x the current level of delinquencies as of 2Q ‘20. The capacity grows to withstand a 35% delinquency rate or approximately 6x the current delinquency rate when including the remaining limit of our aggregate ‘09 to ‘19 book year excess of loss reinsurance transaction, intended to provide PMIERs credit for elevated delinquencies. We also included a page in the investor deck providing additional details on the USMI credit risk transfer program to help investors better understand the reinsurance structures we have in place.

Our Australia MI business ended the quarter with an estimated prescribed capital amount, or PCA ratio of 177%, which is approximately AUD$275 million above the high end of the management target range of 132% to 144%. Subsequent to the quarter, Australia MI upsized and refinanced a significant portion of their Tier 2 debt, which enables the business to extend the Tier 2 debt’s favorable capital treatment. We expect capital in Genworth Life Insurance Company, or GLIC, as a percentage of company action level to be approximately 220% as of the end of the second quarter, up approximately 26 points from the first quarter. The improvement was driven by LTC mortality-related reserve releases and a reduction in reserves on variable annuities related to the equity market recovery.

In closing, we have taken numerous steps to improve the liquidity and financial flexibility of our holding company as well as position our business to navigate these uncertain times. We remain focused on providing value to all our key stakeholders. With that, I will turn it over to Dan Sheehan for brief remarks before we move into Q&A.

[Dan Sheehan, Chief Investment Officer]

Thank you, Kelly and good morning everyone. First, I would like to echo Tom’s comments and recognize Kelly for her outstanding career and dedication to Genworth. I have had pleasure of working with her over the last 22 years, during which her partnership has been invaluable to me. I am also grateful that Kelly will be staying on for some time to ensure a smooth transition as I assume her responsibilities as CFO. I am pleased to be expanding my role at Genworth from leading the investments team to leading both investments and finance. Across both teams, I have extremely talented colleagues who will support me in this newly designed role as well as step up and assume greater responsibility with respect to day-to-day activities. As a member of Genworth’s executive leadership team since 2012, I have been very involved in the development and execution of our strategic priorities as well as the ongoing Oceanwide transaction process. Advancing Genworth’s strategic priorities as Tom and Kelly have just reviewed as well as working to close the transaction, remain my top focus. I look forward to communicating our progress on these trends going forward as Genworth’s CFO.

With that, we can open it up for questions.

[Operator]

Thank you very much, sir. [Operator Instructions] And we will take our first question from Geoffrey Dunn with Dowling Partners.

[Geoffrey Dunn, Dowling Partners]

Thank you. Good morning. Kelly, I saw the slide you referenced with respect to the PMIERs capacity exhaustion analysis, but can you elaborate a little bit more on how the company given so much remaining uncertainty is approaching, planning for the expiration of the 30% multiplier in ‘21 at some point?

[Tom McInerney, President and Chief Executive Officer]

Kelly, do you want to take that one?

[Kelly Groh, Chief Financial Officer]

Yes. Actually, I am going to let Kevin take that one.

[Kevin Schneider, Chief Operating Officer]

Geoff, first of all, I think the expiration of that 30% multiplier is something that will be up in the air and depending on what the development is in the COVID situation. It could absolutely be something that’s revisited by the GSEs again in terms of an extension, just like the other stimulus that’s being provided to the market today. I don’t view that currently as a bookend that will absolutely end the treatment of those COVID delinquencies. Secondly, our books are generating a significant amount of ongoing positive cash flow today. That will continue to help our PMIER sufficiency going forward. We have the additional availability to perhaps pursue some incremental reinsurance or insurance-linked notes to help with our additional – to help provide additional capital sufficiency. So, I think we actually have a lot of levers to work with going forward, and the production we are putting on the books today continues to be very strong from a credit standpoint and will continue to provide help with that profitability going forward. So, I think we have options and we will continue to evaluate those and pull those levers as we leg into the future and see how this plays out.

[Geoffrey Dunn, Dowling Partners]

Okay. And with respect to the idea of issuing debt out of the USMI platform, I assume the idea would be to upstream those funds before the IPO. Is that something you have already discussed with the GSEs given the moratorium on dividends?

[Kevin Schneider, Chief Operating Officer]

So, I will take that one – I think we do have good relationships with the GSEs and with all regulators. We are keeping them updated all along the way. And so, I do think we are focused on issuing the debt transaction at the USMI level in the near-term. And then we are also preparing for the IPO of 19.9%. That we would need to see where we are with the transaction to the extent that the transaction closes because of the $1.5 billion capital commitment, in that case, we may not do the IPO.

[Kelly Groh, Chief Financial Officer]

Yes. And the other thing I would remind you of Geoff is in terms of where we would issue that debt, it would be at the mortgage holding company. So, therefore, there is no restriction on dividends from a holding company and we hold adequate cash and capital to cover interest charges.

[Geoffrey Dunn, Dowling Partners]

Got you. And then the last question, Kelly, I did hear your comment about your claim rate on new notices, given where kind of normalized versus hurricanes are, is 6% to 8% a good guess as to where you might have been, and do you think that rate will be consistent in the back half or potentially rise?

[Tom McInerney, President and Chief Executive Officer]

Yes, let me take that. I think if you think about roll-rates, our assumption is these are going to operate – these delinquencies are going to operate somewhere between, I’d say a traditional roll rate level and the hurricane type performance, which was much lower. And I know how you look at this all the time, one of the things we are seeing in this quarter is that the loan balances of the loans that are COVID delinquencies or delinquencies that are in a forbearance plan, have a higher average risk level and primarily driven by higher loan balances.

So, if you – if I could sort of point you to like our quarterly financial statements, you can see that the newer loans that are 1 to 3 months past due have a higher loan level. That higher loan level is consistent with what I just said, it is coming from the higher loan balances that’s primarily driven by the 2016 and later book years, which are a bigger size of our book than our entire book. So, that really implies a little lower – a little lower – roll rate than you just suggested, but I think you can sort of back into that. It’s somewhere between the traditional level of the loans that we had prior to them – prior to the beginning of the pandemic, and then the resultant loan levels that are – and expected roll rates that are driven by the pandemic or COVID delinquencies. So, it’s probably a little lower than you expect at this point. And I think you can back into some of that math and get a better estimate of where we are at. If you look at those details, I think it’s probably on Page 20 of our QFS.

[Geoffrey Dunn, Dowling Partners]

Okay. And then just the back half of the year, do you think that will be stable or do you think there will be a creep up as you kind of move away from [indiscernible]?

[Tom McInerney, President and Chief Executive Officer]

I think it all depends. That’s something that’s just very difficult to predict at this point. If we see that we are not getting the reaction that we expect, which will be more like a hurricane type loan level. We will have to consider that and ratchet that up a little bit in our reserves. At this point, it’s just too soon to tell.

[Geoffrey Dunn, Dowling Partners]

Okay, thank you.

[Operator]

[Operator Instructions] The next question will come from Josh Esterov with CreditSights.

[Josh Esterov, CreditSights]

Good morning. Thank you. With regards to U.S. mortgage insurance, could you give us some color on what you were seeing on a monthly basis in terms of delinquency activity, like how did April compared to May compare to June? And as a bit of a follow-up to that, can you talk about the typical lag time between a mispayment and when it gets reported to you by the servicer?

[Tom McInerney, President and Chief Executive Officer]

Yes, I will take that. What’s been unique about this period is the forbearance plans has really been and the take-up in forbearance has really been sort of a leading indicator of delinquencies in this during this cycle. As forbearance really started ratcheting up, I would say materially April over March, and then again, May over April and then it’s sort of leveled off a little bit since then and has remained kind of stable, and it’s widely reported in the trades. Forbearances have been creeping down very gradually ever since then. Our delinquencies followed that same pattern at a little different lag and – but they had settled down in terms of that delinquency growth and begun to flatten out as we have come into the end of the second quarter. We have some estimates for some continued growth in those delinquencies that we referenced in Kelly’s remarks in our incurred but not reported charge, and we will have to see how that comes in July, but so far, we’ve seen a step up in those delinquencies as we originally thought in the second quarter and then a gradual decline as we have gotten towards the end of the quarter.

[Josh Esterov, CreditSights]

Thanks a lot. I appreciate that color. And then could you just give us a reminder for what the typical lag is between a mispayment and when it’s reported to you by the servicer?

[Tom McInerney, President and Chief Executive Officer]

We have reported between 2 and 3 months post past due.

[Josh Esterov, CreditSights]

Got it. Thank you. And then if I could get one more in here, from a strategic perspective, it sounds like there is a number of options available to you to raise liquidity in the short-term, could you just kind of prioritize, it sounds like you are saying that the most likely scenario is the partial IPO of the U.S. mortgage insurance combined with a debt raise at the mortgage insurance holding company level. Is that about right or is some kind of collateralization of your un-priced interest in U.S. mortgage insurance a part of that mix as well?

[Tom McInerney, President and Chief Executive Officer]

Josh, I think you are – good question and I think your premise is right that the focus is on in the near-term, a debt issuance at the USMI holding company level and now we are also preparing and taking all the steps that one needs to do to be ready for a 19.9% IPO of USMI and we also will have more information in terms of the deal and as we get through to the end of August, how much is committed and so on. So, I would say that it’s likely that the debt issue will proceed. I think we intend to do the 19.9% IPO if the Oceanwide transaction ended up being further delayed or potentially terminated, but I think the IPO will be dependent really on the closing, because obviously the one of the major benefits to Genworth that are all of our regulars appreciate is the $1.5 billion capital plan from Oceanwide that’s part of the transaction.

[Josh Esterov, CreditSights]

Got it. Thank you very much. Appreciate everyone’s time.

[Operator]

[Operator Instructions] And next, we have Mark Palmer with BTIG.

[Mark Palmer, BTIG]

Yes, thank you. Good morning. Couple of questions. One on U.S. Mortgage Insurance, it was a big quarter in terms of NIW at $28 billion plus. If you can give a breakdown on how that laid out in terms of refinancings versus purchase? And also I just want to make sure that I heard correctly that the company believes that it may have lost share sequentially on that number?

[Kevin Schneider, Chief Operating Officer]

Mark, I will take that. Let me start with – excuse me, Tom, let me start with the second part of your question. We did say that it might be down a little bit, flat to down from last quarter, not materially down. And but it’s really difficult for us to ascertain them for the rest of the MI companies provide their results down that step. We had a very, very strong quarter overall. And as mentioned, it’s – in this interest rate environment, there is a significant amount of refinancing activity. That refinancing activity, I tell you in broadly, our refinance market probably was – our penetration was probably about a 7% penetration rate in the refinances and but equally strong was the purchase penetration, which was we estimate close to 26% purchase penetration for loans, high loan to value loans that had MI on them. So, I think that’s probably a pretty good gauge. The purchase market has been really strong. It’s sort of surprisingly strong as had home sales. So, this is going to be a very big year for mortgage originations overall. And I would say it’s something that we are very encouraged by and we have had good pricing to support that as well.

[Mark Palmer, BTIG]

Thank you. And one other question with regard to the August 31 milestone, with regard to the provision of evidence financing being available outside of Mainland China, would the company need to see funds in escrow, what would constitute acceptable evidence that the financing is actually in place?

[Tom McInerney, President and Chief Executive Officer]

Mark, that’s a good question. And I I would say we are working very well with China Oceanwide and their Chairman, Chairman Lu this week, our Chairman – our non-Executive Chairman and I talk to Chairman Lu. I think we would look for satisfactory evidence that both the $1 billion in Mainland China, which we think is in good shape, but also the $1 billion or more outside of China that it is secured and commitment committed. And obviously, we would want to see and our advisors want to see strong evidence in terms of the documentation from Hony Capital or any of the limited partners that are part of the $1.8 billion financing from outside Mainland China.

[Mark Palmer, BTIG]

Thank you.

[Operator]

Alright. Ladies, gentlemen, we are out of time. I will now turn the call back over to Mr. McInerney, for any closing comments. Apologies. Actually, we did have a question. It looks like a follow-up from Geoffrey Dunn again with Dowling Partners.

[Geoffrey Dunn, Dowling Partners]

Sorry to delay this. Just one last question on numbers, are you able to disclose the actual available assets and minimum acquired assets for the MI platform?

[Tom McInerney, President and Chief Executive Officer]

Kevin, do you want to take that or Kelly?

[Kevin Schneider, Chief Operating Officer]

I do not have access to that handy, but it could be something we could look at offline for you and get back with you, Geoff.

[Geoffrey Dunn, Dowling Partners]

Okay, I appreciate.

[Kelly Groh, Chief Financial Officer]

Yes. Geoff, one of the comments that I made and you can you can easily back into this is that we had $1.275 billion of sufficiency at 143% PMIERs ratio. So that will give you the available assets.

[Geoffrey Dunn, Dowling Partners]

Yes, no, I saw that. I was just trying to make sure that we had if you would consider just giving us the hard numbers going forward. So but yes, I saw that as well. Thanks.

[Kelly Groh, Chief Financial Officer]

Thank you.

[Operator]

Alright. Ladies and gentlemen, with that we are out of time. I will now turn the call back to Mr. McInerney for any closing comments.

[Tom McInerney, President and Chief Executive Officer]

Thank you very much, Greg. I want to thank everyone who joined the call today. We really appreciate it. I do want to comment again and thank Kelly Groh for 24 years of excellent work and service to Genworth. It’s been my pleasure to be partnering with her as CFO for the last 5 years and we wish her very well on her journey back to the West Coast to be with her parents. I know she is very close to them and we wish her all the best. And obviously, we think we have a strong team and a good succession plan in place with Dan and Jerome and others. Obviously, we face continued unprecedented uncertainty and challenges like all companies due to COVID-19 pandemic. We remain focused on the safety of our employees and serving our customers very well despite working remotely, which we think we are going to be doing through the end of the year. We also continue to prepare for a wide variety of economic and performance scenarios depending on how COVID-19 plays out the severity and duration. And obviously, we are all facing together the volatility and uncertainty that results.

And finally, we are working very closely and very well with Oceanwide to close the transaction. I think the long-term fundamentals and value of the transaction to both sides China Oceanwide and Genworth are as strong as ever from a long-term perspective. Both companies remain fully committed to the transaction in coordinating and helping Oceanwide anyway we can. And we will see where we are as we approach the end of August, but we have very close checking points all along the way all through the month. So, we are confident of that, but obviously, it’s always a challenge given just the uncertainties that there is under COVID-19 for financing all deals around the world.

In addition to focusing on that as a top priority to close that transaction, we are also taking steps to meet our near-term obligations and liabilities and we talked about that today both Kelly and I and we answered some questions on that. So again, thank you to everybody for your interest and support of Genworth. And with that, Greg, I will turn it back over to you.

[Operator]

Thank you, sir. Ladies and gentlemen, this concludes Genworth Financial’s second quarter earnings call. Thank you for your participation. And at this time, the call will end.