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.

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.

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…

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…

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.

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

Kelly, do you want to take that one?

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

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.

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?

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.

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.

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?

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.

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]?

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.

Okay, thank you.

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

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.

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?

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

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?

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.

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

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

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.

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?

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.

Thank you.

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.

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?

Kevin, do you want to take that or Kelly?

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.

Okay, I appreciate.

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.

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.

Thank you.

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.

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.

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.