Genworth Financial Inc

NYSE:GNW

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to Genworth Financial First Quarter 2020 Earnings Conference Call. My name is Jennifer and I will be your coordinator today. At this time, participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference call. As a reminder, this 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 today’s 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, VP, IR]

Thank you, operator. Good morning, everyone, and thank you for joining Genworth’s first quarter 2020 earnings call.

Due to the current environment, shelter-in-place and social distancing guidelines, all of our speakers this morning are at home. I would ask that you 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 may be more 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 results of our Australia business, please note that all percentage changes exclude the impact of foreign exchange. Finally, references to statutory results are estimates due to the timing of the filing of the statutory statements.

Now, I’ll turn the call over to our CEO, Tom McInerney.

[Tom McInerney, President and CEO]

Thanks Tim. Good morning, everyone, and thank you for joining our call. I hope all of you and your families are well and safe.

Before, I get started. I would like to thank the healthcare workers, our first responders and the entire community of the essential workers for their heroic efforts during this pandemic. I'd also like to thank my Genworth colleagues for their outstanding efforts to serve our customers and policyholders without interruption under these extraordinary and difficult personal and professional circumstances.

Genworth’s first priority since the beginning of the spread of the coronavirus has been to protect the health and wellbeing of our people. In early March, our view was that there would likely be federal and state government mandates around shelter-in-place and social distancing protocols as our nation navigated the spread of COVID-19. These signals prompted us to conduct a mandatory two-day work-from-home test on March 5th and 6th. This test illustrated our general readiness for a work-from-home scenario while providing us with an early view on areas we needed to improve to ensure Genworth service and operations are seamless.

Some of our key learnings from this experience included the need for upgraded wireless connections for our employees at home as well as assistance in home office setup need. With the information learned through this test, Genworth was able to implement a work-from-home policy across our U.S. offices effective at the close of business on March 11th.

To further support our employees, Genworth is providing additional financial, health and wellness resources including enhanced paid leave policies to assist employees in caring for themselves and their family members. We are also continuing to serve the communities in which we operate through financial contributions from the Genworth Foundation towards COVID-19 relief efforts that are addressing immediate community needs. Genworth is matching 100% of employee contributions to identify [Technical Difficulty] opportunities and special initiatives to support seniors.

And finally, we are working with the GSEs and mortgage services in connection with their forbearance policies for mortgage payments as well as providing extended grace periods for life insurance, LTC and annuity policy holders. We've extended these and other relief options to customers to ensure a continuation of insurance coverage and mitigate financial hardship for our policyholders.

I'm very proud of our internal response efforts under the leadership of our executive and crisis management teams. As a result of the terrific work by the Genworth employees, our operations and best-in-class service levels have been maintained with very little disruption.

Now, I would like to discuss our pending transaction with Oceanwide, which we have maintained focused on completing while navigating the challenges presented by the coronavirus. Despite multiple hurdles throughout our transaction journey, which has been ongoing for three plus years, we are extremely pleased to have received all the U.S. regulatory approvals required to complete the Oceanwide transaction subject to confirmation from the Delaware Department of Insurance that the Oceanwide transaction may proceed under its existing approval.

With those approvals in place, Oceanwide is currently finalizing its funding plan for the transaction purchase price of $5.43 per share. As previously disclosed, Oceanwide has a financing commitment for debt funding of up to $1.8 billion through Hony Capital to partially finance the acquisition of Genworth, which was extended to June 30, 2020. Understandably, we have received several questions about Oceanwide’s financing arrangement and the length of time it may take to align everything up to close, which I would like to address. Oceanwide has informed us that they continue to work to manage funding for the transaction and the funding plan is progressing well.

Hony Capital is a Hong Kong based private equity firm sponsored by Legend Holdings, a leading investment management firm. Oceanwide has a good relationship with the firm with a 17% interest in Legend Holdings and invest as a limited partner in some of their transactions. The investors of Hony Capital include leading global investment institutions such as Goldman Sachs, the Canadian Pension Plan Investment Board, the Abu Dhabi Investment Authority, and Temasek.

In addition to its discussions with Hony Capital, Oceanwide is also talking to a number of third parties as they work through the funding plan to ensure the process continues to run smoothly. Given the unprecedented market disruptions due to the coronavirus pandemic, Oceanwide and Genworth have previously extended the merger agreement deadline to no later than June 30, 2020 to provide the parties with additional time if needed to close the transaction. While we announced in March that we were targeting closing by the end of May, we currently expect that the challenges caused by the pandemic will likely delay the closing until the end of June. The most recent extension provides Genworth with the flexibility to pursue alternative strategic options if desired.

And looking at potential alternatives, our immediate focus is on evaluating options to refinance our $1.1 billion in debt coming due in 2021, which Kelly will discuss in more detail. While having the flexibility is important, it is even clearer today that the Oceanwide transaction is the best alternative for our shareholders and all the stakeholders. As a reminder, we've reached a significant milestone with our New York regulator who reapproved our transaction at the end of March. In connection with the reapproval, Genworth committed among other things to contribute $100 million to GLICNY at the closing of the transaction. Following New York's approval, our Virginia regulator also reapproved the transaction.

Once Oceanwide’s funding plan is finalized, Oceanwide will discuss the currency conversion and transfer of funds with China’s State Administration of Foreign Exchange or SAFE to complete the transaction. Oceanwide will also confirm with our Delaware insurance regulator that the transaction may proceed under its existing approval. Based on discussions we've had with Delaware, we believe they will provide the transformation.

Before I turn the call over to Kelly, I would like to provide a high level overview of our performance in the first quarter, particularly in light of the coronavirus pandemic. The COVID-19 pandemic and significant declines in equity markets and interest rates impacted our first quarter performance, primarily in the month of March as the global social and economic impacts of COVID-19 began to take hold. The global mortgage insurance business has experienced limited impacts from the pandemic in the first quarter as mortgage origination levels remained strong and delinquencies remained stable.

The U.S. Mortgage Insurance business delivered strong operating income of $148 million, up 19% year-over-year, driven by insurance in force growth and strong loss performance. The underlying strength of our USMI business is illustrated by the significant amount of new insurance written during the quarter, which was up 86% to $17.9 billion year-over-year. However, given the significant impact COVID-19 continues to have on the U.S. economy, most notably the unprecedented increase in unemployment and the forbearance protocols currently in effect, we expect lower mortgage originations as well as higher delinquencies in the second half of 2020.

At the end of the quarter, USMI’s PMIERs sufficiency ratio was very strong at 142% and that was $1.1 billion above requirements. While we are pleased with the current level of capital in USMI, we do expect our PMIERs sufficiency to decrease over time as delinquencies increase.

Similarly, in our Australia MI business, although performance in the first quarter was solid and capital was $175 million above management targets, the economic and regulatory environment is such that we expect lower performance in the second half of the year and are closely watching the capital levels.

Now, I'll discuss capital and our liquidity position as well as the options we have at the holding company level to continue to improve our financial flexibility as we move through the rest of the year.

Turning to the life insurance businesses, our performance in the first quarter experienced pressure due to a decline in equity markets and lower interest rates, primarily in our fixed annuity business as well as in our run-off variable annuity block of business.

Long term care insurance roughly broke even in the first quarter with operating profit up $21 million relative to last year, primarily due to higher earnings from our in force rate actions. We have continued to make progress on our multiyear LTC rate action plan or MYRAP, which is essential to stabilizing our long term care insurance business. Year-to-date, we continue to make good progress against rate actions that is consistent with the MYRAP, with approvals on $130 million of annualized in force premiums, representing a weighted average premium increase of 35% or $45 million of annual incremental premiums going forward.

On a cumulative net present value basis, since 2012, Genworth has now achieved approximately $12.7 billion of approved LTC premium rate increases. Aligned with this objective of initiatives set forth by the NAIC Long-Term Care Insurance Task Force to develop a more consistent and timely national approach for reviewing LTC insurance premium increases and to identify more options to provide consumers with choice, such as benefit reductions where policies are no longer affordable due to rate increases.

There is a heightened focus on this extremely important initiative across the long term care insurance industry, particularly in light of the Senior Health Insurance Company of Pennsylvania or SHIP recently filed rehabilitation plan. SHIP’s plan includes proposed changes to either increase policyholder premiums or reduce benefits to LTC policies that have a premium below a specified rate, which are likely to be policies in those states that are behind an actuarially justified rate increases. We will encourage the NAIC task force to consider whether actions similar to those proposed in the SHIP plan can be applied more generally to states that are behind and improving rate actions.

Looking ahead, there's a wide range of possible economic recovery scenarios that depend on several factors, including the duration of the pandemic, impacts from ongoing fiscal and monetary policies, the volatility and strength of the capital markets, and the return of the U.S. consumer. While, we expect near-term volatility in this uncertain environment, we are prepared to navigate these challenges and believe the strategies we have in place will enable Genworth to continue to deliver for our stakeholders.

In summary, I'm pleased with the progress we have made in the last three months to secure the final approvals for the transaction while delivering excellent service to our customers and policyholders during this challenging macroeconomic period. I would like to thank our leadership team and the rest of Genworth employees for their continued focus in this time of uncertainty. We continue to prioritize their safety and wellbeing while remaining 100% committed to closing the Oceanwide transaction as soon as possible. I'd also like to thank our customers and policyholders for their commitment [Technical Difficulty] through this difficult period together. And finally, I'd like to thank our shareholders for their continued patience as we work to bring the Oceanwide transaction to a successful conclusion.

Now, I will turn the call over to Kelly, who will provide you with a more detailed update on our first quarter performance, trends today in the business and our liquidity and capital position.

[Kelly Groh, CFO]

Thanks, Tom, and good morning, everyone.

Today, I will share some financial perspectives regarding current and potential future impacts from the COVID-19 virus on our businesses and our holding company liquidity, as well as discuss our first quarter financial results.

To expand on Tom's comments, the COVID-19 virus and resulting macroeconomic impacts and regulatory responses are unparalleled with the ultimate impact still very much uncertain due to the unknown length of the pandemic, the speed and shape of the economic recovery, and the impact of future regulatory and governmental actions. These dynamics will impact all of our businesses going forward.

Our enterprise, risk management, finance and actuarial teams are focused on modeling these uncertain events and being prepared to implement proactive contingency plans to maintain the financial health of our businesses.

In our U.S. Mortgage Insurance business, we will be closely following delinquencies in the second quarter as we expect them to rise as a result of higher unemployment and government supported forbearance programs. It remains to be seen how these delinquencies cure as the economy restarts and if the pattern will be similar to experience with recent localized events, such as hurricanes Harvey and Irma. In these instances, delinquencies cured months later, following rebuilding and stimulus efforts. We do expect new insurance written or NIW for the second half of the year to decline versus the levels we saw in the first quarter with anticipated slowing of the purchase originations market only partially offset by refinancing activity as interest rates will likely remain low.

We started the quarter in a strong capital position with actions we took over the last few years. We ended the quarter with over $1.1 billion of capital above the PMIERs minimum and approximately 77% of our risk in force covered by some level of reinsurance. We remain actively engaged with our regulators and the GSEs during this turbulent time.

Our view of COVID-19 delinquency experience, the overall housing and macroeconomic environment, and our ongoing regulatory discussions will inform our view around future USMI dividends. And we may not receive further dividends from our USMI business in 2020 in order to preserve capital in our insurance subsidiaries during this period of uncertainty. The amount and timing of dividends will be reevaluated later in the year and depend on the economic recovery from COVID-19.

Turning to Australia, the government is supporting similar forbearance programs for up to 6 months in response to COVID-19. However, under Australia practice, payments missed during the forbearance period are not considered delinquent until after the expiration of the forbearance period, if scheduled future payments are not resumed. We would still anticipate some level of increased delinquencies following the expiration of the forbearance program due to economic pressures and are likely to experience reduced earnings in our Australia business for the remainder of the year.

Similar to the U.S., the shape of the recovery and the cure rates for these delinquencies will be the drivers for the ultimate financial performance. We expect lower new business volume in Australia given the current state of the economy and the housing market activity. We started the quarter in a strong capital position in Australia with over $400 million Australian of capital above our targeted minimum levels and limited debt at the local level with the 2025 maturity.

Also in January, Australia renewed $800 million Australian of excess of loss reinsurance with a panel of over 20 reinsurers. However, given the heightened uncertainty over COVID-19 and recent regulatory guidance, our Australian business withdrew financial guidance in late March, and now will reconsider dividends for the rest of the year until there's more clarity around the impacts of COVID-19. The consideration in this decision that was noted in Australia's release last night is the $182 million Australian local accounting charge the business took for liability adequacy testing or LAT. This test calculates potential losses using a higher confidence level, then best estimates and evaluates recoverability of the DAC balance and then the need for any additional reserves under that stress case. There was no equivalent charge under U.S. GAAP accounting in the first quarter as no deficiency existed due to higher unearned premium reserves, lower DAC balances and an accounting regime based on the best estimate of outcomes.

Regarding our U.S. Life businesses, the COVID-19 economic impacts and uncertainties do not change our view that this business is isolated and dependent on its existing capital, multiyear LTC rate action plan, and prudent management of the in force business, which includes expense management. We have not yet seen meaningfully elevated of a direct mortality or lapses in our U.S. Life business from the COVID-19 virus.

What we have experienced is the resultant macroeconomic impacts of the social distancing measures, which includes the reduction in GDP and higher unemployment, which is driving interest rates to a historically low level, increasing equity market volatility and causing credit deterioration. These impacts will certainly be a heightened focus area of ours going forward.

While a short-term impact may not necessarily cause an impact to our long-term actuarial assumptions that we are monitoring and will review later this year, these broad macroeconomic factors did impact our 1Q results, primarily on U.S. Life products that require updates for unlocked assumptions such as our variable and fixed annuities.

We also experienced unfavorable mark-to-market losses on our equity and limited partnership investments, reflecting the significant market decline as of March 31st. We will continue to monitor interest rates as we move later in the year and evaluate all of our assumptions that may need updating as we see longer term trends.

In addition to the dislocated market environment, the National Association of Insurance Commissioners or NAIC and a number of states have instituted temporary premium grace period programs and no lapse guidelines. We do not anticipate this will have a meaningful impact.

I did want to spend a few minutes discussing our investment portfolio. And given questions investors may have, we have added an additional slide to the presentation posted this morning on our website.

Approximately 85% of our cash and investment portfolio, which totaled $73.2 billion in market value at the end of the first quarter, backs our U.S. Life Insurance obligations. This portfolio is constructed to create a level of diversification based on sector, issuer and rating. In total, approximately 78% is invested in investment grade fixed maturity securities with the majority rated A, or better.

We've always monitored our investment portfolio very carefully for signs of distress that could be early indicators of rating downgrades and credit losses. In the first quarter, we saw no credit losses and limited level of credit migration within our fixed income portfolio. Also, with the low interest rate environment, partly offset by widening credit spreads, our unrealized gain position was $0.9 billion [ph] at the end of the quarter, with less than 5% trading at less than 85% of book value as of 3/31. Both of these metrics have improved since quarter-end.

We do expect credit migration and credit losses will accelerate in 2Q, particularly in the energy and transportation sectors, which represent approximately 9% of our fixed income portfolio. Another 10% of our portfolio is our approximately $7 billion commercial mortgage loan portfolio, which we are also closely monitoring.

As of quarter-end, all loans were performing. However, we have received a number of inbound calls over last few weeks related to restructuring with the focus on loans for retail properties. We're evaluating these situations one-by-one, with the focus on principal preservation.

While the scale of the COVID-19 virus and implications are unprecedented and many uncertainties remain, we will continue to monitor events and proactively take steps to preserve and improve the financial health of our businesses.

Before I talk about operating results for the quarter, I did want to address liquidity at our holding company as this remains a top priority. We ended the quarter with $575 million in cash and liquid assets or approximately $200 million above our targeted 2 times forward debt service buffer. During the quarter, we addressed a number of large near-term obligations with proceeds received from the sale of the Canada MI business in December 2019.

As depicted on page 16 of the investor deck, Genworth retired June 2020 debt in addition to repurchasing $14 million of our 2021 debt in the open market at prices below par. We also fully retired the $200 million intercompany note to GLIC. Other uses of cash during the quarter included additional cash collateral, relating to our interest rate hedge on our hybrid debt, given the sharp reduction in interest rates; interest expense of $66 million, which includes accrued and unpaid interest on the early debt retirement; a $134 million interim payment to AXA, which we discussed on last quarter's call; and approximately $75 million in other miscellaneous and timing items that are typically higher in 1Q and are mostly reimbursed by our businesses throughout the year. Finally, we received ordinary dividends of $11 million from our Australia business during the quarter.

I do want to update to investors on the AXA litigation that we discussed last quarter. We continue to be uncertain of the ultimate amounts that may be due or demanded under a ruling. AXA has updated their invoice claim amount net of the January interim payment to £389 million, which converts to $483 million at March 31st foreign currency exchange rates. As mentioned before, AXA is also seeking a tax gross-up on the amounts invoiced for an additional amount of approximately $142 million, assuming March 31st FX rates. Final damages will be the subject of the June hearing, which we have no reason at this time to believe will be delayed due to COVID-19.

As we manage our liquidity in 2020 and beyond, we are mindful of these possible incremental litigation expenses and approximately $1.1 billion in combined debt maturities in February and September of 2021. We are also cautiously planning for no further subsidiary dividends in 2020 to preserve capital in our mortgage insurance subsidiaries.

We are reviewing alternatives to meet those needs in the event the Oceanwide transaction is terminated or delayed. These liquidity alternatives include a possible debt issuance from our U.S. Mortgage Insurance business or a secured loan facility, which would provide time for market to recover before a more permanent solution can be found, and we can further delever. Our agreement with Oceanwide gives us flexibility to pursue these and other options in parallel with the ongoing transaction. Although our top priority is still to close the Oceanwide transaction.

Turning back to earnings for the quarter. We reported a net loss available to Genworth shareholders for the quarter of $66 million and adjusted operating income of $33 million. The net loss in the quarter included investment losses of $89 million, net of taxes and other adjustments, primarily reflecting embedded derivative losses on our variable annuity product, FX hedges in Australia and mark-to-market losses on equity securities and limited partnerships.

In USMI, adjusted operating income for the quarter was $148 million, compared to $160 million in the prior quarter and $124 million in the prior year. The prior quarter results included $21 million of favorable impacts from assumption updates. The reported loss ratio for the quarter was 8%. [Technical Difficulty] financial performance through the first quarter of 2020 has been generally strong and characterized by strong housing fundamentals, increasing insurance in force and low delinquencies. We did not observe any COVID-19-related delinquencies during the quarter, nor deterioration in performance trends of our existing delinquencies that would warrant reserve strengthening. Flow new insurance written in USMI was $17.9 billion in the quarter, up 86% versus the prior year, primarily driven by a larger private mortgage insurance market.

In Australia, adjusted operating income was $9 million in the quarter, down from $12 million in the prior quarter and $14 million in the same quarter of the prior year. The U.S. GAAP loss ratio for the quarter was 34%. Financial performance on a U.S. GAAP basis in Australia through the first quarter of 2020 has been generally stable, although the pressure from smaller in force books, portfolio seasoning and lower policy cancellations have driven lower results versus prior periods. COVID-19 did not have a material impact on U.S. GAAP results for G&A for the first quarter of 2020. Flow new insurance written in Australia increased 26% versus the prior year to $4.1 billion due to the higher mortgage origination volume from a key customer.

Turning to our U.S. Life Insurance segment. Results were impacted by continued lapses in our 20-year term life products and low interest rates and equity market volatility impacting fixed indexed annuities.

In long term care insurance, our multiyear rate action plan continues to be the key driver of results. In LTC, claim terminations were higher in first quarter versus the prior period and consistent with seasonal expectations. Benefit utilization rates on existing claims, which are updated each quarter on a rolling basis had a slightly favorable impact on earnings for the quarter compared to an unfavorable update in the prior year. New LTC claims for the quarter continued to reflect higher claim counts on our larger Choice 1 and Choice 2 blocks, which we expect as those blocks age. The overall benefits of the in force rate actions for LTC, particularly the reduced benefit impacts were higher than the prior year but down sequentially, as illustrated on page 11 of the investor presentation released this morning.

As we've discussed in the past, the benefit reductions can fluctuate from quarter-to-quarter, and we're also beginning to see a wind-down of the implementations associated with large state approvals we received in 2018 and early 2019, consistent with our projections. We expect the benefit of in force rate actions to continue to be strong this year, although at a level more consistent with first quarter performance. These rate action approvals included expanded reduced benefit and stable premium options, which continue to be selected at a higher frequency by our policyholders, as many of these policyholders have been subject to multiple rounds of increases. This flexibility for our policyholders is more important than ever, given the COVID-19 macroeconomic impacts. We will continue to monitor policyholder behavior carefully in light of the potential COVID-19 impact to our policyholders.

During the quarter, Genworth received approvals, impacting $130 million of premiums with a weighted average approval rate of 35%, which was in line with expectations. We believe regulators continue to recognize the importance of timely justifiable rate actions and our experience the last few months reinforces this, despite the many priorities and work-from-home orders of the state insurance departments.

Turning to life insurance. Overall mortality in term and universal life for the quarter was significantly unfavorable versus the prior quarter and prior year, although we do not have evidence that this is related to COVID-19, given only three claims identified as related to COVID-19 were received during the quarter totaling just under $300,000 in benefit payments. We will continue to monitor our mortality experience as well as any impacts from COVID-19 as we progress throughout the year.

Life results were also negatively impacted by an operating loss of $30 million in our term universal life product, as we experienced a significant GAAP reserve build in the quarter as certain of these policies enter their post-level premium period and are currently in the grace period. The ultimate persistency of these products that are in these periods of higher premiums is uncertain. Reserves attributable to these policies increased during the quarter and will be released over time, assuming a meaningful number of these policies lapse after the premium grace period expires.

[Technical Difficulty] 10-year term UL grew throughout 2010 and peaked mid-2011. We therefore expect this negative dynamic will persist through 2020 and into early 2021 after which the number of policies lapsing should exceed the number of policies entering the premium grace period.

The term life business also continued 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.

Total term life insurance DAC amortization, a non-cash impact, primarily related to these term-life lapses, reduced earnings by $27 million after tax, which is $6 million higher than the last quarter. We expect amortization related to the business written in 2000 to remain elevated throughout 2020 and into early 2021 as more enters the post-level premium period and lapses accelerate.

In fixed annuities, low interest rates and equity markets drove additional reserves in fixed indexed annuities of approximately $9 million during the quarter, compared to a reserve release in the prior quarter. Our single premium immediate annuities did not record any additional charges related to loss recognition testing in the quarter.

The results in our Runoff segment were also negatively impacted during the quarter from the equity market and rate decline. As a reminder, the Runoff segment consists mostly of our variable annuity blocks of approximately $5.7 billion of assets under management before reinsurance with $3.8 billion [ph] net of reinsurance, which has been in runoff since 2011.

Our adjusted operating loss in corporate and other was $41 million for the quarter. This loss was lower versus last quarter, primarily attributable to lower interest expense, as we retired debt.

Turning to capital levels. Our U.S. and Australian mortgage insurance businesses maintained a very strong capital positions at the end of the quarter. We will continue to closely monitor capital levels as the year progress, given the dynamics I discussed earlier.

In USMI, we finished the quarter with PMIERs sufficiency ratio of 142%. The PMIERs sufficiency level is in excess of $1.1 billion above the level of required assets as of March 31, 2020. This amount did include a modest 3-point or $54 million benefit to the application of the industry's PMIERs existing treatment of delinquencies for properties located in FEMA declared major disaster areas for eligible delinquencies.

Our Australia MI business ended the quarter with an estimated capital ratio of 178%, which is approximately AUD$270 million or US$175 million above the high end of the prescribed capital amount or PCA management target range of 132% to 144%. This represents a decrease from 191% last quarter, largely from a first quarter loss due to the Australia GAAP liability adequacy testing I mentioned earlier.

We expect capital in Genworth Life Insurance Company or GLIC as a percentage of company action level RBC to be approximately 195% as of the end of the first quarter, down approximately 18 points from year-end 2019. Statutory results were primarily driven by reserve increases on variable annuities, which were only partially offset by hedge gains. As part of the Oceanwide transaction, Genworth will contribute $175 million to GLIC and $100 million to GLICNY upon closing the transaction. This is possible due to the $1.5 billion capital contribution committed as a part of the transaction. Other than the contribution to U.S. Life subsidiaries that we agreed to make in connection with obtaining the regulatory approval for the USMI transaction, it is our intention to manage all of our U.S. Life entities on a standalone basis with no plans to infuse any additional capital.

In closing, these are unprecedented times. We expect COVID-19 will have a far-reaching and uncertain impact on the economies in which we operate in the quarters ahead. From a financial standpoint, we started the year well-positioned through actions we took to build up capital in our mortgage platforms, further isolate our U.S. Life business, and position its success with the multiyear rate action plan, and selling our Canada MI business with proceeds used to address near-term holding company obligations. We will continue to navigate through these uncertain times with the focus on all our key stakeholders.

With that, let's open it up for questions.

[Operator]

Ladies and gentlemen, we will now begin the Q&A portion of the call. [Operator Instructions] We’ll go to our first question from Joshua Esterov with CreditSights.

[Joshua Esterov, CreditSights]

Hello. Good morning. Thank you very much. My question was around the timing of the deal. So, in previous quarters when New York regulators were looking for a capital contribution in connection with the deal, the Genworth team mentioned that if a solution was in place fairly quickly, that Genworth and China Oceanwide could call the deal off. Now, with the ball seemingly into China Oceanwide’s court in terms of finalizing funding, how amenable are you to extending the deal beyond June 30, if necessary?

[Tom McInerney, President and CEO]

So, thank you very much for the question. It's a good question. And I'll take that one. The first thing I would say, and this is in the press release, both China Oceanwide and their Chairman and Genworth and I are fully committed to the transaction. We have all approvals at this point. Unfortunately, despite all those efforts, COVID-19 came. And given all the uncertainty, it's clearly a challenge I think for any deals under these circumstances. But, China Oceanwide continues to work with Hony Capital to arrange the $1.8 billion in funding. And so, we're focused on closing the deal. We hope to do that by -- as soon as possible, but by the end of the quarter. We'll just have to see how things develop. I think, both of us has shown over a long period of time commitment to the deal. And I think that's our focus at this point on both sides.

[Joshua Esterov, CreditSights]

Thanks a lot. I appreciate that. And maybe one quick follow-up. Is most of the finalizing component for China Oceanwide, is that that related to the Hony funding commitment or is that for the remainder of the $900 million that needs to be funded from China Oceanwide?

[Tom McInerney, President and CEO]

So, I think, the funding within mainland China from China Oceanwide is in good shape. I think the focus at this point is working with Hony Capital. And as I mentioned, Hony Capital and Oceanwide have very good relationship. Oceanwide owns 17% of the founder owner of Hony, Legend Holdings. So, I think that's going well. But, obviously given all the uncertainty, it's taking more time. But, we still hope to be able to close by the end of the second quarter.

[Joshua Esterov, CreditSights]

Thank you very much. Stay safe.

[Tom McInerney, President and CEO]

You too. Thanks.

[Operator]

We will go next to Mark Palmer with BTIG.

[Mark Palmer, BTIG]

Yes. Thanks for taking my questions. You had alluded to China Oceanwide working with third parties on their funding plan. If you could just give a little bit more color in terms of what the role those third parties would potentially play, and why they're reaching out to them, beyond Hony Capital?

[Tom McInerney, President and CEO]

Mark, it's a good question, and I'll take that one again. They are making progress with Hony Capital. And as we said, they have a relationship there. But, they're also talking to other parties, just given all of the uncertainties, in case they need to rely on alternatives at this point. I think, the main focus is on Hony Capital and getting that funding plan finalized.

[Mark Palmer, BTIG]

And also, you had mentioned that you now expect that the deal will not be closed until the end of June and have said that that gives you flexibility to explore other options. If you could just provide a little bit more color on what you meant by that?

[Tom McInerney, President and CEO]

So, Mark, another good question. When we extended the transaction from the end of March to the end of June, obviously, the COVID-19 issues were just developing, and that was in late March. But there was -- we had already gone to working remotely. So, we knew there were going to be challenges. And we did say -- we did ask, in the discussions with China Oceanwide, that given all the uncertainties because of COVID-19, it was prudent for Genworth to look at all the alternatives to the extent we are unable in the end to close the deal. And as part of that discussion, they agreed and this is part of the 14th waiver that we signed just before the end of March. It allows us to explore any other alternatives. And we talked about some of the plan B options some time ago, they're still there. As Kelly and I both said in our remarks, we're primarily focused on the $1.1 billion of debt due next year. So, most of the immediate focus on alternatives is around the refinancing of the $1.1 billion of debt assuming if the deal doesn't close and we don't get the $1.5 billion therefore and we have to look for -- look to refinance the debt that comes due next year.

[Operator]

We’ll go next to Robert Glover [ph] INTL FCStone.

[Unidentified Analyst]

Hi. My question has been answered. Thank you.

[Tom McInerney, President and CEO]

Thank you, Robert.

[Operator]

We’ll go next to Christopher Bolton, private investor.

[Unidentified Analyst]

As far as the rate action taken to-date that has been approved, would you say you are more confident that obligations for long term care policyholders in the older books of business are looking more secure than your projections, say three or four years ago?

[Tom McInerney, President and CEO]

Christopher, I’ll take that question as well. We have made, I would say tremendous progress in the last six or seven years since 2012. If you look at the original price for premiums and the premiums we need, there was a significant shortfall. As of the end of the first quarter, we had received since 2012 premium increases or benefit reductions that have a net present value benefit to Genworth of $12.7 billion. We have a little bit over $7 billion future premium increases and benefit reductions to go. A lot of that is on the newer blocks, what call our Choice 2 block, which were issued in the 2003 to 2010, '11, '12 period. And so, given where we are and what we have left, we would say we're 60% or so all the way through shoring up those books and bringing them closer to a breakeven with 7the level with the premium increases. So, I'd say, today versus where we were several years ago, which is the basis of your questions, I think we're in much better positioned.

The other thing that's happening is -- that's happened over the last three to five years, partly because of the Penn Treaty insolvency and also I talked a little bit on in my prepared remarks about the Senior Health Insurance Company of Pennsylvania and their rehabilitation plan. I think, the regulators have been more open to providing significant premium increases, benefit reductions for all of the long term care insurance because of the shortfalls in the books. So, I do think, we're also working, all of us, including Genworth working well with regulators to shore up those legacy blocks of business. So, thanks for your question.

[Unidentified Analyst]

Okay. And as a follow-up to that, on the life side, the term and the universal life products, are policyholders, as far as your ability to meet claim obligations on the life side on your UL products, would you say that policyholders are in a stronger position to realize policy benefits with the transaction being closed, than without the transaction being closed, viewing or keeping in mind the fact that, while Genworth will remain an independent entity, it now goes to Chinese ownership.

[Tom McInerney, President and CEO]

Well, Christopher, I would say, we have thought all along that, our policy holders, life annuity, long term care, mortgages insurance customers in the U.S. and Australia are all advantaged significantly by the transaction because in addition to the purchase price, China Oceanwide is investing additional $1.5 billion of capital. A significant amount of that will go to strengthen the balance sheet, reduce the debt, get the debt to a place where we're very comfortable with where the debt will be after the investment of $1.5 billion. So, I think that strengthens the Company and therefore is an advantage -- a significant advantage of the deal for all policyholders. And I think the regulators also recognize that. And while we have committed as part of the deal to put capital into our main 49-state company, GLIC, $175 million and $100 million to GLICNY, and that will further strengthen them. But more broadly, I think the regulators also see the benefits of the transaction.

[Operator]

Ladies and gentlemen, we are out of time. And I will now turn the call back over to Dr. -- I'm sorry, Mr. McInerney, for closing comments.

[Tom McInerney, President and CEO]

Thank you very much, operator. And thank you to all of you for joining the call today. All of Americans, we all face unprecedented uncertainty and challenges due to COVID-19 pandemic. At Genworth, we are managing well working remotely. It's been a significant surprise to me that we've been able to both, protect our employees and their families and serve our customers well, despite all working remotely since the middle of March. We continue to work closely with the Oceanwide to close the transaction. They continue to on the funding plan and we are making progress. We are prepared for a wide variety of economic and business scenarios in our businesses, given the unprecedented volatility and uncertainty given the COVID-19.

So, thank you all very much for your interest and support of Genworth. And at this point, I'll turn the call back over to the operator.

[Operator]

Ladies and gentlemen, this concludes Genworth Financial first quarter earnings conference call. Thank you for your participation. At this time, the call will end.