Genworth Financial Outlines Restructuring Plan, Posts 4Q Loss of $760M on Older Long-Term Care Policies
February 17, 2015 by Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com
RICHMOND, Va. – Genworth Financial Inc. said it’s undertaking a multistep restructuring plan targeting cash savings of more than $100 million pretax over the next two years after it posted a fourth-quarter 2014 net loss of $760 million on older blocks of acquired long-term care insurance policies.
The final quarter of 2014 included a GAAP charge of $478 million after-tax on completing its annual review of long-term care insurance active life margins on blocks acquired before 1996, Genworth said. Active life reserves is money set aside for policyholders who are not on claim. Reserves were increased $729 million, pretax, Genworth said. Net income for Genworth was $208 million in the fourth quarter of 2013.
For full-year 2014, Genworth posted a net loss of $1.24 billion, compared with net income of $560 million.
“I am disappointed by the continued challenges in our older LTC blocks and how it is overshadowing otherwise strong performance and momentum in other businesses, however we have taken steps on many fronts to deal with these challenges in order to strengthen and rebuild the future,” Tom McInerney, Genworth’s president and chief executive officer, said in a statement.
In January, Genworth said it began consolidating its U.S. life insurance business and corporate holding company functions, which resulted in reducing key leadership positions.
Genworth is “taking proactive measures to leverage our strengths, namely in the global mortgage insurance division, and rationalize our portfolio including reducing costs and debt levels,” McInerney said. “While LTC continues to be challenged, we plan to capitalize on our industry leadership and drive regulatory changes that are necessary to sustain this business long term.”
Operating earnings were negatively affected by a $0.96 charge related to the active life reserve review of older, acquired blocks of business, wrote Steven D. Schwartz, an equity analyst with Raymond James & Associates, in a research note. “We were aware that such a charge would be necessary but didn’t attempt to quantify it. Doing so would have been nearly impossible; in addition, we view the GAAP charge as meaningless as it does not affect the need for capital.”
“There is no need for an equity raise,” Schwartz wrote, noting Genworth’s risk-based capital is estimated at 430%. The holding company ended the year with $1.1 billion of cash — $65 million in excess of 1.5 times debt service and a $350 million risk buffer, he wrote.
Genworth’s subsidiary in New York had a preliminary incremental negative margin of $195 million. The company said it raised statutory reserves by $39 million in the subsidiary in the quarter with the remaining $156 million recognized over the next four years.
When Genworth posted a third-quarter 2014 net loss of $844 million, McInerney vowed to transform the long-term care insurance business.
During the fourth quarter, Genworth said it substantially completed, pending regulatory filings, its annual review of the active life margins, and updated its margin assumptions and methodologies, informed by the work done related to the claim reserve review completed in the third quarter. It also developed updated assumptions relating to planned in-force premium rate increases on in- force policies, and reviewed its other active life margin assumptions, including claims frequency and investment allocation and returns.
As of Dec. 31, 2014, 47 states approved the initial round of premium rate increases and six approved a second round as part of the 2012 in-force premium rate action. Genworth said it continues to expect to achieve $250 million to $300 million in additional premiums annually when fully implemented by 2017.
The individual long-term care market has experienced challenges over the past decade, according to an A.M. Best Co. special report. The market also continued to battle the challenges of lower-than-expected lapse rates, an extended low interest rate environment and longer claim periods, which prompted many LTC insurance writers to either exit the market or pare back their product offerings over the years (Best’s News Service, Sept. 16, 2013).
Meanwhile, Genworth said the turnaround of its mortgage insurance operations are near complete, with continued strong loss ratios in Australia, Canada and the United States. Also, while no decisions have been made, Genworth said it recognized a tax charge of $174 million as it is “no longer asserting its intent” to permanently reinvest earnings from Genworth Mortgage Insurance Australia Ltd.
Earlier this month, disability insurer Unum Group (NYSE: UNM) posted a fourth-quarter net loss on a $453.8 million reserve charge after tax in its closed block of long-term care insurance as its soon-to-retire Chief Executive Officer Thomas R. Watjen said the closed-block businesses remain “a critical area of focus for the company.”
On the afternoon of Feb. 11, Genworth Financial’s (NYSE: GNW) stock was trading at $8.33 a share, up 6.66% from the previous close.
Genworth Life Insurance Co., Genworth Life Insurance Company of New York and Genworth Life and Annuity Insurance Co. each currently has a Best’s Financial Strength Rating of A (Excellent).
