A.M. Best: Genworth Not Out of the Woods Despite Strategy Reset

News that Genworth is reversing course and will not sell off its life and annuity operation was blessed by analysts, who added the company faces a long road to fiscal stability.

Following the news Wednesday, A.M. Best quickly removed the rating of “under review with developing implications” and affirmed a financial strength rating of A- for Genworth. A.M. Best attached the “under review” status after news broke in April that Genworth sought to sell its life and annuity division.

The outlook assigned to all ratings is negative, which A.M. Best said reflects “concerns with the volatility of earnings, lack of growth in its life and annuity operations and the organization’s challenge to improve sales following the recent strategic uncertainty, as well as the inherent volatility of the long-term care business.”

In an SEC Form 10Q filing, Genworth acknowledged it faces a tough challenge going forward.

"We may be unable to successfully develop and execute strategic plans to effectively address our current business challenges," the company announced in the Risk Factors section of the report.

Genworth went on to warn that it "may be unable to increase the capital needed in our business in a timely manner."

Genworth Chief Executive Officer Tom McInerney said Wednesday that the company may instead seek buyers for blocks of life contracts. McInerney revealed the strategy change during a conference call on second quarter earnings for the Richmond, Va.-based insurer.

An internal review “determined that a large scale transaction (including a legal entity sale) is not in the best interests of shareholders, after considering, among other things, financial and ratings interdependencies across our businesses,” Genworth said in the SEC filing.

McInerney's goal of reducing between $1 billion and $2 billion of debt will be complicated by the decision not to sell. The CEO is seeking to expand profits from mortgage insurance and stem losses from LTC coverage.

Colin Devine, equity analyst with Jefferies LLC, said rating agency pushback was the catalyst behind Genworth’s reversal. Mortgage insurance operations could be called on to backstop LTC reserves, which would put Genworth in a precarious position, Devine wrote.

Genworth’s mortgage insurance business is rated “BB-“ by S&P, and further reduction “would effectively put it out of business,” he added.

Genworth reported a second-quarter net loss of $193 million.

“There were lots of positives for doing the deal, including our ability to reduce debt,” McInerney said. “In the end, our view was they were outweighed by potential adverse effects on the ratings, and the loss of earnings and diversification.”

Genworth executives have noted publicly that their company was experiencing losses stemming from its legacy LTC insurance business written before 1996. It has since sought and secured rate increases, adjusted reserves and designed new products aimed at today’s buyers.

In its SEC filing, Genworth said it will pursue new avenues to profitability of its life and annuity operation.

“Our focus … will include pursuing new business opportunities to address the financial challenges of the aging population by offering more targeted product features and benefits and strengthening relationships with those producers who are focused on the same challenges,” the company wrote.

In June, Genworth executives vowed to remain in the LTC insurance market, including annuity/LTC combos, even if one of its companies is sold. Genworth is the leading seller of LTC policies.

JP Morgan analyst Jimmy Bhullar said stricter underwriting guidelines, less generous features and higher prices are likely to keep Genworth's LTC sales low.

"We are doubtful that GNW can offer a product that generates adequate returns while providing attractive customer value," he wrote.

JP Morgan maintained its "neutral" rating and $9 price target for Genworth.

Jefferies gave Genworth a “buy” rating, but lowered the price from $12 to $9. Genworth stock dropped about 25 percent following the earnings release, before settling in at about $5.15 a share.

The company “faces many risks,” Devine wrote, including: competitive marketplace for its products; underwriting experience on LTC and individual life; impact of low long-term rates, and elevated defaults for U.S. and international, mortgage insurance.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].