By Cyril Tuohy
The market is watching Genworth Financial and hoping for some good news after a disastrous third quarter.
Recall that on Thursday, Nov. 6, the company’s shares plunged nearly 38 percent to below $9 a share from $14 a share the day before.
The stock hasn’t recovered since the company missed expectations after it announced an $844 million loss, or $1.70 per diluted share, after completing a review of its long-term care business. The company earned $108 million, or $0.22 per diluted share, in the third quarter of 2013.
“We continue to believe our long-term care strategy is the best option for Genworth, but the turnaround in this business will be more difficult and prolonged because of the poor performance of the older generation products,” Tom McInerney, president and CEO, said in a Nov. 5 news release.
Genworth reports fourth quarter earnings after market close Feb. 10. A conference call with analysts is planned for 8 a.m. Feb. 11.
The reason for November slide? Changes to its assumptions and methodologies involving long-duration claims.
Claimants in nursing homes, assisted living or at home are living longer and using more of their benefits than the company had previously assumed, which has sent the long-term care carrier scrambling to reassess its reserves.
Net operating losses in the third quarter were $317 million compared with income of $139 million in the year-ago quarter.
The net loss and net operating loss forced the company to raise its pretax claims reserves to the tune of $531 million, the company said.
McInerney tried to reassure investors. In a statement Nov. 6, McInerney said, “We remain sharply focused on building shareholder value.”
Ratings agencies didn’t take kindly to the bad news and initiated a series of reviews. This prompted the company to issue a statement reassuring investors of its solid capital positions and strong liquidity at the holding company level.
Reviews by rating agencies invite the potential for a downgrade in a company’s bond rating, which has the net effect of raising borrowing costs for the company.
Then, in an announcement Dec. 17, the company said its active life margin review was taking longer than expected, further unnerving investors.
Results of the review would be released after the completion by an independent third party on or before the company’s fourth quarter earnings call, the company said.
No further statement on the claims review has been forthcoming, leaving analysts to assume that company will reveal the results of the review next week.
Genworth’s three separate divisions sell long-term care, life insurance and private mortgage insurance.
Analysts, competitors and other industry watchers look to the company as a bellwether since it is the nation’s largest seller of long-term care insurance products.
McInerney said that despite the third quarter earnings setback, the company remains committed to the long-term care market. This is a market from which many companies have fled after sustaining losses or because they weren’t making enough profit.
Hiking long-term care premiums, limiting exposures, adjusting its sales mix and using more reinsurance were in the offing, McInerney said.
“The company is evaluating market trends and sales and investment in the development of products that will help expand the market and meet middle income consumer needs,” the company also said in a statement.
In July, the company launched Privileged Choice Flex 3.0 in 42 states. Genworth said sales of that product were expected to dip in the short term because Privileged Choice Flex 3.0 is priced higher than the ones it replaces.
At an annual conference of the American Association of Long-Term Care Insurance in Kansas City last year, Scott McKay, senior vice president and chief information officer of Genworth, sounded optimistic about the fortunes of the long-term care industry.
As more agents and advisors think about how to reach and craft long-term care insurance solutions, distribution should improve. “Expansion in the number of people selling long-term care is important too,” he said.
Baby boomers, who are retiring in droves, will fuel the need for protection either through stand-alone long-term care insurance coverage or through long-term care life insurance riders to help pay for the cost of nursing home care.
The annual cost of care in a nursing home can reach $80,000 or more.
Even as the premiums spent in the private long-term care market dwarf public spending on long-term care through government programs like Medicaid, policy analysts say the more people rely on private insurance, the lower the pressure on taxpayer-funded long-term care programs.
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