How Genworth is bouncing back from debt and a changing insurance industry

Everything looked rosy a quarter century ago, when General Electric CEO Jack Welch's shopping frenzies landed him two Virginia insurance stalwarts, and GE — then No. 5 on the Fortune 500 – made the Richmond area the headquarters of its multibillion insurance business.

"It was one of those one-plus-one-equals-three scenarios," said Michael D. Frazier, GE Capital's senior vice president for insurance and investment products and eventually the first CEO of an independent Genworth, speaking of the two Virginia acquisitions as he announced GE's insurance operations would be headquartered in Richmond.

"We have a significant presence here, and these two companies are enormous growth platforms,'' he said.

It didn't turn out that way. With its mortgage insurance business hammered by the Great Recession and its long-term care policies falling into the red when decades-old guesses about costs and usage turned out to be wildly wrong, Genworth Financial turned to a white knight, China Oceanwide Holdings Group Ltd., for help.

The Beijing-based company offered to buy Genworth for $2.7 billion in 2016 — the aim was to help Genworth pay down a heavy debt load that stood at $4.18 billion.

That help never came.

But during the 17 deadline extensions over five years that ended in April 2021, Genworth looked to its own resources to fix things.

Fixing its debt

The Henrico County-based insurer wanted to get its debt down below $1 billion; it finally did last year, buying back $143 million of IOUs due in 2024 and 2034, and redeeming $152 million of its 2024 debt. Those actions brought its total outstanding indebtedness down to $887 million.

"We believe this is a sustainable level of debt for the company to carry going forward with manageable interest expense obligations of approximately $60 million per year," Genworth CEO Tom McInerney has said.

The quarterly dividend Genworth's majority-owned mortgage insurer Enact pays on the shares Genworth retained currently yields $76 million a year.

"Addressing our near-term debt maturities has informed many of our strategic decisions over the past several years, including pursuing the Oceanwide transaction, the sale of our majority stakes in our international mortgage insurance businesses, and the IPO of our U.S. mortgage insurance subsidiary, Enact," McInerney said.

"I'm proud that we're entering this next chapter for Genworth with very manageable debt — one of the lowest debt-to-capital ratios in the life insurance industry today," he added.

Hitting Genworth's debt-cutting target clears the way to ease restrictions that federal mortgage funders the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corp., called Freddie Mac, placed on the company.

"This is an important positive development for Enact and for Genworth as Enact will no longer be subject to more stringent capital requirements than its peers once these restrictions are removed, putting Enact on a more level playing field with competitors," McInerney told securities analysts last month.

Last month, S&P Global Ratings raised its credit ratings on Genworth Financial Inc. from B to B+, citing the company's improved financial flexibility and liquidity with the reduction in debt.

S&P said it thinks Genworth's financial profile could further improve, supported by regular dividend flows from its main U.S. mortgage insurance operations.

Premium increases on long-term care insurance

Genworth's efforts to get its long-term care insurance business on a long-term breakeven basis also made progress last year as insurance regulators in 35 states, including Virginia, approved premium increases on its various policies averaging 48% over the $1.14 billion a year it had been receiving — an increase of $549 million.

It also asked last year for increases on other policies on which it now receives $1.23 billion a year. These are still pending.

"That was a very strong year, a record year for us. You know, we've been averaging more, over time, in the $300 million to $350 million range. Last year was a record, a little over $400 million," McInerney told analysts.

"I would say, 10 years ago, there were some regulators who thought, 'Well, why bother,' because Genworth has so many challenges. But — and credit to all of them — ... I want to thank them because I think they really have stepped up," he said.

"It's hard to grant these large increases. This is, you know, probably more premium increases done in LTC than any other industry," McInerney said. But, he added, "it's the key way we manage the legacy book."

The company is also offering policyholders options to rein in the premium increases by agreeing to reduced benefits.

This means trying to figure out benefits now that represent something like the value of what people were hoping to get when they bought the policies decades ago — back when, for instance, inflation hit double digits or when people thought they'd need policies covering $1 million of care that these days usually average about $108,000 per year for a private room in a nursing home.

Roughly half of those older than 65 need nursing home care, 25% of them stay for three months or less and the average stay is a bit more than a year. Other types of care covered by long-term care insurance are less costly — million-dollar coverage might, in fact, be too much for most people.

But what Genworth proposes as a fair equivalent has to be reviewed by state insurance regulators. The numbers as well as what Genworth, or any insurer, plans to tell policyholders about benefit-reduction options are key elements in files that typically run to 300 pages or more.

Genworth's latest round of premium increases, along with benefit reductions policyholders agreed to, gets it to about 75% of the long-term funding it needs for the business to break even as long as any claims might come in, said T. Dan Sheehan, chief financial officer and chief investment officer.

"Our multiyear rate-action process is a critical part of Genworth's path forward. It is our best tool in reaching economic breakeven on our legacy long-term care insurance business that also provides policyholders a range of options to manage rate increases to retain meaningful benefits," McInerney said.

The company's filings with the State Corporation Commission Bureau of Insurance show that for some policies it needs funding to cover claims well into the 2070s.

How long-term care insurance has changed

The basic idea of long-term care, like life insurance, is that investing revenue from early premium payments when claims are relatively small will build up reserves as policyholders age and demands for benefits roll in.

But when the business got started, four decades ago, yields on bonds, a central element of any life or long-term care insurer's holdings, were far higher – the benchmark 10-year U.S. Treasury bond was yielding a return of 10% to 15% a year; over the past decade, those yields have ranged from 3.5% to less than 1%.

The first models for setting premium rates and predicting claims for long-term care insurance, meanwhile, were based off of what insurance experts at the time thought were essentially the same kind of coverage: disability insurance.

Those are policies meant to make up for lost income when an illness or accident keeps a person from working.

Insurers figured roughly the same relatively small portion of policyholders with such disability coverage would ever make a claim under long-term care policies and that designing a policy to reimburse people for lost income was a good proxy for reimbursing them for the cost of care — at the time, medical cost increases pretty much matched the overall inflation rate.

But faster-than-expected long-term care costs, longer-than-expected stays in nursing homes as well as longer and more frequent usage of other covered long-term care services than the designers of the coverage had expected put insurers in a major financial squeeze as policies — and policyholders — aged.

When Genworth predecessor Life of Virginia got into the long-term care insurance business, back in 1974, medical costs rose pretty much at the same pace as the consumer price index, the broad measure of inflation, and stayed that way into the 1980s.

But by 1990, medical cost increases were outpacing the CPI. By 1997, just after GE bought Life of Virginia, the Bureau of Labor Statistics' medical cost index had climbed about 40% since the start of the decade, compared with a 20% increase for the CPI. Last year, the medical index was up by 230% from its 1990 level, compared with a 125% increase for the CPI.

For those few insurers who remain in the business, the critical issue now is building up large enough reserves and capital to be able to pay future claims, considering original premium levels were too low, income from investments has declined with interest rates and medical care costs have outpaced inflation.

Two firms, Penn Treaty and American Network Insurance, couldn't manage, even with stiff premium increases. They went bust in 2017. That means that the guaranty funds that all insurers pay into had to step in to handle claims. That has a real consequence for policyholders. The guaranty funds cap benefits at $300,000.

The current model for financing long-term care, in short, is not a business that looks like it has a bright future: Getting to economic breakeven, as Genworth hopes to, is not a way to grow.

But Genworth wants to stay in the business of long-term care.

The plan is to build on its CareScout business, which does assessments of clinical services and which Genworth acquired in 2008.

CareScout

"CareScout represents Genworth's next chapter. With this new business, we're applying all we've learned about long-term care preferences, challenges and outcomes over the last 40-plus years," McInerney said.

Genworth plans to pilot a digital platform that individuals can use to search for and compare nearby options for long-term care, based on a preferred network of providers. It'll start sometime this spring or early summer, beginning in the Southwest with the company's current policyholders.

It should allow people to customize the care they want, instead of taking only that care that a policy covers.

"We are in the process of vetting and recruiting network partners in order to offer attractive pricing on high-quality care that will benefit both new and existing customers. The services business is designed to reduce claim costs on our legacy LTC book as well as drive new revenue for Genworth," McInerney said.

The company is also looking at new ways for people to finance care, including funding options other than insurance.

"We are still working on options to reduce the capital required to fund these products through innovative reinsurance arrangements. And as a result, implementation of these new LTC funding ... products will likely occur in 2024 or later," McInerney said.

Last year saw another milestone for Genworth, which hasn't paid a dividend since 2008, when its share price fell from a 2007 high of $35.41 to lows below $1. The highest price its shares reached since was $18.96, and they now trade at a bit more than $6.

But the board authorized a share repurchase program, which addresses one goal Genworth set when it and China Oceanwide parted ways: returning capital to its stockholders. So far, the company has repurchased $64 million of shares.

"When I joined Genworth 10 years ago, the board asked me to address two major challenges: our level of indebtedness and our struggling long-term care insurance business," McInerney said.

"We still have very important work ahead of us, though."