Genworth Tumbles After Record Loss; CEO ApologizesZachary Tracer
Genworth Financial Inc. plunged the most since the financial crisis as the insurer’s chief executive officer predicted a tougher path ahead after posting a record loss.
The stock lost 35 percent to $9.16 at 9:44 a.m. in New York, erasing more than $2 billion of shareholder value. Genworth yesterday posted a quarterly loss of $844 million, driven by costs tied to its long-term care insurance operation. CEO Tom McInerney today apologized for his prior remarks about the business.
“The turnaround in this business will be more difficult and prolonged,” McInerney said yesterday in a statement announcing the results. “Despite this setback, we remain steadfast in our commitment to transform this business.”
The loss was the biggest since the firm was spun off from General Electric Co. in 2004. It was fueled by $531 million in pretax costs to increase long-term care reserves, above the high end of an estimate from JPMorgan Chase & Co. Genworth also reduced goodwill at the long-term care unit by $167 million, citing higher claims and a reduced market size.
“To state the obvious, Genworth’s third quarter 2014 earnings release does not paint an optimistic picture about the state of its long-term care business,” Suneet Kamath, an analyst at UBS AG, said in a research note today.
Genworth is the largest seller of long-term care coverage, and McInerney, 58, has been working to improve results at the operation since becoming CEO at the start of last year. He’s increased prices and tightened underwriting for the policies, which help pay for health aides and stays in nursing homes.
The firm said today that it weighed whether to wind down long-term care and decided to stick the business because of the prospects that regulators would approve rate increases on coverage it sold in the past. Genworth said it’s stopped selling new policies in Massachusetts, New Hampshire and Vermont, because those states haven’t approved higher rates.
Larger rivals MetLife Inc. and Prudential Financial Inc. have stopped selling long-term care insurance after results were hurt by near-record-low bond yields and higher-than-expected claims costs.
Genworth said in July it was reviewing whether it had set aside enough funds to cover costs for policies sold in prior years, amid higher-than-expected claims in the second quarter. Yesterday, Genworth said it’s conducting additional reviews of the long-term care business.
“Genworth’s credibility has already clearly been damaged,” Ryan Krueger, an analyst at Keefe, Bruyette & Woods wrote in a research note. The results of the fresh review may “further call into question the real economic value of the LTC block.”
McInerney told investors in December that Genworth had adequate reserves for long-term care coverage. In July, after announcing the review, he said investors had gotten the wrong impression from the earlier remarks and that he was speaking in broad terms last year, without ruling out quarterly volatility.
Today, McInerney said he regretted his July comments.
“I owe you an apology,” McInerney said on a conference call discussing third-quarter results. “In trying to explain the second-quarter LTC claim results relative to comments from the December investor call, I made a misstep when my comments shifted responsibility away from the company and me.”
Genworth also offers life insurance and annuities. Operating earnings from life coverage fell to $13 million from $54 million a year earlier, while annuities generated $26 million, up from $16 million.
The company recorded a goodwill impairment of $350 million in the life-insurance business amid a change in strategy. Genworth is scaling back from term life insurance while working to sell more permanent products.
“Genworth’s third quarter results were poor and affirm our cautious long-term view of the company,” Jimmy Bhullar, an analyst at JPMorgan, said today in a research note. “We are wary of the company’s sustained low returns, limited free cash flow, and possible LTC reserve charge.”
McInerney said the global mortgage-insurance business was a bright spot for Genworth. The unit, which operates mainly in the U.S., Canada and Australia, posted an operating profit of $85 million, compared with $87 million a year earlier.
Genworth sold a 34 percent stake in its Australian mortgage insurer in a May initial public offering, raising about $545 million. The company divested a minority stake in its Canadian home-loan guarantor in a 2009 IPO.
The insurer said today that it will retain funds from the Australia IPO, after previously saying the cash could be used to pay down debt. Genworth will also stop sending dividends from the life insurance unit to the parent. The firm said it won’t achieve its leverage goals.