Genworth CFO: LTC Premium Hikes, Continued Improvement in US Mortgage Insurance Helped 3Q Net
November 1, 2013 by Fran Lysiak
RICHMOND, Va. – Genworth Financial Inc.’s significant jump in third-quarter net income is mostly due to premium rate increases on its long-term care insurance business and continued improvement in its mortgage insurance operations in the United States, despite a slight loss in this business for the quarter, says the company’s chief financial officer.
Net income available to Genworth’s common stockholders jumped to $108 million from $35 million in last year’s third quarter.
The rate actions that Genworth has started to implement in long-term care insurance “are really starting to make themselves felt in our earnings,” Martin Klein, Genworth Financial’s CFO, told Best’s News Service, noting this was much more significant in the third quarter than the prior. The company expects that to continue into next year and will be “one of the big drivers” in the improvement in earnings.
In its U.S. life insurance division, net operating income for its long-term care insurance business fell to $41 million from $45 million. Results benefited from $14 million in premium increases and reduced benefits from the prior quarter and $26 million versus the prior year on the premium increases approved and implemented to date.
After 21 consecutive quarters of losses, Genworth’s U.S. mortgage insurance business recorded an operating profit of $21 million in the first quarter, and net operating income of $13 million in the second. In the third quarter, however, the U.S. mortgage insurance business reported a $3 million net operating loss but that was compared with a net operating loss of $37 million last year.
There’s “seasonality” in the second half of the year so the third and fourth quarter tend not to be as good as the first half, Klein said, noting there were more delinquencies. The trend year over year is “promising and we expect the business to be significantly more profitable” in 2014, he said.
The U.S. mortgage insurance business is showing a year-to-date profit of $31 million, the company said
Net operating income for Genworth’s life insurance business jumped to $54 million from $22 million. However, sales were were flat from the prior quarter and down $26 million from the prior year when Genworth stopped sales of its term-universal life insurance product and started to transition to new term and UL insurance products.
About two years ago, the newer, hybrid term-UL policies sold by insurers including Genworth Financial and Protective Life were at the heart of one of the latest debates surrounding Actuarial Guideline 38, or AXXX. Companies such as Genworth developed term-UL to get out from under the National Association of Insurance Commissioners’ Regulation XXX reserve regime and move into the AG 38 reserve regime. AG 38, to provide guidance on XXX, was used to determine the statutory reserves life insurers must hold to support UL policies with secondary guarantees (Best’s News Service, Dec. 12, 2012). The interpretation of AG 38, however, allowed for less redundant reserves, an equity analyst with Raymond James, said in 2011. Term-UL could be priced lower than a traditional term policy (Best’s News Service, Dec. 12, 2011).
Klein said Genworth discontinued term-UL in last year’s fourth quarter. With a change in regulation, the product, along with some others, were “no longer very efficient from a capital or reserve standpoint,” he said. As a result, Genworth and other companies that sold similar products have exited that business and selling more traditional term business. Genworth instead has introduced a new term product that it repriced in September and expects to see term sales pick up.
Life insurers in New York state will have to increase reserves by as much as $4 billion statewide when the state allowed the Sept. 13 expiration of the NAIC’s guidelines, according to the Department of Financial Services. The state found that reserves are dropping instead of providing the increase supporters argued would happen. New York Insurance Superintendent Benjamin Lawsky let fellow commissioners know on Sept. 11 of his decision to let a modified, principles-based reserving version of AG 38 expire.
The business that led New York to change its approach to reserving is one that Genworth stopped selling in New York last year, Klein said, pointing to UL with secondary death benefit guarantees. Genworth still has some of that business in its New York subsidiary, he said, noting that represents about 1% of its overall life insurance in-force.
Overall, Genworth wants to sell products that rely much less heavily on UL with secondary guarantees, Klein said. The capital and earnings treatment of these products “isn’t attractive nor is the risk profile.” he said. Genworth is looking to transition to products, such as indexed UL and some of the more permanent, hybrid products, which offer long-term care coverage. “That’s going to be a big focus of the business.”
The company is “having discussions with New York regulators” on pulling business from that state, as well as all the other companies doing business in New York, Klein said.
Recently, the company announced that Patrick B. Kelleher, chief executive officer of Genworth Financial’s U.S. life insurance division and an executive vice president, is leaving the company effective Dec. 31. Until a search is conducted and a replacement named, Tom McInerney, president and CEO of Genworth, will work with Kelleher to transition responsibilities and serve as CEO of the U.S. life insurance operations in the interim. This announcement represented the second announcement of a departure of a Genworth executive in the month of October.
He was with the company for about six years, was initially CFO for about four, and then became head of the life business, Klein said. Kelleher had “a big influence on helping the company build financial strength,” Klein said, noting Kelleher did several things to help get Genworth through the financial crisis. More recently, as head of the life business, he helped this business improve its statutory earnings.
But now, Genworth wants to focus on areas that are product and distribution related, which isn’t Kelleher’s background, Klein said.
Genworth remains committed to long-term care insurance and mortgage insurance in the United States — its “core businesses,” Klein said.
On the afternoon of Oct. 30, Genworth Financial’s (NYSE: GNW) stock was trading at $14.34 a share, down 1.58% from the previous close.
Genworth Life Insurance Co., Genworth Life Insurance Company of New York and Genworth Life & Annuity Insurance Co. each currently has a Best’s Financial Strength Rating of A (Excellent).
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)
