Genworth Financial Posts First Profitable Quarter Since Second Quarter of 2014
May 5, 2015 by Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com
RICHMOND, Va. – Long-term care and mortgage insurer Genworth Financial Inc. posted a profit in the opening quarter of 2015.
First-quarter net income available to Genworth’s stockholders declined 16% to $154 million
Steven D. Schwartz, an equity analyst with Raymond James & Associates, told Best’s News Service the quarter represents the first profitable one for Genworth since the second quarter of 2014.
In February, Genworth said it was undertaking a multistep restructuring plan targeting cash savings of more than $100 million pretax over the next two years after it posted a fourth-quarter 2014 net loss of $760 million on older blocks of acquired long-term care insurance policies (Best’s News Service, Feb. 11, 2015). The final quarter of last year included a GAAP charge of $478 million after-tax on completing its annual review of long-term care insurance active life margins on blocks acquired before 1996. Active life reserves is money set aside for policyholders who are not on claim.
That followed a third-quarter net loss of $844 million. A review of claim reserves for Genworth’s long-term care business resulted in an increase of $531 million to claim reserves and a charge to earnings of $345 million after tax. For full-year 2014, the company posted a net loss of $1.24 billion.
The Richmond, Virginia-based Genworth said it continues to make progress on its review of strategic options. These include strengthening its mortgage insurance businesses and long-term care insurance capital, earnings and sales; simplifying its businesses and boosting its financial strength. In addition, the company continues to pursue the planned sale of its non-core lifestyle protection insurance business.
Schwartz wrote in a research note that Genworth’s U.S. life insurance segment reported operating earnings of $81 million, compared with his $51 million forecast. The outperformance was driven by fixed annuity earnings reporting 35% above expectations at $31 million. He wrote life insurance earnings were 16% above estimates at $40 million. “All segments benefited from favorable mortality (the right people died, or didn’t die, depending on the segment),” he wrote.
In its global mortgage insurance business, net operating income for its mortgage operations in the United States increased to $52 million from $33 million in last year’s first quarter, Genworth said. The loss ratio dropped 28 points sequentially to 33%, reflecting seasonally lower new delinquencies and aging of existing delinquencies. New flow delinquencies dropped about 22% from the prior year, reflecting “the continued burn through of delinquencies from the 2005 to 2008 book years,” Genworth said.
Regarding the first quarter, “we are encouraged with the results in spite of continued challenges and remain focused on initiatives aimed at strengthening and building our businesses,” Tom McInerney, president and chief executive officer of Genworth Financial, said in a statement. “During the first quarter, we made significant progress on our strategic review and are developing next steps to position the company for future success.”
As it disclosed earlier in April, Genworth estimates $500 million to $700 million of more capital will be required to be fully compliant with the final Private Mortgage Insurer Eligibility Requirements by the effective date of Dec. 31 of this year. The company will comply by the effective date and intends to use reinsurance and holding company cash to meet the additional capital requirement, it said.
Executing on its initiatives will improve operating returns, support compliance with the mortgage eligibility requirements, reduce debt levels, increase LTC capital buffers and maintain solid cash levels at the holding company, Genworth said.
“Overall, results were pretty good with every segment coming in above expectation with the exception of U.S. mortgage,” Schwartz wrote. The company announced last week that the shortfall in capital at its U.S. mortgage insurance operations under the new final PMIERs issued by the Federal Housing Finance Administration was in the same $500 million to $700 million range as it had last estimated following its third-quarter 2014 earnings release, he wrote.
In Genworth’s U.S. life insurance operations, its long-term care insurance business posted net operating income of $10 million, compared with a net operating loss of $506 million in the prior quarter and net operating income of $46 million a year ago.
“We look forward to updating you on specific actions as appropriate,” McInerney said.
The individual long-term care market has experienced challenges over the past decade, according to an A.M. Best Co. special report. The market also continues to battle the challenges of lower-than-expected lapse rates, an extended low interest rate environment and longer claim periods, which prompted many insurance writers to either exit the market or pare back their product offerings over the years (Best’s News Service, Sept. 16, 2013).
Genworth Life Insurance Co. currently has a Best Financial Strength Rating of A- (Excellent).
On the afternoon of April 29, Genworth Financial’s (NYSE: GNW) stock was trading at $8.92 a share, up 11.64% from the previous close.
