The Fortune 500 insurance holding company, Genworth Financial, Inc. (GNW, Financial), reported its third quarter earnings on Wednesday, October 5, sending negative vibes to the stock market as the numbers were pretty disappointing. Not only did the numbers fail to match the analysts’ expectations, they also failed to lift the sentiments of the investors as the company cast a dull outlook when it predicted its future moves during the earnings call. Let’s check out why the company performed so badly during the quarter. Also let’s take a close look at the management outlook.
The disappointing number mix
The company completed long term care insurance comprehensive claim reserve review, which resulted in the reserve increase of $531 million and an after-tax earnings charge of $345 million during the quarter. The insurer posted a net loss of $844 million, or $1.70 a share on inclusion of the pre-tax charges related to the LTC claim reserves. Even without accounting for the one-time charges, the loss came in as $0.64 per share which was much worse than the $0.16 loss per share expected by analysts.
CEO Tom McInerney said that he was very disappointed by results from the life insurance division which houses the long-term care unit. In fact, he emphasized that the poor performance in the quarter was chiefly due to the older generation products that have been performing poorly on a prolonged basis. The CEO further added that despite such a setback in the quarter numbers, the management would remain committed to transforming the business.
Long-term coverage has proved to be the problem for Gennworth, which has repeatedly shown the inability to properly anticipate the cost of promises it made on policies it sold years ago, when the product was initially launched.
But on the contrary, the other business lines have performed much better during the quarter. The mortgage insurance division and the other divisions, combined to produce a $5 million profit. Thus, one thing is clear that the long-term policies sold in the past are creating bruises within the company right at this juncture. More disappointing news was the CEO sharing that the turnaround in the long-term care business is going to be more difficult and would take longer than thought, mainly due to the continued poor performance of Genworth’s older generation products.
Stock market reacts negatively
The results made investors sulk, as well as dragged the share price down by about 14% to around $12.10 after they were released. In fact, even before the news the stock has been down about 9% for the year. The dull outlook projected by the company would possibly not send the stock skyrocketing for the next few months, and it could become important for investors to keep an eye on the stock movement if they are still holding on to their positions in the company after taking a glance at the third quarter report card.
Standard & Poor’s cut the company by one notch to BB+ from BBB- soon after the results citing the “need to rebuild capital strength, the risk of further reserve strengthening and execution risk in the turnaround of its U.S. life insurance division.” Also, Moody’s Investors Service placed the company’s main unit on review for a downgrade. Such news also hit the share price which has now taken a downward trajectory and has left investors shaken.
The management outlook is not promising enough
The company’s burden of the older policies has been eating into its profits and the management is expecting the turnaround to happen at a much slower rate than anticipated. In fact, the company is in the process of getting the states' approval to raise rates on their legacy policies. Recent data has indicated that 43 states have presently approved such a raise, though many of those were much less than what the company had been seeking.
Also as placed from analysts’ desks, there are possibilities of the company facing extra charges in its long-term care division in the fourth quarter as well; that is a huge risk for Genworth at this moment. There is a huge transformational improvement required in operating fundamentals, including reduced earnings volatility during the next few years.
Concluding thoughts
Genworth Financial’s life insurance business has created a dot in its financial playbook and the management is taking various steps to mend the dot and to sustain its business in the long run. Presently taking the losses into account, the company will be trading for about 35% less than what it was trading at about six months ago. Thus, if investors are looking to stay invested for a short term, the stock is not the right option right now. But for long-term investors, the stock might still look good as an investment option as it might fetch returns in the long run. So, let’s stay tuned!
