Genworth Financial (NYSE:GNW) issued its third-quarter earnings recently, and the results were extremely disappointing. In fact, investors were so unhappy with the company's results that shares lost nearly 40% of their value in the day after the earnings report, and another 15% the day after.
Basically, Genworth's long-term care insurance business is hemorrhaging money, and even worse, any turnaround is going to take much longer than previously thought.
So, what does Genworth's management have to say about the situation? Here are five key takeaways from the company's recent conference call that could help investors understand what's really going on at Genworth.
The mortgage insurance business is doing just fine
Genworth does the majority of its business in two segments: life insurance (which includes the LTC business) and mortgage insurance. While the life insurance side of the business has produced heavy losses lately, the mortgage insurance business is doing fine.
In fact, during the call, one analyst stated that the case could be made that the company's non-LTC businesses alone are worth more than the current stock price.
President & CEO Tom McInerney said that global mortgage results were in line with expectations, and the company anticipates being compliant with the new GSE capital requirements for mortgage insurers by June 30, 2015.
The life insurance products are changing
In order to improve returns, Genworth is transitioning away from lower-return capital-intensive products like term life insurance, and toward more permanent products such as universal life.
And in long-term care, Genworth is introducing higher-return, lower-risk products, such as the recently launched Priveleged Choice Select 3. The company expects sales to drop in the short term, but then believes the new products will begin to gain traction; however, the anticipated time frame is now going to be longer than previously expected.
Management is taking steps to improve the life insurance division
Although the turnaround in the LTC business will take longer than previously expected, the company does have a plan of action in mind to accomplish its goal.
For starters, to strengthen the division's capital, Genworth plans to forego dividend payments from the life division well into 2015. This should give the division a little more financial flexibility during the turnaround.
And, the company is pursuing LTC rate increases more aggressively (more on that later), expanding its use of reinsurance, and adjusting sales specs. Ultimately, this should allow Genworth to build up its capital levels even higher than they were before it took its charges this quarter, but again, this will likely take a while.
More of the company's debt obligations will be shifted to the stronger mortgage insurance division to take some of the financial burden away from the life insurance business. Also, the company will consider monetizing some of its non-core assets, should the need arise.
LTC rates are increasing
Genworth gave an update on its efforts to obtain approval for premium rate increases on its older LTC policies. As of the end of October, the company has reached an agreement with 47 states (up from 43 as of last quarter's report).
The company has also notified three states (Massachusetts, New Hampshire, and Vermont) that it will suspend business in those states since it could not reach an acceptable rate increase agreement. However, those states represent just 4% of Genworth's business.
In all, Genworth plans to be on track for its goal of $250 to $300 million in increases on these rate actions.
The company says it will continue to pursue rate increases on its LTC products until its older legacy policies (where the division's losses are concentrated) are closer to break-even.
Why is the company staying in the LTC business?
As I mentioned a little earlier, one of the analysts on the conference call mentioned that the company's non-LTC businesses are probably worth more than Genworth's current stock price. So, the logical question is, "why does the company stay in the LTC business?"
Well, first of all, since the older policies are the ones losing money, Genworth would be stuck with them even if they got out of the business. Management believes the company's newer LTC products will produce strong returns with manageable risk.
And finally, Genworth believes demand for LTC insurance products is high and will only get higher. McInerney said that less than 10% of Americans in the appropriate age categories have LTC insurance, and the company has said that 70% of them will need long-term care services at some point in their lives.
So, the market is there. It's just a question of whether Genworth can execute its strategy in a profitable manner from here on out.
A good value or a trap?
First of all, any stock that loses half of its value in a two-day time period should set off some red flags. On paper, Genworth looks like a good value right now, but the stock should be viewed as a purely speculative play at this point. If the company is successful in turning around its LTC business, shareholders certainly stand to make a lot of money. However, at this point, that is a very big "if."