Wednesday, February 10, 2016

Genworth Struggling

Several days ago, Genworth Financial (one of the major LTCi carriers) suspended "new sales of life insurance products and fixed annuities to help reverse financial losses."

On the one hand, this should save the troubled carrier upwards of "$50 million in annual expenses." On the other, and this is the puzzler to me, it means they've also cut off a major source of revenue. I especially don't understand why they're stopping annuity sales; seems to me that these would be one of their more profitable lines.

Apparently not, though.

It's not surprising that they took major hits on their Long Term Care insurance business, that's pretty much industry SOP. As we noted the other day, these policies are quite different in terms of underwriting and claims than life insurance. Still, seems like there's something else going on here.

And, of course, there is.

We were able to obtain a copy of the February 5th report that Genworth sent to its field force. It's marked "FOR PRODUCER USE ONLY: NOT TO BE SHOWN TO THE PUBLIC," so we'll respect that but note some interesting tidbits:

"GAAP (Generally Accepted Accounting Principles) loss recognition testing margins for the business written since late 1995 were approximately $2.5 to $3.0 billion as higher expected future claim costs and expenses were more than offset by the impact of future in-force rate actions."

That makes sense: as noted above, there are decent profit margins built into life insurance and annuity plans.

The report also expands on the cost-cutting moves mentioned previously:

"Actions taken in 2015 are expected to reduce cash expenses by approximately $90 to $100 million pre-tax on an annualized basis, bringing total expected cash expense reductions to $150 million or more."

That's a substantial chunk of change; whether or not it's sufficient remains to be seen.

In a bit of damage control, the report confirms that "Genworth’s life insurance companies have more than sufficient capital to pay all eligible claims as they arise." This in order to squelch the (reasonable) objection "will y'all actually be around to pay my claim?"

And, of course, the company will continue (at least for now) to service existing policyowners. Of course, that's not necessarily a permanent commitment (just ask folks with Time or John Hancock life insurance policies).

One question that the report does not effectively address is the future of its LTCi business. It notes that the carrier is planning to "separate and isolate" that line from the life/annuity side, while noting in passing the very real challenge of its "LTC legacy block issues that continue to pressure ratings across the organization." In other words: they're getting hammered on older in-force plans.

We've discussed this before: "[T]oo many folks have kept their policies (not a bad thing, per se, just that carriers count on a certain amount of attrition), so both claims and reserves continue to mount." And of course, the longer the plans stay in force, the more likely they are to generate a claim (or claims).

[Hat Tip: FoIB Jeff M and Brian D]
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