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Are Genworth LTC policies at risk of default?
Old 02-02-2011, 06:44 PM   #1
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Are Genworth LTC policies at risk of default?

Genworth Financial (GNW) is not doing well. The LTC business is their performing asset; they are losing a lot on mortgage insurance. Apparently there is a shareholder bloc that wants the company to be split up.

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Analyst Note 02/02/11

Genworth Financial GNW added $350 million in reserves to cover claims liability in its U.S. mortgage insurance operations, turning an otherwise profitable quarter into a loss of $0.33 per diluted share. An increase in late-stage mortgage delinquencies from foreclosures, largely in the sand states, along with a slowdown in cures was responsible for the negative reserve development. Net operating income from the retirement and protection segment, which includes wealth management, life insurance, retirement income, and long-term care, increased 7% in the quarter on a year-over-year basis while international operations were up 16% on a comparative basis.

In its quarterly conference call, which the firm combined with the previously canceled investor day update, management responded to criticism from some investors over certain strategic issues. Regarding the call to split up the company, management said doing so would negate a large portion of the benefit it will derive in the future from its deferred tax asset, which it currently carries as a $1.9 billion asset. Furthermore, any sale of the troubled U.S. mortgage insurance unit would not have as much value to a buyer as it does to Genworth today for this reason. Management also responded to investor demands for immediately returning capital to shareholders through share repurchases or increased dividends by pointing out the negative effect this would have on capital preservation and possible reduced credit ratings. Instead, the firm argues that shareholders will be better served in the long run by riding out the storm with its more than adequate capital resources as it works through the challenges over the next year or so. Genworth announced that it intends to strategically focus on the retirement and protection and global mortgage insurance operations.

While the case advocated by management may be Genworth's best alternative in the current environment, we think the firm will be challenged to meet its cost of capital at any time in the near future. Claims from the U.S. mortgage insurance operations will probably continue to increase for at least a year, maybe longer, and counting on earning excess returns from life insurance and related products is an extremely uncertain proposition, in our opinion. We'll stick with our fair value estimate, which is roughly half of year-end book value per share.
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Old 02-02-2011, 06:58 PM   #2
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I will state at the outset that I am a shareholder, so take what you will from that. However, I am also a longtime obsever of the insurance industry.

In short, the mortgage insurance woes will not sink the life insurance companies in the Genworth family or the company overall. The mortgage insurance (MI) units of the company are separate and distinct legal entities from the rest of the company and they neither own or are owned by the other insurance operating companies. What this means is that if the MI units implode, the rest of the operating units go pretty much unscathed. As such, policyholder obligations of the life insurance companies (such as LTC) should be OK, or at least will not be affected by the implosion of the MI units.

Is this the highest quality obligor that I would want to be the farm on for insutrance coverage? No, but if I already had a policy with them I probably would not get rid of it.
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Old 02-02-2011, 07:19 PM   #3
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>The mortgage insurance (MI) units of the company are separate and distinct legal entities from the rest of the company

That's good to know.
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Old 02-02-2011, 07:53 PM   #4
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Originally Posted by Bongleur View Post
>The mortgage insurance (MI) units of the company are separate and distinct legal entities from the rest of the company

That's good to know.

FWIW, this is all public information. If you go to Genworth's investor relations website and download one of their statutory financial statements (for an insurance company) the organizational chart that shows who owns who in the corporate family is included on (IIRC) Schedule Y, which is somewhere at the back of the "blue book."

Ah, the useless knowledge I have accumulated over the years which ought to be worth something considering the brain cells it occupies...
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Old 02-02-2011, 08:19 PM   #5
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Ah, the useless knowledge I have accumulated over the years which ought to be worth something considering the brain cells it occupies...
Those brain cells are the first to succumb to alcohol poisoning. I hope.
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Old 02-02-2011, 08:29 PM   #6
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Those brain cells are the first to succumb to alcohol poisoning. I hope.

If that were true, I would have forgotten a lot of this nonsense years ago.
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