Will 2016 be the year that Genworth Financial (GNW) is no longer able to sell bogus reassurances that everything will be OK in long-term care?
Throughout the shares' 77% decline since President Obama inked the Affordable Care Act in 2010, Genworth has tried to put a happy face on its ability to stave off the rising costs of medicine, widening life expectancies, and the swelling number of Baby Boomers filing into assisted-living centers -- all of which have put a squeeze on its long-term care business.
CEO Thomas McInerney, who took the helm of the Richmond, Va.-based insurer at the start of 2013, has repeatedly deflected the woes in long-term care, emphasizing new product rollouts and his ability to net regulatory approval in order to hike rates on existing blocks of long-term care policies.
"As we continue the transition this year to new product offerings, we would expect to see sales rebound and the sales will then shift over time towards life from long-term care insurance," he said on a May 2013 earnings call, after which shares have tumbled 63%, while dragging the company's credit rating down several notches by both Moody's and Standard & Poor's.
"These new products and the decisions we're making on distribution are examples of bringing a better discipline to the products we want to sell and the returns we want to achieve," he added.
And now as investors ponder their New Year's resolutions, it's time they should think about including renewed skepticism over McInerney's familiar calls for confidence, especially because much of Genworth's decline has come off the heels of earnings that appear to have surprised a consistently gullible pool of analysts and investors.
Genworth's decline under McInerney so far comprises three steep single-day plummets: a 14% decline off a July 2014 earnings release, when long-term care badly missed earnings estimates and representing a mere $6 million operating income; a 38% drop off an alarming earnings release in November 2014; and a 20% fall last August after revealing another earnings miss and nixed plans to sell off its life and annuities businesses.
But McInerney has always been quick to reassure investors.
After the first miss he emphasized his confidence that Genworth was adapting to a new regulatory framework that will help introduce a more profitable long-term care model, largely by getting the backing of state regulators to raise rates on existing policies.
After the November 2014 miss, he offered: "While challenges exist for Genworth, we are confident that we have the right strategy in place, and the right team to execute that strategy."
And most recently, after suffering the share tumble this August and a series of ratings cuts, he again highlighted that Genworth is "leading the way" with regulators and policy holders in finding new sources of income from blocks of existing long-term care policies.
"We have significantly stepped up regulatory discussions, including with some of the most influential state regulators in the National Association of Insurance Commissioners," he said. "I believe Genworth is leading the way on pursuing important regulatory reform... Our long-term care premium rate action track record is very strong,"
Now's the year for investors to wake up. McInerney's long-term care strategy is essentially unchanged. He remains committed to hiking rates, rolling out new products, while reshuffling managers. (Former GE executive Kelly Groh recently stepped in as CFO, and McInerney is turning over his role as head of the U.S. life insurance business to former Aetna (AET) executive David O'Leary.)
"With these management changes, I will now focus my attention on driving Genworth's overall strategy, including the implementation of our strategic priorities and obtaining significant LTC premium rate actions, including changes to the existing regulatory model," he said at Genworth's most recent earnings call in October. "Our strategic priorities remain to strengthen our core businesses, simplify our portfolio of businesses and increase our financial flexibility."
Just last year, Genworth booked a $1.4 billion net loss to common shareholders based on its long-term policies, along with a $815 million operating loss. And shares of Genworth are down roughly 56% over the past 12 months, versus a 2% decline in the broader S&P 500. (Genworth was recently elbowed out of the S&P 500 index by former GE (GE) credit arm Synchrony Financial (SYF).)
Genworth's long-term care (LTC) reserves have also been squeezed by the rising costs, triggering a series of rating downgrades by both Moody's and S&P -- most recently in February following Genworth's disclosure of about $494 million in unexpected charges tied to long-term care.
"While the company has taken a number of prudent steps to protect its capital position and maintains meaningful LTC accounting reserve margins, we believe it remains highly concentrated in the LTC business and exposed to further deterioration in its legacy block," Moody's Senior Vice President Scott Robinson said in the February report.
"The company is largely reliant on the continued approvals of rate increases by state regulators to mitigate the financial impact of further adverse experience," he wrote.
Moody's downgraded Genworth's senior debt three notches to Ba1 from Baa3, putting Genworth just one step from crossing the threshold into "junk-rated" status. Moody's also downgraded the financial strength of Genworth's life insurance subsidiaries three notches, to Baa1 from A3.
"The bulk of the charges were the result of the company's review of the assumptions and methodology refinement related to its LTC active life reserves," according to the report.
Standard & Poor's, which deems Genworth's credit sub-investment grade, similarly downgraded GE's debt two notches, to BB- from BB+, and the outlook of its subsidiaries to BBB- from BBB+.
While Genworth is the largest provider of long-term care policies in the U.S., its rivals with large exposure in the beleaguered industry have receded moderately, with Manulife (MFC) and Metlife (MET) falling 23% and 13% over the past 12 months, respectively.