Genworth Financial Inc. is the largest U.S. seller of long-term care insurance, a position that Chief Executive Officer Tom McInerney is counting on to turn the company around after a record loss.
Yet that business is worthless, according to analysts at Macquarie Group Ltd. and Keefe, Bruyette and Woods.
“We do not think long-term care is a good business,” Sean Dargan, an analyst at Macquarie, wrote in a research note Monday. “Our preference would be for Genworth to put LTC into runoff in a closed block.”
Genworth posted a third-quarter loss of $844 million on Nov. 5, fueled by costs to set aside more funds for long-term care policies. To revive the business, McInerney has been raising premiums on policies sold in the past, while increasing costs and cutting benefits for new coverage.
While that may improve results, it’s also weighing on sales of the policies, which help pay for nursing home stays and home health aides. Ryan Krueger, the KBW analyst, estimated the value of the long-term care operation at negative $750 million. The figure no longer assigns any value to fresh sales, he wrote in a research note dated Nov. 9.
“Our thesis that long-term LTC risks wouldn’t play out that badly near-term was wrong, and now we don’t feel comfortable recommending Genworth” as the company conducts another review of reserves, Krueger wrote. He cut his price target to $10.50 from $16 and lowered his rating on the stock to market perform.
Share Slump
Genworth shares on Monday fell 3.4 percent to end at $8.12 in New York. The stock tumbled 40 percent last week after the loss was announced.
After the third-quarter loss, Genworth is conducting another review of its long-term care business and plans to announce preliminary results next month.
Fitch Ratings said last week that it expects Genworth to record pretax charges of $500 million to $1 billion in the fourth quarter, and Standard & Poor’s cut Genworth’s credit grade to junk, citing diminished capital strength and the prospect of the need to set aside more funds.
The actions by ratings firms could limit sales of some products and increase the cost of taking on additional debt, Genworth said Monday in a regulatory filing.
‘Consider Everything’
Genworth has several ways to bolster the affected units before issuing equity or debt, the analysts said. The company has proceeds from the partial sale of an Australian unit this year, and could sell more of that unit or a Canadian business. Genworth also could divest its international protection operation or use reinsurance.
Turning to markets to raise capital is “certainly not something we anticipate doing at this time,” Chief Financial Officer Martin Klein said on a Nov. 6 conference call with analysts. “It’s certainly something we don’t want to do. But we’ll watch and if circumstances change, we’ll certainly have to consider everything involved.”
Even with a long-term care business that has no value, Genworth’s other businesses are worth more than the current share price, Dargan said. He cut his price target to $12 from $16 and has an outperform rating.
“With management credibility compromised and another unknown coming next month with the results of Genworth’s long- term care active life reserve review, the market has punished Genworth shares,” Dargan wrote. “For value-oriented new money, we think this offers an attractive entry point.”