Tuesday, February 16, 2016

No. 144: Genworth's Life Insurance Companies Experience a Significant Reduction in Their Financial Strength Ratings

On February 4, 2016, Genworth Financial, Inc. (NYSE:GNW) issued a lengthy press release entitled "Genworth Financial Announces Fourth Quarter 2015 Results." The subtitle was "Net Operating Loss Of $0.17 Per Share And Net Loss Per Share Of $0.59 Driven By Annual Assumption Updates In Life Insurance; Loss On Sale From Previously Announced Business Divestitures Also Impacted Net Loss." Genworth attached the press release as an exhibit to an 8-K (material event) report filed with the Securities and Exchange Commission.

A. M. Best Company, Fitch Ratings, Moody's Investors Service, and Standard & Poor's (S&P) are the major firms that assign financial strength ratings to insurance companies. Within a few days after Genworth's recent press release, all four firms significantly reduced the ratings of Genworth's life insurance companies: Genworth Life Insurance Company, Genworth Life and Annuity Insurance Company, and Genworth Life Insurance Company of New York.

Genworth's Strategic Update
Genworth's recent press release includes a section entitled "Strategic Update." Here are a few excerpts from that section:
  • In 2016, the company plans to initiate a series of internal restructuring actions aimed at separating and isolating its LTC [long-term care insurance] business, subject to regulatory and other potential third-party approvals. These actions are focused on addressing LTC legacy block issues that continue to pressure ratings across the organization.
  • Also, the company has elected to suspend all sales of traditional life insurance and fixed annuity products in the first quarter of 2016 given the continued impact of ratings and recent sales levels of these products....
  • In January 2016, the company completed the sale of certain blocks of term life insurance to Protective Life Insurance Company....
  • In December 2015, the company completed the sale of its lifestyle protection insurance business to AXA....
Secure Versus Vulnerable Ratings
"Secure" financial strength ratings are often called "investment-grade ratings." "Vulnerable" financial strength ratings are often called "below-investment-grade ratings" or, pejoratively, "junk ratings." The table here shows the secure and vulnerable ratings assigned by the four rating firms.

Rating Categories Best Fitch Moody's S&P
Secure Ratings A++ AAA Aaa AAA
A+ AA+ Aa1 AA+
A– AA– Aa3 AA–
B++ A+ A1 A+
B+ A A2 A
A– A3 A–
BBB+ Baa1 BBB+
BBB– Baa3 BBB–

Vulnerable Ratings B BB+ Ba1 BB+
B– BB Ba2 BB
C++ BB– Ba3 BB–
C+ B B1 B
D C Caa1 R
E Caa2
F Caa3

Ratings as of August 2, 2013
The final special ratings issue of The Insurance Forum was the September 2013 issue, which listed ratings as of August 2, 2013. At that time, the ratings assigned to Genworth's life insurance companies were not high enough to place the companies among those I suggested for consumers who were conservative regarding financial strength, but all the ratings were in the secure range. The table here shows the ratings at that time.

Ratings as of 8/2/13 Best Fitch Moody's S&P
Genworth Life A A– A3 A–
Genworth Life & Annuity A A– A3 A–
Genworth Life of NY A A– A3 A–

Ratings as of February 1, 2016
During the 30 months prior to Genworth's recent press release, the ratings of Genworth's life insurance companies declined somewhat. However, all the ratings remained in the secure range. The table here shows the ratings just before the recent press release.

Ratings as of 2/1/16 Best Fitch Moody's S&P
Genworth Life A– BBB Baa1 BBB–
Genworth Life & Annuity A– BBB Baa1 BBB–
Genworth Life of NY A– BBB Baa1 BBB–

Ratings as of February 10, 2016

As indicated earlier, all four rating firms reduced the ratings of Genworth's life insurance companies within a few days after Genworth's recent press release. Best's ratings remained in the secure range, Fitch's ratings declined into the vulnerable range, two of Moody's ratings declined into the vulnerable range, and S&P's ratings declined into the vulnerable range. The table here shows the current ratings.

Ratings as of 2/10/16 Best Fitch Moody's S&P
Genworth Life B++ BB+ Ba1 BB
Genworth Life & Annuity B++ BB+ Baa2 BB
Genworth Life of NY B++ BB+ Ba1 BB

In my 2013 special ratings issue, I showed a watch list of life-health insurance companies which had or might be developing financial problems. I suggested that consumers should exercise caution in dealing with companies on the list. One criterion for inclusion on the list was a rating in the vulnerable range from at least one of the four rating firms. I no longer construct a watch list.  If I did, Genworth's life insurance companies, each of which has multiple vulnerable ratings, would now be on it.

Share Prices
On February 4, Genworth's shares closed at $2.79. On February 5, the shares declined sharply to $2.18 on heavy trading volume. The shares declined further to $1.86 on February 8 and $1.67 on February 9. The shares closed at $1.73 on February 10, $1.61 on February 11, and $1.70 on February 12.

Earnings Conference Call
Genworth held a one-hour earnings conference call on February 5. A replay is available through February 19 at (888) 203-1112. The telephone number for those outside the U.S. is (719) 457-0820. The conference ID number is 858342. I listened to the replay and found it interesting.

My First Contact with Genworth
My first article about Genworth was in the May 1997 issue of The Insurance Forum. I had seen a long-term care insurance promotional letter distributed by Genworth's predecessor, General Electric Capital Assurance Company. The letter included this sentence, with the indicated underlining: "Your premiums will never increase because of your age or any changes to your health." I wrote the company expressing the opinion that, although the sentence may have been technically correct, it was nonetheless deceptive because the company had the contractual right to increase premiums on a class basis. I said the promotional letter should have mentioned explicitly the company's right to increase premiums on a class basis.

A company officer responded that he understood my concern, because some companies had increased premiums, but he gave three reasons why the sentence was not deceptive. First, he said the company had never increased premiums and had an "internal commitment to rate stability." Second, he said the letter was an "invitation to inquire" rather than a "direct sales piece." Third, he said the company's representatives are trained to review a sales brochure that mentions the right to increase premiums. The incident was ironic in view of Genworth's substantial premium increases in recent years and the increases yet to come.

Later I saw a promotional letter that was virtually identical except that the company had removed the sentence about which I had expressed concern. I reported the change in the February 1998 issue of The Insurance Forum.

General Observations
I believe that the problems at Genworth may be traced, at least in part, to the company's heavy involvement in long-term care insurance. The company was one of the earliest in the long-term care insurance business, and has long been one of the most prominent in that business. It is interesting that the company now appears to be placing even greater emphasis on long-term care insurance, while exiting lines of business in which the company's relatively low financial strength ratings place it at a competitive disadvantage.

There is no doubt that the need for long-term care can be financially devastating for individuals and their families. However, I believe that the long-term care exposure cannot be handled effectively through the mechanism of private insurance. I first discussed the problem briefly in the August 1991 issue of The Insurance Forum, and I elaborated on the problem in the July 2008 issue. In the latter article I identified and discussed several important insurance principles that the long-term care exposure violates, thereby causing private insurance to be unsuitable for addressing the long-term care exposure.

Available Material
I am making available a complimentary 31-page PDF consisting of Genworth's recent press release and my articles in the August 1991, May 1997, February 1998, and July 2008 issues of The Insurance Forum. Email jmbelth@gmail.com and ask for the February 2016 Genworth package.