Genworth Financial Inc. startled investors Tuesday with good earnings news.
The Richmond, Virginia-based insurer reported $216 million in net income for the first quarter on $2.2 billion in revenue, up from $108 million in net income on $1.8 billion in revenue per share. Earnings were about 20% higher than what Wall Street securities analysts had predicted, and revenue was 1.5% higher.
China Oceanwide Holdings Group Co. Ltd., a Beijing-based conglomerate, has been seeking regulatory approval to acquire Genworth for $2.7 billion. Genworth said it has shareholder approval to proceed and still hopes to complete the transaction by the middle of the year. Genworth has stopped holding its regular quarterly earnings conference calls with securities analysts while the deal is pending.
Long-Term Care Insurance
Genworth has been struggling to cope with the effects of low interest rates and inaccurate assumptions on the performance of its large block of in-force long-term care insurance.
The LTCI business generated $16 million in adjusted operating income in the latest quarter on $634 million in premium revenue, compared with $16 million in operating income on $618 million in premium revenue for the first quarter of 2016.
Net investment income increased to $356 million, from $329 million, even though the average yield on the company’s investments fell to 4.98%, from 5.19% in the year-earlier quarter.
Genworth generated just $3 million in new LTCI sales in the first quarter, down from $7 million in new sales in the first quarter of 2016.
The company has been depending heavily on increases in premiums for the consumers who already have its LTCI policies to boost revenue.
This year, the company’s efforts to raise premiums may be slowing.
The company filed just 18 LTCI rate increase requests in the first quarter, down from 45 in the first quarter of 2016. The policyholders potentially affected by the new filings are paying about $24 million in premiums pear year. The filings submitted in the first quarter of 2016 could have affected policyholders that were paying $554 million in premiums per year.
Genworth received final state approval during the latest quarter for LTCI rate increases for policies that generate $98 million in annual premiums. In the year-earlier quarter, actual LTCI rate approvals affected policyholders who were paying $344 million in premiums per year.
The average size of a rate increase actually approved fell to 22%, from 25%.
Traditionally, LTCI purchasers have been serious, well-educated, motivated consumers who have held on to their policies even after facing steep rate increases.
Genworth included a table in an earnings presentation suggesting that pattern may be continuing.
The table shows how much benefit from LTCI rate increases is the result of extra premium revenue, and how much is the result of reserve releases. Reserve releases are often a result of “shock lapse,” or decisions by policyholders to give up their coverage after they see premiums are going up.
In the latest quarter, only 37% of the financial benefits of rate increases came from reserve changes. That was down from an average of 44% for all of 2016, and an average of 45% for all of 2015.
Many life and health insurers have reported that they will have to pay guaranty fund assessments in connection with the insolvency of Penn Treaty American Corp., a failed long-term care insurer.
Genworth said it expects to pay $13 million in Penn Treaty guaranty fund assessments.
— Read China’s Top Insurance Regulator Under Probe for Violations on ThinkAdvisor.