Genworth Financial (NYSE: GNW) saw its stock rating downgraded from “Neutral” to “Underperform” this week in a report from global financial services company Credit Suisse, related to continued uncertainty in the long-term care insurance industry.
The downgrade comes following the recent rally in shares reached in late July to early August of more than 100% and over 50% since mid-November and reflects risks Genworth faces in its long-term care insurance business.
Despite the company’s stock share increase, Credit Suisse believes GNW placed too much emphasis on the housing market recovery and its impact on the U.S. Mortgage Insurance, but not enough focus on the company’s life insurance operations.
Credit Suisse even upped the target price on GNW’s shares from $6 to $7, due to the company’s higher multiple placed on the U.S. MI.
However, as one of the largest long-term care insurance blocks in the industry with about $20 billion of gross statutory reserves, Genworth faces continued risks as its policyholders live longer, according to Credit Suisse.
Genworth currently has $1.1 billion of goodwill, $850 million of which lies in the company’s life insurance operations and $350 million associated with long-term care insurance, notes the report.
“Genworth has used captive reinsurance to limit pressure from low interest rates, and it is our understanding that Genworth will not need to take any statutory reserve actions at YE12 as a result of cash flow testing (note reinsured business is not subject to cash flow testing), we suspect as a result of the use of the captive reinsurance,” it says. “We no longer assume a $700 million statutory reserve addition to the long-term care [insurance] book in our valuation because of the uncertainty associated with the need to unwind captive reinsurance.”
Other companies that used to offer long-term care insurance, including MetLife and Prudential, have exited the market in recent months and contributed to its uncertainty. Moody’s Investors Services has previously released a report calling the future sustainability of the product into question, citing its complex structure and the difficult nature of profitably pricing policies.
Written by Jason Oliva