(Bloomberg) -- Genworth Financial Inc. has lost 44 percent of its value since reporting a reserve shortfall in November. That’s set up a test for Chief Executive Officer Tom McInerney when the insurer reports fourth-quarter results later Tuesday.
The CEO has to convince investors that the company has figured out the size of the hole at the long-term care coverage business, and that the gap won’t keep growing, overwhelming the insurer’s other businesses.
“Management has to be careful not to over-promise, and to get the markets comfortable with the fact that there’s some conservatism built into their reserve analysis,” said Sean Dargan, an analyst at Macquarie Group Ltd. “It’s a long-term show-me story.”
Dargan estimated that Richmond, Virginia-based Genworth will record pretax costs of $495 million to add LTC reserves. JPMorgan Chase & Co.’s Jimmy Bhullar projected the figure could be $300 million to $500 million, writing that it’s tough to calculate because companies have discretion in determining how much they need to hold for eventual claims.
“We are not overly confident in our estimate,” Bhullar said in a January research note. “We expect results to be marked by poor margins and recurring reserve hikes.”
Long-term care insurance helps pay for nursing-home stays and health aides. Genworth has been raising premiums for existing customers and tightening underwriting for new clients after underestimating claims costs. The company has also been hurt by low bond yields, limiting growth in funds set aside for future claims.
Cushioning the LTC losses, Genworth has seen profits climb at its mortgage guarantor as U.S. home prices rise. Mortgage insurers cover losses when homeowners default and foreclosures fail to recoup costs. Genworth also offers life policies and retirement products.
The stock has been volatile since McInerney took over at the start of 2013. It more than doubled that year as the mortgage business rebounded, before falling 45 percent in 2014 amid doubts about the long-term care unit’s prospects.
This year, the shares have dropped 7.3 percent, closing at $7.88 on Monday. The stock traded for $14.07 on Nov. 5, before Genworth reported a record loss of $844 million. Al Orendorff, a spokesman for the company, declined to comment.
Rivals have also struggled with long-term care liabilities. MetLife Inc., Prudential Financial Inc. and Unum Group have retreated from the coverage. Unum recorded pretax costs of $698.2 million in the fourth quarter to bolster reserves for the coverage.
Colin Devine, an analyst at Jefferies Group LLC, said Genworth’s shares can eventually rebound, and recommends the stock to investors who can hold it for a few years. He expects the firm to add at least $1 billion to long-term care reserves when it reports results after the close.
“Management credibility has become an issue following several false starts at stabilizing long-term care,” Devine wrote in a Jan. 29 research note. “The first step to restoring it will be by recognizing estimated reserve deficiencies of at least $1 billion,” and other costs.
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