Genworth Financial, Inc. (NYSE: GNW) reported another large quarterly loss and its third consecutive annual loss as it continued to revise assumed mortality rates, resulting in a $196 million after-tax charge in universal life insurance.
The Richmond, Va.-based insurer reported a net loss of $122 million, or $0.25 per diluted share, for the fourth quarter of 2016, compared with a net loss of $292 million, or $0.59 per diluted share, in the fourth quarter of 2015.
The adjusted operating loss for the fourth quarter of 2016 was $137 million, or $0.27 per diluted share, compared with an adjusted operating loss of $82 million, or $0.17 per diluted share, in the fourth quarter of 2015.
For all of 2016, Genworth reported a net loss of $277 million, or $0.56 per diluted share, compared with a net loss of $615 million, or $1.24 per diluted share, in 2015. The company reported an adjusted operating loss of $316 million, or $0.63 per diluted share, in 2016, compared with adjusted operating income of $255 million, or $0.51 per diluted share, in 2015.
Genworth said in a Feb. 7 release announcing its 4Q financials the net loss in the fourth quarter of 2016 was impacted by net investment gains, net of taxes and other adjustments, of $19 million in the quarter, compared to net investment losses of $1 million in the prior year. The net loss in the current quarter and prior year quarter also reflected after-tax losses of $196 million and $194 million, respectively, related to the assumption updates in universal life insurance and $214 million in the prior year quarter related to the pending and completed sale of the European mortgage and lifestyle protection insurance businesses.
Long Term Care Insurance
LTC reported an adjusted operating loss of $1 million, compared with $270 million in the prior quarter and adjusted operating income of $19 million in the prior year. Results in the prior quarter included an increase to LTC claim reserves of approximately $435 million pre-tax resulting in an after-tax charge of $283 million related to the company's annual review of LTC claim reserves assumptions and methodologies.
During the quarter, the company completed its annual review of GAAP active life margins or loss recognition testing. GAAP loss recognition testing margins for the business were reduced to approximately $1.0 to $1.5 billion as higher expected future claim costs were partially offset by the impact of higher future in-force rate actions. The company continues to separately test its LTC acquired block (representing business written prior to late 1995) for recoverability as part of testing its GAAP loss recognition margins. The GAAP loss recognition testing margin for the LTC acquired block was positive and did not require an increase to reserves in the quarter, driven mostly by more favorable claim termination assumptions.
Results for the quarter included a less favorable impact from reduced benefit options from elections from in force policyholders of $13 million after-tax versus the prior quarter and $26 million after-tax versus the prior year. Estimated favorable impact from in force rate action premiums continues to build and was $67 million after-tax in the current quarter versus $62 million after-tax in the prior quarter and $51 million after-tax in the prior year.
Results in the quarter were negatively impacted by a $7 million after-tax increase to the reserve related to profits followed by losses versus the prior quarter.
Life insurance reported an adjusted operating loss of $193 million, compared with adjusted operating income of $48 million in the prior quarter and an adjusted operating loss of $173 million in the prior year.
During the quarter, the company completed its annual review of life insurance assumptions and recorded an after-tax charge of $196 million associated with its universal life insurance products. The negative impact was primarily driven by assumption changes due to emerging mortality experience in older age populations with more modest assumption updates related to interest rates, lapses and other refinements. Results in the prior year reflected an after-tax charge of $194 million related to the company's annual review of life insurance assumptions.
Results versus the prior quarter and prior year reflect lower investment income from unfavorable prepayment speed adjustments related to residential mortgage-backed securities as well as higher mortality.
Fixed annuities reported adjusted operating income of $40 million, compared with $15 million in the prior quarter and $19 million in the prior year. Results in the quarter include a $6 million after-tax favorable adjustment related to state guaranty funds and a $10 million after-tax favorable impact related to an update of lapse assumptions and other refinements versus the prior quarter. Results in the prior quarter also included an $8 million after-tax unfavorable correction related to state guaranty funds.
China Oceanwide takeover update
The previously announced transaction with China Oceanwide is subject to receipt of required approvals by Genworth's stockholders, regulators and other closing conditions. On Jan. 25, 2017, Genworth filed a definitive proxy statement with the Securities and Exchange Commission (SEC) and commenced mailing to stockholders of record the definitive proxy materials in connection with the transaction. The special meeting of Genworth stockholders will be held on Tuesday, March 7, 2017, at 9 a.m. Eastern.
All filings required under the merger agreement for regulatory approval of the transaction have been submitted. Both parties are engaging with regulators regarding the applications and the pending transaction. Genworth and China Oceanwide continue to expect the transaction to close by mid-2017.
"China Oceanwide is continuing to work diligently with Genworth to obtain all regulatory approvals and satisfy other necessary conditions to closing," said Mr. Lu Zhiqiang, Chairman of China Oceanwide.
"The Genworth Board of Directors continues to believe that this transaction is in the best interests of Genworth's stockholders and unanimously recommends the approval of the transaction," said Tom McInerney, President and CEO of Genworth.
About Genworth Financial: Genworth Financial, Inc. is a Fortune 500 insurance holding company committed to helping families achieve the dream of homeownership and address the financial challenges of aging through its leadership positions in mortgage insurance and long term care insurance. Headquartered in Richmond, Va., Genworth traces its roots back to 1871 and became a public company in 2004. For more information, visit genworth.com.
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