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Analyst Blog

On May 28, 2013, we downgraded Genworth Financial Inc. (GNW - Analyst Report) to Underperform from Neutral. The introduction of new products and pricing changes in the U.S. Life Insurance Division led to lower sales.

Further, Genworth expects operating earnings to be weighed upon by the continued low interest rate environment. In addition, the company incurred goodwill impairment and other loss and expects to incur more losses upon closure of the transaction related to the sale of its wealth management business.

Why the Downgrade?

The introduction of new products and pricing changes in the U.S. Life Insurance Division implemented over the past year are expected to continue in 2013 as well. These actions led to lower sales for Genworth.

Life insurance sales slipped 68% year over year, while long-term care insurance sales decreased 17% year over year. In addition, loss ratios of long-term care insurance business have been increasing over the past several years and ranged from 65% to 71% over the last five years.

Genworth expects operating earnings to be weighed upon by continued low interest rate environment. Genworth expects consolidated operating earnings per share from after-tax spreads to be down by 7 cents per share in 2013 and 11 cents per share in 2014. It also anticipates the U.S. Life Insurance segment to be affected majorly due to its product mix, long-term care and universal life insurance in particular.

Further, to emphasize on generating capital, increasing the financial strength and flexibility of the company as well as to simplify the business model, Genworth decided to divest the wealth management business. It recognized $27 million from goodwill impairment. The company also expects to record an additional after-tax loss of up to $10 million.

Life Insurance Stocks That Warrant a Look

While we prefer to avoid Genworth Financial, other life insurance stocks worth a look are Protective Life Corp (PL - Analyst Report), StanCorp Financial Group Inc. (SFG - Analyst Report) and Lincoln National Corp (LNC - Analyst Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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