The shares of Genworth Financial plummeted after disclosing a material weakness related to the accounting of its long-term care unit in a regulatory filing with the Securities and Exchange Commission (SEC).
The stock price of Genworth Financial declined almost % to $7.31 per share at the time of this writing around 3:01 in the afternoon in New York.
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In its filing, the insurer wrote, “We are currently working to remediate the material weakness. We did not have adequate controls designed and in place to ensure that we correctly implemented changes made to one of the methodologies as part of our comprehensive long-term care insurance claim reserves review.”
On March 2, KPMG LLP submitted its report to the board of directors of Genworth Financial indicating its opinion that the insurance company “did not maintain effective internal control over financial reporting as of December 31, 2014.”
KPMG stated that a “material weakness related to a control over the company’s implementation of assumption and methodology changes for long-term care insurance claim reserves has been identified and included in management’s assessment.”
Genworth Financial initially failed to identify a calculation error
Genworth Financial explained that it initially failed to identify an accounting error of $4 million related to a review of its long-term care reserves.
According to the insurance company, it is taking measures to resolve the problem by separating its actuarial teams, and it also expanding the scope of reviews when changing its assumptions or methods. Genworth Financial aims to fix the issue this year.
Genworth Financial conducts accounting reviews on long-term care coverage contracts, which helps pay for customer’s home-health aides and nursing home states. Some policy holders pay premiums for decades before the insurance company finds out if it would encounter claim costs.
The insurance company’s accounting reviews include regular re-calculation of the percentage of policy holders who submit claims, and the cost per person. According to Genworth Financial, lower interest rates prompted that company to change its profitability assumptions because insurers earn less on bond held to support its obligations.
Genworth Financial posted quarterly losses
Genworth Financial reported losses related to the underperformance of its long-term care unit for two consecutive quarters. The insurance company recorded net losses of $844 million and $760 million in the third quarter and fourth quarter last year, respectively.
One day after Genworth Financial released its financial results for the fourth quarter, its CFO Marty Klein informed investors that the company was evaluating whether it committed accounting errors.