Flickr/sima dimitric Genworth Financial has more problems.
In its latest annual report on Form 10-K filed with the SEC, Genworth Financial disclosed that it has identified a "material weakness" in its internal control over some financial reporting related to its long-term care insurance unit.
By disclosing a "material weakness," a company is basically saying that there are problems in how it internally handles financial reviews. In afternoon trade on Monday, shares of Genworth were down as much as 8%.
Back in November, Genworth shares fell more than 30% after the company announced that it took an $844 million loss after completing a review of its long-term care business. In the fourth quarter, the company disclosed further write-downs related to its long-term care unit.
As we explained back in November, Genworth's wrong assumptions in its long-term care unit were related to "claimants ... staying on claim longer," meaning that its life insurance customers were living longer than the company previously expected.
And so Monday's disclosure isn't about the company alerting investors to more losses — though there's been plenty of that recently with the company more than $1.2 billion in 2014 — it's about telling investors it has problems with how it goes about identifying its problems.
From its filing on Monday:
[W]e have concluded that we did not have adequate controls designed and in place to ensure that we correctly implemented changes made to one of our methodologies as part of our comprehensive long-term care insurance claim reserves review completed in the third quarter of 2014. As a result, we failed to identify a $44 million after-tax calculation error. Although this control deficiency did not result in a material misstatement in the consolidated financial statements, we have concluded a material weakness exists in the controls over the implementation of our long-term care insurance claim reserves assumption and methodology changes because such a misstatement could have occurred. We are currently working to remediate the material weakness ... We cannot be sure when we will successfully remediate the material weakness or whether compensating controls will be effective before then in preventing or detecting material errors.
Here's what Genworth said about remedying this situation:
We are currently working to remediate the material weakness. We have reviewed the design of our current "review control" over implementation of assumption and methodology changes to our long-term care insurance claim reserves to determine appropriate improvements and implement enhanced procedures. As part of these enhanced procedures, our actuarial team responsibilities will be separated to provide that one team will develop and implement all significant assumption and methodology changes to the long-term care insurance claim reserves while another team will determine the nature and scope of the review required as a result of the changes, and then execute the review process.
In addition, the scope of the "review control" over the implementation of assumption and methodology changes to our claim reserves will be expanded to include testing of our claim reserves calculation, on an individual claim basis, from the point at which the claim record is included in our policy administration system through the point at which our reserve is reported in our consolidated financial statements. These control enhancements are intended to ensure that assumption and methodology changes to the long-term care insurance claim reserves function as intended.
We believe these measures will remediate the control deficiency identified above and will strengthen our internal control over financial reporting for the calculation of our long-term care insurance claim reserves. We currently are targeting to complete the implementation of the control enhancements during 2015. We will test the ongoing operating effectiveness of the new controls subsequent to implementation, and consider the material weakness remediated after the applicable remedial controls operate effectively for a sufficient period of time.
And in the last year, Genworth shares are down more than 50%.
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