On Genworth by David Merkel, CFA of The Aleph Blog

Another letter from a reader:

Hi David

Hope you are having a good summer.

Would love to hear your thoughts on recent developments at Genworth Financial Inc (NYSE:GNW).  My sense has always been that LTC care insurance is a really tough business for the underwriter.  How can one possibly know how LTC costs will trend in the future – yet that unknown is what the insurer is agreeing to cover.  And some states aren’t even allowing them to raise prices?  Why would I want any exposure to this!!

Dear Friend,

Yes, LTC [long term care] is an ugly liability and it has been consistently underpriced for the last 25+ years.  This has lad to the demise of some small companies (like Penn Treaty), with many more exiting or limiting the business.  I try to avoid companies that don’t reserve conservatively, and that has been true of Genworth Financial Inc (NYSE:GNW) over the last ten years. Both LTC and Mortgage Insurance produced more claims than anticipated.

I’m not saying that things will get worse from here, but I put this in my “too hard” pile.  I would need a lot more information before committing money to a stock like this.  There are companies that are easier to understand, that also offer good potential returns.

If you can’t understand it, don’t buy it.

Sincerely,

David