On Genworth And Long Term Care Insurance

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On Genworth And Long Term Care Insurance

On Genworth by David Merkel, CFA of The Aleph Blog

Another letter from a reader:

Hi David

Hope you are having a good summer.

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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

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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