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.? 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 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