Penn Treaty Insurance: Death at Last

| About: Genworth Financial, (GNW)

Alas, but all good things in the human sphere come to an end. Penn Treaty [OTC:PTYA] is the biggest insurer failure since 2004. Now, don’t cry too much. The state guaranty funds will pick up the slack. The banks are jealous of an industry that has so few insolvencies. Conservative state regulation works better than federal regulation.

Or does it? In this case, no. The state insurance regulator allowed a reinsurance treaty to give reserve credit where no risk was passed. The GAAP auditor flagged the treaty and did not allow credit on a GAAP basis, because no risk was passed. No risk passed? No additional surplus; instead it is a loan. I do not get how the state regulators in Pennsylvania could have done this. Yes, they want companies to survive, but it is better to take losses early, than let them develop and fester.

A prior employer asked me about this company as a long idea, because it was trading at a significant discount to book. I told him, “Gun to the head: I would short this. Long-term care is not an underwritable contingency. Those insured have more knowledge over their situation than the insurance company does.” He did nothing. He could not see shorting a company that was less than 50% of book value.

It was not as if I did not have some trust in the management team. I knew the CEO and the Chief Actuary from my days at Provident Mutual. Working against that was when I called each of them, they did not return my calls. That made me more skeptical. It is one thing not to return the call of a buyside analyst, but another thing not to return the call of one who was once a friend.

Aside from Penn Treaty, the only other company that I can think of as being at risk in the long term care arena is Genworth (NYSE:GNW). Be wary there. What is worse is that they also underwrite mortgage insurance. I can’t think of a worse combo: long term care and mortgage insurance.

The troubles at Penn Treaty are indicative of the future for those who fund long term care. Be wary, because the troubles of the graying of the Baby Boomers will overwhelm those that try to provide long term care. That includes government institutions.