3 Reasons Why Genworth Shares Will Probably Remain Challenged

| About: Genworth Financial, (GNW)

Genworth Financial Inc., (NYSE:GNW) shares appeared to be in an uptrend, but it has given up much of the recent gains. While the stock looks cheap at first glance, a deeper look at the company and industry trends show why this stock could continue to frustrate some investors. Other than the fact that the mortgage insurance business has been very tough due to the housing crisis, there are three other issues that this insurance company is facing:

1) Genworth enjoys an investment-grade status at Moody's Investors Service, however, that may soon change and the rating could be cut to junk. The company is rated Baa3 by Moody's, which is the lowest investment-grade rating, and just one notch above junk. A drop in the rating would be negative for Genworth and lower profits, since it might have to pay more in interest costs.

2) The long-term care insurance industry is facing troublesome trends because with a weak economy and high unemployment, fewer people can afford to buy new policies. It also appears that many older policies were not properly priced since people are living longer than expected. Low interest rates are also impacting the industry. Companies like MetLife (NYSE:MET) even stopped selling long term care insurance in 2010, due to the challenges involved. Dr. Robert Pokorski, chief medical strategist for The Hartford (NYSE:HIG), was recently interviewed in a CNBC article which summarizes some of the challenges facing the long-term care insurance industry. The article states:

Pokorski says 'there's been a rush for the exits by these companies that provided long-term care insurance' for a number of reasons. He explains that companies didn't realize that people would live as long as they currently do, nor did they expect interest rates to drop as low as they have. 'The sales of long-term care insurance have shown quite a downward trend,' Pokorski says. 'They actually peaked 12 years ago in the year 2000 at 600,000 new individual policies sold that year'. New policies have since declined annually until 2011, when new policies edged higher, according to data from the Life Insurance Marketing and Research Association.

3) Another concern could arise in 2013, if the fiscal cliff concerns are realized and the U.S. economy heads down again. That could lead to another round of foreclosures and increased losses for mortgage insurance companies. I own small position in Genworth stock, but the downside risks and ongoing economic concerns will keep me from taking a major position at current levels, at least until more clarity arises in the future. A credit rating downgrade seems likely for Genworth, and that event could take the stock back down to recent lows of nearly $4 per share. If so, that would present a better buying opportunity for those willing to buy an out of favor stock.

Here are some key points for GNW:

  • Current share price: $5.23
  • The 52 week range is $4.06 to $9.68
  • Earnings estimates for 2012: 64 cents per share
  • Earnings estimates for 2013: $1.27 per share
  • Annual dividend: None

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Disclosure: I am long GNW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.