Genworth (GNW) declined over 24 percent and cost the Fund 38 basis points of performance during the quarter. The company announced a sizeable addition to reserves for purposes of covering potential loss exposure to long-term care insurance provided to its earliest customers. This was not an unknown risk to us as we did factor this into our thinking when we established our position. However, while the reserve build was in-line with our projections, it was still a negative surprise to the street. Our view with respect to long-term care is that States will allow for premium increases, sometimes sizeable, as GNW (and others providing this insurance) are last line defenses to patients who would otherwise likely end up in Medicaid and exacerbate state budget situations. Unfortunately, a mismatch in timing occurs as claims rise first, then reserves are lifted followed by a request for premium increases. Ultimately, we feel GNW is very cheap and is in a good position to seek premium relief even as the company continues to restructure its business in both long-term care and mortgage insurance.
From John Keeley (Trades, Portfolio)’s KEELEY All Cap Value Fund Q3 2014 Commentary.
