GE's Insurance Offspring: A Good Risk?

This time next year, chances are the name Genworth Financial won't leave you asking, "Huh?" A group of insurance operations with nearly $100 billion in total assets, Genworth today is a wholly owned part of General Electric (GE ). Soon, however, it is set to take on a life of its own. GE aims by June to sell 30% of Genworth in an initial public offering. Count on seeing lots of image ads with Genworth's motto: "Built on GE Heritage."

Just the same, Genworth is a legacy that GE is eager to unload. GE has been busily cutting its hefty exposure to financial services, especially the capital-hungry insurance lines. Already, in December, it took a $2.9 billion dividend from Genworth. The entire proceeds of the Genworth IPO, which could top $5 billion, plus $3.1 billion from borrowings and a concurrent issue of preferred stock, are earmarked for GE. Then, over the ensuing two years, GE expects to sell to the public an additional 20% or more, taking its Genworth stake under 50%. All of which raises the question: If cashing out of Genworth is good for GE, is buying the new shares a reasonable move for you?

COULD BE. Genworth execs, who are based in Richmond, Va., aren't talking ahead of the deal. Nor have they yet estimated a per-share price for the shares. But a 327-page registration statement offers plenty of other details. As you might expect, Genworth has some formidable strengths, starting with its balance sheet. If Genworth had already gone public, total borrowings and other obligations would have come to $5.5 billion on Sept. 30; total cash and equivalents, to nearly $3.1 billion. Rating agencies such as Standard & Poor's and A.M. Best give Genworth's 10 main underwriting units high scores. And it's profitable, netting $764 million on $7.3 billion in revenue through 2003's first nine months.

Like familiar rivals such as MetLife (MET ) and John Hancock Financial Services (JHF ) (soon to merge with Manulife Financial (MFC )), Genworth sells a long list of financial products and services. It reports results in three segments. The biggest by revenue, protection, includes term life insurance and, notably, long-term care insurance, a market it leads. Heads up, investors: Long-term care is a key risk, since underwriters still have scant actuarial data on which to base profitable pricing. "GE has a reputation across all of their business lines of being extremely thoughtful and careful," A.M. Best analyst Michael Cohen told me. "But [in long-term care] it is still early."

A second segment, retirement income and investments, includes annuities, variable life insurance, and some specialized asset-management services. What distinguishes Genworth from its better-known rivals is its third segment, mortgage insurance. In the U.S., depending on how you measure, it's the third- or fourth-biggest underwriter of policies that protect banks and other mortgage holders such as Fannie Mae (FNM ) against default by home buyers who put little money down. Abroad, it's the leading mortgage insurer, with fast-growing operations in Canada, Australia, Britain, and Europe. Where Genworth's protection segment last year was generating a net margin of 9.3% and retirement income and investments a 6.4% margin, insuring mortgages proved far more profiTABLE: Through Sept. 30, mortgage insurance netted $292 million on revenue of $720 million -- a profit margin of more than 40 cents on the dollar. Even next to top rivals MGIC Investment (MTG ) (a 29% net margin in the period) and PMI Group (PMI ) (25%), that's one rich return.

So what might Genworth be worth? Peers lately trade in a range of 14 or 15 times earnings and 1.2 to 1.7 times book value (table). Given its lineage and the importance of the deal to lead underwriters Morgan Stanley (MWD ) and Goldman Sachs (GS ), look for Genworth to come at a nice premium -- a market value range of perhaps $16 billion to $19 billion. Below that, it's worth a closer look.

By Robert Barker

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