Genworth, Once Part of GE, Offers Breakup Gains: Real M&A

Perhaps one breakup leads to another. Insurer Genworth Financial Inc. could reap $4 billion for shareholders by splitting up a decade after General Electric Co. pushed it out on its own.

Shares of the $6.3 billion insurer are trading below the price at which GE took it public in 2004. Billionaire John Paulson, a Genworth shareholder, says one way to reverse that slump may be to separate the global mortgage-guarantee operations from the business selling life and long-term care coverage in the U.S.

A split could help push Genworth shares up 64 percent, estimates compiled by Bloomberg show. There are no operational benefits to keeping the insurer’s two businesses together and they would be easier to value as separate entities, according to Raymond James Financial Inc. Chief Executive Officer Tom McInerney signaled last month that he was open to considering a split once the two businesses are financially capable of standing on their own, possibly as soon as 2016.

“I don’t think it makes long-term strategic sense for the mortgage insurer and life insurer to be part of one company,” said Ryan Krueger, an analyst at Stifel Financial Corp.’s KBW. “The reason they’re together is all because of a legacy decision by GE.”

A representative of Richmond, Virginia-based Genworth declined to comment, as did a spokesman for Paulson & Co.

Crisis, Aftermath

Since its spinoff from GE, Genworth has confronted a barrage of challenges. The worst U.S. housing crash in seven decades drained capital and then the record-low interest rates that followed pressured profits. Insurers generate earnings by investing clients’ premiums until they need to pay claims.

“Interest rates may be down for a long period of time, and that is a huge issue for this industry,” McInerney said today at a conference in Washington.

Net income for Genworth was $560 million last year, about half what it generated in 2007. The stock traded yesterday at just 0.4 times the company’s book value, the cheapest multiple for any company in the Standard & Poor’s 500 Index for which data are available.

Today, Genworth shares climbed 4.5 percent to $13.35, the biggest rise in six months. The stock’s gain led the Standard & Poor’s 500 Financials Index.

Improving operating results and an eventual split of the mortgage and life-insurance businesses could help reverse that sagging valuation, according to Paulson.

“If the company chooses to spin off its mortgage-insurance and other life-insurance businesses into two separate companies, there could be substantial additional upside,” the money manager said in a letter to investors discussing first-quarter results for his hedge fund firm. He said Genworth can trade for at least $24 a share, and even more if the company breaks apart.

Hartford Precedent

Paulson, best known for a successful bet against subprime mortgages amid the financial crisis, also pushed for a split at Hartford Financial Services Group Inc. The insurer didn’t heed Paulson’s call for a breakup, although it did shed assets. The stock is up 91 percent since the investor pressed the CEO on a February 2012 conference call to unlock value.

Genworth CEO McInerney has rejected Paulson’s breakup plan, at least for the time being. He said in September he wants to improve the operating performance of both divisions first. Then it will be time to talk “with investors in order to decide, ‘Is it better to keep the businesses together or not,’” he said.

The company still needs access to the cash flow from the improved mortgage-insurance business “to help cushion any blows that may occur while they’re waiting for interest rates to move in a favorable direction” for the life-insurance business, said Ken Billingsley, an analyst at Compass Point Research & Trading LLC.

Setting Up

Genworth should be able to set itself up for a breakup by 2016, according to Suneet Kamath, an analyst at UBS AG. By that time, the company will probably have cut its leverage to a more acceptable threshold and lifted cash flow at both the mortgage and life-insurance businesses, the analyst wrote in a report last month.

Genworth should be valued at about $21 a share, or 64 percent more than its closing price yesterday, according to the average of three estimates compiled by Bloomberg.

A split would “certainly make it cleaner,” Steven Schwartz, a Chicago-based analyst at Raymond James, said in a phone interview. “There was no real reason for this ever to be together except to make General Electric’s life easier. Mortgage-insurance analysts don’t understand life insurance and the life insurance guys probably don’t know mortgage insurance as well as we should.”

Earnings Clues

The company’s third-quarter report may help advance the cause of breakup advocates. Genworth is reviewing whether it set aside enough funds to cover long-term care claims and will discuss the results with its earnings. The earnings will be released on Nov. 5 and a conference call is scheduled for the next day.

If the review is “really bad, you could probably have people say, ‘Why don’t you split this up,’” to focus on the more stable mortgage business, Billingsley of Compass Point said. “If it’s not bad, I think it gives management a little bit more breathing room to say, ‘We’re going to keep this together because our plan is working.’”

Hedge Effect

Keeping mortgage insurance and long-term care coverage together helps create a natural hedge, said Joel Salomon, whose SaLaurMor Capital LP fund owns the stock. Higher interest rates are good for long-term care insurance, while they may slow housing sales, weighing on home-loan guarantees.

There may also be tax reasons for sticking with the status quo, tied to losses accumulated at the mortgage-insurance during the financial crisis, said Schwartz of Raymond James.

Even so, those benefits won’t exist forever and an eventual split is likely, he said.

“I think they recognize that it muddies the story” to keep the two units together, Schwartz said. “It honestly doesn’t make sense from a corporate view outside of taxes. It really doesn’t.”

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