GEs Planned Life Insurance Spinoff: As Much About The Industry As GE

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General Electric Companys plan to spin off its life insurance business in an initial public offering speaks as much to the environment in the life insurance industry as it does to GEs strategy going forward, insurance analysts say.

Last week, GE announced an initial public offering of a new company comprised of its life and mortgage insurance operations.

Life insurance companies that will be part of the new company include General Electric Capital Assurance Company, GE Life and Annuity Assurance Company, General Electric Capital Life Assurance Company of New York, First Colony Life Insurance Company, Federal Home Life Insurance Company, and American Mayflower Life Insurance Company of New York.

The new company is named Genworth Financial Inc. GE, based in Fairfield, Conn., expects to complete the IPO in the first half of 2004.

A company spokesman said the company is now in a quiet period and consequently, declined comment on specifics of the proposed transaction.

But, in its announcement the company did offer an initial blueprint of its plan.

GE said it plans to sell approximately 30% of the equity of the new company in the IPO and expects to reduce its ownership position over the next three years as Genworth transitions to a fully independent company. GE intends to use the proceeds to invest in growth initiatives and reduce “parent-support debt” at GE Capital.

GE previously announced its intent to reduce the level of its insurance-related assets from about 40% to about 15% of its total financial services assets. The businesses GE will contribute to the new company, it says, represent about 20% of GEs financial services assets and about half of the assets of GEs insurance segment at Sept. 30, 2003. As of that date, the businesses had a book value of approximately $10 billion, net of assets to be retained by GE.

Jeffrey Immelt, GE chairman and CEO, described the strategy of the company in an investor update on Nov. 19.

Among the strategic imperatives cited was to sustain a strong business model through consistent cash generation and maintaining a “AAA” rating.

A second imperative was to accelerate organic growth through technical excellence, service and customer relationships and a global focus.

And, the third imperative cited was to strengthen the portfolio of companies by improving technology, the financial core and building strong growth platforms.

Immelt also discussed “consistent and reliable growth through cycles” as demonstrated by 10% earnings growth and a 20% return on total capital.

Analysts say the life insurers are not generating that kind of return.

The returns of the companies being spun off are below the targets set by GE, according to Robert Riegel, managing director with Moodys Investors Service, New York. After a period of several acquisitions, GE has not acquired any new life insurance companies in the last several years, he notes.

GEs life companies are “very solid companies” but do not meet GEs objective of being No. 1, 2 or 3 in their market or its required returns, he continues.

The size of the new company with $10 billion in equity, puts it in a position to be an acquirer, according to Riegel.

In general, GEs desired level of return is not present in the life insurance industry, Riegel says. “And if you see that kind of return, then that is a red flag,” he says. “It is an accident waiting to happen.”

It could suggest an overly aggressive strategy, he explains.

The reason for the lower returns in the industry, Riegel continues, is that many of the products insurers offer are now commodities. Additionally, he says, there is overcapacity and the need for consolidation.

Cynthia Crosson, director with Fitch Ratings, New York, notes recent M&A and divestiture activity within the industry. In part, it might be due to a resurgence in the market, but companies also are re-examining their businesses, she says.

Part of that re-examination reflects the returns insurers are providing, Crosson explains. “In general, it is hard for life insurers to compete with 20%+ returns. They just cant do it.”

Crosson adds that “some insurers have recently needed capital injections from their parents and that is getting everyones attention.”

The combination of the mortgage and life insurance businesses in Genworth Financial reflects GEs strategy of a lifetime relationship with the customer in which different needs are provided for at different times in a clients life, Crosson says.

When the Genworth transaction is complete, she says, it will be important for the life insurance companies to generate stable earnings and avoid volatility or events that will require a capital injection. However, she adds that even without the full support of GE, as a public company, Genworth will have access to capital.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.