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

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.