Genworth: No Premium on Excitement


Despite its pedigree as a General Electric (GE) offshoot and its leading market share in key industry areas, investors greeted Genworth Financial (GNW) with a remarkable lack of enthusiasm on May 25, its first day of trading. Shares in the spin-off of 30% of the life- and mortgage-insurance business dipped below the $19.50 offering price during the day but ended flat. The $19.50 price was well below the $21 to $23 range that had been predicted for the initial public offering, and it stayed at that level on a day when the broader market was way up (159 points on the Dow) after several consecutive rough selling days. What gives?

First, investors seem to understand all too well this could be a tough environment for any company that will depend on the vagaries of the housing market. Mortgage insurance makes up almost 40% of Genworth's earnings, and it could turn down once home-buyers' appetites diminish. Moreover, while rising interest rates may help parts of the company's investment portfolio, some investors worry that the overall effect will be negative.

UNDER THE RADAR. Yet the biggest drag on future earnings may be the prospect of GE unloading another big chunk of the $10 billion business on the public in the next three years. CEO Jeff Immelt has already said GE wants to further reduce its stake to free capital for faster-growth businesses. That raises two questions: If GE doesn't want to hold on to the business, why should you? And what will happen to the value of existing shares when another flood of Genworth stock hits the market?

Analysts and GE executives are quick to point out that the prospect of another offering has already been priced into the stock. And they note that GE's rationale for selling the business has as much to do with improving its own debt situation as with the insurance business' fundamentals.

Still, Genworth hasn't been generating as high a return on equity as rivals like MetLife (MET). And Genworth certainly needs to boost its return much higher to meet the standards set by Immelt for GE's financial businesses. Another largely unpublicized challenge for Genworth is that it has been, well, unpublicized. Institutional investors were well aware of the largest IPO of the year so far. But the general public knows very little about this Richmond (Va.) company, which has about $100 billion in assets (see BW Online, 5/20/04, "The GE Spin-Off You Never Heard Of"). That lack of buzz may not have hurt the share price, but it certainly didn't help.

BUYING OPPORTUNITY? Lack of hype aside, investors may have cause to worry about Genworth's leading position in areas like long-term-care insurance or life insurance once the GE name fades into the background. In any event, a concerted ad campaign, expected in June, may begin to put Genworth's brand in the minds of consumers and investors.

Over the long haul, the appeal of Genworth shares will largely depend on the health of the industries in which it operates. And a disappointing debut may, of course, turn out to be an excellent investment opportunity. But at the very least, Genworth's muted coming-out party is likely to prompt some soul-searching and strategy sessions at GE about the handling of an insurer it still controls. By Diane Brady in New York


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