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Genworth Genesis
Genworth has been doing just fine since its birth as an independent company. More flexible and innovative now, the insurance giant is expanding overseas and boosting its financial performance.
by Peter Galuszka
Working under management maven Jack Welch can try the soul of any corporate executive. The General Electric chairman was famous for setting high performance measures for company profit centers. Company divisions were expected to generate returns on equity (ROE) of 20 percent or higher. Managers who couldn’t keep up faced an unpleasant visit with Welch... or worse.
Richmond-based GE Financial Assurance was one of the companies that didn't make the grade. The financial service and insurance field was so crowded with powerhouse companies, such as AIG and Prudential, that the company recorded ROE of nine percent or less. That didn’t make the top brass happy. When Jeffrey R. Immelt took over as GE’s chief executive in 2001, he initiated a spin-off of the firm.
And that may be the best thing that ever happened to GE Financial, now Genworth. The management philosophy that worked for refrigerators, aircraft engines and broadcast television didn't necessarily translate well into insurance products. Since emerging as an independent firm nearly two years ago, Genworth has boosted ROE from about nine percent to a predicted 10.7 percent this year.
In a flat stock market, Genworth's stock price has climbed from $19.50/share at its Initial Public Offering in the spring of 2004 to the low $30/share-level today. In November, ratings service Standard & Poor’s announced that Genworth was replacing California-based energy company Calpine Corp. on its famed S&P 500 index of select companies.
Genworth has achieved a number of milestones in those two years, the most daunting of which was establishing a new identity. The old-line insurance company has completely re-branded itself in an advertising market where insurance services are highly saturated. Progress so far has been good.
“Our performance is based on executing strategy and being more agile,” CEO and Chairman Michael Fraizer told analysts at a conference call in late January. Genworth’s top official was upbeat despite news that the firm saw an 11 percent drop in profit for the fourth quarter of 2005, racking up a net income of $307 million for the period. Even so, Genworth beat Wall Street earnings per share estimates by two cents for the period and future prospects look good. In 2005, Genworth recorded net income of $1.2 billion on sales of $10.5 billion.
Genworth offers a series of financial products including life insurance, annuities, mortgage insurance and group life plans for smaller companies. It is the No.1 provider of long-term care (LTC) insurance which is designed to help clients, notably aging Baby Boomers, pay for their health care and living needs after they retire. Operating in 24 countries, Genworth is a major seller of mortgage insurance in such far away spots as Australia and New Zealand. It is targeting housing markets in Poland and The Czech Republic where pent-up demand for home ownership is intense after years of Communist rule.
Thriving in Richmond
This far-flung activity is orchestrated from several modern buildings just across West Broad Street from the new corporate home of Philip Morris USA. Genworth executives say they are glad that General Electric chose Richmond to be its new headquarters after a nationwide search in 1996.
GE Financial Assurance, cobbled together through a series of acquisitions, had been headquartered in a city near Seattle. After the company acquired Life of Virginia in Richmond and First Colony in Lynchburg, GE started a national search for a new place for the firm to call home. Three locations were considered on the East Coast and Richmond won.
“I was lucky enough to be the one who was chosen to negotiate to determine where we should put our headquarters, says Leon Roday, Genworth’s senior vice president, general counsel and secretary. “I spent a lot of time in Richmond and it became clear that Richmond would be a great place to have our global headquarters. It’s got a great talent pool, it’s a good location, a great lifestyle for our associates and, very importantly to us, Richmond and the Commonwealth of Virginia have a very positive and supportive business environment.”
Of Genworth’s 6,150 employees, some 2,800 are in Virginia -- split about equally between Richmond and Lynchburg. Roday says that Richmond’s location offers major advantages because it is a short trip to New York and Washington, where the company maintains extensive government relations operations. Genworth must keep tabs on federal insurance regulation and watch such potentially lucrative possibilities as the privatization of Social Security.
One drawback has been the high cost of airfare at Richmond International Airport, he says. But that problem is easing since Genworth has joined such new arrivals in Richmond as Philip Morris USA and Wachovia Securities to beat down airlines on fares. Overall, fares have dipped since discount carrier AirTran started serving the area last year and JetBlue announced that it would start service in March. International travel, a must for Genworth employees, is generally handled through Washington’s Dulles International or New York.
Otherwise, Richmond gets high marks, Roday says. Schools are good and housing is plentiful and cheap. “We have had absolutely no issues with recruiting top talent,” he says. In fact, company executives were pleasantly surprised when they announced the transfer of a number of employees from San Raphael north of San Francisco to Richmond. Plenty of workers were willing to leave the Bay Area for Virginia’s capital. More affordable housing was one reason.
Organic Growth, Selected Acquisitions
Genworth, meanwhile, has its eyes on its ROE numbers. Fraizer has set a target of 12 percent by the end of 2008. That would be better than Genworth’s performance under GE but still shy of some competitors. To achieve that goal, Roday says the firm is growing organically, introducing new products and making selective acquisitions. One such buy was Continental Life Insurance Co. for $145 million. The Brentwood, Tenn.-based company will boost Genworth’s efforts in the markets for Medicare supplements which pay for needs not covered by Medicare.
Genworth already enjoys a strong position regarding elder care issues because of its long-term care insurance program, which Roday estimates is No. 1 in the U.S. and No. 5 in the world. Long-term care helps retirees with paying for such elder care necessities as dealing with assisted living and nursing homes. Neither service is covered by federal insurance. It’s a growing field, since 79 million baby boomers will be retiring in coming years in the U.S.
Genworth’s predecessors got in on the ground floor when long-term care was introduced about 30 years ago. Their experience will give the company a leg up as needs grow more acute, stock analysts believe. “We think the aging population, coupled with escalating health-care costs, must eventually precipitate an industry turn around,” wrote an analyst for the ratings service Morningstar in a recent report. “As a clear market leader, Genworth is well positioned to capitalize on such a recovery.” Offering protection products is Genworth’s biggest single sector. It earned the firm $527 million in 2004.
To help build the market for LTC insurance, Genworth took the unusual step of partnering with Harley Gordon, a nationally recognized elder-care attorney, to provide ongoing education and training to the company and its distribution partners. That move in late 2004 occurred in conjunction with an expansion of the LTC sales team of wholesalers, retail point-of-sale specialists and internal sales staff to more than 140 professionals.
In mid-February this year, Genworth introduced another innovation for baby boomers: a new indexed annuity. Called the SecureLiving Classic Indexed Annuity, the product offers protection of investment principal and tax-deferred growth benchmarked by the Standard & Poor’s 500. It has several features tailored to the needs of aging baby boomers. It allows clients to start early withdrawals after only seven years and waives early withdrawal penalties if the funds are to be used for extended hospital or nursing home stays longer than 30 days.
Morningstar also is enthusiastic about Genworth’s plans to expand its mortgage insurance business in foreign countries. Late last year, for example, Genworth announced that it would participate in a state-operated mortgage risk guarantee program in Mexico. By assuming some of the risk of some of the Mexican mortgages, Genworth will help the Mexican government reach its goals of increasing private home construction from 500,000 homes a year to 750,000 a year. The idea is to help create new markets in Mexico’s burgeoning middle class. Even so, Morningstar doesn’t believe expanding mortgage insurance in the over-saturated U.S. market will be as lucrative. Mortgage insurance earned the company $426 million in 2004.
Retirement income and investment also has growth potential, Roday says. The firm has been expanding its annuities business and Roday says that one good aspect of President George W. Bush's so-far failed effort to change Social Security is that it has pointed out the need for investment vehicles, such as annuities. “People realize the need for a guaranteed payout of an accumulated amount,” he says.
The sector, which earned Genworth $148 million in 2004, is expanding. CEO Fraizer told industry analysts that he expects Genworth will have $1.4 trillion in managed assets by 2008.
Genworth Rates a "Buy"
Analysts like where Genworth is heading. Twenty-two analysts surveyed by First Call/Thomson Financial gave the firm a mean rating of “buy.” That’s testimony that Genworth is doing just fine without GE, which recently announced plans to sell its remaining 18 percent stake in the firm by the end of this year.
Is Jack Welch to thank for Genworth’s success? Partly, says Roday. “We are very proud of our GE heritage and the things we have learned,” he says. “Yet we have a great opportunity to take what we learned at GE and add our own vision. Now we can really focus on our customers and our stakeholders and take the best from both worlds.”
-- April 3, 2006
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Genworth CEO Michael Fraizer
Useful Links Recent News Genworth Financial Renames Three Life Underwriting Companies (Nov. 29, 2005) Genworth Financial Will Participate in Mortgage Guarantee Program in Mexico (Nov. 1, 2005)
Genworth Financial Renames Mortgage Insurance and Servicing Companies (Oct. 31, 2005)
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