Return to Virginia Business - September 2004

by Jack Milligan
Virginia Business
September 2004

Independence Day came early this year for Michael Fraizer — on May 25th to be exact. That’s when 30 percent of Richmond-based Genworth Financial Inc. was spun off from a tough and demanding parent, the General Electric Co., in one of the biggest initial public offerings of 2004. Fraizer, Genworth’s 45-year-old CEO, president and chairman, and a group of senior executives trekked to New York to watch as the first shares of Genworth’s stock — listed under the symbol GNW — traded on the New York Stock Exchange. As part of the going-public ritual, Fraizer rang the opening bell and then went to the trading floor where he handed over a check in return for a couple shares of Genworth stock, becoming the first official buyer.

For Fraizer and his senior managers, the $2.83 billion Genworth IPO was the culmination of a year’s worth of blood, sweat and tears. In the few seconds required for Genworth’s stock symbol to parade across an electronic tickertape, it became one of the country’s largest publicly owned insurance companies, with assets of $106 billion and sales last year of $9.8 billion. Getting to that point required an enormous amount of work. First the company had to cut its corporate apron strings with GE, since many functions had been centralized, and it had to create a whole new marketing identity — including a new name. Next came preparation of a 400-page prospectus, and then the IPO had to be sold to investors in an exhausting three-week, 29-city “road show.” The new stock was issued at $19.50 a share and in August was trading at a slight, $22-per-share premium.

Like any proud parent who has just birthed a child, Fraizer enjoys rehashing the day when Genworth came to life. Employees back in Richmond and Lynchburg got caught up in the drama, he says, as they watched it unfold on the Internet and television. “When you go to the exchange … and you walk out on the platform. And it’s just lying there before you. What you see on TV does not capture the energy and excitement of the floor. … It was absolutely exhilarating,” he recalls during a recent interview in his spacious office in Genworth’s corporate headquarters in Richmond.

The building’s setting in a park-like campus with a waterfall and trails seems appropriate for a youthful CEO like Fraizer. A trim, athletic-looking man, he jogs regularly and lifts weights to stay fit. Keeping Genworth fiscally fit — a company cut loose from one of the globe’s best known companies — may feel more like a marathon than the three-milers Fraizer runs. While GE still owns 70 percent of the company’s stock, it plans to sell off its entire stake over the next two or three years. So for all practical purposes, Fraizer and his team are already on their own. And despite the adrenaline rush of the IPO, Fraizer realizes it wasn’t the finish line; it’s just the beginning. “If anybody thinks that going public is the culmination of something, they’re kidding themselves. It’s only the start of your next act.”

And what an act that might be if Fraizer and his highly regarded management team can get theirs together. As one might expect from a manager who has spent his entire career at General Electric — where business management has been elevated to an art form — Fraizer boasts that Genworth is an “execution company.” That means several things in his lexicon: product innovation, efficiency and strong community values. One quality Fraizer doesn’t mention and that will probably be his biggest challenge is the imperative of providing new shareholders with a competitive return on their investment.

Genworth’s return on equity (ROE), a standard performance benchmark, is well below the average for life insurance companies. Fraizer has told investors he has a plan to gradually boost Genworth’s ROE over the next three and a half years — from 9.2 percent to 12 percent — and most Wall Street analysts are recommending the stock as a good investment opportunity. However one skeptic, Lehman Brothers insurance analyst Eric Berg, frames the issue squarely. “They’ve got a good plan, but [the performance] ain’t there yet,” he says. “I’m completely agnostic towards Genworth, meaning that I believe results when I see results. They have a plan, but [have made] no progress that I can see in raising ROE.”

One could argue that GE’s decision to spin Genworth off was in itself an indictment of the company’s long-term prospects. In short, the businesses that now comprise Genworth couldn’t meet GE’s performance expectations. GE’s return on equity for the last 12 months exceeds 19 percent and its five-year average exceeds 25 percent. “GE simply made a capital allocation decision, where it wanted to grow the technology services and manufacturing side, and concentrate financial services in two areas, consumer finance and commercial finance,” explains Fraizer. Those all tend to be high-return businesses.

Judging Genworth by the same standards used to evaluate GE’s aircraft engines division might strike some people as a little cold-hearted, particularly when you consider that Genworth is basically in the business of helping ordinary people manage their financial affairs. “You’re helping people at every stage of their lives,” says Fraizer. “And that’s a pretty exciting way to come to work every day.”
Still, there’s no getting around the fact that most insurance companies offer returns that are somewhere between fair and middling. “The insurance industry in general produces returns on equity that average between 10 percent and 12 percent,” says E. Stewart Johnson, an analyst at Arlington-based Friedman, Billings Ramsey & Co. “I simply don’t think the business was producing the rates [of return] that GE was looking for and [the company] decided to spin it off.”

If Fraizer is cowed by the responsibility of running a large public company and meeting the expectations of institutional investors who usually want immediate results, he certainly doesn’t show it. A Nebraska native who entered a GE management-training program following his graduation from Carleton College in 1980 with a degree in political science, Fraizer has been running the businesses that now comprise Genworth since 1997. He is a product of one of the most results-oriented corporate cultures in the world and has worked for two of the toughest bosses in business — former GE CEO John F. Welch and current CEO Jeffrey R. Immelt.

“Do I feel pressure? I’d say no,” he says. “Let’s just say that GE was pretty, ah,’’ Fraizer’s voice dissolves into soft laughter. “When you’ve sat across the table from Jack Welch and Jeff Immelt, let’s just say you’re battle-hardened. If you don’t think those guys ask tough questions …”

As Fraizer moves Genworth out from under the shadow of GE, he generally receives high marks from the securities analysts who have met him. “Mike is a very decent, down-to-earth, sincere guy,” says Vanessa Wilson, an analyst who covers insurance stocks at Deutsche Bank Securities in New York. “He wants to win. He wants to do the right thing, and he wants to do it the right way.”

In a market that has been conditioned to expect IPOs from wet-behind-the-ears technology companies, Genworth is something of an anomaly. It came to public ownership with mature businesses and a well-established track record. Genworth sells products in 20 countries around the world and has about 5,800 employees, including 2,400 who work in its Richmond and Lynchburg locations. Genworth grew primarily through acquisitions, including two key purchases in 1996 when it bought First Colony Life Insurance Co. and The Life Insurance Co. of Virginia in Richmond.

Genworth divides its insurance businesses into three operating segments. In the United States, Genworth’s Protection segment markets life insurance, long-term care (LTC) insurance and group life and health coverage for companies with fewer than 1,000 employees. Genworth is the largest provider of LTC coverage in the country and was the first company to offer the product. Genworth also markets so-called payment insurance in Europe, which helps people meet various payment obligations in case of illness, layoffs, death or disability. Combined, these businesses provided about 51 percent of Genworth’s earnings last year. The protection operation is in Lynchburg.

The company’s Retirement Income and Investments section sells customers a variety of annuity products, along with variable life insurance and specialty products including guaranteed investment contracts. This operation accounted for close to 10 percent of the company’s earnings in 2003, and is located in Richmond.

Genworth’s fastest growing business is the Mortgage Insurance segment, where it is the fourth largest insurer in the country. Since the United States is a relatively mature market for mortgage insurance, the company’s best growth prospects are in Europe and Asia, where many countries have not embraced home ownership as enthusiastically as U.S. residents. This business contributed slightly over 39 percent of Genworth’s earnings last year.

According to security analysts, Genworth’s financial returns in recent years have been hurt by an extremely competitive payment protection market in the U.K. and by some long-term care policies written in the mid-1990s that turned out to be less profitable than expected.

Volatile stock market returns have also led to lower-than-expected investment yields on some of Genworth’s annuities and guaranteed interest contracts (GICs), further pulling down its returns. GE contributed to the problem by requiring Genworth to harvest investment gains in its securities portfolios to pay losses and restructuring charges elsewhere in the parent company. Had Genworth been allowed to keep those gains, Deutsche Bank’s Wilson estimates that the company’s ROE in 2003 would have been closer to 13 percent.

Both Johnson and Wilson rate Genworth’s stock a buy. Berg at Lehman Brothers agrees that GE’s investment practices hurt Genworth’s performance, but isn’t willing to blame its low ROE on that alone, and he rates the stock as neutral. In a recent report, he laments that Genworth hasn’t been able to take its many advantages — which include expanding markets, a cost-conscious culture and good capital-management skills — and “translate these into powerfully and consistently a track record of success.”

The guy who’s ultimately responsible for Genworth’s performance is, of course, Fraizer. And he’s not about to talk trash about GE — where he worked for 24 years, and which still owns 70 percent of his company’s stock. Fraizer describes the spin off as a “win-win” situation where each party came away with something important. “GE won, as it wanted to shift capital, and we won as a business because we can take Genworth — which is a great company — to the next level and beyond,” he says.

Other people with some skin in this game are willing to be more candid about Genworth’s future without GE. Unlike some of its competitors, Genworth sells its products through a multi-faceted distribution system that includes wholesalers like Richmond-based Special Services Agency, which provides Genworth’s life, LTC and annuity products to independent insurance agents. That makes the opinions of people like Special Services owner Nancy Ayers count for something. She looks forward to Genworth being independent of GE, because she says the company will be able to develop new products faster. GE’s elaborate and highly detailed management process took too long to approve new products. “Everything had to go through this endless process of being approved,” she says. “By the time it’s introduced, the product is stale.”

The Fraizer Plan for raising Genworth’s investment returns can be broken down into several distinct components. Fraizer begins by pointing to each of Genworth’s three main businesses — protection, retirement and mortgage. They’re all “deep markets” with powerful demographic drivers behind them, he explains. For example, the long-term care business should benefit from the “crisis in America of people [being] without a safety net,” he says. “Increasingly the burden’s being shifted from government and employers to the individual to have your own safety net.”

Genworth’s various investment products stand to be positively affected by an estimated 77 million baby boomers projected to retire over the next 20 years. “One of their biggest risks is outliving their savings, and as you know American savings rates are not exactly high,” Fraizer says. “Helping them achieve a dependable income is a deep market and will grow over the years.”

In addition, the company expects solid growth in mortgage insurance, particularly outside the United States. “Governments are encouraging home ownership around the world,” Fraizer says. “We’re number four in the United States, number two in Canada, number one in Australia and the leader in what is an emerging European market. We see that as a growth area.”

Genworth also plans on reducing its overhead by $150 million. This goal, Fraizer says, would be accomplished through smarter purchasing practices and better use of technology rather than layoffs. He expects to maintain a stable work force in Virginia, where its Richmond and Lynchburg locations employ some 1,100 and 1,300 people, respectively. In fact, the company recently relocated the headquarters of its LTC operation from San Raphael, Calif., to Richmond.

Another key goal is to gradually raise Genworth’s return on equity at a rate of 30 to 50 basis points a year and to hit 12 percent by the end of 2008. Yet even that, notes Wilson, would leave Genworth well behind such industry leaders as The Hartford Financial Services Group, a Hartford, Conn.-based insurance company that posted a 16.5 percent ROE over the last four quarters. Still, Fraizer is a conservative manager who says he won’t put his company at risk to curry favor on Wall Street. “We’re a careful and conservative company,” he says. “You have to manage risk carefully so that you’re there for your policyholders and you’re there for your shareholders as well.”

Besides plotting its financial strategy, another birthing pain for the new company has been the creation of a new identity. Genworth will spend $35 million a year over the next three years for the marketing, advertising and legal costs associated with changing its name and identity from GE Financial Assurance Holdings. Managing the branding campaign is WPP Group, a New York-based advertising and marketing communications firm. Genworth can cite its GE heritage for the next five years, and it’s taking advantage of the opportunity to plug its roots by including an endorsement tag — “Built on GE Heritage” — in advertisements. “Names mean things to people,” says Fraizer. Genworth was invented with both a focus on being there for generations and helping people to achieve their financial dreams. “The ‘Gen’ is a tip-of-the-hat to our heritage,” he explains.

In his new role as the leader of an independent public company, Fraizer has been forced to focus on other external issues as well. He expects to rollout a new community relations strategy and says the company will be taking a higher lobbying profile in Washington, D.C., where Genworth has opened a new government office. “You’re always focused on customers, you’re always focused on your markets and participating in things like trade groups and government relations,” he says. “That just goes up three-fold as a public company.”
Meanwhile, Wall Street is waiting to see how well Fraizer executes. Berg at Lehman Brothers had dinner with Fraizer and several of his senior managers recently and came away impressed. “They’re a likable, smart, exceptional group of individuals,” he says. “Now it’s time to deliver.”

Return to Virginia Business - September 2004