Genworth sale short list would be long list

Number of firms would likely be interested in insurer's wealth management business — if it's on the block

Oct 15, 2012 @ 3:57 pm

By Andrew Osterland and Darla Mercado

Genworth
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((Photo: Taber Andrew Bain))

If Genworth Financial Inc. has its asset management business on the block, the company should have no shortage of suitors.

Reuters reported last Friday that Genworth had hired The Goldman Sachs Group Inc. to find a buyer for its turnkey asset management platform business and its alternative investments business, Altegris Investments Inc. Combined, the two businesses manage about $24 billion in assets.

A spokesperson for Genworth would not confirm Monday that the units were up for sale. Goldman Sachs was not immediately available for comment.

Genworth's credit rating was downgraded last week to BBB- by Standard & Poor's Rating Services, leaving it on the verge of junk status. With its insurance businesses struggling, selling the asset management businesses would make sense. The asset management business is changing and the platforms need infusions of capital, said Alois Pirker, a senior analyst with Aite Group LLC. Genworth may not be in a position to do that.

While some clients — notably insurance companies — still want the traditional program that includes investment management, other more rapidly growing segments of the market such as broker-dealers and registered investment advisers want some services, but not others.

“The TAMPS have had to learn how to unbundle their businesses. It's becoming a lot more a la carte,” Mr. Pirker said. “The traditional TAMP fits for clients like insurance companies, but the broker-dealers and RIAs want to retain fees. They like outsourcing, but if they're serious about investment management, the classic TAMP is not a good fit.”

Who are the most-likely buyers? Anybody who wants to ramp up their fee-based business, Mr. Pirker suggested. Topping the list would probably be regional brokerages such as Raymond James Financial Inc., Ameriprise Financial Inc. and possibly even Edward Jones, he said. The wirehouses already have in-house TAMPs for their wealth management businesses and are likely to be less interested.

LPL Financial Holdings Inc. is aggressively expanding its RIA and fee-based business, but bought TAMP provider Fortigent LLC earlier this year.

Large clearing firms such as J.P. Morgan Chase & Co. and RBC Capital Markets LLC also are potential buyers, Mr. Pirker said. Their clearing operations deal mostly with commission-based business, but a TAMP offering could broaden their client base.

A sale of Genworth's asset management businesses would leave it with its life and long-term-care insurance businesses and its fixed-annuity products — all three of which are interest-rate sensitive. The company also has its mortgage insurance business, the earnings for which are tied to the health of the housing market, noted Edward Shields, associate director of equity research at Sandler O'Neill and Partners LP.

Asset management has been a relatively steady source of earnings for Genworth, albeit a small one. During the first half of the year, the money management units earned $24 million, and they reliably generate $45 million to $50 million per year, according to Steven Schwartz, an analyst with Raymond James.

Before the financial crisis, asset management accounted for just 3% of Genworth's earnings, he added. But with the company's U.S. mortgage insurance business in the doldrums, asset management accounted for 36% of the company's overall operating income in 2011. Mr. Shields predicted that proportion will slip to 13%, as the housing market improves.

He also expects Genworth's insurance businesses to improve. “The U.S. housing market appears to be getting better — or at least not getting worse,” Mr. Shields said. “More normalized earnings for the U.S. mortgage insurance unit will counterbalance the impact of low interest rates on the other insurance businesses.”

And a sale of the asset management business would give the company a bigger capital cushion. Genworth spokesman Tom Topinka said the company doesn't comment on speculation.

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