GE IPO: Company Laying Groundwork in Europe

When a firm files an "S1" statement with the Securities and Exchange Commission, it usually includes all of its hopes, dreams and fears as the company prepares to sell its shares to the public.

The new S1 filed by General Electric on behalf of Genworth Financial - its mortgage insurance unit and related businesses - is no exception, but what's interesting about the document is GE's plans for expansion into Europe and other overseas markets.

Genworth includes not just MI, but life insurance, long-term care insurance and other consumer-related businesses.

GE officials have spent a good deal of time laying the groundwork for MI expansion in Europe. "Our growth strategy depends partly upon the development of favorable legislative and regulatory policies throughout Europe that support increased homeownership and provide capital relief for institutions that insure their mortgage loan portfolios with private mortgage insurance."

The company notes that it has "collaborated" with government agencies to develop bank regulatory capital requirements that "provide incentives to lenders to implement risk transfer strategies such as mortgage insurance."

GE readily admits that "we have invested, and we will continue to invest, significant resources to advocate such a regulatory environment at the national and pan-European levels."

Just how great is the potential for MI in Europe? GE says the net premiums written by its international mortgage insurance unit "have increased by a compound annual growth rate of 44% for the two years ended Dec. 31."

The only thing that could go wrong it says is "if European legislative and regulatory agencies fail to adopt these policies, then the European markets for high loan-to-value lending and mortgage insurance may not expand as we currently anticipate."

In other words, GE is copying what it has done in the U.S. - lobbying politicians and regulators to pass rules, regulations and laws that benefit its products.

It would appear from reading the SEC documents that Genworth is a cash cow but not everything is entirely rosy. The MI and other businesses that GE hopes to spin off this year saw its net earnings decline by 24% during the first nine months of last year.

The mortgage insurance division - one of five businesses that comprise Genworth - saw its net income decline by 20% during the period even though its revenue rose by 2%. (The MI, though, had record earnings in 2002.)

The S1 notes that the MI unit, GE Capital Mortgage Insurance, Raleigh, N.C., is the second best performer among the five.

Overall, Genworth, which boasts assets of $103 billion, earned $749 million during the nine-month period. Once GE spins off Genworth it will own 70% of the company, but in time it hopes to divest itself entirely.

The S1 warns that if Fannie Mae and Freddie Mac adopt policies to only do business with AAA-rated insurers, "our competitive position may suffer." GECMI, which is the nation's fourth largest MI out of seven firms , is rated AA. (The ranking is based on figures compiled by Mortgage Servicing News.)

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