China Oceanwide Holdings Group Co. agreed to buy Genworth Financial Inc. for $2.7 billion in cash, pledging to help the U.S. firm manage its debt and strengthen life insurance units after it was hurt by higher-than-expected losses tied to long-term care coverage.
A China Oceanwide investment platform will pay $5.43 per share, the companies said Sunday in a statement. That’s 4.2 percent more than Genworth’s closing price of $5.21 Friday. The buyer also promised to provide $600 million to Genworth to address debt maturing in 2018, as well as $525 million to strengthen the life insurance businesses.
Genworth Chief Executive Officer Tom McInerney has been selling assets to ensure the insurer has sufficient liquidity after it was hit by losses on its long-term care coverage, which pays for home-health aides and nursing home stays, and as low interest rates crimp returns. China Oceanwide plans to let Richmond, Virginia-based Genworth operate as a standalone company after the takeover with senior management still in place, according to the statement.
“Genworth is an established leader in both mortgage insurance and long-term care insurance, which are markets that present significant long-term growth opportunities,” China Oceanwide Chairman Lu Zhiqiang said in the statement. “We are providing crucial financial support to Genworth’s efforts to restructure its U.S. life insurance businesses.”
China Oceanwide spans real estate, energy and finance. It was founded in 1985 by Lu, who is a Communist Party secretary, as well as a member of the standing committee of the 12th Chinese People’s Political Consultative Conference, according to the company’s website.
Lu is also one of the founding shareholders of China Minsheng Banking Corp., and earlier this year boosted his stake in the Chinese lender through China Oceanwide. Lu’s purchases of about $1.1 billion in Minsheng’s stock in July reflected his confidence in the Beijing-based lender, he said at the time. He dismissed speculation at that time that his moves may signal a looming tussle for ownership with the bank’s biggest shareholder, Anbang Insurance Group Co.
Genworth isn’t likely to see higher bids because of the struggles at its long-term care operation and China Oceanwide’s agreement to add more capital, according to BTIG LLC analyst Mark Palmer.
“GNW’s rationale for agreeing to sell itself likely was rooted in the challenges faced by its LTC unit, as the company in conjunction with the sale announcement disclosed that as a result of its annual review of its LTC claim reserves it would increase such reserves,” Palmer wrote in a note to clients.
Genworth writes mortgage insurance in the U.S., and has stakes in a Canadian and an Australian home-loan guarantor. Mortgage insurers cover losses for lenders when homeowners default and foreclosure fails to recoup costs. This deal gives China Oceanwide the chance to benefit from gains in the U.S. housing market.
McInerney has been seeking to free up capital to pay bonds coming due, and has also been boosting capital by selling assets. He struck a deal in 2015 to sell a European mortgage unit to AmTrust Financial Services Inc. and also agreed to have Axa SA buy a European unit that offers customers protection against the financial impact of major illness, accident or death. He’s also been working to restructure the business units in a way that’s acceptable to regulators, and won approval from bondholders earlier this year to reorganize some of its units.
The deal will help give Genworth the finances to separate a life and annuity operation from another life insurance arm, according to the statement. Lu said the transaction was structured to make it easier to obtain regulatory approval.
Genworth shares have slumped from as high as $15.53 at the end of 2013 as the company dealt with its long-term care operations. The insurer has also been seeking in recent years to boost rates on old long-term care coverage as medical costs increased and more people than expected held on to those policies. The Chinese buyer has no intention or obligation to add more capital to support those legacy obligations, according to the statement.
“We believe that this transaction creates greater and more certain stockholder value than our current business plan or other strategic alternatives,” McInerney said in the statement. “China Oceanwide is an ideal owner for Genworth. They recognize the strength of our mortgage insurance platform and the importance of long-term care insurance in addressing an aging population.”
Overseas buyers have been seeking to enter the U.S. insurance market to expand in a large market and counter some challenges at home. Japan’s Dai-ichi Life Insurance Co. agreed in 2014 to buy Birmingham, Alabama-based Protective Life Corp., and Sumitomo Life Insurance Co. agreed to purchase Symetra Financial Corp. last year. China’s Anbang agreed to a deal for Des Moines, Iowa-based Fidelity & Guaranty Life that same year, but has hit a roadblock, pulling an application for regulatory approval from New York to buy the firm. Anbang has renewed discussions with regulators about the transactions, people with knowledge of the talks said in September.
The deal is expected to close by the middle of 2017, the company said in the statement. Genworth received advice from Goldman Sachs Group Inc., Lazard Ltd., Willkie, Farr & Gallagher LLP, and Weil, Gotshal & Manges LLP, while the board of directors sought guidance from Richards, Layton & Finger. China Oceanwide was advised by Citigroup Inc., Willis Towers Watson Plc, Sullivan & Cromwell and Potter Anderson & Corroon LLP.
Genworth also announced charges associated with its long-term care reserves and taxes of about $535 million to $625 million, unrelated to this transaction.