Regulators in China have come out with tough new corporate acquisition rules in recent weeks. Officials there want to block irrational deals, and deals involving controversial activities that could hurt people in other countries, and, possibly, make China look bad.
The new rules could create turbulence for Genworth Financial Inc.
Genworth is the Richmond, Virginia-based mortgage insurer and life insurer formed from General Electric Company’s old insurance company subsidiaries.
Genworth is still one of the most active players in the mortgage insurance market in the United States, Canada and Australia.
The company has stopped selling new life and annuity products, but it has large amounts of life and annuity business on its books, including in-force life insurance with a total of $639 billion in death benefits, and annuities with about $23 billion in total account value.
The company is still selling new long-term care insurance, and it generated $623 million in net earned LTCI premium revenue in the second quarter.
Genworth has been facing severe pressure on the performance of its LTCI block as a result of low interest rates, inaccurate assumptions about policyholder behavior, and the effects of a belief common in the 1980s and 1990s that premiums for in-force LTCI should never increase.
China Oceanwide Holdings Group Co. Ltd., a large real estate developer based in Beijing, agreed in October to acquire Genworth for $2.7 billion, and to contribute $525 million in cash to shore up the in-force U.S. LTCI operations.
Genworth and China Oceanwide disclosed Aug. 21, in a document filed with the U.S. Securities and Exchange Commission, that they have pushed the completion deadline for their deal back to Nov. 30, from Sept. 1. The companies said they also have agreed to free China Oceanwide from having to pay a deal termination fee if the deal falls through because of a decision by regulators in China. The summary of the new agreement does not appear to refer directly to U.S. insurance regulators.
The China Oceanwide-Genworth appears to be different from some of the “irrational” deals that have concerned regulators in China, however, and those differences could increase the odds that this deal will really close.
Here’s a look at five factors that may be working in favor of completion of this deal, based in part on an analysis of the deal prepared by a team at Hong Kong-based Orient Capital Research in November, and in part on a China Oceanwide preliminary senior notes offering memorandum dated July 10. The memorandum is marked “strictly confidential,” but at least four organizations have posted copies of the memorandum on the web.
1. For Chinese real estate developers, acquiring a non-Chinese insurers is a good way to get access to low-cost capital.
The Orient Capital analysts write that real estate development companies in China have been facing tight constraints on capital.
For companies in China, getting into the insurance business looks like a good way to eventually get access to low-cost sources of capital, the analysts write.
2. China acquirers now see selling new insurance products as a better way to raise money than using an industrial company serve as collateral for bank loans.
For now, Genworth’s relatively low ratings, and questions about the future of its long-term care insurance business, are limiting its sales.
For a Chinese buyer, one popular strategy is to acquire an underperforming insurer, strengthen the insurer, and increase the insurer’s sales. Issuing new insurance products is a much more efficient way to bring in cash than using a business as bank loan collateral, according to the Orient Capital Research analysts.
3. The Chinese government is experimenting with a long-term care insurance pilot program and wants to know more about how LTCI works.
China has a rapidly aging population, with just one child responsible for caring for two parents in many families. The Chinese government has been sending representatives to U.S. long-term care insurance conferences to learn about the U.S. commercial LTCI market for years.
In July, China’s Ministry of Human Resources and Social Security, the country’s equivalent of the U.S. Department of Health and Human Services, set up an LTCI pilot program aimed at workers with basic government-provided major medical coverage.
In June, Li Keqiang, the economist who runs the State Council of the People’s Republic China, said at a council meeting in June that one priority for China is developing commercial insurance programs to protect older residents of China against accidental injury risk, longevity risk and the risk of needing long-term care, according to a China Government Network account posted on the ministry’s website.
China should make sure the commercial insurance arrangements for older people are safe and reliable, and that they provide a reasonable rate of return, according to Li.
Li’s comments suggest that officials in China may place a high value on getting advice from organizations that have operated large LTCI programs.
4. China Oceanwide is interested in building insurance operations in China as well as in building insurance operations in the United States.
The pending Genworth deal is just one part of China Oceanwide’s efforts in the insurance sector.
The company’s Wuhan CBD unit acquired 51% of Asia-Pacific Property & Casualty Insurance Co. Ltd. in 2015 from an investment group. In August 2015, the company began setting up Asia-Pacific Reinsurance Holdings Co. Ltd., the first reinsurance company established with private capital in China. The reinsurer will offer life, health and accident reinsurance as well as property-casualty reinsurance, according to China Oceanwide.
The company is also planning to start Asia-Pacific Internet Life Insurance Ltd., a company that will sell personal insurance through the Internet.
One of the company’s directors is Zhao Xiaoxia, has been a senior vice president at New York Life Insurance Company and president of Haier New York Life Insurance Company. Several other directors have been executives at life insurers based in China.
5. China Oceanwide managers seem to have a good ability to analyze and disclose the risks they face.
The note offering memorandum includes a long discussion of risk factors, ranging from the possibility that the company may face problems from changes in interest rates to the possibility that negative press coverage may hurt its reputation.
In two comments on insurance-related risk, the company acknowledges that it has a relatively short operating history in the insurance industry.
The company also acknowledges that its assumptions about the growth of the insurance market in China may be off.
The company has a list of advisors that includes some names familiar to U.S. investors. The list of legal advisors on the memorandum includes the Hong Kong office of Davis Polk. The auditor is an affiliate of BDO based in Shenzhen, China.
— Read Genworth Says Higher LTCI Rates Beat Liquidation on ThinkAdvisor.
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