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August 25, 2017 at 08:45 AM
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.
(Related: Genworth’s Would-Be Buyer Helped Build Modern China)
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.
(Image: Thinkstock)
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.
