Thomas McInerney,, president and chief executive officer of Genworth Financial Inc., listens to a question during a Bloomberg Television interview in New York, U.S., on Friday, June 27, 2014. Thomas McInerney (Photo: Victor J. Blue/BB)

One of the biggest headaches for executives at Genworth Financial Inc. could turn out to be a blessing for insurance agents, Genworth annuity holders and China Oceanwide Holdings Group Co. Ltd.: Regulators in Delaware think the company’s long-term care insurance (LTCI) unit is more valuable than potential buyers realize.

The battle over the value of the unit, Genworth Life and Annuity Insurance Company (GLAIC), came up today during a conference call Genworth executives held with securities analysts.

China Oceanwide has been trying to acquire Genworth since October 2016. One obstacle has been delays in Genworth’s efforts to separate GLAIC, which is now a subsidiary of another Genworth unit, Genworth Life Insurance Company (GLIC), from GLIC.

Thomas McInerney, Genworth’s president , said Genworth and China Oceanwide believe, based on Genworth’s efforts in 2015 to sell part or all of Genworth, that GLAIC is worth about $700 million.

Delaware regulators’ valuation expert believes, based on cash-flow analysis, that GLAIC might be worth significantly more than $700 million, McInerney said.

“Delaware, I think, is still working on their valuations,” McInerney said.

(Related: Genworth Could Sell Non-U.S. Mortgage Units If Term Loan Efforts Fall Through)

McInerney declined to give analysts many more details about the GLAIC valuation dispute.

“We really can’t comment, because we’re in active negotiations,” McInerney said.

But McInerney said that, because of the valuation dispute, Genworth will likely try to proceed with the China Oceanwide deal without “destacking” GLAIC from GLIC.

If China Oceanwide manages to acquire Genworth under the current terms, and Delaware’s expert turns out to be right about GLAIC, that could mean that GLAIC annuity holders are more secure than observers might expect, and that China Oceanwide could end up with a U.S. insurance operation that’s more secure and more valuable than it had hoped. The expert’s valuation could also mean that the value of the assets backing GLAIC’s ability to make all sorts of payments, including trailing commissions for agents, is greater than the $700 million valuation might suggest.

Genworth and China Oceanwide also have to get approvals for their deal from insurance regulators in New York state, national security regulators in the federal government, and regulators in China and other countries.

McInerney said the New York state review process has been going “reasonably well.”

De-Stacking GLAIC

GE Capital, which was a subsidiary of General Electric Company, spent years creating the insurance business that eventually separated from General Electric and took the name Genworth.

  • Genworth, a Richmond, Virginia-based holding company, owns Genworth North American Corp.
  • Genworth North American owns Genworth Life Insurance Company (GLIC), which has written large amounts of long-term care insurance.
  • GLIC  owns GLAIC, which is best known as an annuity issuer.

Genworth has been trying to turn GLAIC into a company separate from GLIC through a process called “de-stacking.”

Today, GLIC uses cash from GLAIC to shore up long-term care insurance reserves. If GLAIC were separate from GLIC, GLAIC could send cash directly to Genworth.

Because de-stacking would make GLIC and GLAIC simpler, that might help Genworth carve out and sell either GLIC or GLAIC.

Separation could also help protect GLAIC annuity holders if regulators ever put the GLIC long-term care insurance operation under supervision, Genworth has argued in the past.

But, from the perspective of GLIC long-term care insurance policyholders, de-stacking would reduce the value of the assets backing GLIC long-term care insurance policies. China Oceanwide has tried to compensate for that effect by promising to provide $525 million in cash for GLIC. Genworth has agreed to pay $175 million to GLIC.

Genworth Earnings

Genworth held the conference call to go over first-quarter earnings.

The company is still actively selling mortgage insurance, but it is not selling enough new life insurance, annuities or long-term care insurance to report sales figures for those products.

The company is reporting $165 million in net income for the latest quarter on $2.1 billion in revenue, compared with $216 million in net income on $2.2 billion in revenue for the first quarter of 2017.

The life segment as a whole lost $5 million on $1.6 billion in revenue, compared with earnings of $53 million on $1.6 billion  in revenue for the year-earlier quarter.

The LTCI unit posted a $32 million operating loss on $1 billion in revenue, compared with year-earlier earnings of $14 million on $994 million in revenue.

— Read 5 Things Genworth Executives Told Wall Street on ThinkAdvisor.

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