Stock market investors seemed to be more optimistic today about efforts by China Oceanwide Holdings Group Co. Ltd. to acquire Genworth Financial Inc.
Delaware insurance regulators held a hearing on the proposed $2.7 billion acquisition this morning.
Investors responded by pushing the price of shares of Genworth common stock to $4.93 each around noon Eastern time, when the hearing ended, up from $4.51 per share at the close of trading on Tuesday.
Genworth is a major player in the U.S., Canadian and Australian mortgage insurance markets. The Richmond, Virginia-based company helped create the modern long-term care insurance (LTCI) market, and it has also been a major issuer of life insurance and annuities.
China Oceanwide — a Beijing-based real estate developer and financial services firm — has been trying to acquire Genworth for about two years.
The companies cleared a major regulatory hurdle this past summer, when Committee on Foreign Investment in the United States (CFIUS), a secretive U.S. national security agency, approved the deal.
But Genworth executives noted in October, during a conference call with securities analysts, the companies still had to get additional approvals from many other agencies in the United States and overseas, including insurance regulators in Delaware, New York state and China, and from the U.S. federal mortgage insurance agencies.
Trinidad Navarro, Delaware’s insurance commissioner, and Tanisha Merced, Delaware’s deputy insurance commissioner, announced today’s hearing Nov. 8.
In the hearing notice, Delaware officials said their review after the hearing could take about 30 days.
Merced said, in a statement included in the hearing notice, that regulators will consider the financial condition and fitness of the acquiring parties, policyholder protection and fairness when reviewing the China Oceanwide application.
“Every regulator in the country is focused on the troubled history and uncertain future of long-term care insurance,” Merced said in the statement. “As the lead regulatory in determining how this transaction impacts long-term care policyholders, Delaware will continue to scrutinize this carefully to assure that those policyholders are best protected.”
Insurance agents who have sold LTCI products and other products from Genworth have been following news of the proposed transaction the way they would follow news of a close relative undergoing open heart surgery.
They see the Genworth’s recovery as important to the fate of the U.S. market for stand-alone LTCI coverage. Many longtime LTCI agents see stand-alone LTCI as the most efficient way to protect individuals and their families against the risk that people will need many years of long-term care services.
State insurance regulators and rating agencies have viewed Genworth’s efforts to stabilize its operations with skepticism. In November, for example, Fitch Ratings downgraded its insurer financial strength rating on two key Genworth operating units, Genworth Life Insurance Company (GLIC) and Genworth Life Insurance Company of New York (GLICNY), to B-, from a B+.
Fitch noted that Genworth executives are now emphasizing that GLIC and GLICNY will have to pay its own way going forward, with a $175 million cash injection but no other capital contributions from Genworth or China Oceanwide.
Fitch said it cut the ratings of GLIC and GLICNY because of the insurers’ weak business profile.
“Genworth no longer writes new life and annuity business,” Fitch said. “GLIC and GLICNY continue to write LTC in most states. However, the volume of new business written has declined steeply.”
GLIC and GLICNY have written most of Genworth’s LTCI business, and “Fitch views [LTCI as] one of the most risky products sold by U.S. life insurers due to above-average underwriting and pricing risk, high reserve and capital requirements and exposure to interest rate volatility,” Fitch said.
Genworth has tried to strengthen its LTCI reserves, but “there remains considerable uncertainty regarding ultimate claims costs and the ability of the company to achieve future premium rate increases on legacy in-force business,” Fitch said.
Fitch also said that it is unsure whether it will get enough information about China Oceanwide to continue to assign a rating to GLIC and GLICNY.
Nate Anderson, a blogger with Hindenburg Research, who has been involved with short-selling, has argued that China Oceanwide appears to be facing a cash crunch, and that letting a non-U.S. entity acquire Genworth could reduce U.S. insurance regulators’ ability to protect policyholders located in the United States.
Delaware regulators have posted documents related with their China Oceanwide-Genworth deal review process here.
John Schreppler II, a New Jersey-based lawyer who is representing the deal applicants in Delaware, noted, in a letter dated Sept. 6, that the applicants could end up using one financing structure, which they proposed early on, or a second “contingent funding structure.”
Adding the contingent structure is necessary because of “international economic and political developments, including Chinese foreign exchange controls,” Schreppler wrote.
If China Oceanwide uses the original funding structure, all of the cash for the deal will come from entities based in China, Schreppler wrote.
If the company uses the contingent funding structure, 35% of the cash will come from China, and 65% from entities incorporated in the British Virgin Islands, Schreppler wrote.
The Contingent Funding Structure Corporate Family
Another recently filed document, an organizational chart, shows how Genworth might fit in China Oceanwide’s corporate family if China Oceanwide uses the contingent funding structure.
“China Oceanwide” is the entity name commonly used in news articles about the proposed deal, but the organizational chart shows that China Oceanwide is really a mid-level organization in a family of companies partly controlled by Zhiqiang Lu.
Lu is a pioneer in China’s modern commercial real estate development sector.
If Lu completes the Genworth deal using the contingent funding structure, Genworth could become part of Asia Pacific Insurance Holdings Ltd. of Bermuda.
Tonghai International Group Investment Ltd., a company controlled by Lu, would own 65% of Asia Pacific Insurance of Bermuda.
A Hong Kong-based company, Asia Pacific Universe Investment (Hong Kong) Ltd., would own 35% of Asia Pacific Insurance of Bermuda.
Lu and two partners control most of Asia Pacific Universe of Hong Kong. But public shareholders have a 30% stake in another intermediate company, Oceanwide Holdings Co. Ltd. Oceanwide Holdings would have a 25% stake in the entity that controls Asia Pacific Universe of Hong Kong.
Shares of Oceanwide Holdings stock trade under the symbol CNY on the Shenzhen Stock Exchange.
The public company’s English-language website is available here.
— Read Short-Seller Makes a Pessimist’s Case Against China Oceanwide-Genworth Deal, on ThinkAdvisor.