When is a rescue not a rescue, when it is a bailout?
The question arises from the surprise news yesterday that private (and little known) Chinese financial holdings company, China Oceanwide had agreed to pay $US2.7 billion for listed US insurance group Genworth Financial, which in turn controls 52% of Genworth Mortgage Insurance Australia (GMA), our largest Lenders Mortgage Insurance provider.
The announcement came at the same time as Genworth slipped out (on a Sunday in the US) an announcement revealing it was facing more than $US600 million in new losses and asset calls for its troubled life insurance business and the writing off of deferred tax assets that will not be used (because the company is not generating profits).
It is clear these write offs and provisions were more than Genworth’s financial resources could tolerate and it needed to be takeover over (bailed out) or it would have had trouble remaining solvent and keeping regulators happy.
Genworth has been struggling for several years with ballooning claims costs in parts of its life insurance business, poor claims management and under reserving for future claims – all of which has needed more capital and more restructuring to try and bring the situation under control.
The company’s June 30 second quarter report talked confidently about how progress was being made, reducing costs, revamping the life insurance business by merging various parts into one unit and selling US government bonds for a profit and quitting its European mortgage insurance for $US50 million. But the company said it faced higher mortgage insurance costs in Western Australia and Queensland in the quarter. But Genworth said it has boosted its cash and liquid securities holdings to $US934 million at June 30, but given yesterday’s bailout takeover, that was clearly not enough.
But in Sunday’s statement, Genworth said its annual review of its its Long Term Care (LTC) reserves, had been found more capital was needed. It said as a “result of this review, the company expects to increase LTC claim reserves by approximately $400 to $450 million pre-tax resulting in an after-tax charge to earnings of $260 to $300 million for the third quarter…. “In light of the company’s latest financial projections, including the projected impact to current and future earnings associated with higher expected claim costs in LTC and sustained low interest rates, the company also expects to record a non-cash charge of $275 to $325 million primarily related to deferred tax assets that are not expected to be utilized before their expiration."
So it’s no wonder the same announcement from Genworth included news of the China Oceanwide takeover offer. Beijing-based Oceanwide said in a separate statement yesterday that it would acquire all outstanding shares in Genworth for $US5.43 a share – 2 cents above last Friday’s close in New York which valued the company at $US2.6 billion – hardly a huge premium for control.
The offer prices is also the highest price for the shares since early August, 2015.
But the key part of the announcement was that the Chinese group will help recapitalise Genworth’s troubled life insurance business. The proposed bid will help shore up the group by injecting $US1.1 billion of additional capital.
Genworth has been struggling tor raise capital to improve the finances of its life insurance arm (it has been under regulator pressure to do so in the US), while it has also found it hard to convince lenders and shareholders that it can raise enough new capital and debt to repay loans due in 2018.
The Chinese group said if the deal is approved, it will contribute $US600 million in cash to Genworth to address debt maturing in 2018, and $525 million for the US life insurance business.
The Chinese group underlined the deal was effectively a bailout by saying in yesterday’s statement that the takeover will help strengthen Genworth’s life insurance business. “In acquiring Genworth and contributing $1.1 billion of additional capital, we are providing crucial financial support to Genworth’s efforts to restructure its US life insurance businesses,” said Oceanwide chairman Lu Zhiqiang.
Genworth’s senior management will stay intact and the company will become a standalone subsidiary of Oceanwide, according to the statement, which was issued by both companies.
The offer comes two weeks ahead of the September quarter results from Genworth.
As part of the deal, China Oceanwide would pick up the 52% stake in the Australian subsidiary, which will need the greenlight from key regulator, APRA.
China Oceanwide is a privately held, family-owned financial holding group, with interests in financial services, energy, culture, media and real estate. GMIA shares rose 3% to $3.01.
The Australian company has been self liquidating in the past year as the number of loans needing lenders mortgage insurance (loans with an Loan To Valuation Ratio of 80% or more) falls as regulators demand banks ask home buyers for more deposits and crack down on interest only lending and other types of home loans where mortgage insurance underpins the deal.
