Genworth needs Delaware regulators' blessing, analysts say

Genworth Financial's ability to chart its own course may depend on its ability to persuade insurance regulators in Delaware to approve an acquisition offer from China Oceanwide Holdings Group Co. Ltd.

Securities analysts asked about Delaware insurance regulators several times today during a conference call Genworth held to discuss the offer.

China Oceanwide, a Beijing-based real estate and financial services formed organized in 1985 by Lu Zhiqiang, has offered to pay Genworth's shareholders $5.43 per share for their Genworth stock.

China Oceanwide has also promised to provide $525 million that Genworth can use to shore up two big U.S. life insurance company subsidiaries, Genworth Life Insurance Co., which is known as GLIC (pronounced "Glick") and Genworth Life and Annuity Insurance Co., which is known as GLAIC (pronounced "Glake").

China Oceanwide would provide another $600 million that the company could use to refinance or retire debt securities that are set to mature in 2018.

The deal would give the company a total market value of $2.7 billion. That compares with a total market capitalization value, or stock-based value, of about $2.3 billion Friday, according to Yahoo Finance, and a peak market capitalization value of more than $15 billion in 2007.

Genworth has been trying to change its corporate structure to separate its big long-term care insurance unit, which has been hit hard by low interest rates and problems with the assumptions used to set product prices, in order to "isolate the long-term care insurance business from the parts of the business that write life and annuity products.

The securities analysts asked several times, in several different ways, whether Delaware regulators will really let Genworth carve out financial responsibility for the long-term care insurance business from the rest of the company.

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Why the Genworth-China Oceanwide deal could work

One analyst pointedly asked Genworth President and CEO Thomas McInerney today about the deal breakup fee, or how much either Genworth or China Oceanwide would have to pay the other company if regulators rejected the deal.

McInerney said, several times, that Genworth has been talking to regulators and has tried to maximize the likelihood that regulators will approve the deal.

But "we've looked at many different options," McInerney said. "We do have alternatives."

Genworth could reinsure parts of its business, and it could pursue asset sales, McInerney said.

McInerney hinted that other suitors have offered lower prices for Genworth, or deal arrangements financed partly with the acquirer's stock.

The all-cash China Oceanwide deal "creates greater and more certain value for shareholders," McInerney said.

Genworth has been trying to change the relationship of its GLIC and GLAIC units.

GLIC is the Genworth unit that writes stand-alone long-term care insurance and has problems with underpriced long-term care insurance business.

GLAIC is the unit that writes life insurance and annuity products.

Today, GLAIC is a daughter of GLIC. If GLAIC does well, it has to start by sending dividends to GLIC, the struggling long-term care insurance issuer, rather than to the parent company.

Genworth has been trying to make GLAIC a sister of GLIC, rather than a daughter of GLIC.

Using the proposed $525 million cash infusion from China Oceanwide to make GLAIC a sister of GLIC, rather than a daughter "will help to isolate the downside risk from long-term care insurance," McInerney said.

Genworth announced today that it could take more than $675 million in charges in connection with an increase in long-term care insurance claim reserves, and a writedown of the value of "deferred tax assets," or tax breaks Genworth stored for the future but is unlikely to earn enough in the near future to use.

Genworth told China Oceanwide about the charges before it announced the charges to the publish, McInerney said.

The charges could hurt Genworth's credit ratings and make completing an attractive alternative deal more difficult, McInerney said.

McInerney said China Oceanwide is a good suitor in this situation because it has about $30 billion in assets and $5.9 billion cash.

China Oceanwide is "a credible financial sponsor," McInerney said.

McInerney said he also likes China Oceanwide because it has donated $250 million to worthy causes and has talked about leaving Genworth's current operations in place.

"I think China Oceanwide's very supportive of our mortgage insurance businesses around the world as well as our U.S. businesses," McInerney said.

McInerney made a point of saying Genworth wants to continue to meet the needs of its distribution partners as well as of its policyholders and lenders.

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Reimbursement LTCI v. indemnity LTCI

Also during the call, Genworth's chief financial officer, Kelly Groh, said the company is adding to the long-term care insurance claim reserves partly because a recently completed claim review turned up interesting information about how long-term care insurance policies with long durations work.

Groh said the company will be increasing long-term care insurance reserves because it now has more information about how long-term care insurance policies designed to reimburse policyholders for actual long-term care expenses really work.

Originally, Genworth's long-term care insurance units, like many other longtime issuers of stand-alone long-term care insurance products, focused on selling indemnity long-term care insurance policies. The indemnity long-term care insurance policies paid the holders who needed long-term care services a fixed amount of cash per month.

In the past, most of the information Genworth had about the performance of long-term care insurance claims had to do with indemnity long-term care insurance claims. Even in 2014, the company had too little information about the performance of reimbursement-type long-term care insurance claims with durations of seven years or more to include reimbursement long-term care insurance data in claim assumption adjustments it made this year.

This year, when the company conducted a new long-term care insurance claim review, information about long reimbursement long-term care insurance claims was still sparse, but the company had enough to use estimates to fine-tune reimbursement long-term care insurance claim assumptions, Groh said.

Genworth now has 23 percent more reimbursement long-term care insurance claims to analyze than it did in 2014, and it has 32 percent more reimbursement long-term care insurance claims with a duration of seven years or longer, Groh said.

Genworth reports long-term care insurance results

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