China’s Big Insurance Buy Leaves Lots of Risk
October 27, 2016 by Anjani Trivedi
A Chinese knight in shining armor has come to the rescue yet again. But it may not have made things safe for investors.
In the latest outbound Chinese deal, conglomerate China Oceanwide Holdings agreed to buy New York-listed insurer Genworth Financial for $2.7 billion in cash, paying a 4.2% premium to the current stock price.
It barely makes the list of recent Chinese mega-bids, but this is China Oceanwide’s biggest deal yet. Still, Genworth doesn’t quite fit its investment portfolio, which mostly spans property from New York to Hawaii, Chinese banking, and Australian mining.
In truth, China Oceanwide’s foray into U.S. insurance looks more like a helping hand than an aggressive takeover bid. On top of the $2.7 billion purchase price, China Oceanwide committed $600 million to deal with Genworth debt that matures in just over a year and $525 million to shore up and restructure Genworth’s U.S. life insurance business. Genworth’s CEO acknowledged the nature of the deal, noting that it creates “greater and more certain value” for shareholders than its existing strategy—largely. selling off smaller operations.
As in many of the $189 billion in previous Chinese outbound deals this year—for producers of products ranging from printers to aluminum to microchips—it’s hard to see value for the buyer. Genworth, one of the largest players in the volatile U.S. market for long-term-care insurance and a seller of mortgage insurance in the U.S., Canada, and Australia, has been plagued by issues including litigation costs, charges on its long-term-care business and rising delinquencies in Australia. This is aside from the low-interest rates dogging all insurers.
China Oceanwide’s chairman said the deal was structured in a way that would facilitate regulatory approval, though a number deals have run into roadblocks, including a $1.57 billion bid by China’s Anbang Insurance Group for U.S. listed insurer, Fidelity & Guaranty Life earlier this year.
Credit Sights analysts say regulators may fear a repeat of the long-term-care troubles of Penn Treaty American Corp. 15 years ago, when an inability to pay claims forced state guarantee associations to cover its obligations.
That’s hardly grounds for synergies, especially since China Oceanwide said it had “no current intention or future obligation to contribute additional capital to support” Genworth’s legacy business.
Ultimately investors and regulators are relying on Genworth’s claim that it won’t need further support from its Chinese buyer.
While announcing the transaction, Genworth separately revealed charges of up to $625 million, including claim reserves that could dent margins further. The rescue may go only so far.
Write to Anjani Trivedi at anjani.trivedi@wsj.com
