China Oceanwide updates and amends merger filing, tempered by pending Genworth MI Canada sale

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Attorneys for China Oceanwide Holdings Co. Ltdhave submitted additions and exhibits to its application to acquire Genworth Financial to its state regulator to reflect the proposed sale of Genworth’s montage insurance stake in Genworth MI Canada Inc. to Brookfield BBP Canada Holdings Inc. in hopes regulators will rely upon previous approval letters.

The Genworth Canada deal won’t change any of the previously-agreed upon terms and conditions of the original acquisition, the lawyers assured in their Oct. 8th letter. China Oceanwide believes that the Genworth buyout can be completed under the original approval granted Jan. 11, 2019 by the Commission, the letter stated.

The letter and accompanying exhibits submitted to the Virginia State Corporation Commission also pinned the closing of the Genworth Canada transaction on year-end 2019, with aspirations to close the entire deal of the Virginia-domiciled long-term care insurer to Oceanwide soon thereafter. 

The letter also details a corporate maneuver by Genworth to contribute 100% of its stock in Genworth Mortgage Holdings, Inc. to Genworth Holdings, Inc. (GHI) before consummating the Genworth Canada deal. Called the “contribution transaction,” this proposed internal insurance holding company change allows greater potential financial flexibility, and gets around any covenants prohibiting the sale of all or substantially all of GHI’s assets, the lawyers argue. This internal transaction will also increase the asset base of GHI, they said.

The Oceanwide legal team letter states that the so-called contribution transaction was exempted from Form A or legal change of insurance company ownership state filing requirements by the North Carolina Department of Insurance in August. Additionally, the parties said they had received non-objection letters from federal mortgage entities Fannie Mae and from Freddie Mac in September. It is not clear that the other states where prior approval for the Oceanwide deal have been granted —Virginia, Delaware, South Carolina, Vermont and New York among them —have cleared it.

Genworth struck a deal back in August to sell its almost 60% stake in Genworth Canada to clear the decks of any Canadian government objection to the acquisition of the entire Genworth firm by the Chinese conglomerate.Purchaser Brookfield Business Partners agreed as part of this deal to give Genworth Financial up to $850 million in bridge financing if regulatory approvals for the Genworth mortgage insurance transaction weren’t in place by Oct. 31, now three weeks away.

“Genworth Canada is not a direct or indirect subsidiary or parent of the domestic insurers, and the Genworth Canada transaction will have no impact on the operations, management, personnel or policies of the domestic insurers,” the lawyers’ letter claims.

 The Virginia Commission approved the Oceanwide-Genworth deal well before the decision to sell Genworth’s stake in the Canadian mortgage insurer was announced. China Oceanwide and Genworth were not making headway with Canadian regulators in their bid for approval of the deal despite sending out a cadre of top lobbyists  to meet for months with Canadian officials and regualtors.

The Oct. 8 filing’s exhibits include previous securities filings, merger agreements, waivers to extend the deal expiration and a new post-mortgage insurance sale transaction organization chart.

The original $2.7 billion proposed acquisition of Genworth by Oceanwide was announced three years ago — on Oct. 21, 2016 — and has been extended a dozen times as it awaited one approval after another, from foreign, federal and local regulators. The current waiver extends the deal until Dec. 31, 2019, but it is clear that if the Brookfield deal isn’t consummated by then, there will be an opportunity for another extension. 

Oceanwide is also preparing an updated organizational chart as there have been internal changes in ownership interests held by subsidiaries or individuals d within the China Oceanwide group, the letter stated. It said it would submit it to regulators when it becomes available. 

One exhibit kept confidential is an updated three-year financial projections for Genworth. The lawyers write that they contain confidential and proprietary trade secret information, and “disclosure would be materially adverse to the Applicants and the Domestic Insurers.” 

The director of the Division of Information Resources for the Commission cautioned against pre-judging the direction of or the outcome of the regulators review of the material 

A Genworth spokeswoman said that the company has been “working closely with all of our regulators throughout the transaction approval process. The purpose of this filing was to update the Virginia Bureau of Insurance on developments in the transaction in light of closing delays.” She did not specify which delays or if this referred to the Genworth Canada-Brookfield transaction. 

Canada has already issued a no-action letter for the Brookfield Business Partners  deal, meaning the government there does not object and has clearance there.

Oceanwide/Genworth have likely amended their filings in other states with insurance company subsidiaries in addition to their state of domicile, Virginia. Delaware and New York have not previously commented or made documents public, as Virginia does on its website.  Delaware requires a hearing with a thirty-day notice for a merger review, and it is unknown whether the Brookfield deal would trigger a new review. A spokesperson for the Delaware Insurance Department did not respond. 

Once all other regulatory approvals are gained or re-gained, as the case may be, the Oceanwide deal will still require clearance in China for currency conversion, the parties have stated in regulatory filings. 

Separately, the Bland & Sorkin letter also disclosed that although the three security directors mandated by an agreement to safeguard policyholders’ personal identifiable information as part of the approval nod from the Committee on Foreign Investment in the United States haven’t joined Genworth’s board yet, they have been busy. They are already “providing oversight and review of the security procedures” that Genworth has put in place, according to the Bland & Sorkin lawyers representing Oceanwide.

CFIUS has also approved the nominations of the three high-level security personnel: General Raymond Odierno (Ret.); Lt. General Karen Dyson (Ret.) and Eric Rosenbach, they noted. 

Additionally, Ankura Consulting Group, LLC, the third-party monitoring firm hired by Genworth a part of the mitigation agreement with CFIUS, is now filing monthly certifications with the Treasury Department and the Department of Justice on Genworth’s adherence to the CFIUS mitigation agreement, the Oceanwide lawyers told Virginia’s insurance regulators.

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SHIP’s Q2 exhibits further erosion while a regulatory update on a corrective action is expected soon

The negative surplus of struggling long-term care insurer Senior Health Insurance Company grew in the second quarter 2019 to almost half a billion dollars from about $466.9 at year-end 2018, while certain permitted practices appear to push the negative surplus to $608 million for 2019 in a statutory accounting calculation. 

However, according to regulators, there may be a plan to address this unveiled soon.

“We are hopeful we should be able to provide a more detailed update in the very near future,” the Pennsylvania Insurance Department said in a short statement in response to an inquiry.

“We continue to work with the company to address its negative surplus.  We will provide policyholders and interested parties an update when company management and the Department agree on a path forward. Currently, all claims are being paid when due and policyholders are encouraged to continue to pay premiums to keep coverage in place,” the state regulatory body said.

The SHIP quarterly statement to the Pennsylvania Insurance Department signed in mid-August acknowledges that it has suffered “recurring losses from operations and has a net capital and surplus deficit,” so is working with regulators to “develop a corrective action plan.”

This work has been underway for some months now, and meetings with the regulators have been ongoing.

SHIP’s net admitted assets for the second quarter are $2,072,200,204 and its liabilities are $2,568,440,242, leaving a negative $496,240,038 on its balance sheet. 

In a note to the financial statement, SHIP described an NAIC [National Association of InsuranceCommissioners] SAP permitted practice that allowed the release of an interest maintenance reserve of $192.5 million, which increased SHIP’s 2019 reported net income and negative Surplus balances by $111,868,692, bringing the 2019 surplus deficit to $608.1 million compared with a deficit of $575.9 million for 2018. 

The company stated in the report that as of June 30, it has a $259.5 million operating loss carry-forward with expiration dates between 2028 and 2031 and an almost  $156 million  operating loss carry-forward.

The quarterly report also describes ongoing litigation with the liquidators of Platinum Partners, in which it had investments made through reinsurer Beechwood Re Ltd. 

For example, in June, Platinum Partners Value Arbitrage Fund filed against the SHIP alleging that several transactions involving Agera Energy resulted in its interests in Agera Energy in exchange for allegedly worthless Platinum Funds. 

The plaintiffs allege that the allege the Agera-related transactions were created by Beechwood and Platinum Partners insiders to benefit alleged Beechwood preferred investor clients, including SHIP. 

SHIP stated that it plans to vigorously defend this suit but noted that a bad outcome in the case could have an adverse impact on its financial position.

The LTC insurer, which was first incorporated in 1887 and was part of Conseco Senior Health Insurance Co, no longer writes new business. It is run by its affiliate, Fuzion Analytics under a contract. SHIP paid Fuzion almost $15,5 million for services under this agreement in 2018 and will pay $12.6 million in 2019, the report stated. The trustees of SHIP include former insurance regulators. 

An insurance academic who reviewed the document noted that the company’s gross reserves are about what they were in December, or almost $1 billion if losses come in as projected, which this person said would be optimistic. The assets are not earning much and there is almost no reinsurance, this person said. 

Fuzion executives did not comment on the corrective plan progress, if any, being made or on any updated numbers.

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*From SHIP’s quarterly statement for quarter ending June 301, under Notes on Significant Accounting Practices in which the financial statements of Senior Health Insurance Company of Pennsylvania are presented on the basis of accounting practices prescribed or permitted by the Pennsylvania Commissioner of Insurance.