‘Over and done with:’ China Oceanwide withdraws Genworth application from Virginia SCC

April 23, 2021 — China Oceanwide Holdings Group Co. Ltd. asked for its application to acquire Genworth Financial Inc. to be withdrawn in a letter to Virginia regulators, formally ending an almost five year attempt to purchase the long-term care insurer.

The acquisition was publicly proposed in October 2016, although Genworth had been courting would-be buyers privately in the months before it made its choice to go with the Beijing-based conglomerate, offering $5.43 per share or $2.7 billion.

In the end, after numerous state federal regulatory approvals and re-approvals were won in the U.S., and even after Genworth sold its majority stake in its mortgage insurance subsidiary in Canada to remove any hurdles there, China Oceanwide could not raise the funds needed to finance the deal, and Genworth elected to terminate the merger April 6.

China Oceanwide’s letter to the Virginia State Corporation Commission through its lawyers was short and curt. It noted that the application had been approved by the SCC’s Bureau of Insurance on Jan. 11, 2019, and re-approved on March 31, 2020.

“We are submitting this letter to inform the Bureau that pursuant to the notice of termination, dated April 6, 2021, provided on behalf of Genworth to China Oceanwide, Genworth has exercised its right to terminate the Merger Agreement and abandon the Proposed Acquisition pursuant to Section 8.2(a) of the Merger Agreement, with such termination effective as of April 6, 2021. In light of the foregoing, China Oceanwide respectfully requests that the Application be withdrawn from the Commission and the Bureau,” the filing on Bland & Sorkin letterhead said.

Thus ends the saga, although Genworth is planning on moving forward with an IPO of its mortgage insurance subsidiary, which it announced earlier this week.

 Although no state regulators have commented despite inquiries and Genworth is in a quiet period before earnings and generally cannot comment, one equity analyst wrote after Genworth terminated the merger that it could face solvency issues in the future without the cash infusion of about $525 million to be given to Genworth’s. life insurance businesses. 

“Our understanding is that GNW has no intention of supporting GLIC with any future capital contributions, which may mean GLIC will be taken over by regulators over the next few years, if LTC pressure continues,” warned Evercore ISI analyst Thomas Gallagher in a research note April 7. The note regarded Ameriprise Financial, Inc., which had reinsured half of its LTC block, about $2.7 billion, Genworth’s subsidiary, Genworth Life Insurance Co. or GLIC.

The analyst was gaming out what would happen in a dire solvency event to Ameriprise’s reinsurance contract with Genworth, as it has reinsured half of its LTC block to GLIC, which it noted had year-end RBC ratio of 229% “and so it is probably okay for now, but worth watching if the RBC dips below 200%, a level at which regulatory oversight and surveillance would increase,” the analyst wrote.

The life businesses must rely on their consolidated statutory capital of about $2.3 billion as of the end of the third quarter 2020, stated Tom McInerney, Genworth’s CEO, on a conference call in February to discuss year-end earnings. He touted though, the fact the company secured, on a cumulative net present value basis about $14.5 billion of approved LTC premium rate increases since 2012. “As we’ve discussed in the past, we have no plans to infuse additional capital into, or extract capital from, our U.S. Life Insurance businesses,” McInerney stated.

Gallagher wrote that Ameriprise’s total potential total economic exposure to LTC is $5.4 billion.

To market, to market: Genworth Financial files intent to IPO mortgage insurance sub after scuttling Oceanwide deal

April 19, 2021 — Genworth Financial is planning on going to market with its mortgage insurance subsidiary, triggering its Plan B in the wake of its collapsed deal with China Oceanwide Holdings Group Co., Ltd. 

In a filing for a proposed offering April 19 with the Securities and Exchange Commission, Genworth Mortgage Holdings Inc. stated that recent data reveals continued optimism in the resilience of the U.S. housing market while more available and attractive risk transfer alternatives have improved the mortgage insurance industry’s risk profile.

Genworth hasn’t yet determined the number of shares to be offered nor the price range for the proposed offering.

In deciding the time was ripe for a future IPO, GMHI also touted what it sees as the strength, durability and diversity of its customer relationships among its 1,800 active customers across the mortgage origination market. These include national banks and other mortgage lenders, such as local and community bankers and credit unions.

An index from the National Association of Realtors measuring homebuyer’s mortgage payment ability using median levels of income and pricing increased to 170 in December 2020, up from 158 in 2017, according to GMHI’s new filing. 

Total capitalization of the mortgage company is listed as about $4.62 billion as of Dec. 31, 2020.

Genworth Financial mentioned it was weighing the possible spin off its mortgage insurance business well over a year ago, before the Covid-19 pandemic struck the globally, while it was still struggling to complete its acquisition by China Oceanwide, mainly through gaining all remaining jurisdictional regulatory approvals. This was before funding the proposed acquisition, first announced in October 2016, became the last, final and probably fatal issue for deal. Genworth Financial called off the merger two weeks ago.

Genworth Financial, the parent, expects to indirectly own at least 80% of the mortgage insurer’s common stock following the deal’s completion. A tax allocation agreement between the parties depends on the parent company’s continuing ownership of at least that much. 

“Our parent’s indebtedness and potential liquidity constraints may negatively affect us,” GMHI warned in the filing. 

GMHI operates under GSE (government sponsored enterprises like Fannie Mae and Freddie Mac) restrictions, which mean that’s liquidity must not fall below 13.5% of its outstanding debt. 

However, if Genworth Financial no longer owns directly or indirectly 50% or more of our common stock, Fannie Mae has agreed to reconsider the GSE restrictions.

Parent company Genworth sold all of its common shares in Genworth Mortgage Insurance Australia Ltd. in March to help fund its ongoing settlement with AXA, leaving a balance owed of $338 million, which is subject to increase, the mortgage insurance company stated in the filing. 

Genworth told the mortgage subsidiary that under the AXA settlement, the holding company plans to repay or reduce upcoming debt maturities with money made from the offering of its 2025 senior notes. 

The significant financial settlement with AXA was announced in July 2020 and involves losses from allegations of misspelling payment protection insurance underwritten by two companies that AXA acquired from Genworth in 2015. The liability case was argued under the High Court in the U.K. Under the terms of the settlement, Genworth had to pay AXA $125 million last July, in addition to a former interim cash payment the year before and deferred cash payments totaling approximately about (converted from pounds sterling) $442 million in two installments in 2022 and to pay a significant portion of all future mis-selling losses incurred by AXA, which the company will invoice each quarter. 

J.P. Morgan and Goldman Sachs & Co. LLC will be the joint book-running managers for the proposed offering.

The company has been buffing the image of its mortgage insurance subsidiary for awhile. North Carolina-based Genworth Mortgage Insurance rolled out a colorful and detailed 29-page investor presentation Aug. 17, 2020, touting the subsidiary company’s strengths, such as leadership, capitalization, risk management and operating performance over the years.

The presentation, led by Dan Sheehan, Genworth CFO and CIO, Genworth Mortgage Insurance CEO Rohit Gupta and CFO Dean Mitchell, served as a primer in the structure of the company as well as a lesson in how Genworth Mortgage is very much a separate entity from that of Genworth, the long-term care insurer, which faces a set of very different challenges.

Photo by Laura James on Pexels.com

State insurance regulators challenge SHIP rehab plan, wonder if policyholders will get a fair shake

April 10, 2021 — Parties to the rehabilitation of Senior Health Insurance Co. of Pennsylvania, or SHIP, are disputing the best way to treat insolvent long-term-care insurer’s policyholders when billions of dollars and end-of-life care coverage are at stake. 

Rehabilitators and at least a dozen state insurance commissioners intervening, suing or supporting the interveners in the case have stepped up their rhetoric and involvement on how SHIP should proceed. They did so in pre-hearing memos filed April 5th with the Commonwealth Court of Pennsylvania.

While those tasked with attempting rehabilitate the insurer want to avoid liquidation, some state regulators definitely don’t believe that their policyholders will be better off with the amended rehabilitation plan. 

These state insurance regulators dove right into the math of the finances while the rehabilitators focused on choice and quality rather than the ultimate purse holdings. 

The rehabilitation plan “would require policyholders to absorb more than$800 million more than a liquidation. The Plan balances the SHIP deficit on the backs of the policyholders rather than bringing in additional funds through the guaranty associations,” argued commissioners from the intervening states of Massachusetts, Maine and Washington State, the latter of which hosts the longest-serving insurance commissioner in history, Mike Kreidler.

These regulators were joined with new letters of support from commissioners from Connecticut, Louisiana, Maryland, Mississippi, New Jersey, South Carolina, Vermont and Wisconsin.

 “The only evident purpose of the Plan is to avoid triggering the guaranty associations, when they were created to protect policyholders in the event of an insolvency such as this,” the intervening insurance regulators stated. 

When state guaranty associations are triggered in a liquidation, limits for benefits range from about $100,000 to a maximum limit of $615,525 in California, with the vast majority of states (42 states plus the District of Columbia) having a threshold of $300,000. 

  • SHIP facts as described in court memos: 
  • 41,000 policyholders
  • $2.6 billion (almost) in liabilities 
  • $1.4 billion (almost) in assets
  • $1.224 billion — SHIP funding gap as of June 30,2020
  • 86 — average long-term care policyholder age
  • 89 — average age of SHIP claimant 
  • 47 — Number of states involved should guaranty funds be triggered
  • 1/29/2020 – Commonwealth Court of Pennsylvania enters rehabilitation order 
  • 4/22/2020 Rehabilitators, led by Pennsylvania Insurance Commissioner Jessica Altman, file their plan with Court 
  • 10/21/2020 Rehabilitators file amended plan after considering comments 
  • 05/03/21 Rehabilitators will file an updated proposed rehabilitation plan by this date for Court hearing

Life insurers, health insurance and HMOs pay into the fund to varying degrees depending on state laws. While this is straightforward in amount, the rehab plan seeks to fill the funding gap through a more complex system of increasing premiums and/or reducing benefits, so policyholders will often have to make some difficult decisions in terms of their coverage or how much they can afford to pay to keep their rich policies. 

The rehabilitators said they were anticipating the state regulators’ arguments and said the solution is a lot more complicated than easy math.

In one of the plan’s policy modifications options, policyholders would provide “at least the benefit value that the Guaranty Association would provide in liquidation for every policyholder whose current policy provides benefits in excess of those limits,” according to the rehabilitator’s memo. This means that these policyholders might indeed do better in liquidation if their benefits are less than what the state limit is. 

Other insurance commissioners have sued the rehabilitation plan. South Carolina Insurance Director Ray Farmer, the immediate past president of the National Association of Insurance Commissioners filed Dec. 10, for a declaratory judgment that the proposed plan is invalid and unenforceable to the extent it does not comply with South Carolina’s regulatory authority to set rates and benefits. The matter is pending in federal court.

Jim Donelon, Louisiana’s long-standing insurance commissioner, filed a complaint in U.S. District Court in September 2020 seeking a declaratory judgment that the rehabilitator’s cannot impose rate and benefit modifications on Louisiana policies without complying with Louisiana’s laws and regulations, and also seeking as well a permanent injunction against implementation or enforcement of the proposed plan if it is approved.

 “In the case of a company like SHIP with its unique insurance coverages, a simple arithmetic computation cannot suffice to determine whether policyholders fare better or worse under particular circumstances,” they stated.

“Approximately 85% of SHIP’s policyholders are offered at least one option under the amended plan no less favorable than what they would have in liquidation, and perhaps materially better,” they noted in their memo.
Their memo said it offers policyholder choices, unlike a liquidation would, and allows an array of coverage cuts and premium hikes to suit individual circumstances, which include ailments and longevity expectations. Other considerations that are material but not easily quantified, they argued, include inflation protection percentages offered, lifetime benefits, or just five-year or two-year benefit periods, elimination periods, indemnity versus reimbursement models and benefit triggers.

The rehabilitators offered an example of a policyholder given a six-year benefit period at substantial cost when, due to her heath condition, she reasonably does not expect to live more than one or two more years.

Another example they offered is the ability to have up to 30 months of coverage for no additional premium for some policyholders, an alternative that would not be a available in liquidation, “even if the plan offered in liquidation might have more valuable benefits.”These choices offered are more meaningful and cannot be quantified readily, the rehabilitators argued. 

In addition,“a substantial number of policyholders’ policies and policy rates will be unaffected by the plan,” they said. These policyholders will have at least one option where they will receive at least as much in benefits as would be provided by their respective guaranty associations. Using “simple arithmetic comparison,” it might seem as if about 15% of SHIP’s policyholders wouldn’t do as well under the plan as they would in liquidation, they acknowledged.

The rehabiliators used legal and regulatory precedent to argue that although some individual interests would be more adversely affected or compromised, the plan was designed on the whole to be fair and equitable to policyholders, creditors and the public in general, the constituency of the whole overriding the individual. 

Courts haven’t adopted a formulaic or mathematical test for satisfying the standard that policyholders as a group should fare at least as well under a rehab plan as they would have in liquidation. The courts have not, however, adopted a formulaic or mathematical test for the satisfaction of this standard.

The modification mechanism in the rehab plan uses is designed to “maximize policyholder choice by relying on each individual’s circumstances and chosen preferences—an invaluable benefit to policyholders which would not be available if SHIP were liquidated immediately and the state guaranty associations assumed responsibility for coverage,” the rehabilitators argued. 

However, the rehab plan will allow objecting states to opt-out and offer their own rates for policyholders under a revised rate proposal, according to the memo. 

There are others intervening, including various insurance agents and brokers’ who allege the plan “unlawfully seeks to suspend [their] rights to receive earned commissions,” as well as the National Organization of Life and Health Insurance Guaranty Associations. NOLHGA its expected to offer possible modifications to the plan and discuss the impact on the guaranty associations could be impacted by the plan, both in terms of potential future obligations to policyholders and as claimants against SHIP’s estate.

The entire rehabilitator’s memo with analytics and presentations and lawsuit updates can be found here: https://630dfcef-4112-425b-a05a-db687961d4d5.usrfiles.com/ugd/630dfc_1ea118f30e5d45ebaebabb07c8eb6a2a.pdf 

The entire interveners memo with exhibits can be found here: https://630dfcef-4112-425b-a05a-db687961d4d5.usrfiles.com/ugd/630dfc_d60ea856f56340f68dd781a187ceddd2.pdf

Litigation from Donelon and Farmer can be found here: https://www.shipltc.com/related-proceedings 

LTC New Blotter, April 2021: Curtains and Fresh Starts — Genworth, GE and the Regulators

April 6, 2021 —

1 . The prolonged merger agreement between China Oceanwide and Genworth Financial is finally over, after Genworth pulled the plug after the market closed April 6. Oceanwide was not able to show Genworth the money, and wants to have the freedom to move forward with a likely partial IPO of its U.S. mortgage insurance business. No time frame was given for such an offering.

Stateside, this could mean Genworth’s long-term care insurance business could deteriorate faster, analysts warned. “Our understanding is that GNW has no intention of supporting GLIC [Genworth Life Insurance Co.] with any future capital contributions, which may mean GLIC will be taken over by regulators over the next few years, if LTC pressure continues,” said Evercore ISI equity analyst Thomas Gallagher in a research note April 7. What happens to Genworth’s enormous legacy LTC block will be of regulatory interest without the anticipated cash infusion from China Oceanwide. Gallagher’s research note focused on the news’ effect on covered company Ameriprise Financial, which has reinsured half of its LTC block to Genworth’s life insurance subsidiarity, which is probably okay for now with a 229% RBC ratio at year-end, he said. A 200% RBC is the threshold for regulatory involvement, generally. The company also has over $1 billion in debt coming due later this year.

The curtain-call on the $5.43 per share deal came as no surprise but it did come more than three months after the 17th and final extensions of the merger agreement, on Dec. 31, 2020. Genworth’s board of directors “has concluded that Oceanwide will be unable to close the proposed transaction within a reasonable time frame and that greater clarity about Genworth’s future is needed now in order for the company to execute its plans to maximize shareholder value. Thus, the board decided to terminate the Oceanwide merger agreement,” stated James Riepe, Genworth’s board chairman in a press release. The LTC insurer left the possibility of working together on the table. “Genworth continues to share Chairman Lu‘s vision of bringing long-term care solutions to the aging population in China.

Both parties believe there are significant, compelling opportunities to address critical societal needs outside of the U.S,” stated said Genworth president and CEO, Tom McInerney. Genworth, over the course of about four and a-half years jumped through scores of hoops to try to close the deal, from getting regulatory approvals in key states, promising to contribute $100 million to New York-domiciled insurance company, Genworth Life Insurance Co. of New York, selling its interest in its Canadian mortgage insurance unit after failing to get a timely regulatory approval there and even having some LTC employees begin to learn Mandarin.

The Richmond, Va.-based company is focused in its revised strategic plan so it has been settling debt and legal matters in the last year or so, including the sale of Genworth’s interest in its Australian mortgage insurance business, its $750 million debt offering at the U.S. mortgage insurance holding company and the negotiation of a settlement with AXA S.A.

On the plus side for the business, Genworth has been steadily getting needed rate increase requests from states and won a recent lawsuit in New Hampshire where its life company challenged amended regulations promulgated by the state’s insurance department retroactively limiting rate increases for LTC insurance policies for over 6,000 New Hampshire residents, according to the opinion summary. Genworth argued against this under the takings clause of the state and federal constitution. The New Hampshire Supreme Court concluded that the regulations invalid and reversed a lower court opinion. The state Supreme Court ruled in February “that New Hampshire’s regulation that places certain caps on long-term care insurance premium rate increases exceeds the Insurance Commissioner’s rulemaking authority and, therefore, is invalid,” noted law firm Faegre Drinker Biddle & Reath LLP on its blog.

“The litigation around this matter remains pending and open, therefore we are unable to comment beyond that.The Department has and will continue to review the ruling to understand its implications and determine if any interim actions are necessary on long term care insurance rates,” a spokeswoman for the New Hampshire department said last month.

It is unclear what will be the fate of Genworth’s North Carolina shell company which was to house new, modern hybrid-type LTC products under the proposed merger with China Oceanwide. The merger proposition spanned three presidencies in its negotiations, numerous delays, hard-won jurisdictional approvals and re-approvals, a dance with HONY Capital on its potential investment in the Chinese conglomerate — and many lawyers.

2. UPDATE April 11, 2021: DUE to new and unforeseen CONFIDENTIAL CoRPORATE LEGAL Strictures, this personnel move will not take place. Both parties are said to be disappointed. Bodnar, WHO WAS SET TO MODERNIZE THE LTC WORLD UNDER GE’S STEWARDSHIP is currently at Oliver Wyman where he will remain at least through mid-April. Ex-Genworth chief actuary, Vince Bodnar, who had continued his career as a partner at Oliver Wyman after departing Genworth about two years ago, will be joining GE on or around April 19th as its chief claims modernization officer, he says, to help with its LTC portfolio through a new approach to claims reduction among its insurers and retrocessionaires. This modern approach utilizes pre-claims intervention models under development now and gleaned from membership-driven continuing care communities in the U.S.

The veteran actuary will be responsible for developing and implementing these pre-claims intervention programs along with other similar initiatives with LTC blocks GE has reinsurered over the years even as it has run up great liabilities for these benefit-rich policies. It has been more than three years since GE Capital announced that after reserve testing its run-off LTC portfolio, North American Life & Health, would take a GAAP pre-tax charge of $9.5 billion for the fourth quarter of 2017, and make statutory reserve contributions of about $15 billion over seven years.

Bodnar, who will report to Tim Kneeland CEO of NALH in Kansas, will help conduct pilot programs to measure impacts of pre-claims interventions in health, wellness and social behaviors to help policyholders stay healthier and more autonomous for longer, pushing off the need for more expensive facility-care.

Bodnar has said that actuaries are learning that the most effective interventions are not health or medical interventions. Instead, they are related to social, community and family caregiver support. The cost of care for the aging has risen far beyond the amount at which long-ago actuaries first priced older LTC policies, and now the industry must figure out ways to address the mammoth shortfall.

On a recent webinar hosted by Oliver Wyman and insure-tech provider Montoux , Bodnar said the LTC insurance industry has close to $200 billion in reserves for their in-force blocks but that the present value of future benefits is well in excess of that.

“If you can improve outcomes by 10%, that is a $20 billion financial impact,” he said during the webinar. “There is a prize besides saving the entire system money here,” Bodnar said. “Most people do want age in their home, reserve value, contribution to society. We owe into our elderly, our society, age in place as long was we can.” There are regulatory hurdles to overcome, from privacy concerns to discrimination worries to rebating issues. At least one leading insurance commissioner has said that regulators are willing to listen.

3. The National Association of Insurance Commissioners will be hosting its executive-level LongTerm Care Task Force Committee April 9 at its virtual spring national meeting.

Reports from subgroups on the multi-state rate review process, reduced benefit options and LTC financial solvency are expected. The rate review process is central to the granting of future premium hike requests across the nation as it strives to create a more consistent approach for reviewing rate increase filings that make sense on an actuarial basis and do not lead to one state subsidizing another’s artificially lower increases. Consumer advocates are concerned about many of the factors at play, including the potential and incidence for lapses after rate increases and lost asset protection after choosing a reduction in benefits from the original policy. Previously, the NAIC’s Executive Committee and the Internal Administration Subcommittee had also considered hiring an outside legal consultant to help them on policy issues regarding the restructuring LTC policies.

Insurance regulators ponder ways to prevent & address racial and gender discrimination by AI

‘Safe Harbor’ for early insurance company violations concept explored

April 2, 2021 — Insurance regulators considering how to wrestle with biased, discriminatory outcomes from artificial intelligence (AI) in both the offering and coverage of insurance discussed the potential of a safe harbor from enforcement companies when they err, with a chance to correct their course.

A panel comprised of regulators, consumer advocates, data specialists and the filmmaker of documentary Coded Bias met virtually March 31 to discuss how to address AI algorithms when they cause disparate impact among people of color and vulnerable populations —or before they can do so.

The National Association of Insurance Commissioners sponsored both the Big Data/Artificial Intelligence forum and the screening of Coded Bias by Shalini Kantayya. The groundbreaking movie premiered at Sundance Film Festival in 2020. 

AI is a gatekeeper of many things from how long a prison sentence someone gets to who gets job or other opportunity and who does not, Kantayya said on the panel.

These same systems, including facial recognition systems that we are trusting so implicitly haven’t been vetted for gender bias or racial bias or even for vetted for some shared standard of accuracy, she said. Kantayya warned that we as a society in using these algorithms blinding  could “roll back 50 years of civil rights advances with AI’s black boxes.”

Jon Godfread, North Dakota insurance commissioner and chair of the NAIC’s Innovation and Technology Task Force, raised the concept of a safe harbor, noting that it is entirely possible to have an AI algorithm go through an auditing process to check for bias and still have a bad outcome. He said there could be a process so the full weight of the regulatory authority won’t come down on the insurer’s head. The outcome could instead lead to a discussion without the threat of a fine that sends a company into bankruptcy or other major problems, he said. 

Companies are going to get it wrong with the best intentions, Godfread warned. He suggested the focus be on going back and making the customer who suffered a discriminatory result whole. It is beneficial to correct the problem early on rather than have it go on for years, he said. 

Godfread acknowledged there would be a liability issue with class action lawyers over bias, but it is better to create a system where failure comes early and is learned from, and problems are corrected. 

Panelist and NAIC longtime consumer advocate Birny Birnbaum also appeared to endorse the idea of a safe harbor for unintentional bias that would be immediately rectified during the group panel discussion.

Birnbaum emphasized the need — and its urgency — to create a data collection system to look at outcomes from the algorithms insurers use, so regulators can assess their impact and how they might discriminate against vulnerable populations and groups with a smorgasbord of assembled available data points. Insurance coverage and selection matters enormously in everything from community development to catastrophe recovery and preparation, according to Birnbaum.

“There is a special need need for insurance regulators to address this quickly and modernize the system for accountability and oversight, Birnbaum said. “We are seeing exponential growth with algorithms. We need concrete steps, not just dialogue.”

State insurance commissioners discussed their ongoing work in the executive-level special Race and Insurance Committee and executive sessions and explorations they have held on diversity within their own organization, the NAIC. 

However, AI bias issues won’t be limited to just insurance regulatory oversight and accountability in the future.

Data scientist Cathy O’Neil, author of Weapons of Math Destruction and a panelist on the forum, noted that discussions on algorithms’ potentially harmful outcomes with the Consumer Protection Financial Bureau have started up again. These talks were dormant during the Trump Administration.

How are we to translate existing laws to rules that data scientists can make sure their algorithms are passing?, O’Neil asked. “The answer is not obvious,” she acknowledged.

It’s not just the CFPB —the use of data in creating disparate impact harm among people of color is getting attention from the very top. Fimmaker Kantayya said that President Joe Biden and Vice President Kamala Harris was well as House Speaker Nancy Pelosi have asked for a screening.