Genworth's AXA deal allows it to proceed with possible MI spin-off

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Genworth Financial's settlement with AXA will allow the company to continue with its "Plan B" of spinning off its U.S. mortgage insurance subsidiary if the China Oceanwide deal falls apart.

But as part of the settlement, Genworth gave AXA a promissory note secured by a 19.9% stake in the U.S. mortgage insurer. It is also secured by a 19.9% stake in the Australian MI unit; Genworth Financial currently owns 52% of that separately traded company.

"The settlement removes uncertainty around the amount of the liability arising from the AXA litigation, defers our obligation to make the bulk of the payments to AXA and allows us to move forward with our plans to pursue alternatives to raise capital and meet our near-term liquidity needs, which includes our $1 billion in debt maturing in 2021," Tom McInerney, Genworth's president and CEO, said in a press release.

"These alternatives include a potential debt offering, as well as the ability to prepare for a 19.9% IPO of our U.S. Mortgage Insurance business, subject to market conditions, should our pending transaction with China Oceanwide not close," McInerney said.

Those overhangs on Genworth's finances were revealed in the latest extension of its agreement with China Oceanwide. However, there are triggers in that agreement for both parties, which could lead them to walk away from the transaction.

That led Genworth to revive the possibility of an initial public offering, which it was planning to do before the China Oceanwide deal.

Genworth's settlement with AXA was the result of a ruling by the United Kingdom's High Court in which Genworth was found liable for the mis-selling of payment protection insurance underwritten (but made by unaffiliated third parties to consumers) at two former units between 1970 and 2004. AXA acquired the units in 2015.

The court had yet to issue final damages.

Under the settlement, Genworth is to pay AXA 100 million pounds (approximately $127 million) on July 23. It previously made a 100 million pound payment prior to the settlement being reached.

Genworth has agreed to make deferred cash payments under the promissory note totaling approximately 317 million pounds ($403 million) in two installments: the first on June 30, 2022 and the second on Sept. 30, 2022.

In addition, Genworth could be on the hook for additional payments to AXA for claims still being processed; the current estimate of those is 107 million pounds ($136 million).

The note terminates upon payment in full by the due dates. Genworth has also agreed to make prepayments on the note to AXA if there are certain debt or equity transactions or if it receives subsidiary dividends from its mortgage insurance companies.

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