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Genworth has a large Canadian business and is currently the country’s second-largest mortgage insurer.

Deborah Baic/The Globe and Mail

The federal government has national-security concerns about the Chinese acquisition of mortgage insurer Genworth Financial Inc., leaving Ottawa as the major holdout in a lengthy cross-border merger review.

In October, 2016, Genworth Financial announced a deal to be acquired by China Oceanwide Holdings Group Co. Ltd., a privately held conglomerate founded by Lu Zhiqiang, for US$2.7-billion. Genworth’s stock had dropped 72 per cent over the two years prior, largely because of losses on long-term-care insurance.

Genworth is based in Richmond, Va., but has a large Canadian business and is currently the country’s second-largest mortgage insurer, behind the federal government’s Canada Mortgage and Housing Corp. This division, Genworth MI Canada Inc., was spun out in an initial public offering in 2009, but remains controlled by the American company.

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Oceanwide needs approvals from numerous bodies to complete its acquisition, including the Committee on Foreign Investment in the United States, or CFIUS. Ottawa’s approval is also needed because of the Canadian division’s ownership structure. In Canada, the banking and insurance watchdog known as the Office of the Superintendent of Financial Institutions (OSFI) is administering the process and will make a recommendation to the Finance Minister.

Yet nearly three years after the deal was announced, the United States has signed off, with CFIUS giving its approval in 2018, but the Canadian government has not. The acquisition deadline was extended for the 10th time this week to June 30.

Genworth has said Canada is studying the deal on national-security grounds, something chief executive officer Tom McInerney outlined on a conference call this week. “Our discussion with Canadian regulators has been centred around national security matters, including data protection and safeguarding our customers’ personally identifiable information."

To obtain approval from CFIUS, Oceanwide and Genworth agreed to an extraordinary mitigation agreement that required Genworth to use a U.S.-based, third-party service provider to manage and protect the personal data of its American policyholders. Genworth’s CEO said this week that a similar mitigation strategy has been proposed to the Canadian regulators.

Canada’s national-security review comes as Ottawa manages a number of sensitive files pertaining to China. Notably, the federal government is weighing whether to bar Huawei Technologies Co. Ltd. from providing equipment for Canada’s 5G telecommunication network. The United States has asserted that Huawei is a national-security risk and a pawn of the ruling Communist Party, and has cited numerous concerns about privacy and spying concerns.

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Canada is also caught in the middle of a trade war between the United States and China – a situation that was exacerbated after Canadian authorities arrested Huawei chief financial officer Meng Wanzhou, the daughter of Huawei’s founder, while she was transiting through Vancouver in December, at the request of U.S. law-enforcement authorities.

In the five months since, China has detained two Canadians and given two others death sentences for drug trafficking. China has also withdrawn the import licences for major Canadian canola sellers, a trade action that is thought to be more retaliation for the arrest of Ms. Meng.

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Canada last year blocked a Chinese acquisition for national-security reasons. The federal cabinet prohibited the sale of construction company Aecon Group Inc. to China Communications Construction Co. Ltd. (CCCC), a state-owned enterprise, after accepting the findings of a national-security review that determined the deal was not in Canada’s national-security interest.

However, that review was under the Investment Canada Act, which falls under the Department of Innovation, Science and Economic Development. The Genworth acquisition is being studied by OSFI and the Department of Finance. In e-mails, OSFI said it cannot comment on specific transactions, while the Finance Department wrote only that the review is “ongoing.”

Genworth’s Mr. McInerney said he and others have met with Canadian regulators several times this year. The mortgage insurer has also hired StrategyCorp to help lobby the government, and the firm has met with people including the chief of staff to Finance Minister Bill Morneau and Elder Marques in the Prime Minister’s Office.

In a statement this week, Genworth said Canadian regulators have informed the company that they had the information needed to complete their review, but added the regulators did not provide a time frame for completing their review.

Genworth declined to comment for this story beyond the statements it made this week. StrategyCorp also declined to comment.

Earlier this week, Oceanwide reiterated its support for the takeover bid, which is worth US$5.43 a share. However, Genworth’s stock closed at US$3.88 on Friday, suggesting investors are skeptical that the takeover will be completed.

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Shares of Genworth MI Canada, meanwhile, have performed well since the IPO a decade ago, and have more than doubled. The Canadian company reported a $452-million net income in fiscal 2018, but analysts expect its growth will be muted because of recent changes to mortgage qualifications and because of slower economic growth.

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