Fitch Affirms Genworth Life Insurance's IFS at 'A-'; Outlook Negative
Fitch Ratings has affirmed the 'A-' Insurer Financial Strength (IFS) ratings of Genworth Life Insurance Company, Genworth Life and Annuity Insurance Company and Genworth Life Insurance Company of New York (collectively, Genworth Life). Fitch has also affirmed the 'A-' long-term ratings on the Genworth Global Funding Trusts. The Rating Outlook is Negative.
The rating action reflects Fitch's view that Genworth Life's statutory capital position remains strong. Also reflected in the rating affirmation is that its holding company liquidity profile has improved, investment losses have tapered off and remain within the levels previously forecasted by Fitch. Recent earnings have also generally been in line with rating expectations.
Genworth Life's statutory capital position has benefited over the past year from the sale of its Medicare supplement business. Also bolstering its position are favorable taxes and positive statutory income, and the completion of a life block transaction that closed in the first quarter of 2012 (1Q'12). Genworth Life plans to complete a second life transaction in 4Q'12 which is expected to generate in excess of $100 million of after-tax capital benefits.
Genworth Financial, Inc. (NYSE: GNW) holding company debt that matured in 2009-2011 has been refinanced and paid. Financing is in place for debt maturities prior to 2014. GNW holding company liquidity remains strong. GNW management has indicated its intent to hold a cash buffer of 2x annual debt service in holding company cash and exceeded its goal at the end of 3Q'12.
The Negative Outlook reflects Fitch's concerns regarding continuing, albeit lower, U.S. mortgage insurance losses; low reported life insurance statutory earnings; exposure to the low interest rate environment particularly within its long-term care and fixed annuity business; and somewhat limited financial flexibility. Also reflected in the Negative Outlook is uncertainty tied to execution of its new corporate strategy and search for a CEO.
Fitch believes macroeconomic conditions (home prices and unemployment) are stabilizing. However, they continue to provide a significant headwind to the U.S. mortgage insurance business. Additionally, the U.S. mortgage insurance business continues to depend on regulatory and counterparty forbearance to write new business. GNW management has indicated that it believes the U.S. mortgage insurance business has economic value and as such, Fitch believes GNW will continue to provide reasonable support to this business. The current rating level can tolerate a moderate amount of additional losses at the U.S. mortgage insurance business, including additional capital replenishment. The rating's tolerance for further capital replenishment at the U.S. mortgage insurance business will depend on the amount and form of that replenishment.
The performance of certain life and long term care (LTC) insurance blocks has put downward pressure on the statutory earnings of the life companies. Genworth Life has initiated several rounds of premium rate increases designed to mitigate losses on older generation policies as well as offset the impact of lower interest rates and lower than expected lapse rates. Fitch believes these price increases will improve statutory earnings. However, it will take some time to receive regulatory approval in all states and for rates to flow through to earned premiums.
Fitch views GNW's financial flexibility as being hindered by the company's low stock price that trades at a significant discount to book value and high spreads in the credit default swap market. Additionally, both of GNW's revolving credit facilities matured in 2012 and neither facility was replaced.
GNW's financial leverage was approximately 27% at Sept. 30, 2012. Fitch's expectation that leverage will remain below 30% includes an assumption of further impairments in goodwill. In 3Q'12, the company took an after-tax goodwill impairment charge of $86 million related to its International Protection business. The remaining goodwill balance of $1.1 billion is largely related to its U.S. life insurance and long-term businesses.
Triggers that could result in and Outlook revision to Stable include:
--Improvement in earnings at the U.S. mortgage insurance business;
--Improvement in GAAP earnings-based interest coverage to 5x or better;
--Sustained statutory earnings at Genworth Life of $300 million annually;
--Successful execution of the new corporate strategy.
Triggers that could result in a rating downgrade include:
--An increase in financial leverage above 30%;
--A sustained decline in statutory interest coverage below 3x, especially if combined with a decline in cash at the holding company below 2x annual holding company interest expense;
--GAAP earnings-based interest coverage below 3x in 2013;
--A decline in Genworth Life company risk-based capital below 350%;
--A material ($500 million or more) earnings charge from adverse development of long-term care reserves.
Fitch believes GNW's U.S. mortgage insurance business could be considered a significant subsidiary of GNW. If a significant subsidiary were to become subject to an insolvency proceeding, it could trigger an event of default under GNW's senior debt indenture resulting in an acceleration of the maturity of GNW's debt. Such an event would trigger a multi-notch downgrade. Fitch however believes the likelihood of this event taking place to be low.
Fitch has affirmed the following ratings:
Genworth Life Insurance Company;
Genworth Life and Annuity Insurance Company;
Genworth Life Insurance Company of New York;
--IFS at 'A-'.
Genworth Global Funding Trusts;
--Long-term rating at 'A-'.
The Rating Outlook is Negative.
Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Oct. 18, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
Tana M. Higman, +1-312-368-3122
70 West Madison Street
Chicago, IL 60602
Douglas L. Meyer, +1-312-368-2061
Keith M. Buckley, +1-312-368-3211
Brian Bertsch, +1-212-908-0549
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