Fitch Affirms Genworth Life Insurance's IFS at 'A-'; Outlook Negative
CHICAGO -- November 16, 2012
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
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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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