Fitch Affirms Genworth Life Insurance's IFS at 'A-'; Outlook Revised to
CHICAGO -- June 4, 2013
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 has been revised to Stable
from Negative. A full list of rating actions follows at the end of this
KEY RATING DRIVERS
The revision in the Outlook to Stable reflects the improved operating
performance of the U.S. mortgage insurance business, strong statutory capital
position of Genworth Life's subsidiaries, reduction in product and investment
portfolio risk and somewhat improved financial flexibility of the holding
company. The revision in Outlook also reflects the continued execution of the
company's new corporate strategy and the naming of a new CEO.
The Negative Outlook on the life companies had been driven in part by losses
at the U.S. mortgage insurance business and the potential effect on the life
companies. Favorably, Genworth Financial, Inc.'s (NYSE: GNW) U.S. mortgage
insurance segment reported an operating profit of $21 million in the first
quarter of 2013, following 21 consecutive quarters of losses. Fitch believes
improving macroeconomic conditions coupled with a greater proportion of risk
related to vintage 2009 and forward books of business reduce the likelihood
that the company would have to rely on large capital contributions from the
life companies to support the U.S. mortgage insurance business. The current
rating level of the life companies can tolerate a moderate amount of
additional losses at the U.S. mortgage insurance business, including
additional capital replenishment.
As part of GNW's U.S. mortgage capital plan, $100 million of capital and
ownership of the European mortgage insurance subsidiary was transferred to
GNW's lead U.S. mortgage insurance subsidiary. As a result, the U.S. mortgage
subsidiaries will have a risk-to-capital ratio below the statutory maximum of
25:1 and will no longer have to depend on regulatory and counterparty
forbearance to write new business.
GNW also implemented an internal legal entity reorganization that created a
new public holding structure removing the U.S. mortgage insurance subsidiaries
from the companies covered by the indenture governing GNW's senior notes. This
eliminated the risk that 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
Fitch believes GNW's holding company liquidity profile is strong and financial
flexibility is somewhat improved. Holding company cash totaled $955 million at
March 31, 2013, in excess of management's stated target to hold 2x annual debt
service plus a buffer of $350 million for stress scenarios. Net proceeds from
the upcoming sale of the Wealth Management business are estimated at $360
million and will be used to address the $500 million of 2014 debt maturity.
However, Fitch views GNW's financial flexibility as still being hindered by
the company's low stock price, which is 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
Genworth Life's statutory capital position remains strong and has benefited
from the sale of its Medicare supplement business and the completion of two
life block transactions. Reported risk-based capital (RBC) was estimated at
450% at March 31, 2013. Unassigned surplus totaled $335 million at year-end
2012, which should allow the company to resume the payment of ordinary
statutory dividends to the holding company.
Offsetting these positives is GNW's GAAP earnings-based interest coverage,
which remains below expectations for the rating category, and exposure to the
low interest rate environment, particularly within its long-term care and
fixed annuity businesses. In addition there is uncertainty as to the impact of
increased regulatory scrutiny of the industry's use of affiliated captives,
which may impact GNW's future ability to cede reserves to special-purpose
GNW's GAAP earnings-based interest coverage ratio was 4.0x through the first
three months of 2013, up from 2.9x in 2012 and 2.4x in 2011, but below Fitch's
expectation of 7x for the rating category. Fitch expects some improvement over
the near term as U.S. mortgage insurance losses subside and financial leverage
declines. However, Fitch believes GNW's exposure to interest-sensitive
business, particularly fixed annuities and long-term care, will hamper the
company's ability to meaningfully improve earnings in its U.S. Life Insurance
The performance of certain legacy life and long-term care insurance blocks has
put downward pressure on the statutory earnings of the life companies.
Genworth Life has initiated several rounds of premium rate increases on
long-term care designed to mitigate losses on older generation policies as
well as offset the impact of lower interest rates, unfavorable business mix
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
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 4x;
-A decline in Genworth Life company RBC below 350%;
-A material ($500 million or more) earnings charge from adverse development of
long-term care reserves.
While Fitch does not anticipate a rating upgrade in the near term, triggers
that could result in a rating upgrade over the longer term include:
-Consistent earnings generation at the U.S. mortgage insurance business;
-Improvement in GAAP earnings-based interest coverage to 7x or better;
-Sustained statutory earnings at Genworth Life of $400 million annually.
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 Stable.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (January 11, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology - Effective Oct. 18, 2012 to Jan. 11, 2013
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Tana M. Higman
Fitch Ratings, 70 West Madison Street, Chicago, IL 60602
Douglas L. Meyer
Keith M. Buckley
Brian Bertsch, New York, +1 212-908-0549
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