Fitch Affirms Genworth Life Insurance's IFS at 'A-'; Outlook Stable
CHICAGO -- June 3, 2014
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 Stable. A full list of
rating actions follows at the end of this release.
KEY RATING DRIVERS
The ratings affirmation reflects Genworth Financial, Inc.'s (NYSE: GNW)
improved overall operating performance, strong statutory capital position of
Genworth Life's subsidiaries, reduction in product and investment portfolio
risk, and improved financial flexibility of the holding company.
The ratings also consider the company's large exposure to the long-term care
insurance market, which continues to be challenged by under-performing legacy
business and the ongoing low interest rate environment, as well as uncertainty
as to the effect 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 captive reinsurers. While GNW's earnings profile has improved,
earnings and GAAP interest coverage metrics remain somewhat below rating
GNW's improved earnings profile in recent years is largely tied to the
company's U.S. mortgage insurance segment, which reported an operating profit
of $37 million in 2013 and $33 million thus far in 2014, following 5
consecutive years of losses. The increase is attributable to improving
macroeconomic conditions coupled with a greater proportion of risk related to
vintage 2009 and forward books of business. Fitch believes the improving
profitability together with $300 million of proceeds from the December 2013
debt raise that remain at the U.S. mortgage insurance (MI) holding company and
proceeds from the recent Australian MI IPO 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.
GNW has initiated several rounds of premium rate increases on long-term care
products designed to mitigate losses on older generation policies as well as
offset the impact of lower interest rates, unfavorable business mix,
improvements in life expectancy, and lower than expected lapse rates. Fitch
believes these price increases will improve earnings over the longer term.
However, it will take some time to receive regulatory approval in all states
and for rates to flow through to earned premiums.
Fitch believes GNW's holding company liquidity profile is strong and financial
flexibility has improved. Holding company cash remains in excess of
management's stated target to hold 1.5x annual debt service plus a buffer of
$350 million for stress scenarios. GNW has approximately $925 million of debt
maturing in the next three years, $625 million of which has been prefunded. In
the third quarter of 2013 GNW entered into a three-year $300 million revolving
credit facility, which provides the company with an additional source of
working capital. However, Fitch views GNW's financial flexibility as still
somewhat hindered by the company's low stock price. Unlike many of its life
insurance peers, GNW's stock continues to trade at a significant discount to
Genworth Life's statutory capital position remains strong with a reported RBC
of 480% at Mar. 31, 2014. Unassigned surplus totaled $440 million, which has
allowed the company to resume the payment of ordinary statutory dividends to
the holding company. Fitch notes that reported statutory capital is heavily
leveraged to reinsurance captives. At year-end 2013, Genworth Life's operating
subsidiaries recognized $5.4 billion in reserve credit, or 145% of year-end
surplus, for reserves ceded to special-purpose captive reinsurers.
Fitch views positively the company's plans to capture the long-term care
reserves that have been ceded to its Bermuda subsidiary. While the impact on
risk-based capital (RBC) will be minimal, proposed recapture significantly
improves the transparency associated with this challenging line of business.
GNW's GAAP earnings-based interest coverage ratio was 4.2x through the first
three months of 2014, up from 3.9x in 2013 and 2.9x in 2012, but below Fitch's
expectation of 7x for the rating category. Fitch expects some improvement over
the near term as U.S. mortgage insurance is modestly profitable and interest
expense 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
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 management's
target of 1.5x annual holding company interest expense plus a buffer of $350
million (approximately $790 million);
-GAAP earnings-based interest coverage below 4x;
-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.
While Fitch does not anticipate a rating upgrade in the near term, triggers
that could result in an upgrade over the longer-term include:
-Consistent earnings generation at the U.S. MI 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-'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (November 19, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
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Tana M. Higman, +1-312-368-3122
Fitch Ratings,Inc. 70 West Madison Street, Chicago, IL 60602
Douglas L. Meyer, +1-312-368-2061
James B. Auden, CFA, +1-312-368-3146
Brian Bertsch, New York, +1 212-908-0549
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