TEXT-S&P: Genworth Australia Affirmed At 'AA-'; Outlook Stable

(The following was released by the rating agency)

Overview

-- The ratings affirmation reflects our expectations that Genworth Australia's claims experience should continue to normalize--to loss ratios of around 50%--over the next two quarters to deliver a profitable 2012 result, albeit down on 2011.

-- In line with our expectations, the company reported an improved loss ratio--in U.S. GAAP terms--of 54% for the second quarter compared to 154% in the prior quarter due to significant reserve strengthening.

-- In our opinion, there is evidence of delinquency rates stabilizing for Genworth Australia's coastal Queensland, 2007 and 2008, and self-employed books, which have been sources of ongoing stress on the insurer's claims frequency and severity, as well as signs that better quality 2010 and 2011 vintages are exhibiting relatively favorable claims development trends.

-- We believe that the combination of lower interest rates, households adapting to higher living costs, and other resilient economic factors has contributed to stabilizing delinquencies, and expect this to translate to normalizing loss ratios over the near term. Rating Action Standard & Poor's Ratings Services today affirmed its 'AA-' financial strength and issuer credit ratings on Genworth Australia. The outlook is stable. Rationale

The 'AA-' insurer financial strength and issuer credit ratings on Australia-based insurer Genworth Financial Mortgage Insurance Pty Ltd. (Genworth Australia) reflects our opinion of the company's very strong capitalization, conservative financial structure, and market leadership position in the Australian lenders' mortgage insurance (LMI) industry. Offsetting rating factors include Genworth Australia's earnings vulnerability to changes in economic and property market conditions.

In our opinion, Genworth Australia's very strong risk-based capitalization should enable the company to absorb a significant level of claims if Australia were to experience a severe economic downturn. Based on Standard & Poor's Australian LMI capital model, the company's capitalization was scored at the 'AA' category level at March 31, 2012. Inputs to our capital model assessment included approximately A$2.0 billion in shareholders' equity, A$1.0 billion in unearned premium reserves, as well as reinsurance cover to fund claims. Further supporting the company's capitalization are its conservative financial structure, improving reserving practices and reinsurance arrangements, and financial flexibility.

Genworth Australia is the market leader in the Australian LMI industry. Standard & Poor's estimates that Australian LMIs insure more than A$500 billion of Australian residential mortgages, based on risk in force (RIF) at the time of loan settlement. Of this A$500 billion, Genworth Australia insures A$257.9 billion, or approximately 50% of the market. We expect Genworth Australia to maintain its market leadership position over the medium term, given the majority of its relationships are tied to exclusivity arrangements with terms of two or more years.

LMI earnings are inherently sensitive to changes in economic and property market conditions, given LMIs take the first-loss position on the residential mortgage market. Genworth Australia's earnings have, however, historically been strong and stable, even throughout the global financial crisis. The company did experience significant reserve strengthening in the first quarter of 2012 (see "Genworth Australia Ratings Affirmed At 'AA-' After Significant Reserve Strengthening And Delay Of IPO," published May 1, 2012), although we viewed this as a one-off occurrence. In line with our expectations, the company reported an improved loss ratio--in U.S. GAAP terms--of 54% for the second quarter compared to 154% in the prior quarter. We expect Genworth Australia's claims experience to continue to normalize-to loss ratios of around 50%--over the next two quarters, to deliver a profitable 2012 result, albeit down on 2011.

We view Genworth Australia as non-strategically-important to the Genworth Group (core operating entities rated A/Stable), given it does not operate in the same line of business as the group's core life insurance companies. Furthermore, Genworth Australia continues to demonstrate its increasing independence by reducing its reliance on affiliate reinsurers and accessing capital markets in its own right. Genworth Australia, however, does provide a solid dividend stream to the group.

The ratings on Genworth Australia are currently segmented from the ratings on the Genworth Group's core life insurance companies (rated A/Stable), which are used as a proxy for the group credit profile. We believe that on a stand-alone basis, Genworth Australia continues to meet several operational and financial measures supportive of a higher rating than its parent. The company also has protection against financial deterioration at the group level. This is due to several factors, including: robust prudential supervision by the Australian Prudential Regulation Authority (APRA); presence of independent board members; strong depth of experience and operational expertise of local management; and a considered dividend policy. In addition, there remains a strong economic incentive to maintain the 'AA-' ratings on Genworth Australia to support the insurer's business model and value proposition.

Outlook

The stable outlook reflects Standard & Poor's view of Genworth Australia's significant resources which should enable it to withstand a severe economic downturn. It is unlikely that the ratings on Genworth Australia would be raised in the medium term. Downward ratings pressure could occur if:

-- Operating performance negatively deviates from our expectations or point to a structural deterioration in earnings, whereby normalized loss ratios exceed recent historical averages in the mid 50%s; or

-- If delinquencies do not continue to stabilize, and further adverse development of claims is expected as a consequence; or

-- If the company's Standard & Poor's capital model score fell below the 'AA' category level; or

-- If Genworth Australia lost its major clients, resulting in significant loss of market share; or

-- If there was a deterioration in Genworth Group's financial position.

The Genworth Group's core life insurance companies are the reference point for Genworth Australia's ratings. If the ratings on the Genworth Group's core life insurance companies were lowered, it would not likely trigger an automatic downgrade of Genworth Australia, but would trigger a review of the ratings. We note that successful execution of the planned partial IPO would mean that the ratings on Genworth Australia would be less likely to move in tandem with the ratings on the Genworth Group's core life insurance companies.

Related Criteria And Research

-- Research Update: Genworth Australia Ratings Affirmed At 'AA-' After Significant Reserve Strengthening And Delay Of IPO, May 1, 2012

-- Australian LMI Industry Likely To Shrug Off An Economic Downturn, April 16, 2012

-- Australian Lenders' Mortgage Insurance Capital Model, published Aug. 16, 2010

-- Group Methodology, published April 22, 2009

-- Hybrid Capital Handbook: September 2008 Edition, published Sept. 15, 2008.

Ratings List

Ratings Affirmed Genworth Financial Mortgage Insurance Pty Ltd.

Counterparty Credit Rating

Local Currency AA-/Stable/--

Analytical Factors

Local Currency aa-

Genworth Financial Mortgage Insurance Pty Ltd.

Genworth Financial Mortgage Insurance Pty Ltd. (NZ Branch)

Financial Strength Rating

Local Currency AA-/Stable/--

Genworth Financial Mortgage Indemnity Ltd.

Counterparty Credit Rating

Local Currency A-/Stable/--

Financial Strength Rating

Local Currency A-/Stable/--

Genworth Financial Mortgage Insurance Pty Ltd.

Subordinated A+