June 4, 2013 / 3:16 PM / 4 years ago

Fitch Affirms Genworth Life Insurance's IFS at 'A-'; Outlook Revised to Stable

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(The following statement was released by the rating agency) CHICAGO, June 04 (Fitch) 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 release. 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 debt. 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 replaced. 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 captive reinsurers. 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 segment. 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 premiums. RATING SENSITIVITIES 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. Contact: Primary Analyst Tana M. Higman Director +1-312-368-3122 Fitch Ratings, 70 West Madison Street, Chicago, IL 60602 Secondary Analyst Douglas L. Meyer Managing Director +1-312-368-2061 Committee Chairperson Keith M. Buckley Managing Director +1-312-368-3211 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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 here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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