October 11, 2012 / 5:10 PM / 7 years ago

TEXT-S&P cuts Genworth Financial to 'BBB-'

Overview
     -- Earnings have not met our expectations for the rating level and 
financial flexibility continues to be strained.
     -- We are lowering our ratings on Genworth Financial Inc., Genworth Life 
Insurance Co., and core U.S. life operations.
     -- The negative outlook on the holding company hinges primarily on the 
execution of the strategic review conducted by management and the board.
     -- The outlook on the U.S. life operations is stable.

Rating Action
On Oct. 11, 2012, Standard & Poor's Ratings Services lowered its counterparty 
credit rating on Genworth Financial Inc. (GNW) to 'BBB-/A-3' from 'BBB/A-2'. 
At the same time we lowered the insurer financial strength rating and 
counterparty credit rating on Genworth Life Insurance Co. (GLIC) and core U.S. 
life operations to 'A-/A-2' from 'A/A-1'. We also downgraded Genworth 
Financial Mortgage Insurance Ltd. to 'BBB-' because it relies on a 
holding-company guarantee.

Rationale
We continue to view GNW as investment grade due to its increased liquidity at 
the holding company, significant improvement in its U.S. mortgage insurance 
platform year to date, the Australian mortgage insurer's return to 
profitability in the second quarter, and the positive momentum in unassigned 
surplus at the U.S. life operations. However, we are lowering the counterparty 
credit rating by one notch to reflect the low earnings level for the 
organization (below expectations for the 'BBB' category) and the difficulty it 
will face expanding margins globally in the weak economy.

GNW let its two five-year credit facilities expire this year, and although we 
don't think a full renewal was necessary given a shift in its mix of 
businesses, the move highlights a straining of its financial flexibility in 
the capital markets. Finally, GNW's indenture contains a clause (section 
6.01(g)) whereby the outstanding principal would become due and payable 
immediately if a "significant subsidiary" is adjudicated bankrupt or 
insolvent, or placed under court-ordered regulatory receivership. Genworth 
Mortgage Insurance Corp. is considered a "significant subsidiary." Although we 
think the likelihood of this clause being triggered is remote, we believe that 
it hampers GNW's financial flexibility in the marketplace and increases its 
financing costs above peer companies'.

The U.S. life operations are being downgraded one notch because of the 
business's sensitivity to interest rates (fixed annuities and long-term care 
 ), and its underperforming legacy term and LTC blocks that will take time 
to stabilize and improve. In addition, financial flexibility continues to be 
affected by the ongoing stress at the holding company and the expectation for 
the life operations to support holding company interest expenses. The 
company's two main competitive advantages are in the commoditized term product 
and interest sensitive LTC. Legacy blocks that impede margin expansion 
continue to hurt both product lines. While management improves its position 
(as exemplified by its life block transaction completed in first-quarter 2012 
[RiverLake III]), its ability to significantly and quickly alter the in-force 
book is limited. The margin compression on the remaining legacy term block due 
to failed auctions in its RiverLake structures is a hindrance. While 
regulatory approvals of announced premium rate increases on the legacy LTC 
block are expected starting in 2013, it will take a few years for these 
increases to be fully recognized in premium revenue. Lapsation, morbidity, 
termination rates, and interest rates have all led to the deterioration of the 
block, necessitating the large premium increases that GNW recently announced.

The 'A-' U.S. life operations are supported by a strong business profile with 
leadership positions in both term life and LTC product lines. The streamlining 
of its product set following the sale of the Medicare supplement business and 
exit of the variable annuity line has allowed GLIC to better focus on its core 
competencies. Strong and improving capitalization at the U.S. life company 
also supports the 'A-' rating. We expect the U.S. life operations to become a 
regular dividend-paying entity to the parent company.

Finally, we believe that management has successfully hedged a significant part 
of its interest rate risk on its LTC block primarily through forward-starting 
swaps. As of second-quarter 2012, it has more than $2 billion in cash-flow 
hedge gains in accumulated other comprehensive income. Assuming interest rates 
stay level, these gains will be amortized into earnings over time.

Outlook
The outlook on GNW is negative, reflecting the low fixed-charge coverage 
metrics, the uneven business performance, and the continued poor, albeit 
improved, performance at the U.S. mortgage insurer. Financing costs are more 
than peer companies' and likely factored into management's decision not to 
renew the credit facilities. We believe that the ongoing strategic review will 
address many of the factors that currently strain the company's financial 
flexibility. However, until management can execute its plans, we believe there 
are still downward rating scenarios given the volatility in operating 
performance since the start of the financial crisis. We would expect to review 
the outlook within six to 12 months as the strategic plans are executed and 
operating earnings trend above or below the 3x-5x coverage level expected for 
the ratings. In addition, we believe that to maintain the investment-grade 
rating, management needs to continue to hold a buffer in excess of 2x holding 
company interest expense.

The outlook on the life companies is stable, reflecting their strong capital 
and business positions. We are unlikely to change the ratings during the next 
18-24 months. However, we could lower the ratings if the holding company 
relies too heavily on the U.S. life operations to service its debt, hindering 
capital formation and leading to sustained capital levels below the 'A' level. 
We could also lower the rating if the legacy LTC business further deteriorates 
and management actions are insufficient to stabilize the block. We could raise 
the ratings if the life companies can more quickly improve underperforming 
business lines and improve operating fundamentals in line with other companies 
that are rated 'A'.

Related Criteria And Research
Holding Company Analysis, June 11, 2009

Ratings List
Downgraded
                                        To                  From
Genworth Financial Inc.
 Counterparty Credit Rating
  Local Currency                        BBB-/Negative/A-3   BBB/Negative/A-2

Genworth Financial Mortgage Insurance Ltd.
 Counterparty Credit Rating
  Local Currency                        BBB-/Negative/--    BBB/Negative/--
 Financial Strength Rating
  Local Currency                        BBB-/Negative/--    BBB/Negative/--

Genworth Life Insurance Co.
Genworth Life and Annuity Insurance Co.
 Counterparty Credit Rating
  Local Currency                        A-/Stable/A-2       A/Stable/A-1

Genworth Life Insurance Co.
 Financial Strength Rating
  Local Currency                        A-/Stable/A-2       A/Stable/A-1

Genworth Life Insurance Co. of New York
 Counterparty Credit Rating
  Local Currency                        A-/Stable/--        A/Stable/--

Genworth Life Insurance Co. of New York
Genworth Life and Annuity Insurance Co.
 Financial Strength Rating
  Local Currency                        A-/Stable/--        A/Stable/--

Genworth Financial Inc.
 Senior Unsecured                       BBB-                BBB
 Preferred Stock                        BB                  BB+
 Commercial Paper                       A-3                 A-2

Genworth Global Funding Trusts
 Senior Secured                         A-                  A

Genworth Life Institutional Funding Trust
 Senior Secured                         A-                  A

Insurance Note Capital RMI 2006-1
 Senior Secured                         BBB-                BBB

Insurance Note Capital RMI 2006-2
 Senior Secured                         BBB-                BBB

Insurance Note Capital RMI 2006-3
 Senior Secured                         BBB-                BBB

River Lake Insurance Co.
 Senior Secured                         A-                  A
 Senior Unsecured                       A-                  A

River Lake Insurance Co. II
 Senior Secured                         A-                  A
 Senior Unsecured                       A-                  A

River Lake Insurance Co. IV Ltd.
 Senior Secured                         A-                  A
 Subordinated                           BB+                 BBB-



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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