Fitch Affirms Genworth Life Insurance's IFS at 'A-'; Outlook Negative

CHICAGO--()--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 Negative.

The rating action reflects Fitch's view that Genworth Life's statutory capital position remains strong. Also reflected in the rating affirmation is that its holding company liquidity profile has improved, investment losses have tapered off and remain within the levels previously forecasted by Fitch. Recent earnings have also generally been in line with rating expectations.

Genworth Life's statutory capital position has benefited over the past year from the sale of its Medicare supplement business. Also bolstering its position is the repositioning of its portfolio of forward starting interest rate swaps, and the completion of a life block transaction that closed in first quarter-2012 (1Q'12).

Genworth Financial, Inc. (NYSE: GNW) holding company debt that matured in 2009- 2011 has been refinanced and paid. Financing is in place for debt maturities prior to 2014. GNW holding company liquidity remains strong. GNW management has indicated its intent to hold a cash buffer of 2x annual debt service in holding company cash and exceeded its goal at the end of 1Q'12.

The Negative Outlook reflects Fitch's concerns regarding continuing US mortgage insurance losses, low reported life insurance statutory earnings. Also reflected in the Negative Outlook is uncertainty tied to GNW's ongoing strategic review of its businesses and recent resignation of its long-standing Chairman and CEO. Other rating concerns include GMW's somewhat limited financial flexibility due to the company's low stock price.

The performance of certain life and long term care (LTC) insurance blocks has put downward pressure on the statutory earnings of the life companies. Genworth Life is in the process of raising prices on certain older blocks of LTC business to improve profitability. Fitch believes price increases in the older LTC block will improve statutory earnings. However, it will take some time to receive regulatory approval in all states.

In 1Q'12, Genworth's Australian mortgage insurance subsidiary reported an operating loss due to higher frequency and severity of claims in the Queensland region. The Australian mortgage insurance unit has been an important source of dividends to the holding company. Thus, if losses continue, interest coverage and holding company liquidity could be adversely affected.

Fitch believes macroeconomic conditions (home prices and unemployment) are stabilizing. However, they continue to provide a significant headwind to the US mortgage insurance business. Additionally, the US mortgage insurance business continues to depend on regulatory and counterparty forbearance to write new business. GNW management has indicated that it believes the US mortgage insurance business has economic value.

Fitch believes GNW may continue to support its US mortgage insurer. Fitch believes this decision will not be made until a permanent CEO is selected. The current rating level can tolerate a moderate amount of additional losses at the US mortgage insurance business, including additional capital replenishment. The rating's tolerance for further capital replenishment at the US mortgage insurance business will depend on the amount and form of that replenishment.

Triggers that could result in and Outlook revision to Stable include improvement in earnings at the US mortgage insurance business, improvement in GAAP interest coverage to 5 times or better, sustained statutory earnings at Genworth Life of $300 million annually. The Rating Outlook would likely not change until GNW completes the strategic review described above.

Triggers that could precipitate a rating downgrade include an increase in equity-credit adjusted financial leverage above 30%; a decline in Genworth life company risk-based capital below 350%; and a sustained decline in statutory interest coverage below 3 times. The latter is especially true if combined with a decline in cash at the holding company below two times annual holding company interest expense. Fitch may also downgrade GNW's ratings if Genworth Life was to report a material ($500 million or more) earnings charge from the life operations including (but not limited to) adverse development of long-term care reserves.

Fitch believes GNW's US mortgage insurance business could be considered a significant subsidiary of GNW. 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. Such an event would trigger a multi-notch downgrade. Fitch. however, believes the likelihood of this event taking place to be low.

As a result, Fitch expects GNW will continue to provide reasonable support to its US mortgage insurance operations. Since the business currently being written by that operation is profitable, Fitch believes GNW will seek to maintain sufficient capital to continue writing new business but, at a minimum, at least enough capital for a solvent runoff if new business writing was to cease.

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 Negative.

Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (September 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

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Contacts

Fitch Ratings
Primary analysts
Donald F. Thorpe, CPA, CFA
Senior Director
+1-312-606-2353
Fitch Ratings, 70 West Madison Street, Chicago, IL 60602
or
Tana M. Higman
Director
+1-312-368-3122
or
Secondary Analyst
Douglas L. Meyer
Managing Director
+1-312-368-2061
or
Committee Chairperson
Keith M. Buckley
Managing Director
+1-312-368-3211
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary analysts
Donald F. Thorpe, CPA, CFA
Senior Director
+1-312-606-2353
Fitch Ratings, 70 West Madison Street, Chicago, IL 60602
or
Tana M. Higman
Director
+1-312-368-3122
or
Secondary Analyst
Douglas L. Meyer
Managing Director
+1-312-368-2061
or
Committee Chairperson
Keith M. Buckley
Managing Director
+1-312-368-3211
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com