Fitch Affirms Genworth Life's IFS at 'BBB' & Removes Negative Watch; Assigns Negative Outlook

CHICAGO--()--Fitch Ratings has affirmed and removed from Rating Watch Negative the 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) at 'BBB'. The Rating Outlook is Negative. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Fitch placed Genworth Life on Rating Watch Negative on Nov. 6, 2014, following the company's announcement that it would be conducting its annual review of long-term care (LTC) active life margins and associated assumptions and methodologies in the fourth quarter of 2014 (4Q'14). At that time and based on Fitch's internal estimate, the agency assumed an additional $500 million to $1 billion of pre-tax GAAP charges. Charges materially in excess of that assumption could have resulted in a downgrade.

GNW announced yesterday that it substantially completed, pending regulatory filings, its review of LTC active life margins, including a review of the associated assumptions and methodologies. As a result, the company incurred a pre-tax GAAP charge of $735 million related to its blocks of LTC business acquired before 1996. Additionally, the company recorded non-cash charges of $340 million after-tax reflecting the write-off of remaining life insurance and LTC goodwill, as well as a tax charge related to a change in its permanent reinvestment assertion in Australia mortgage insurance and a tax benefit in connection with the company's plan to sell its lifestyle protection business. GNW also announced a restructuring plan designed to reduce expenses, monetize certain businesses and reduce debt.

The Negative Outlook reflects the company's dependence on regulatory approval for future LTC rate increases, the potential for future LTC reserve charges and the risk GNW will be unsuccessful in its restructuring plan. The Negative Outlook also reflects the company's low coverage metrics, which have been below rating expectations over the past several years. Fitch believes GNW's exposure to interest sensitive business, particularly fixed annuities and LTC, will hamper the company's ability to meaningfully improve earnings in its U.S. Life Insurance segment, and thus improve coverage metrics.

GNW's ratings consider the company's large exposure and market leading position in the LTC market, which Fitch views as one of the most risky products sold by U.S. life insurers due to above-average underwriting and pricing risk, high reserve and capital requirements and risk exposure to low interest rates. While GNW has initiated several rounds of premium rate increases and introduced changes to its LTC product offerings, Fitch believes GNW remains susceptible to future charges and earnings volatility.

Genworth Life's reported statutory capital position remains strong for the rating category with a risk-based capital (RBC) of 430% at year-end 2014. Fitch notes that reported statutory capital is heavily leveraged to reinsurance captives. At year-end 2013, GNW's operating subsidiaries recognized $5.4 billion in reserve credit, or 145% of Genworth Life's year-end surplus, for reserves ceded to special-purpose captive reinsurers. GNW's future ability to cede reserves to special-purpose captive reinsurers could be impacted by the increased regulatory scrutiny of the industry's use of affiliated captives.

Fitch views positively the company's plans to capture the LTC reserves that have been ceded to its Bermuda subsidiary. While the impact on RBC is expected to be minimal, proposed recapture significantly improves the transparency associated with this challenging line of business.

GNW's GAAP earnings-based fixed-charge coverage ratio was -1.2x in 2014, down from 3.9x in 2013 and 2.9x in 2012, and below Fitch's expectation of 3x for the current rating category. While earnings within the mortgage insurance segment have improved, earnings in the company's U.S. Life Insurance business have trailed peers.

Fitch believes GNW's holding company liquidity profile remains strong but Fitch views GNW's financial flexibility as being hindered by the company's low stock price and high spreads in the credit default swap market. Holding company cash of $1.1 billion 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's next scheduled debt maturity of $300 million is in December 2016. In 3Q'13, GNW entered into a three-year $300 million revolving credit facility, which provides the company with an additional source of working capital.

RATING SENSITIVITIES

Triggers that could result in a rating downgrade include:

--Any further earnings charges related to LTC reserves in the near to intermediate term;

--Inability to execute on the restructuring plan;

--A sustained decline in statutory interest coverage below 1.5x, 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 $770 million);

--GAAP earnings-based fixed-charge coverage below 3x;

--A decline in Genworth Life company risk-based capital below 350%;

--An increase in financial leverage above 35%.

Triggers that could result in a revision in the Outlook to Stable include:

--Consistent generation of LTC earnings and no further reserve charges related to LTC;

--Improvement in GAAP earnings-based interest coverage of 3x or better;

--Maintenance of Genworth Life company risk-based capital over 400%;

--Sustained statutory earnings at Genworth Life of $400 million annually.

Fitch has affirmed and removed from Rating Watch Negative the following ratings:

Genworth Life Insurance Company;

Genworth Life and Annuity Insurance Company;

Genworth Life Insurance Company of New York;

--IFS at 'BBB'.

The Rating Outlook is Negative.

Additional information is available on 'www.fitchratings.com'.

THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS OTHER THAN THROUGH THE MEDIUM OF ITS PUBLIC DISCLOSURE.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 4, 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979556

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Contacts

Fitch Ratings
Primary Analyst
Tana M. Higman, +1-312-368-3122
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Douglas L. Meyer, CFA, +1-312-368-2061
Managing Director
or
Committee Chairperson
James B. Auden, CFA, +1-312-368-3146
Managing Director
or
Media Relations:
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Tana M. Higman, +1-312-368-3122
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Douglas L. Meyer, CFA, +1-312-368-2061
Managing Director
or
Committee Chairperson
James B. Auden, CFA, +1-312-368-3146
Managing Director
or
Media Relations:
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com