NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed 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.
The Negative Outlook reflects the company's dependence on regulatory approval for future long-term care (LTC) rate increases and the potential for future LTC reserve charges. 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.
KEY RATING DRIVERS
Earlier this year GNW announced strategic and restructuring plans designed to reduce expenses, monetize certain businesses, reduce debt and strengthen capital. Fitch believes the company has made significant progress thus far. The sale of its lifestyle protection is expected to close by the end of 2015 and generate net proceeds of $400 million and the sale of its European mortgage insurance business is expected to close in the first quarter of 2016 and generate net proceeds of $55 million. The company's planned sale, via reinsurance, of certain blocks of term life insurance will generate capital of $100 to $150 million in aggregate and is expected close in the first quarter of 2016. While these transactions have generated cash proceeds for the company, Fitch notes that GNW will report after-tax GAAP losses of $742 million in 2015 related to the sales.
Through the use of reinsurance and an internal legal entity restructuring, GNW's U.S. mortgage insurance business is expected to be compliant with the private mortgage insurance eligibility requirements (PMIERs) capital requirements that become effective on Dec. 31, 2015.
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. In the fourth quarter, GNW will be completing its LTC margin testing. Since the company unlocked its PGAAP block year and it has no margin, Fitch believes this block is sensitive to adverse changes.
Genworth Life's reported statutory capital position remains strong for the rating category with a risk-based capital (RBC) estimated at 445% at Sept. 30, 2015. However the company's Life's reported statutory capital is heavily leveraged to reinsurance captives. At year-end 2014, GNW's operating subsidiaries recognized $5.8 billion in reserve credit, or 166% of GNW's year-end surplus, for reserves ceded to special-purpose captive reinsurers. While the planned sale of certain blocks of certain life business will improve this ratio to approximately 100%, Fitch continues to view it as high among its rated universe.
Fitch views positively the company's plans to capture the LTC reserves that have been ceded to its Bermuda subsidiary in 2016 or 2017. 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 4.0x in first nine months of 2015. While earnings within the mortgage insurance segment have improved, earnings in the company's U.S. Life Insurance business have trailed peers.
Based on statutory dividend capacity of $500 million, Fitch expects statutory interest coverage to be 1.6x in 2015. Fitch expects dividend capacity from the subsidiaries to be constrained over the near to intermediate term. While the international mortgage insurance business is expected to remain a reliable source of dividends to the holding company, Fitch believes it is unlikely that the US life companies or the US mortgage insurance company will pay ordinary dividends to the holding company.
Fitch believes GNW's holding company liquidity profile remains strong but views its financial flexibility as being hindered by low stock prices and high spreads in the credit default swap market. Holding company cash of $983 million remains in excess of management's stated target to hold 1.5x annual debt service plus a buffer of $350 million for stress scenarios. In the third quarter of 2013 GNW entered into a three-year $300 million revolving credit facility, which provides the company with an additional source of working capital.
GNW's financial leverage was 28.5% at Sept. 30, 2015. The next scheduled debt maturity of $300 million is in December 2016. The company has indicated that a majority of the proceeds from the sale of the lifestyle protection business will be used to fund this maturity.
RATING SENSITIVITIES
Triggers that could result in a rating downgrade include:
--Any further earnings charges related to long-term care 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;
--GAAP earnings-based fixed-charge coverage maintained 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 change in the Outlook to Stable include:
--No adverse changes announced in the restructuring plan;
--Consistent generation of LTC earnings and no further reserve charges related to LTC;
--Maintenance of 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.
FULL LIST OF RATING ACTIONS
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 'BBB'.
The Rating Outlook is Negative.
Additional information is available on www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub. 16 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=994183
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994183
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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