Rating Action on Genworth Wings

Zacks

Fitch Ratings recently affirmed the insurer financial strength (:IFS) rating of Genworth Financial Inc.’s (GNW) subsidiaries - Genworth Life Insurance Company, Genworth Life and Annuity Insurance Company and Genworth Life Insurance Company of New York – as well as the long-term ratings on Genworth Global Funding Trust at ‘A-’. However, the outlook on the ratings is negative, indicating the possibility of a downgrade in the near future.

The rating affirmation was based on the strong statutory capital position of the subsidiaries coupled with enhanced liquidity and lower investment losses of the holding company. Moreover, the company’s earnings results were favorable and the divestiture of the Medicare supplement business further strengthened its capital position.

However, the long-term loss trend in the US mortgage insurance business, low statutory earnings in the life insurance business, doubts regarding the strategic review of Genworth’s businesses, stepping down of the Chairman-cum-CEO and restricted financial flexibility led to the negative outlook.

While unsatisfactory income from some life and long-term care insurance blocks are restricting the statutory earnings, Fitch expects improvement if the company obtains the necessary regulatory approval for price increase. However, slow recovery of home prices and employment levels are adversely affecting the US mortgage insurance business.

Nevertheless, increase in future earnings from the US mortgage insurance business, increase of the GAAP interest coverage ratio to at least 5 times or regular generation of at least $300 million in annual statutory earnings can lead to revision of the outlook to stable. However, the outlook is not expected to change before the completion of the ongoing strategic review.

On the other hand, Fitch can revise the ratings downward if the equity-credit adjusted financial leverage rises beyond 30%, the risk-based capital of the subsidiaries falls below 350% or the statutory interest coverage stays below 3 times over the long-term. Further, in case the subsidiaries incur at least $500 million of charge against earnings from the life operations, then a rating downgrade is imminent.

Moreover, in the unlikely event of bankruptcy of a significant subsidiary such as the US mortgage insurance business will cause Genworth’s senior debt to mature faster, as per the debt agreement. This in turn can lead to a downgrade by several notches.

In early May, Standard & Poor's Ratings Services affirmed the long-term counterparty credit rating of  MetLife Inc. (MET), an arch rival of Genworth, at 'A-'. The rating agency also affirmed long-term counterparty credit at 'AA-' and financial strength ratings of its subsidiaries. The outlook was also revised to stable from negative.

Genworth carries a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating.

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