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Fitch Downgrades Genworth Life's IFS Ratings to 'BB+'; Outlook NegativeFitch Ratings has downgraded 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) to 'BB+' from 'BBB'. The Rating Outlook is Negative. A full list of rating actions follows at the end of this release. Today's rating action follows the announcement that Genworth Financial, Inc. (GNW) will be suspending all sales of traditional life insurance and fixed annuity products in the first quarter of 2016. The company will continue to offer long-term care (LTC) products. As such, Fitch views Genworth Life and Annuity Insurance Company as a run-off entity and Genworth Life Insurance Company as a monoline LTC company and has downgraded the ratings accordingly. The Negative Outlook reflects the company's dependence on regulatory approval for future LTC rate increases and the potential for future LTC reserve charges. Fitch believes the company's financial flexibility has deteriorated significantly and holding company liquidity will be constrained over the next several years, so it would difficult for the holding company to fund a capital contribution to the life companies, if one were required. KEY RATING DRIVERS Genworth Life'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. The company has initiated several rounds of premium rate increases and introduced changes to its LTC product offerings designed to improve profitability. However, sales have declined from $241 million in 2012 to $38 million in 2015 and management of legacy blocks remains a challenge. In the fourth quarter, Genworth Life completed its LTC margin testing. While the company did not require an increase in reserves, Fitch believes the company remains susceptible to future charges and earnings volatility. Fitch believes GNW has very limited financial flexibility due to the significant deterioration in its stock valuation and extremely high spreads in the credit default swap market. Holding company cash of almost $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. However, Fitch believes near- to intermediate-term liquidity is highly dependent on the receipt of ordinary and special dividends from the mortgage insurance businesses and/or further asset sales or block transactions. Genworth Life's reported statutory capital position remains strong for the rating category with a risk-based capital (RBC) estimated at 430% at year-end 2015. However the company's reported statutory capital is heavily leveraged to reinsurance captives and exposed to statutory reserve strengthening tied to the LTC business and/or low interest rates. GNW plans to recapture the LTC reserves that are ceded to its Bermuda subsidiary later this year. While the proposed recapture will sinificantly improve the transparency associated with this challenging line of business, it is expected to have a negative 20 to 30 point impact on the U.S. life companies' RBC ratio. GNW's GAAP operating earnings-based fixed-charge coverage ratio was 3.1x in 2015. Fitch believes GNW's exposure to interest sensitive business, particularly its LTC and run-off fixed annuity business, and weakness in the Australian and Canadian housing market will hamper the company's ability to meaningfully improve earnings, and thus improve coverage metrics in 2016. GNW's financial leverage was approximately 27% at year-end 2015. The next scheduled debt maturity of $600 million is in May 2018. RATING SENSITIVITIES Triggers that could result in a rating downgrade include: --Significant charges related to long-term care or run-off business in the near- to intermediate-term that leads to a decline in Genworth life company risk-based capital below 250%; --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. Triggers that could result in a change in the Outlook to Stable include: --Consistent generation of earnings on both an operating and reported basis and no further reserve charges related to LTC or run-off businesses; --Maintenance of Genworth life company risk-based capital over 350%; --Successful execution of the restructuring plan. FULL LIST OF RATING ACTIONS Fitch has downgraded the following ratings: Genworth Life Insurance Company; Genworth Life and Annuity Insurance Company; Genworth Life Insurance Company of New York; --IFS to 'BB+' from '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=999210 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999210 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. View source version on businesswire.com: http://www.businesswire.com/news/home/20160208005887/en/ |
