Moody's Continues Review of Genworth (GNW) Ratings
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Moody's Investors Service announced the continued review for downgrade of the Ba3 senior unsecured debt rating of Genworth Holdings, Inc. (Genworth)(NYSE: GNW), and the Baa2 insurance financial strength (IFS) rating of Genworth Life and Annuity Insurance Company (GLAIC). In the same rating action, Moody's downgraded the IFS ratings of Genworth's long-term care (LTC) subsidiaries, Genworth Life Insurance Company and Genworth Life Insurance Company of New York (GLIC and GLICNY, collectively, GLIC) to Ba2 from Ba1. These ratings remain on review for downgrade. Moody's also affirmed the Ba1 IFS rating of Genworth Mortgage Insurance Corporation (GMICO). The outlook for GMICO remains stable.
The rating actions follow China Oceanwide Holdings Group Co. Ltd (COH; Unrated) announcement on 23 October 2016 that an affiliate and an indirect affiliate, Asia Pacific Global Capital Co., Ltd, (Unrated) and Asia Pacific Global Capital USA Corporation (Unrated) respectively will purchase Genworth for approximately $2.7 billion in cash as well as Genworth's announcement that it would take a $400 million -- $450 million pre-tax charge related to its long-term care (LTC) business in Q3 2016. The purchase price is expected to be funded with a capital infusion from COH, Oceanwide Capital Investment Management Group Co., Ltd. (Unrated) and Wuhan CBD Development & Investment Co., Ltd. (Unrated).
With the acquisition of Genworth, COH will support Genworth's restructuring plan of growing in the mortgage insurance (MI) space and containing risk in its life insurance business. COH is an international holding company based in Beijing, China with diversified investments across a range of industry sectors. The transaction is expected to close prior to August 31, 2017 subject to Genworth shareholder approval, various regulatory clearances and approvals and other customary closing conditions.
The rating of Genworth's Australian mortgage insurance operations (A3 IFS rating, negative) is not part of this rating action.
Ratings Rationale - The Holding Company
Genworth's continued review for downgrade reflects execution risk associated with the transaction as well as a lack of visibility into Genworth's plans to resolve its holding company liquidity and financial flexibility challenges following a transaction. Although COH will contribute capital (in addition to the payment to Genworth shareholders) to support GLIC and pay down the 2018 debt, Moody's remains concerned about Genworth's ability to address the $1.5 billion of debt maturing in 2020 and 2021, as well as the company's weak results from its life insurance operations.
Notwithstanding these uncertainties, should the deal close, it would be a credit positive for Genworth, as COH will help support Genworth's restructuring plan. Specifically, this includes a capital infusion of approximately $700 million into GLIC (This includes approximately $175 million contributed from Genworth) to facilitate regulatory approval for the separation and isolation of GLIC, Genworth's LTC company. In addition to isolating holding company creditors from downside LTC scenarios, the de-stacking of GLAIC would also facilitate its ability to pay dividends to its parent. Additionally, as part of the merger agreement, COH will contribute funds to repay $600 million of debt maturing in 2018 at or before maturity.
During its review, Moody's will examine sources of funding to repay the debt maturing in 2020 and 2021, statutory capitalization and capital adequacy targets of insurance subsidiaries, and the resulting holding company capital structure. Additionally, the review will focus on understanding COH's longer term strategic plans regarding Genworth's business strategy.
Ratings Rationale - The Life Insurance Companies
The downgrade of GLIC and the continued review for downgrade of GLIC and its subsidiary GLAIC reflect both the uncertain financial flexibility at Genworth holding company (discussed above), and the announcement on 23 October 2016 that the combined life companies would take a GAAP charge in 3Q2016 of $400 - $450 million, pre-tax, to increase LTC claim reserves reserve after its annual review of assumptions and methodologies and other actuarial assumptions for its LTC business. In addition, Genworth will take a non-cash GAAP charge of approximately $275 - $325 million due to deferred tax assets that are not expected to be utilized before their expiration. We remain concerned about the tail risk associated with the LTC business in GLIC. While GLAIC has meaningful interest sensitivity associated with its business, we believe it has a stronger credit profile than GLIC and should release capital over time, should the de-stacking take place. As a result, we widened the difference between these ratings accordingly, but left them both under review for downgrade to reflect the pressures they face.
Moody's said the review will continue to focus, among other things, on the strategic rationale of the acquisition of Genworth by COH, the necessary regulatory approvals, progress related to the de-stacking, in terms of regulatory approvals on the timing and contributions; on definitive debt repayment decisions; and on business and financial profile of the life insurance companies, in terms of earnings, reserve adequacy, and regulatory capitalization.
Ratings Rationale - U.S. Mortgage Insurance
According to Moody's, the affirmation of GMICO's Ba1 IFS rating with a stable outlook balances GMICO's improving profitability amid favorable US housing market fundamentals, its good market position in the US mortgage insurance sector and its compliance with Fannie Mae's and Freddie Mac's capital standards against the weak credit profile of its corporate parent. Moody's notes that meaningful separation exists between Genworth's life and mortgage insurance businesses, which mitigates the impact of Genworth's weak financial flexibility on GMICO's overall credit profile. The sale of Genworth to COH is expected to address some of these issues, but also could create some uncertainties about corporate governance, transparency and financial policy for the US mortgage insurance business going forward.
Should the deal close, Moody's expects to confirm the ratings of Genworth and its life insurance companies, or lower them by up to one notch depending on their financial performance. If the deal closes and the company demonstrates a path to address the 2020/2021 debt maturities, there would be upward pressure on the ratings of GMICO, GLAIC and the holding company. If the deal does not close, it is likely all ratings will be downgraded, with the exception of GMICO.
Rating Drivers -- Holding Company
Capital support to repay the 2018 and all or a portion of the 2020 and 2021 debt maturities at closing could lead to a confirmation or upgrade of Genworth's ratings. Without the additional explicit support beyond the 2018 debt at closing, the following could result in a confirmation of the holding company's ratings: 1) successful separation and isolation of the LTC business and improvement of holding company financial flexibility (i.e., reduction in and/or refinancing of 2018 and 2020/2021 debt maturities); and 2) Improved credit profile of GLAIC.
Conversely, the following could result in a downgrade of the holding company's ratings: 1) further downgrade of the US life insurance operations; 2) lack of progress in addressing upcoming debt maturities in 2018 and 2020/2021; and 3) if the planned acquisition by COH is terminated or delayed.
Rating Drivers - US life insurance operating subsidiaries
Given GLAIC's run-off status and the interest rate sensitivity of its liabilities, an upgrade beyond Baa2 is unlikely. However, the following factors could result in GLAIC's rating being confirmed: 1) stability in statutory earnings and return on statutory surplus greater than 10%, and 2) improvement in financial flexibility at the holding company (i.e., reduction in and/or refinancing of 2018 and 2020/2021 debt maturities).
Conversely, factors that could result in a downgrade of GLAIC's rating include: 1) Failure to maintain RBC > 350% of company action level (CAL), 2) return on statutory surplus less than 5%, and 3) if the planned acquisition by COH is terminated or delayed.
Given GLIC/GLICNY's underperformance in its LTC business, an upgrade beyond their current level is unlikely. However, the following could lead to a confirmation of their ratings: 1) significant LTC rate approvals and/or other actions that help grow margins in the legacy LTC book of business, and 2) improvement in financial flexibility at the holding company (i.e., reduction in and/or refinancing of 2018 and 2020/21 debt maturities).
Factors that could result in a downgrade of GLIC's/GLICNY's ratings include: 1) further deterioration of the margins on LTC reserves, increasing the probability of a material reserve charge in the future, 2) RBC ratio less than 300% CAL, and 3) denial of LTC rate approvals, pressuring reserve adequacy of legacy LTC business.
Rating Drivers - US Mortgage insurance
The closing of sale of Genworth to COH under terms broadly consistent with those announced by the company could lead to positive ratings pressure on GMICO, depending on the degree of clarity regarding the plan to address Genworth's debt maturing in 2020 and 2021. A termination of the planned transaction, with no material change to GMICO's current business and financial profile would most likely result in an affirmation of its IFS rating at the current Ba1 level. Going forward, corporate governance, financial transparency and additional clarity on COH's longer-term plan for Genworth's US mortgage insurance business in the context of its own strategic priorities will be important qualitative factors in our analysis of GMICO.
More broadly, GMICO's ratings could be downgraded if there is a further decline in the group's financial flexibility or non-compliance with Fannie Mae's and Freddie Mac's capital standards.
The following ratings remain on review for downgrade:
Genworth Holdings, Inc.: backed senior unsecured at Ba3, backed junior subordinate at B1 (hyb), backed provisional senior unsecured shelf at (P)Ba3, backed provisional subordinate shelf at (P)B1;
Genworth Life and Annuity Insurance Company: insurance financial strength at Baa2.
Genworth Global Funding Trusts: funding agreement-backed senior secured MTN notes at Baa2.
The following ratings were downgraded and remain on review for downgrade:
Genworth Life Insurance Company: insurance financial strength to Ba2 from Ba1;
Genworth Life Insurance Company of New York: insurance financial strength to Ba2 from Ba1;
General Repackaging ACES SPC 2007-2, 3, 7: funding agreement-backed senior secured notes to Ba2 from Ba1;
The following rating was affirmed with a stable outlook:
Genworth Mortgage Insurance Corporation: Insurance financial strength at Ba1
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