Fitch Affirms Genworth Life's IFS Rating at 'BB+'; Outlook Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of Genworth Life Insurance Company (GLIC), Genworth Life and Annuity Insurance Company (GLAIC) and Genworth Life Insurance Company of New York (collectively, Genworth Life) at 'BB+'. The Rating Outlook is Negative. A full list of rating actions follows at the end of this release.

The affirmation reflects the significant progress Genworth Financial, Inc. (GNW) has made thus far with its restructuring plan. Favorably, the company executed a bond consent solicitation for the senior and subordinated notes which excludes the operating entities that operate the long-term care (LTC) business from the event of default provisions. GNW also plans to separate, then isolate the long-term care business from the run-off life and annuity business through a series of reinsurance and restructuring transactions that would unstack GLAIC from GLIC.

The Negative Outlook reflects the company's execution risk tied to achieving future LTC rate increases, which are subject to regulatory approval, the potential for future LTC reserve charges, and exposure to continued low interest rates. Fitch also believes the company's financial flexibility and holding company liquidity will be constrained over the next several years, making it difficult for the holding company to fund a large 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 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 fallen precipitously over the past several years and management of legacy blocks remains a challenge. Genworth Life will be completing its annual LTC margin testing and assumption reviews later this year. Fitch believes the company remains susceptible to future charges and earnings volatility.

Fitch believes GNW's access to the capital markets for future funding needs and overall financial flexibility is limited. Over the intermediate term, holding company funding needs is highly dependent on existing cash balances, ordinary and special dividends from the mortgage insurance businesses and/or further asset sales or block transactions. At June 30, 2016 holding company cash of $934 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. GNW's next scheduled debt maturity of $600 million is in May 2018.

Genworth Life's reported statutory capital position remains strong for the current rating category with a risk-based capital (RBC) estimated at 370%. However the company's reported statutory capital remains exposed to statutory reserve strengthening tied to the LTC business and/or low interest rates. GNW plans to complete the recapture of LTC reserves that are ceded to its Bermuda subsidiary later this year, which will significantly improve the transparency associated with this challenging line of business. Earlier this year GNW recaptured a block of universal life and a block of term life from BLAIC which is expected to have a negative 15 to 20 point impact on the U.S. life companies' RBC ratio in the third quarter of 2016 but is expected to reverse over the next several quarters as GNW implements reinsurance solutions on the recaptured business.

GNW's financial leverage was approximately 27% at June 30, 2016. GNW's GAAP operating earnings-based fixed-charge coverage ratio was 3.3x in the first half of 2016. Fitch believes GNW's exposure to interest sensitive business, particularly its LTC and run-off fixed annuity business, and weakness in portions of the Australian and Canadian housing market will hamper the company's ability to meaningfully improve earnings, and thus improve coverage metrics over the near term.

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%;

--Continued deterioration in the company's franchise value that negatively impacts the performance of the GNW's active and run-off businesses;

--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 affirmed the following ratings:

Genworth Life Insurance Company;

Genworth Life and Annuity Insurance Company;

Genworth Life Insurance Company of New York;

--IFS at 'BB+'.

The Rating Outlook is Negative.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 15 Sep 2016)

https://www.fitchratings.com/site/re/887191

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012402

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012402

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Douglas L. Meyer, CFA, +1-312-368-2061
Managing Director
Fitch Ratings, Inc.
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or
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Managing Director
or
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Managing Director
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[email protected]

Source: Fitch Ratings

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