S&P downgrades Genworth

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From S&P:

Genworth Financial Mortgage Insurance Pty Ltd. Ratings Lowered; Outlook Negative

Overview

· S&P has lowered the financial strength ratings on Genworth Life Insurance Co., Genworth Life and Annuity Insurance Co. and Genworth Life Insurance Co. of New York to ‘BBB+’ from ‘A-‘.

· As a result, the financial strength ratings on Genworth Financial Mortgage Insurance Pty Ltd., the active Australian lenders’ mortgage insurance (LMI) business, have been lowered to ‘A+’ from ‘AA-‘, with the ratings being capped at three notches above the group credit profile. The outlook is negative, in line with that on the core life insurance companies of the Genworth group.

· The subordinated debt ratings on Genworth Financial Mortgage Insurance Pty Ltd. have been lowered to ‘A+’ to ‘A’.

· The ‘A-‘ rating on Australian LMI run-off subsidiary Genworth Financial Mortgage Indemnity Ltd. has been affirmed with a stable outlook.

Rating Action

On Nov. 6, 2014, Standard & Poor’s Ratings Services lowered its long-term counterparty credit and senior unsecured debt ratings on Genworth Financial Inc. to ‘BB+’ from ‘BBB-‘. We also lowered our financial strength ratings on Genworth Life Insurance Co., Genworth Life and Annuity Insurance Co., and Genworth Life Insurance Co. of New York to ‘BBB+’ from ‘A-‘. The outlook is negative.

Along with ratings actions on a number of other subsidiaries of the Genworth group, we lowered our financial strength ratings on Genworth Financial Mortgage Insurance Pty Ltd., the active Australian lenders’ mortgage insurance (LMI) business, to ‘A+’ from ‘AA-‘. The outlook is negative. We affirmed our ‘A-‘ rating on Australian LMI run-off subsidiary Genworth Financial Mortgage Indemnity Ltd. with a stable outlook.

Rationale
The downgrade of the core U.S. life insurance companies to ‘BBB+’ from ‘A-‘ reflects our less-favorable assessment of the organization’s inherent capital and earnings volatility and overall risk position after third-quarter earnings volatility. Genworth reported increased statutory disabled life reserving of $589 million in third-quarter 2014 driven by lower claims-termination rates and higher utilization rates than previously assumed in its U.S. long-term care business. The third-quarter charge represents more than 10% of the life companies’ total adjusted capital (including Bermuda-based affiliate Brookfield Life and Annuity Insurance Co. Ltd. [BLAIC], which holds a significant portion of Genworth’s long-term care liabilities). The heightened volatility increases our uncertainty about prospective claim and reserve development for this long-tail line of business. In addition, we believe that Genworth will face decreased consumer and regulatory receptivity to future rate increases, as it manages the developing costs of its liabilities.

The rating actions on the active Australian mortgage insurance business are driven by the developments in the U.S. life insurance operations. The active Australian mortgage insurance business currently has a stand-alone credit profile of ‘aa-‘. The ratings on this business are capped at three notches above the group credit profile under our group ratings methodology, and accordingly moved in step with the rating action on Genworth Life. The Australian mortgage insurance business continues to have a very strong capital and earnings profile, in our view, though there is potential for further capital management initiatives in addition to the targeted dividend payout ratio, and we see a greater demand from parent Genworth Financial for dividend payments. Ratings on Genworth Indemnity (the Australian LMI run-off subsidiary) are affirmed at its stand-alone credit profile level of ‘a-‘ as an insulated subsidiary.

Outlook
The outlook on the active Australian LMI business is negative, in line with the outlook on the Genworth group’s core life insurance companies. The outlook on the Australian run-off LMI business is stable.

The negative outlook on the core life insurance companies, which indicates at least a one-third chance of a downgrade, reflects the need to rebuild capital strength, the risk of further reserve strengthening, and execution risk in the turnaround of the U.S. life insurance division.

Moreover, the negative outlook captures our ongoing reassessment of management’s operational effectiveness and ability to execute strategy, and the importance and effectiveness of Genworth’s enterprise risk management program.

The negative outlook on the holding company reflects concerns in the core life insurance company outlook, loss of dividends from the life insurance division likely through late 2015, and execution risk at the U.S. mortgage division as it seeks to self-fund new government-sponsored entity capital requirements without calling upon parent cash. The outlook includes concern about low earnings capacity in the near term as well as low fixed-charge coverage.

Under our base-case assumptions capturing recent third-quarter developments, we expect Genworth Financial to generate consolidated break-even performance on a pretax basis for full-year 2014. This excludes any further reserve strengthening or material one-time charges for the remainder of 2014. We expect full-year 2014 consolidated financial leverage of 31%. We expect earnings improvement in 2015 that would restore capital strength at both the U.S. life and U.S. mortgage insurance divisions.

We could lower the ratings if the group financial profile further deteriorates. Any additional material reserve strengthening could result in a downgrade. Any perceived or actual inability to improve U.S. life division earnings would mute the benefit of diversification in our ratings and could result in a downgrade as well. We could also lower the ratings if we have a changed view of management’s ability to execute its chosen strategy, or of Genworth’s enterprise risk management program.

Higher premiums then!

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.