Fitch Affirms Genworth Life IFS Ratings at 'BBB'; Outlook Negative
The Negative Outlook reflects the uncertainty associated with GNW's strategic and restructuring plans, the company's dependence on regulatory approval for future long-term care (LTC) rate increases and the potential for future LTC reserve charges. The Negative Outlook also reflects the company's low coverage metrics, which have been below rating expectations over the past several years. Fitch believes GNW's exposure to interest sensitive business, particularly fixed annuities and LTC, will hamper the company's ability to meaningfully improve earnings in its U.S. Life Insurance segment, and thus improve coverage metrics.
KEY RATING DRIVERS
Since GNW is still in the early stages of its strategic and restructuring plans, Fitch believes a high level of uncertainty remains around the final outcome. While the company could realize a significant amount of cash and capital from the sale of various businesses including life, annuity and lifestyle protection, Fitch believes the organization will be much less diversified with greater exposure to the more volatile lines of business.
GNW'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. While GNW has initiated several rounds of premium rate increases and introduced changes to its LTC product offerings, Fitch believes GNW remains susceptible to future charges and earnings volatility.
Genworth Life's reported statutory capital position remains strong for the rating category with a risk-based capital (RBC) estimated at 450% at March 31, 2015. Genworth Life's reported statutory capital is heavily leveraged to reinsurance captives. GNW's future ability to cede reserves to special-purpose captive reinsurers could be impacted by the increased regulatory scrutiny of the industry's use of affiliated captives.
Fitch views positively the company's plans to capture the LTC reserves that have been ceded to its Bermuda subsidiary during 2015. While the impact on RBC is expected to be minimal, proposed recapture significantly improves the transparency associated with this challenging line of business.
Fitch notes that Genworth Life and Annuity Insurance Company (GLAIC) is a wholly owned subsidiary of Genworth Life Insurance Company (GLIC). GLAIC's book value of \\$2.1 billion as of year-end 2014 represents a significant portion of GLIC's statutory capital structure. Fitch believes the sale of GLAIC could have a material impact on GLIC's RBC ratio going forward.
GNW's GAAP earnings-based fixed-charge coverage ratio was 4.5x in first three months of 2015, up from -0.1x in 2014. While earnings within the mortgage insurance segment have improved, earnings in the company's U.S. Life Insurance business have trailed peers.
On a statutory basis (maximum statutory dividends divided by adjusted interest) coverage is expected to decline to 1.4x in 2015 from 2.6x in 2014 because dividend capacity declined from \\$1 billion to \\$500 million. This is slightly below Fitch's median ratio guideline of 1.5x for the 'BBB' rating level. Fitch expects dividend capacity from the subsidiaries to be constrained over the near to intermediate term. While the international mortgage insurance business is expected to remain a reliable source of dividends to the holding company, Fitch believes it is unlikely that the US life companies will pay ordinary dividends to the holding company over the near term.
Fitch believes GNW's holding company liquidity profile remains strong but Fitch views GNW's financial flexibility as being hindered by the company's low stock price and high spreads in the credit default swap market. Holding company cash of \\$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. Fitch expects a portion of the cash at the holding company could be used to provide GNW's U.S. mortgage insurer with additional capital to meet the Private Mortgage Insurer Eligibility Requirements (PMIERs) that become effective on Dec. 31, 2015.
GNW's next scheduled debt maturity of \\$300 million is in December 2016. In the third quarter of 2013 GNW entered into a three-year \\$300 million revolving credit facility, which provides the company with an additional source of working capital.
RATING SENSITIVITIES
Triggers that could result in a rating downgrade include:
--Any further earnings charges related to long-term care reserves in the near to intermediate term;
--Inability to execute on the restructuring plan;
--A sustained decline in statutory interest coverage below 1.5x, especially if combined with 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 (approximately \\$770 million);
--GAAP earnings-based fixed-charge coverage maintained below 3x;
--A decline in Genworth life company risk-based capital below 350%;
--An increase in financial leverage above 35%.
Triggers that could result in a change in the Outlook to Stable include:
--No adverse changes announced in the restructuring plan;
--Consistent generation of LTC earnings and no further reserve charges related to LTC;
--Maintenance of GAAP earnings-based interest coverage of 3x or better;
--Maintenance of Genworth life company risk-based capital over 400%;
--Sustained statutory earnings at Genworth Life of \\$400 million annually.
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 'BBB'.
The Rating Outlook is Negative.
Комментарии