No Rating Impact for Genworth Australia from US downgrade
Fitch has downgraded the 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'. For the full rating action commentary, see 'Fitch Downgrades Genworth Life's IFS Ratings to 'BB+'; Outlook Negative'.
Fitch assesses GMA on a stand-alone basis and has previously indicated that further downgrades to GNW's ratings would not result in a downgrade to GFMI's rating (see 'Fitch Publishes Genworth Rating at 'A+'; Outlook Stable' dated 17 December 2014). GFMI is able to achieve a higher rating than the US operating subsidiaries of GNW, as a result of the regulatory ring-fencing in Australia and substantial minority shareholder base (48%).
Fitch affirmed the rating of GFMI on 28 January 2016, based on its stand-alone profile and a full discussion on the key rating rationale and sensitivities which is contained in the following rating action commentary, 'Fitch Affirms Genworth Australia at 'A+'; Outlook Stable'. These include a solid operating performance, strong capital ratios and conservative investment approach. A favourable operating environment continues to support the performance of the insurance portfolio, and delinquency rates remain low.
GNW has maintained a controlling stake in GMA despite reducing its stake from 66% to 52% in 2015. Fitch believes that Australian business and prudential requirements act as a considerable barrier to the transmission of weakness at GNW to GMA.
GMA has a majority non-executive and locally resident board where four of the eight board members including the chairman are independent. The board is ultimately responsible for ensuring that GMA maintains a strong credit profile to support the franchise, and it is the boards' responsibility to ensure that GMA's risk management framework is integrated into its internal capital adequacy assessment process. We believe Australia's prudential and legal framework ensures a robust level of board governance and behaviour.
The deterioration in the credit profile of GNW does not pull the rating on GFMI down. However, it does constrain any upside to the rating. Fitch believes that in order for an issuer to attain a rating in the 'AA' category, there should be no constraint on its financial flexibility. For GFMI to attain a 'AA-' rating under the current ownership structure, the agency would expect to see no more than a one to three notch differential with the main operating subsidiaries of GNW.
Fitch could change this approach, and place greater reliance on group linkages, if we believed deterioration in the credit profile of GNW could result in a weakening of GMA's credit profile.