Fitch Downgrades Genworth Life’s IFS Ratings to ‘BB+’; Outlook Negative
Today's rating action follows the announcement that Genworth Financial, Inc. (GNW) will be suspending all sales of traditional life insurance and fixed annuity products in the first quarter of 2016. The company will continue to offer long-term care (LTC) products. As such, Fitch views
The Negative Outlook reflects the company's dependence on regulatory approval for future LTC rate increases and the potential for future LTC reserve charges. Fitch believes the company's financial flexibility has deteriorated significantly and holding company liquidity will be constrained over the next several years, so it would difficult for the holding company to fund a 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
Fitch believes GNW has very limited financial flexibility due to the significant deterioration in its stock valuation and extremely high spreads in the credit default swap market. Holding company cash of almost
Genworth Life's reported statutory capital position remains strong for the rating category with a risk-based capital (RBC) estimated at 430% at year-end 2015. However the company's reported statutory capital is heavily leveraged to reinsurance captives and exposed to statutory reserve strengthening tied to the LTC business and/or low interest rates. GNW plans to recapture the LTC reserves that are ceded to its
GNW's GAAP operating earnings-based fixed-charge coverage ratio was 3.1x in 2015. Fitch believes GNW's exposure to interest sensitive business, particularly its LTC and run-off fixed annuity business, and weakness in the Australian and Canadian housing market will hamper the company's ability to meaningfully improve earnings, and thus improve coverage metrics in 2016.
GNW's financial leverage was approximately 27% at year-end 2015. The next scheduled debt maturity of
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%;
--A decline in cash at the holding company below management's target of 1.5x annual holding company interest expense plus a buffer of
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 downgraded the following ratings:
--IFS to 'BB+' from 'BBB'.
The Rating Outlook is Negative.
Additional information is available on www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub.
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172
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