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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

View source version on businesswire.com: http://www.businesswire.com/news/home/20160929006260/en/

Fitch Ratings

Primary Analyst

Douglas L. Meyer, CFA, +1-312-368-2061

Managing Director

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

Julie A. Burke, CFA, CPA, +1-312-368-3158

Managing Director

or

Committee Chairperson

Keith M. Buckley, CFA, +1-312-368-3211

Managing Director

or

Media Relations, New York

Hannah James, +1-646-582-4947

[email protected]

Source: Fitch Ratings