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Announcement:

Moody's affirms Genworth Australia's rating following IPO announcement; notes ultimate credit profile remains fluid

Global Credit Research - 08 Nov 2011

Sydney, November 08, 2011 -- Moody's Investors Service has affirmed the ratings of Genworth Financial Mortgage Insurance Pty Limited (Genworth Australia, insurance financial strength rating of A1) and its subsidiary Genworth Financial Mortgage Indemnity Limited (Genworth Indemnity, insurance financial strength rating of A2). The rating outlooks remain negative for Genworth Australian and stable for Genworth Indemnity.

RATINGS RATIONALE

The affirmation follows the announcement on 3 November 2011 by the ultimate parent of the two entities, Genworth Financial Inc. ('GNW', senior unsecured rating of Baa3, negative outlook), that it intends to sell a minority position in its Australian mortgage insurance operations, comprised of Genworth Australia and Genworth Indemnity. GNW expects to sell up to 40% of its Australian holdings, with a targeted completion in Q2 2012. The transaction remains subject to market conditions and regulatory approvals. The IPO follows a similar sale of a minority stake in GNW's Canadian mortgage insurance operations in July 2009.

"On balance, a successful IPO would be a moderate credit positive for Genworth Australia," Moody's Senior Credit Officer Ilya Serov commented. "Genworth Australia's current rating profile is constrained by uncertainties and challenges within GNW's US mortgage insurance operations, which are pressured by the US housing downturn. The planned IPO would improve financial flexibility at the Australian entity by providing direct access to equity capital markets", Serov explained.

At the same time Moody's notes that, in the short-run, the IPO raises some uncertainty in respect of Genworth Australia's ultimate credit profile. In its analysis Moody's will particularly focus on:

- The governance structure and risk appetite of the Australian entity post-IPO. The composition of the Board of Directors, the company's strategy and its risk appetite may change following the IPO, and will be a key component of Moody's analysis of Genworth Australia going forward.

- The possible restructuring of the Australian entity's reinsurance coverage. Genworth Australia maintains reinsurance agreements with its US affiliate Genworth Mortgage Insurance Corporation (IFSR Ba1, negative outlook), which continues to provide the majority of its reinsurance support. Genworth Australia has previously indicated an intention to reduce dependence on the US entity for reinsurance to about 6% of its regulatory capital sources by 2013. Moody's would view reinsurance sourced from a stronger provider to be credit-positive for Genworth Australia.

Moody's has also commented that, by the nature of its operations, Genworth Australia's credit profile remains dependent on continued stability in the Australian housing market.While Moody's views the probability of a severe housing crisis to be low, a greater degree of caution with regards to the future performance of Australian mortgage portfolios may be warranted, as the rating agency noted in its July 26, 2011 special comment titled "Australian RMBS: A Post-Crisis Reassessment". In particular, a number of risk factors have been either increasing in intensity over the recent past, or remain elevated:

- Australia's economic growth has been increasingly driven by commodity sector investment and favorable terms of trade. However, the continuing structural transformation of the economy, in favour of commodity sector, implies the creation of both winners and losers, with certain industries and geographic regions potentially coming under significant pressure. As a result, default and delinquency rates in the mortgage market are likely to be both variable and, on average, higher over the coming decade than in the recent past.

- The data with regard to the sustainability of Australian house prices are ambiguous, with the run-up in prices over the past decade only partially explained by fundamentals. Moody's considers the possibility of major regional house price drops to be a material risk for the Australian market.

- Elevated mortgage debt levels point to vulnerability within the Australian financial system. The mortgage market's robustness to an adverse economic shock has not been tested at current levels of indebtedness, with the recent experience of other countries positing some questions in this regard.

Taken together, these factors expose Genworth Australia to adverse shocks in the Australian housing market and act as somewhat of a constraint on its overall rating profile.

The outlook for the rating of Genworth Australia remains negative.

Genworth Indemnity ceased writing new business in 2003, and is running off its existing book of business. The company is characterized by the seasoned nature of its portfolio and strong regulatory capital levels. The outlook for Genworth Indemnity's rating is stable.

Moody's ratings of Genworth's US businesses are not part of this rating action.

The principal methodology used in this rating was "Moody's Global Rating Methodology for the Mortgage Insurance Industry", published in February 2007. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating. Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Ilya Serov
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service Pty. Ltd.
Level 10
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Pty. Ltd.
Level 10
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Moody's affirms Genworth Australia's rating following IPO announcement; notes ultimate credit profile remains fluid
No Related Data.

 

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