Approximately $5 billion of debt affected
New York, January 16, 2013 -- Moody's Investors Service has confirmed the debt ratings of Genworth Financial,
Inc. ("Genworth"; NYSE: GNW, senior debt at Baa3),
with a stable outlook. The rating action follows the company's
announcement of a reorganization plan designed to reduce the linkages
of the holding company with Genworth's US Mortgage Insurance (MI)
operating companies. At the same time, Moody's downgraded
the insurance financial strength (IFS) ratings of Genworth's US
MI operating companies to Ba2 from Ba1, with a negative outlook.
The rating actions conclude a review for downgrade that was initiated
on June 27, 2012. A complete list of affected ratings is
given below.
Moody's ratings on Genworth's US life insurance operating companies
(IFS at A3 / stable), Genworth Financial Mortgage Insurance Pty
Limited (Genworth Australia, IFS at A1 / on review for downgrade)
and Genworth Financial Mortgage Indemnity Limited (Genworth Indemnity,
IFS at A2 / on review for downgrade) are unaffected.
Overview of Genworth's Reorganization Announcement
Moody's said the plan outlined by Genworth consisted of the following
actions: 1) A legal entity reorganization that includes the creation
of a new ultimate parent entity (New Parent) to facilitate the separation
of the US MI business from the holding company that has issued the senior
note obligations; 2) Creation of the option, under certain
conditions, to write future US MI business using a new operating
company (NewCo) structure; and 3) Transfer of the ownership of the
European MI operating subsidiaries to Genworth Mortgage Insurance Corporation
(GMICO).
According to the rating agency, the New Parent will own Genworth,
the old parent, as well as the US MI subsidiaries. Genworth's
outstanding senior and subordinated notes will remain obligations of the
old parent. As a result of the reorganization, under which
the old parent no longer owns the US MI subsidiaries, the latter
are no longer among the companies covered by the indenture governing the
old parent's senior notes. The reorganization, which
the company expects to be completed in the second quarter of 2013,
does not require shareholder or noteholder consent. North Carolina,
the state regulator for GMICO, has approved the plans. The
plans have also been filed with other regulators and are subject to their
approval, which the company expects to be completed by the second
quarter of 2013.
The NewCo option, discussed in the US MI section below, gives
Genworth the option to write new business out of a new operating company
in the unexpected event that business at GMICO deteriorated significantly
or significant additional capital is required by its counterparties,
effectively walling off GMICO's existing liabilities and placing
the entity into runoff. The option to create NewCo has received
requisite approvals from US government sponsored enterprises (GSEs),
the main regulator for MIs. If Genworth created a new US mortgage
insurance company under the NewCo option, Genworth and GMICO would
also have to meet certain obligations, pursuant to the approvals
granted by the GSEs.
RATINGS RATIONALE
Holding Company
Commenting on the confirmation of the holding company ratings of Genworth,
Moody's Senior Vice President Robinson said: "The plan outlined
by Genworth limits the potential downside impact of the lower-rated
US MI on the holding company and the rest of the operations, thereby
addressing the key rating concern that drove the review for downgrade."
The rating agency noted that since, under the reorganization plan,
stress losses in the US MI operations should not pressure or require support
from Genworth's financial resources going forward, notching
for holding company debt will no longer be affected by the weaker creditworthiness
of the US MI business. Genworth's Baa3 senior debt rating is now
3 notches lower than the A3 IFS ratings of the company's life insurance
operating entities, the standard notching practice for insurance
groups.
Genworth ended the fourth quarter with approximately $1 billion
of cash and highly-liquid securities at the holding company.
As part of the actions outlined above, the company expects to contribute
about $100 million of cash to GMICO.
Moody's added that restoring dividend capacity for the life entities
is important from a holding company perspective, especially as the
company aims to sell off a portion of its Australian MI business.
In its US life operations, statutory capital generation has been
weak relative to peers, and the company has a modest amount of unassigned
surplus, which limits dividend capacity to the holding company.
Over the past year, the company has taken and continues to take
a number of steps to increase unassigned surplus.
US Mortgage Insurance (GMICO)
Moody's said the downgrade of the IFS rating of Genworth Mortgage
Insurance Corporation (`GMICO'- collectively consolidated US MI
operating company affiliates) to Ba2 from Ba1, reflects the expected
weaker implicit parental support going forward under the new holding company
structure, which reduces the linkage between GMICO and Genworth.
GMICO's rating had previously benefited from one notch of uplift
from its stand-alone credit profile due to the implicit financial
support of the holding company. In addition, under a stress
scenario, Genworth could put GMICO into run-off and use the
NewCo to write new business, and that would limit GMICO's
future earnings from higher quality new production. Moody's
believes that while the capital infusion in connection with the restructuring
is expected to enhance GMICO's current capital adequacy, it
is not sufficient to offset the negative credit pressure attributable
to diminishing support from Genworth and the potential for GMICO being
placed into run-off.
The rating agency commented that GMICO's rating and negative outlook reflect
the firm's modest capitalization and its reliance on regulatory forbearance
to write new business. The negative outlook also incorporates continued
elevated mortgage delinquencies, modest cures, and remaining
uncertainty about the role of private mortgage insurers amid ongoing housing
market reform, offset slightly by recent improved underwriting prospects.
Rating Drivers - holding company
The rating agency said the following could result in an upgrade to Genworth's
ratings: 1) Upgrade of Genworth's life insurance subsidiaries;
2) Significant increase in cash flow diversity available to the holding
company.
Conversely, the following could place downward pressure on the company's
ratings: 1) Deterioration in credit profile of the US life insurance
or the international mortgage insurance operations; 2) Unassigned
surplus at the US life operations is expected to be less than $100
million as of year-end 2013; 3) Financial leverage in excess
of 30% and/or earnings coverage less than 2x on a sustained basis;
or 4) Failure to execute the reorganization plan.
Rating Drivers -- US mortgage insurance
The following factors could lead to a change in rating outlook to stable
from negative: 1) Ability to maintain new business flows and to
return to profitability; 2) Persistent lower new delinquencies and
robust cures; 3) A regulatory framework that affirms the market opportunity
for private mortgage insurers.
Conversely, the following factors could lead to a downgrade of GMICO:
1) Material deterioration of risk to capital and statutory loss ratio;
2) Non-renewal of GSE agreements and regulatory forbearance;
3) Genworth elects the NewCo as its main mortgage insurance writer,
while placing GMICO into run-off.
The following ratings were confirmed with a stable outlook:
Genworth Financial, Inc.— senior unsecured debt rating
at Baa3, junior subordinated debt rating at Ba1(hyb), provisional
senior unsecured shelf rating at (P)Baa3, provisional subordinate
shelf rating at (P)Ba1, provisional preferred shelf rating at (P)Ba2,
short-term debt rating for commercial paper at P-3;
Genworth Seguros de Credito a la Vivienda—insurance financial strength
rating at Baa3, national scale insurance financial strength rating
at Aa3.mx.
The following ratings were downgraded with a negative outlook:
Genworth Mortgage Insurance Corporation—insurance financial strength
rating to Ba2 from Ba1;
Genworth Residential Mortgage Insurance Corporation of NC—insurance
financial strength rating to Ba2 from Ba1.
Genworth Financial, Inc., headquartered in Richmond,
Virginia, reported total assets of $114 billion and total
stockholders' equity, excluding noncontrolling interests,
of $16.4 billion as of September 30, 2012.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to pay punctually senior policyholder claims and
obligations.
Visit Moody's website at www.moodys.com for more information.
The methodologies used in this rating were Moody's Global Methodology
for Rating Mortgage Insurers published in December 2012 and Moody's Global
Rating Methodology for Life Insurers published in May 2010. Please
see the Credit Policy page on www.moodys.com for a copy
of these methodologies.
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country
modifier signifying the relevant country, as in ".mx"
for Mexico. For further information on Moody's approach to national
scale ratings, please refer to Moody's Rating Methodology published
in October 2012 entitled "Mapping Moody's National Scale Ratings
to Global Scale Ratings".
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Scott Robinson
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's confirms Genworth (sr debt at Baa3), lowers US mortgage insurance IFS to Ba2 following reorganization announcement
