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Rating Action:

Moody's affirms GMICO’s insurance financial strength ratings; outlook changed to positive

17 October 2019

New York , October 17, 2019 – Moody's Investors Service ("Moody's") affirmed the Baa3 insurance financial strength (IFS) rating of Genworth Mortgage Insurance Corporation (GMICO), Genworth Financial's (NYSE: Genworth) (unrated) primary US mortgage insurance subsidiary. Genworth Financial is the ultimate holding company for Genworth Holdings, Inc. (Genworth Holdings, B2 negative). The rating outlook for GMICO is positive.

RATINGS RATIONALE

The US mortgage insurance sector has reported broad-based improvements to its credit profile over the past several years with strong net income and improved capital adequacy bolstered by organic capital growth and the increased utilization of excess of loss reinsurance through insurance-linked notes (ILNs) issued to investors as well as traditional reinsurance coverage. With more than $8.4 billion of ILNs sponsored by US mortgage insurers since mid-2015, Moody's expects that this significant source of off-balance sheet risk transfer capacity will dampen the earnings and capital volatility that have historically impacted the sector during adverse economic environments, allowing mortgage insurers with comprehensive reinsurance coverage to maintain an adequate capital cushion to the GSEs' Private Mortgage Insurer Eligibility Requirements (PMIERs) in the case of an economic downturn.

The change in outlook on GMICO's rating also reflects the company's improved profitability in recent years as its pre-2009 vintage legacy business amortizes and is replaced by well-priced, high quality new business, with less new delinquencies. In addition, the positive outlook reflects our expectation that GMICO's profitability will remain strong due to favorable US housing market and economic fundamentals that continue to be supportive of mortgage credit, including continued (albeit slowing) economic growth, rising home prices and a strong US labor market with low unemployment rates, and its capital adequacy will benefit from prudent use of reinsurance. Through the first six months of 2019, Genworth's US mortgage insurance business reported net income of $271 million, and a loss ratio of 4%, and a PMIERs sufficiency ratio of 123% as of June 30, 2019.

Moody's also noted GMICO's strong position in the US mortgage insurance market with an approximate 16% market share, good client diversification, its comfortable cushion in its compliance with the GSEs' PMIERs, and good profitability that has increased liquidity at the company. These strengths are tempered by the commodity-like nature of the mortgage insurance product, the potential for price competition in the US mortgage insurance market, and Genworth's weak financial flexibility that exposes the company to event risk from Genworth's inability to address its debt ladder and restructure its organization.

GMICO has sourced risk transfer protection through excess of loss coverage in the traditional reinsurance market. Through these arrangements, GMICO has reinsurance covering a majority of all its business written during 2016, 2017 and 2018, providing significant capital resources to absorb losses during periods of elevated mortgage credit losses. However, the company has not entered into a ILN transaction with the capital markets at this time. Assuming GMICO systematically uses ILNs to reinsure new business going forward, it will take time for the company to have comprehensive reinsurance coverage on a substantial majority of its risk in force.

RATING DRIVERS

According to Moody's, The following factors could result in an upgrade of GMICO's rating: (1) Improvement in Genworth's financial flexibility, including a clear path to managing its debt maturities in 2020/2021; (2) Maintaining a top tier market position in the US mortgage insurance market; (3) Profitability metrics consistent with those of its peers, or return on capital above 10%; (4) Comfortable compliance with PMIERs and a sufficiently ratio greater than 110%; and (5) More comprehensive reinsurance coverage on its entire insured portfolio.

Given the positive outlook, it is not likely that GMICO's rating will be downgraded; however, the following could lead to affirming the company's rating and change the outlook back to stable: (1) A further weakening of Genworth's financial flexibility; (2) Genworth does not complete its acquisition with China Oceanwide Holdings Group Co. Ltd (unrated) and the associated actions to address its high debt leverage at Genworth Holdings; (3) A consistent and material decline in GMICO's capitalization by more than 10% over a rolling twelve month period; (4) significant weakening of underwriting standards or pricing; and (5) Non-compliance with the PMIERs or a sufficiently ratio less than 110%;

The following rating was affirmed:

Genworth Mortgage Insurance Corporation: IFS rating at Baa3;

The following ratings were unaffected:

Genworth Holdings, Inc.: senior secured term loan at Ba3, backed senior unsecured at B2, and backed junior subordinate at B3 (hyb), outlook remains negative;

Outlook actions:

..Issuer: Genworth Mortgage Insurance Corporation

….Outlook, Positive

GMICO is a mortgage insurance company domiciled in Raleigh, NC which provides mortgage insurance products in the United States. As of June 30, 2019, GMICO reported assets of $4.2 billion, statutory capital of $3.5 billion, and primary insurance in force of $178.5 billion

Moody's insurance financial strength ratings are opinions of the ability of insurance company to pay senior policyholder claims and obligations. For more information, visit our website at www.moodys.com/insurance.

The principal methodology used in this rating was Mortgage Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Bob Garofalo
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Scott Robinson, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

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