RATINGS RATIONALE – The Holding Company
The rating affirmation recognizes that Genworth has material holding company resources, including its stake in its mortgage insurance operations and net cash and investments of approximately $504 million at December 31, 2018. However, Genworth's ability to organically build additional liquidity is constrained by its modest dividend capacity in aggregate from its insurance subsidiaries, relative to its debt load. As a result, Genworth will need to evaluate potential refinancing alternatives, current holding company cash, and / or potential asset sales to address upcoming debt maturities in case the transaction with COH does not close.
The negative outlook reflects the continued delay in the regulatory review process to close the transaction with COH. As time passes and the transaction remains uncertain, the execution risk associated with refinancing its existing debt ladder with alternative arrangements becomes a more meaningful credit consideration. Genworth faces meaningful debt maturities over the next five years starting with $400 million in June 2020 and $1.1 billion in 2021. While Genworth and COH remain committed to the transaction, evident by the agreed extension in the merger agreement to March 15, 2019 from January 31, 2019, the closing of the transaction still requires regulatory approval in the US - Financial Industry Regulatory Authority, Canada, and China. As a result, the timing for the transaction to close remains uncertain. Should the deal close, it would be a credit positive for Genworth and Holdings, as COH is expected to support Genworth's capital investment plan with a capital infusion of $1.5 billion in 2019.
Moody's said the resolution to resolve the negative outlook will focus on progress towards closing the transaction, sources of funding to repay the debt ladder, statutory capitalization and capital adequacy targets of insurance subsidiaries, and Genworth's ability to organically build additional liquidity at Holdings, relative to its debt load in case the transaction with COH does not close or is further delayed beyond the current merger end date.
RATINGS RATIONALE – The Life Companies
The review for downgrade of GLIC and its subsidiary GLAIC reflect both the continued earnings volatility associated with their respective underlying liability profile, and concern about GLIC / GLICNY's ability to grow margins and improve capital adequacy, obtain future rate actions, and the tail risk associated with the LTC business. In addition, the rating action considers the elevated mortality experience and lower net interest margins in its life and annuity businesses after its annual review of assumptions, and the reduced financial support beyond the $175 million pledged to GLIC in connection with Genworth's previously announced transaction with COH. GLAIC ownership by GLIC also places downward pressure on its ratings.
Moody's indicated the US Life Insurance segment's profitability weakened in Q4 2018. The segment reported a $376 million adjusted operating loss for 2018, which included a $348 million adjusted operating loss in LTC due to an increase in LTC claim reserves after Genworth's annual review of assumptions and methodologies and other actuarial assumptions. This reflected unfavorable claim performance including higher utilization trends and lower terminations. In addition, capital adequacy declined at GLIC – the company's National Association of Insurance Commissioners (NAIC) Company Action Level (CAL) Risk-Based Capital (RBC) ratio fell to between 190% - 200% at year-end 2018 from 282% at year-end 2017. Although statutory results and margin testing results are not completed for 2018, we remain concerned about GLIC's capital base which will continue to face headwinds and rely heavily on premium rate increases to counteract adverse LTC experience.
During its review, Moody's will focus on the business and financial profile of the life insurance companies, in terms of final 2018 statutory earnings, net capital generation, reserve adequacy, regulatory capitalization and margin testing results.
If the deal closes and Genworth demonstrates a path to address the 2020/2021 debt maturities at Holdings, there would be upward pressure on the ratings of GMICO, and Holdings. If the deal does not close, there would be downward pressure on the ratings of Holdings. Concurrently, Moody's will evaluate the financial performance of the businesses, the company's financial flexibility challenges and progress it has made in developing alternative arrangements for addressing its upcoming debt maturities.
Rating Drivers – The Holding Company
Capital support to repay all or a portion of the 2020 and 2021 debt maturities at deal closing would lead to the affirmation and/or upgrade of Holdings ratings. Additionally, the following could place upward pressure on Holdings ratings: 1) Improvement of holding company financial flexibility including increased dividend capacity; and 2) reduction in the amount outstanding in the debt ladder beyond 2021.
Conversely, the following could result in a downgrade of Holdings ratings: 1) Lack of progress in developing alternative arrangements for its upcoming debt maturing between 2020 and 2021; and 2) if the planned acquisition by COH is terminated or further delayed.
Rating Drivers – The Life Companies
Given GLIC/GLICNY's ratings are under review for downgrade, an upgrade is unlikely. However, the following could lead to a confirmation of their ratings: 1) Increased certainty regarding significant LTC rate approvals and/or other actions that help grow margins in the legacy LTC book of business, and 2) Sustained improvement in GLIC's RBC ratio above NAIC CAL RBC ratio of 300%.
Factors that could result in a downgrade of GLIC/GLICNY's ratings include: 1) Continued uncertainty and/or further deterioration of the margins on LTC reserves, increasing the probability of a material reserve charge in the future, 2) sustained NAIC CAL RBC ratio at GLIC of less than 300% CAL, and 3) inability to obtain LTC rate approvals embedded in margin testing, further pressuring reserve adequacy of legacy LTC business.
GLAIC's ratings are also under review for downgrade, and an upgrade is unlikely. However, the following factors could lead to a confirmation of their ratings: 1) stability in statutory earnings, and return on statutory surplus greater than 4%, 2) Sustained CAL RBC ratio > 400%.
Conversely, factors that could result in a downgrade of GLAIC's rating include: 1) Failure to maintain NAIC CAL RBC > 325% for an extended period of time, and 2) return on statutory surplus less than 4%.
The following ratings were affirmed with a negative outlook:
Genworth Holdings, Inc.: senior secured term loan at Ba3, backed senior unsecured at B2, backed junior subordinate at B3 (hyb);
The following ratings were placed under review for downgrade:
Genworth Life Insurance Company: IFS rating at B3;
Genworth Life Insurance Company of New York: IFS rating at B3;
Genworth Life and Annuity Insurance Company: IFS rating at Ba3;
Genworth Global Funding Trust 2007-4: funding agreement-backed senior secured MTN notes at Ba3;
Genworth Global Funding Trust 2008-7: funding agreement-backed senior secured MTN notes at Ba3;
Genworth Global Funding Trust 2008-9: funding agreement-backed senior secured MTN notes at Ba3;
Genworth Global Funding Trust 2008-10: funding agreement-backed senior secured MTN notes at Ba3;
Genworth Global Funding Trust 2008-14: funding agreement-backed senior secured MTN notes at Ba3;
Genworth Global Funding Trust 2008-26: funding agreement-backed senior secured MTN notes at Ba3;
Genworth Global Funding Trust 2008-29: funding agreement-backed senior secured MTN notes at Ba3;
Genworth Global Funding Trust 2008-36: funding agreement-backed senior secured MTN notes at Ba3;
Genworth Global Funding Trust 2008-38: funding agreement-backed senior secured MTN notes at Ba3;
The following rating was unaffected by this rating action and remains with a positive outlook:
Genworth Mortgage Insurance Corporation: IFS rating at Ba1;
The following rating was unaffected by this rating action and remains with a stable outlook:
Genworth Financial Mortgage Insurance Pty Limited: IFS rating at Baa1.
Holdings is the intermediate holding company of Genworth, an insurance and financial services holding company headquartered in Richmond, Virginia. Holdings also acts as a holding company for its respective subsidiaries including GLIC, GLAIC, and the international mortgage businesses. In addition, Holdings relies on the financial resources of Genworth including the US mortgage business to meet its obligations. The group reported GAAP net income (loss) available to Genworth's common shareholders of $119 million for 2018 on total assets of $101 billion and shareholders' equity of $14 billion.
The principal methodologies used in rating Genworth Holdings, Inc. were Life Insurers published in May 2018, and Mortgage Insurers published in May 2018. The principal methodology used in rating Genworth Life Insurance Company, Genworth Life Insurance Company of New York, Genworth Life and Annuity Insurance Company, and Genworth Global Funding Trusts was Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.