RATINGS RATIONALE – Holdings
The rating affirmation on Holdings recognizes that Genworth has material holding company resources, including its stake in its mortgage insurance operations and net cash and investments of approximately $405 million at March 31, 2019. 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.
The negative outlook reflects the continued delay in the regulatory review process and high level of uncertainty regarding the final outcome of the planned acquisition of the company by China Oceanwide Holding Group Ltd. (COH) (unrated) which could pressure the need to evaluate potential refinancing alternatives, current holding company cash, and / or potential asset sales.
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 Insurance Companies
The confirmation of GLIC and GLICNY's B3 IFS ratings reflects their combined weak financial profile that includes low quality and relative low levels of capital, offset by their success in achieving rate increases on LTC business. However, Moody's has continued concern about their ability to achieve rate actions, grow margins, and the tail risk associated with the LTC business. The downgrade of GLAIC reflects the continued earnings volatility due to adverse mortality, higher lapses, reserve increases and accelerated DAC amortization, and reduced net interest margins from lower interest rates. While GLAIC has meaningful interest sensitivity associated with its life and annuity business, it has a better credit profile than GLIC / GLICNY, although its ownership by GLIC also acts as a constraint on the rating.
The stable outlook on the life companies reflects their standalone ratings profile. Moody's added it does not expect the companies to receive capital support from Holdings, and thus they must rely on current financial resources, as well as future rate increases in the case of GLIC and GLICNY, to fund policyholder obligations.
RATINGS RATIONALE – The US Mortgage Company
The upgrade of GMICO's rating reflects the company's improving profitability amid favorable U.S. housing market fundamentals, its good market position, and its cushion in its compliance with Federal National Mortgage Association's (Fannie Mae) (Aaa Stable) and Federal Home Loan Mortgage Corporation's (Freddie Mac) (Aaa Stable) capital standards (PMIERs). We expect GMICO will maintain a solid market position in the US and continue to improve its financial profile through organic net capital generation in an operating environment that remains favorable for mortgage credit. These strengths are tempered by the commodity-like nature of the mortgage insurance product, the sensitivity of the mortgage insurance business model to economic conditions and the potential for increased price competition in the US mortgage insurance market.
The stable outlook reflects our view that GMICO's profitability will remain robust over the next several years. Moody's notes that meaningful separation exists between Genworth's life and mortgage insurance businesses, which mitigates the impact of Genworth's weak financial flexibility on GMICO's overall credit profile.
Rating Drivers – Holdings
Given the negative outlook at Holdings, if Genworth demonstrates a path to reduce its debt ladder that may include closing the transaction and the $1.5 billion capital investment plan with COH, there would be upward pressure on the ratings of Holdings. Capital support to repay all or a portion of the 2020 and 2021 debt maturities at deal closing would lead to a change in the outlook to stable, and/or an 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. 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 Life Insurance Companies
The following could lead to an upgrade of GLIC/GLICNY's ratings: 1) Increased certainty regarding significant LTC rate approvals and/or other actions that help grow margins in the legacy LTC book of business, 2) stability in statutory earnings, and return on statutory surplus greater than 4%, and 3) 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 175% CAL, and 3) inability to obtain LTC rate approvals embedded in margin testing, further pressuring reserve adequacy of legacy LTC business.
For GLAIC's ratings, the following factors could lead to an upgrade 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 > 300% for an extended period of time, and 2) return on statutory surplus less than 4%.
Rating Drivers – The US Mortgage Company
The following factors could result in an upgrade of GMICO's ratings: (1) A continued improvement of GMICO's stand-alone credit profile as evidenced by increased market share at attractive pricing levels, and continued strong capital adequacy, (2) improved profitability metrics with returns on capital consistent with those of its peers; (3) improvement in Genworth's financial flexibility, including a clear path to managing its debt maturities in 2020/2021
Conversely, the following could result in a downgrade on the rating: (1) A further weakening of Genworth's financial flexibility that would result in the need to extract significant capital from GMICO resulting in a material and consistent decline in GMICO's capitalization by more than 10% over a rolling twelve month period; (2) significant weakening of underwriting standards or pricing, (3) Non-compliance with the PMIERs; and (4) Genworth does not complete its acquisition with COH and the associated actions to address its high debt leverage at Holdings;
The following rating was upgraded, with a stable outlook:
Genworth Mortgage Insurance Corporation: IFS rating to Baa3 from Ba1;
The following rating was downgraded with a stable outlook:
Genworth Life and Annuity Insurance Company: IFS rating to B1 from Ba3;
The following ratings were confirmed with a stable outlook:
Genworth Life Insurance Company: IFS rating at B3;
Genworth Life Insurance Company of New York: IFS rating at B3;
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);
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 $174 million at March 31, 2019 on total assets of $102.2 billion and shareholders' equity of $14.9 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, and Genworth Life and Annuity Insurance Company was Life Insurers published in May 2018. The principal methodology used in rating Genworth Mortgage Insurance Corporation was Mortgage Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.