A.M. Best Revises Outlook to Stable for Genworth Financial, Inc. and Its Key Life/Health Subsidiaries

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a” of Genworth Life Insurance Company (Wilmington, DE), Genworth Life Insurance Company of New York (New York, NY) and Genworth Life and Annuity Insurance Company (Richmond, VA), the key life/health subsidiaries of Genworth Financial, Inc. (Genworth) (NYSE: GNW). Additionally, A.M. Best has assigned an ICR of “bbb” to Genworth, a newly formed holding company. The outlook assigned to the ICR is stable.

Concurrently, A.M. Best has revised the outlook to stable from negative and affirmed the ICR of “bbb” of Genworth Holdings, Inc. (GHI) (formerly known as Genworth Financial, Inc.), which is now a direct subsidiary of Genworth. A.M. Best also has revised the outlook to stable from negative and affirmed the existing debt ratings of GHI, which are guaranteed by Genworth. (Please see below for a detailed listing of the companies and debt ratings.)

The ratings and revised outlook for Genworth and its subsidiaries reflect the group’s improved profitability, enhanced financial flexibility, well-performing investment portfolio, focused yet diverse business profile and sound risk-adjusted capitalization. Genworth continues to improve its statutory capital position, de-risk both its product and investment portfolio and implement necessary pricing actions on both its inforce blocks and newly underwritten business. The life insurance segment complements Genworth’s domestic and international mortgage insurance business, providing excellent earnings diversification. Holding company liquidity remains good, and financial flexibility continues to improve. Moreover, Genworth’s financial leverage and interest coverage remain adequate for its current ratings.

Partially offsetting these positive rating factors are Genworth’s sizeable long-term care business, exposure to interest-sensitive liabilities and strong competition in its core life and fixed annuity products. Additionally, although the segment reported a profit for the first quarter of 2013, the domestic mortgage insurance business continues to underperform and places a potential drag on the group’s future profitability. Moreover, management is taking appropriate action to enhance margins on its long-term care business; however, the product line’s results remain below A.M. Best’s expectations as some of the older blocks struggle to achieve profitability.

Genworth continues to have significant life insurance reserves subject to relatively high guaranteed minimum interest rates, primarily from its universal life book. The ongoing earnings drag is currently manageable but will exacerbate over a sustained period of low rates. Additionally, Genworth’s core life products face strong competition. Pricing actions taken in 2012 have reduced premium growth in 2012 and are likely to impact 2013 results as well. However, overall profitability should improve from greater margins on new products sold. Genworth took significant action with respect to the use of existing captives to make more efficient use of capital at a moderate cost to future earnings. Ongoing funding of excess reserves (both Regulation XXX and AXXX) remains a priority, but not a near-term concern.

Genworth continues to improve the quality of its investment portfolio. Impairments continue to decline to manageable levels, and the company took advantage of favorable pricing in certain riskier asset classes to enhance yield. A.M. Best notes that Genworth continues to take mortgage risk on both sides of its balance sheet. The general account portfolio has seen little impairments on commercial mortgage loans, and overall exposure to this asset class is generally consistent with peers. Investments in structured securities continue to perform solidly and are closely monitored. Additionally, A.M. Best notes that recent metrics on the mortgage insurance side appear favorable; however, A.M. Best remains somewhat concerned about a quick economic downturn that would likely drive losses in this product segment. On the international mortgage insurance front, A.M. Best notes management’s plan for an initial public offering of a minority interest of the Australian mortgage subsidiary. Nevertheless, A.M. Best does not expect this strategy to be executed in the near term.

On April 1, 2013, Genworth announced the completion of a legal entity reorganization with the net result being the creation of a new ultimate holding company. This restructuring effectively removes the U.S. mortgage insurance subsidiaries from the companies covered by the indenture governing Genworth's senior notes. A.M. Best recognizes that the reorganization, which included transferring ownership of the European mortgage insurance subsidiaries to Genworth Mortgage Insurance Corporation and a contribution of $100 million to U.S. mortgage insurance (USMI), may limit the potential exposure of the life/health companies to the USMI business.

A.M. Best believes Genworth is well-positioned at the current rating level. Factors that could lead to negative rating actions include a material decline in operating performance in any of Genworth’s businesses, a significant decline in its risk-adjusted capital and/or a material increase in leverage or loss of holding company liquidity.

The FSR of A (Excellent) and the ICRs of “a” have been affirmed for the following key life/health subsidiaries of Genworth Financial, Inc.:

• Genworth Life Insurance Company
• Genworth Life Insurance Company of New York
• Genworth Life and Annuity Insurance Company

The following debt ratings have been affirmed:

Genworth Holdings, Inc. (guaranteed by Genworth Financial, Inc.)—
-- “bbb” on $600 million 5.75% senior unsecured notes, due 2014 ($500 million currently outstanding)
-- “bbb” on $350 million 4.95% senior unsecured notes, due 2015
-- “bbb” on $300 million 8.625% senior unsecured notes, due 2016
-- “bbb” on $600 million 6.515% senior unsecured notes, due 2018
-- “bbb” on $400 million 7.70% senior unsecured notes, due 2020
-- “bbb” on $400 million 7.20% senior unsecured notes, due 2021
-- “bbb” on $750 million 7.625% senior unsecured notes, due 2021
-- “bbb” on $300 million 6.50% senior unsecured notes, due 2034
-- “bb+” on $600 million fixed/floating rate junior subordinated notes, due 2066

Genworth Financial, Inc. —
-- AMB-2 on commercial paper

Genworth Global Funding Trusts—“a” program rating
-- “a” on all outstanding notes issued under the program

Genworth Life Institutional Funding Trust—“a” program rating

The following indicative debt ratings on securities available under universal shelf registration have been assigned:

Genworth Financial, Inc.—
-- “bbb” on senior unsecured debt
-- “bbb-”on subordinated debt
-- “bb+” on preferred stock

The following indicative debt ratings on securities available under universal shelf registration have been affirmed:

Genworth Holdings, Inc.—
-- “bbb” on senior unsecured debt
-- “bbb-”on subordinated debt
-- “bb+” on preferred stock

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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