A.M. Best Removes From Under Review and Downgrades Ratings of Genworth Financial Inc. and Its Subsidiaries

A.M. Best has downgraded the financial strength rating (FSR) to A- (Excellent) from A (Excellent) and the issuer credit ratings (ICR) to “a-” from “a” of Genworth Life Insurance Company (GLIC) (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 downgraded the ICR to “bbb-” from “bbb” of Genworth and its existing debt ratings by one notch. The ratings had been under review with negative implications since Dec. 18, 2014. The outlook assigned to all ratings is stable. (Please see below for a detailed listing of the debt ratings.)

The ratings downgrade follows Genworth’s recent reporting of fourth-quarter 2014 results, which reflected the substantial completion of its long-term care insurance (LTC) active life margin review. Additionally, management confirmed its intention to conduct a thorough review of Genworth’s businesses, encompassing holding company debt reduction and a multistep restructuring plan to streamline operations.

Driving the downgrade is A.M. Best’s opinion that Genworth’s LTC business is likely to exhibit volatility going forward due to the limited credibility of claims data (particularly with later-stage claim duration data), the profile of its inforce block and the challenge of achieving regulatory approval for actuarially justified rate increases. A.M. Best notes the continued poor performance of the acquired block (i.e., business acquired before 1996). Additionally, roughly one-third of Genworth’s older vintage organically written LTC contracts, amounting to $1.1 billion, have lifetime benefits. (Genworth has slightly more than $2.5 billion of total inforce LTC premium.) A.M. Best believes that it is important for Genworth to take actions to reduce this tail risk, such as policyholders accepting reduced benefits in lieu of higher premiums.

In the near to medium term, the company is unlikely to experience growth in sales of life insurance, annuities or long-term care, which may pressure operating results in this segment. Genworth may also face additional challenges within the U.S. mortgage insurance (USMI) segment regarding its ability to execute one or more reinsurance transactions to comply with the yet-to-be finalized Private Mortgage Insurance Eligibility Requirements (PMIERs) capital standards. While the performance of USMI recently has been trending favorably, it will likely take a few years for the business to contribute significant dividends. Genworth’s Canadian and Australian mortgage insurance operations continue to generate solid cash flows that the holding company will rely on primarily to service its debt obligations. As management has committed to refraining from taking dividends from the domestic life/health companies in the near to medium term, A.M. Best will monitor Genworth’s ability to source healthy dividends from the mortgage insurance operations if a sell-down of either Australian and/or Canadian operation is undertaken.

A.M. Best notes that Genworth plans to allocate new money to slightly lower credit quality assets over the long term. This concern is mitigated by the organization’s seasoned investment management team, its sound risk-adjusted capital position at the life/health entities and good financial flexibility at the holding company, with more than $1.1 billion of cash and liquid assets. Additionally, A.M. Best views favorably Genworth’s plans to repatriate the LTC business currently at its Bermuda affiliate, Brookfield Life and Annuity Insurance Company Limited. Moreover, A.M. Best recognizes Genworth’s favorable history of achieving premium rate increases on its inforce blocks. The ability of the company to successfully obtain state regulatory approvals for rate actions, achieve expense savings from the corporate consolidation and divest non-core operations and unprofitable blocks of business are key factors driving the firm’s future profitability.

A.M. Best believes future positive rating actions could occur if LTC profitability substantially improves, GLIC’s risk-adjusted capital is maintained at or above current levels and operating performance of the mortgage insurance operations continues to trend favorably. Negative rating actions may occur if a material weakness in internal controls is identified, if GLIC’s risk-adjusted capital falls below A.M. Best’s expectations, or if another significant reserve charge on the inforce LTC block is taken.

The ICR has been downgraded to “bbb-” from “bbb” for Genworth Financial, Inc. and Genworth Holdings, Inc.

The following debt ratings have been downgraded:

Genworth Holdings, Inc. (guaranteed by Genworth Financial, Inc.)—

-- to “bbb-” from “bbb” on $300 million 8.625% senior unsecured notes, due 2016

-- to “bbb-” from “bbb” on $600 million 6.515% senior unsecured notes, due 2018

-- to “bbb-” from “bbb” on $400 million 7.70% senior unsecured notes, due 2020

-- to “bbb-” from “bbb” on $400 million 7.20% senior unsecured notes, due 2021

-- to “bbb-” from “bbb” on $750 million 7.625% senior unsecured notes, due 2021

-- to “bbb-” from “bbb” on $400 million 4.9% senior unsecured notes, due 2023

-- to “bbb-” from “bbb” on $400 million 4.8% senior unsecured notes, due 2024

-- to “bbb-” from “bbb” on $300 million 6.50% senior unsecured notes, due 2034

-- to “bb” from “bb+” on $600 million fixed/floating rate junior subordinated notes, due 2066

Genworth Global Funding Trusts—program rating to “a-” from “a”

-- to “a-” from “a” on all outstanding notes issued under the program

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

Genworth Financial, Inc.—

-- to “bbb-” from “bbb” on senior unsecured debt

-- to “bb+” from “bbb-” on subordinated debt

-- to “bb” from “bb+” on preferred stock

Genworth Holdings, Inc.—

-- to “bbb-” from “bbb” on senior unsecured debt

-- to “bb+” from “bbb-” on subordinated debt

-- to “bb” from “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.

Key insurance criteria reports utilized:

• Analyzing Insurance Holding Company Liquidity
• Rating Funding Agreement-Backed Securities
• Insurance Holding Company and Debt Ratings
• Rating Members of Insurance Groups
• Risk Management and the Rating Process for Insurance Companies
• Understanding BCAR for U.S. and Canadian Life/Health Insurers

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

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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