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TEXT-S&P: Genworth Australia Outlook Negative On Group Downgrade

(The following was released by the rating agency)

Overview

-- The lowering of the ratings on U.S.-based Genworth Group's core life insurance companies (GLIC; A-/Stable) has triggered a review of the ratings on Genworth Financial Mortgage Insurance Pty Ltd. (Genworth Australia; AA-/Negative).

-- The outlook on Genworth Australia has been revised to negative because our previously stated two-notch rating-differential tolerance between the stronger-rated Genworth Australia and weaker-rated GLIC has now been breached.

-- The outlook revision reflects our opinion that ongoing stress at the group's holding company level has heightened the importance of contributions from the group's subsidiaries, including Genworth Australia.

-- We have not lowered the ratings at this time because we expect the company's planned partial sale to take place within the first half of 2013.

-- We have also revised the outlook on Genworth Financial Mortgage Insurance Pty Ltd. (NZ branch) to negative, and affirmed the 'AA-' financial strength rating.

Rating Action

On Oct. 12, 2012, Standard & Poor's Ratings Services revised its outlook on Genworth Financial Mortgage Insurance Pty Ltd. (Genworth Australia) and Genworth Financial Mortgage Insurance Pty Ltd. (NZ branch) (Genworth New Zealand) to negative. At the same time, we affirmed the 'AA-' financial strength and issuer credit ratings on Genworth Australia, and the 'AA-' financial strength rating on Genworth New Zealand. The 'A-' financial strength and issuer credit ratings on Genworth Financial Mortgage Indemnity Ltd. (Genworth Indemnity) were affirmed, and its stable outlook maintained.

Rationale

The lowering of the ratings on U.S.-based Genworth Group's core life insurance companies (GLIC; A-/Stable) (see Research Update: Genworth Financial Inc. Downgraded To 'BBB-'; Outlook Negative) has triggered a review of the ratings on Genworth Australia. We view GLIC's ratings as a proxy for the group credit profile, as GLIC represents the group's core operations. The long-term financial strength and issuer credit ratings on GLIC were lowered to 'A-'from 'A'. At the same time, the long-term issuer credit rating on the Genworth Group's holding company, Genworth Financial Inc. (GNW), was lowered to 'BBB-' from 'BBB'.

The outlook on Genworth Australia has been revised to negative because our previously stated two-notch rating-differential tolerance between the stronger-rated Genworth Australia and weaker-rated GLIC has now been breached. The outlook revision reflects our opinion that ongoing stress at the group's holding company level has heightened the importance of contributions from the group's subsidiaries, including Genworth Australia. We have not lowered the ratings at this time because we expect the company's planned partial sale to take place within the first half of 2013. However, further delay of the planned partial sale beyond the first half of 2013, or its cancellation, would likely result in a lowering of the ratings on Genworth Australia by one notch to 'A+'. The company's partial IPO was originally scheduled for early 2012 (see Research Update: Genworth Australia Ratings Affirmed At 'AA-' After Significant Reserve Strengthening And Delay Of IPO).

We also expect at least one-third of the Genworth Group's ownership and control to be diluted to external parties. In our opinion, material dilution of the Genworth Group's ownership and control would reinforce protection mechanisms already in place that support Genworth Australia's segmented ratings. These protection mechanisms include: robust prudential supervision by APRA; the presence of independent board members; a considered dividend policy; and the strong depth of experience and operational expertise of local management. Genworth Australia's ratings are also segmented from those on GLIC's because, on a stand-alone basis, Genworth Australia continues to meet several operational and financial measures supportive of a higher rating than GLIC.

Should the above scenario eventuate, the ratings on Genworth Australia would likely be insulated from the ratings on GLIC, and the outlook on Genworth Australia would be revised to stable. Such action would be consistent with our treatment of the ratings on Genworth Australia's affiliate, Genworth Financial Mortgage Insurance Co. Canada (Genworth Canada; AA-/Stable), which were not affected by the rating action on GLIC (see Bulletin: Ratings On Genworth Financial Mortgage Insurance Co. Canada Unaffected By Downgrade Of Genworth Financial Inc.). In 2009, Genworth Canada completed a partial sale via IPO, similarly structured to that previously proposed for Genworth Australia.

We note that the change in outlook does not indicate a change in our view of Genworth Australia's very strong capitalization and stand-alone credit profile. In our opinion, Genworth Australia's very strong risk-based capitalization should enable the company to absorb a significant level of claims if Australia were to experience a severe economic downturn. Based on Standard & Poor's Australian lenders' mortgage insurance capital model, the company's capitalization was scored at the 'AA' category level at June 30, 2012. Inputs to our capital model assessment included approximately A$2.0 billion in shareholders' equity, A$1.0 billion in unearned premium reserves, as well as reinsurance cover to fund claims. Further supporting the company's capitalization are its conservative financial structure, improving reserving practices and reinsurance arrangements, and financial flexibility.

Outlook

The negative outlook reflects our opinion that ongoing stress at the group's holding company level has heightened the importance of contributions from the group's subsidiaries, including Genworth Australia.

We could insulate the ratings on Genworth Australia from the ratings on GLIC, and revise the outlook on Genworth Australia to stable if:

-- Genworth Australia successfully executes its planned partial sale within the first half of 2013; and

-- At least one-third of the Genworth Group's ownership and control is diluted to external parties; and

-- The company maintains its very strong capitalization, conservative financial structure and market leadership position.

We will otherwise lower the ratings on Genworth Australia by one notch to 'A+' within this same timeframe. Downward ratings pressure could also occur if:

-- Operating performance negatively deviates from our expectations or points to a structural deterioration in earnings, whereby normalized loss ratios exceed recent historical averages in the mid-50%s; or

-- Delinquencies do not continue to stabilize, and further adverse development of claims is expected as a consequence; or

-- The company's Standard & Poor's capital model score fell below the 'AA' category level either due to weak operating performance or excessive repatriation of capital to the Genworth Group; or

-- Genworth Australia lost its major clients, resulting in significant loss of market share; or

-- GLIC's creditworthiness further deteriorates. Related Criteria And Research

-- Research Update: Genworth Financial Inc. Downgraded To 'BBB-'; Outlook Negative, October 11, 2012

-- Bulletin: Ratings On Genworth Financial Mortgage Insurance Co. Canada Unaffected By Downgrade Of Genworth Financial Inc., October 11, 2012

-- Full Analysis: Genworth Financial Mortgage Insurance Pty Ltd., August 14, 2012

-- Research Update: Genworth Australia Ratings Affirmed At 'AA-' After Significant Reserve Strengthening And Delay Of IPO, May 1, 2012

-- Australian LMI Industry Likely To Shrug Off An Economic Downturn, April 16, 2012

-- Australian Lenders' Mortgage Insurance Capital Model, published Aug. 16, 2010

-- Group Methodology, published April 22, 2009 Ratings List Ratings Affirmed Genworth Financial Mortgage Insurance Pty Ltd. Analytical Factors Local Currency aa- Genworth Financial Mortgage Indemnity Ltd. Counterparty Credit Rating Local Currency A-/Stable/-- Financial Strength Rating Local Currency A-/Stable/-- Genworth Financial Mortgage Insurance Pty Ltd. Subordinated A+ Ratings Affirmed; CreditWatch/Outlook Action To From Genworth Financial Mortgage Insurance Pty Ltd. Counterparty Credit Rating Local Currency AA-/Negative/-- AA-/Stable/-- Genworth Financial Mortgage Insurance Pty Ltd. Genworth Financial Mortgage Insurance Pty Ltd. (NZ Branch) Financial Strength Rating Local Currency AA-/Negative/-- AA-/Stable/--

Keywords: MARKETS RATINGS GENWORTHAUSTRALIA

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