Wires

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

Share

(The following was released by the rating agency)

Overview

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

-- The outlook on Genworth Australia has been revised tonegative because our previously stated two-notchrating-differential tolerance between the stronger-ratedGenworth Australia and weaker-rated GLIC has now been breached.

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

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

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

Rating Action

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

Rationale

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

The outlook on Genworth Australia has been revised tonegative because our previously stated two-notchrating-differential tolerance between the stronger-ratedGenworth Australia and weaker-rated GLIC has now been breached.The outlook revision reflects our opinion that ongoing stress atthe group's holding company level has heightened the importanceof contributions from the group's subsidiaries, includingGenworth Australia. We have not lowered the ratings at this timebecause we expect the company's planned partial sale to takeplace within the first half of 2013. However, further delay ofthe planned partial sale beyond the first half of 2013, or itscancellation, would likely result in a lowering of the ratingson Genworth Australia by one notch to 'A+'. The company'spartial IPO was originally scheduled for early 2012 (seeResearch 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'sownership and control to be diluted to external parties. In ouropinion, material dilution of the Genworth Group's ownership andcontrol would reinforce protection mechanisms already in placethat support Genworth Australia's segmented ratings. Theseprotection mechanisms include: robust prudential supervision byAPRA; the presence of independent board members; a considereddividend policy; and the strong depth of experience andoperational expertise of local management. Genworth Australia'sratings are also segmented from those on GLIC's because, on astand-alone basis, Genworth Australia continues to meet severaloperational and financial measures supportive of a higher ratingthan GLIC.

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

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

Outlook

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

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

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

-- At least one-third of the Genworth Group's ownership andcontrol 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 byone notch to 'A+' within this same timeframe. Downward ratingspressure could also occur if:

-- Operating performance negatively deviates from ourexpectations or points to a structural deterioration inearnings, whereby normalized loss ratios exceed recenthistorical averages in the mid-50%s; or

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

-- The company's Standard & Poor's capital model score fellbelow the 'AA' category level either due to weak operatingperformance or excessive repatriation of capital to the GenworthGroup; or

-- Genworth Australia lost its major clients, resulting insignificant 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 MortgageInsurance Co. Canada Unaffected By Downgrade Of GenworthFinancial Inc., October 11, 2012

-- Full Analysis: Genworth Financial Mortgage Insurance PtyLtd., 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 EconomicDownturn, 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