Fitch Affirms Genworth’s U.S. Life Insurer Ratings at ‘A-’; Outlook Remains Negative

Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of Genworth Financial Inc.‘s (GNW or holdco) primary U.S. life insurance companies (GNW-Life) at ‘A-’. The Rating Outlook remains Negative. A full rating list is shown below. The affirmation follows an updated review of GNW’s investment exposures, capital position, liquidity and interim financial performance, and reflects Fitch’s view that these key ratings factors remain consistent with expectations for the current rating. Fitch notes that the company has taken a number of positive steps this year to improve its financial flexibility and strengthen its capital position, including the successful partial IPO of its Canadian mortgage insurance business for $705 million of proceeds, and a recently completed equity raise of $621 million.

Fitch believes that it’s projected stressed investment losses for GNW-Life of $1.0 billion to $1.2 billion over the next 12-18 months, while large, are manageable in the context of the company’s capital base and statutory earnings. This is despite the fact that consolidated U.S. life and Bermuda reinsurers’ statutory capital levels declined by 11% to $4.1 billion at June 30, 2009 from $4.6 billion at year-end 2008, primarily through investment losses. Both actual and projected investment losses, including related declines in risk based capital ratios, had already been factored into Fitch’s current rating of GNW-Life when they were downgraded earlier this year.

Fitch’s projected stressed investment losses are based on a detailed analysis of GNW-Life’s investment portfolio. The midpoint of this projection equates to 25% of GNW-Life’s statutory total adjusted capital (TAC) and represents approximately 3 times Fitch’s projected run-rate statutory net operating gain. Fitch’s loss projection is primarily driven by the company’s exposure to structured securities and to a lesser extent by corporate bonds. Projected losses on mortgage loans and alternative investments were modest.

GNW management has stated that it is prepared to contribute cash from the holding company into the consolidated U.S. life subsidiaries in order to maintain target NAIC risk-based capital (RBC) ratios at or greater than 350%. This compares to RBC of approximately 390% at June 30, 2009. Based on the agency’s stressed investment loss projections, Fitch believes material capital contributions will likely be necessary for management to meet its RBC target. However, based on a current holding company cash position estimated to be approximately $1.5 billion, Fitch believes that GNW has the ability to provide further capital support to the U.S. life insurance companies.

While GNW has improved its holding company liquidity in recent periods, if significant cash is ultimately contributed to the life companies, GNW will face intermediate term refinancing risks related to debt maturities of $591 million in 2011 and $1.3 billion in 2012 that include balances on its drawn bank line. Should capital markets remain open to GNW, the potential ability to further monetize its majority ownership position in the Canadian mortgage insurance business (currently valued at approximately $1.4 billion), or raise new equity or debt capital, could help mitigate this risk.

Another key rating concern in 2009 has been GNW-Life’s ability to secure XXX financing for the unfunded portion of the ‘peak’ reserves on in-force term life insurance business. The company has historically relied on capital and/or bank markets to fund projected capital strain derived from the impact of Reg. XXX reserve requirements emanating from its term life business. Fitch notes that access to these funding sources has been negatively impacted over the past year due to the current disruption in the capital markets. GNW Life Ops has been among the most reliant of all U.S. life insurers on access to XXX financing given its product portfolio mix and large market share in the term life market. Fitch is aware management is exploring various possible approaches to secure additional XXX financing, and will be monitoring the company’s progress in this area.

Fitch notes that certain of GNW-Life’s reserve funding structures have performed below expectations during the capital markets crisis requiring some financial support from GNW and restructuring. Fitch believes the life company’s increased investment in reserve funding structures has reduced the quality of GNW-Life’s reported statutory capital.

GNW remains exposed to a troubled U.S. mortgage insurance operation. Explicit to Fitch’s rating of GNW-Life is an assumption that GNW will not provide any future capital support to the U.S. mortgage insurance operations. Should this assumption prove false, GNW Life’s ratings would likely be downgraded.

GNW-Life’s GAAP and statutory operating profitability, while constrained in recent periods, are in line with expectations for the (lower than historic) current rating level. In 2008, pretax GAAP operating earnings declined 39% to $689 million, but were not as volatile as many peers with significantly higher variable annuity exposure. The performance of the protection businesses continue to be strong points through 2009 with good mortality in life insurance and stable to improved loss ratios in long-term care.

Fitch notes that operating company liquidity appears sound, with a build up of cash balances to fund maturities and lapses in the institutional and fixed annuity businesses. Other ratings strengths include the ongoing impact of expense initiatives and relatively low exposure to equity market risk.

The Negative Rating Outlook primarily reflects concern that investment losses could be higher than projected, uncertainties with respect to performance of the affiliated U.S. mortgage insurance operations and any impact on capital plans of the parent company, and uncertainties as to future earnings performance given fast evolving competitive challenges across the life insurance industry. Fitch has affirmed the following ratings with a Negative Rating Outlook:

Genworth Life Insurance Company

Genworth Life Insurance Company of New York

Genworth Life and Annuity Insurance Company

Continental Life Insurance Company of Brentwood, TN—IFS at ‘A-’.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.

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