Late last week, the rating agency A.M.Best reviewed the financial strength ratings (FSR) and issuer credit ratings (ICR) of Genworth Financial, Inc. (GNW) It affirmed the FSR of “A” and ICR of “a” of Genworth’s major life and health subsidiaries. The rating agency also affirmed the ICR of “bbb” of the company. All the above stated ratings carry a negative outlook.
The rating agency eyes Genworth favorably, taking into account its strong business position in term life, long-term care, retirement and wealth management markets. The company is also favorably positioned with respect to liquidity and stable capital levels.
The rating agency acknowledges the ability of the company to generate positive results despite high losses in the company’s U.S. mortgage insurance business owing to high claims and reserve strengthening. The ratings agency also believes a leverage ratio of 26% is manageable and the holding company liquidity is adequate to pay off debt over the near term.
The rating agency is, however, not certain about Genworth Mortgage Insurance Corporation, a primary mortgage subsidiary of Genworth Financial. The unit is still experiencing losses as a result of the stressed economic conditions combined with elevated unemployment rates.
The unit has received waivers related to risk to capital requirements and it can continue to underwrite new U.S. mortgage insurance business with favorable credit risks under tighter underwriting standards. Yet, A.M.Best believes that the unit might fail to maintain or complete additional state waivers, coupled with continued U.S. housing distress, thereby putting the holding company under certain severe economic stress.
Nonetheless, the rating agency feels that the weakness in the mortgage unit can be mitigated by Genworth’s strong life insurance operations. The company’s life and health units are witnessing capital support from their improving investment portfolio. Also, the use of captive reinsurance has helped to fund its redundant reserves.
Lastly, the rating agency is also of the view that the risk to the company’s investment portfolio is not considerable and is in line with the peers. It also views the company’s efforts to manage and reduce credit risk, overall reduced levels of credit losses, and unrealized gains in investment portfolio favorably.
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