Moody's Investors Service has downgraded the insurance financial strength ratings of Genworth Financial, Inc.'s life insurance operating subsidiaries to A1 from Aa3 after Genworth announced a third-quarter loss of $258 million.
The rating agency also downgraded Genworth's senior debt from A2 to Baa1, and said the downgrade "concludes the review that was initiated on September 30."
For the life insurance subsidiaries, Moody's said earnings capacity and internal capital generation for the company have been constrained because of significant credit losses in the company's structured investment portfolio and financial institutions securities, and also, to a lesser extent, weak equity markets.
Scott Robinson, vice president and senior credit officer of Moodys, said, "The downgrade of the life insurance operations and the negative outlook reflect the continuing adverse impact of the difficult credit and economic environment on Genworth's earnings, challenges in managing capital and life insurance related collateral needs to support the company's growth, and diminished financial flexibility at the holding company."
Moody's said the A1 IFS rating on the U.S. life insurance subsidiaries is based on Genworth's "good business profile, supported by diversified earnings and a product portfolio with competitive positions in income and protection products."
But the company will be challenged by additional investment losses, funding regulatory reserve requirements associated with term and universal life products, and managing liquidity risk in light of its surrenderable institutional investment products and fixed annuities, Moody's said.
Moody's added that the life companies were strengthened to 360 percent NAIC Risk Based Capital (RBC) ratio at the end of the third quarter due to a recent $500 million capital contribution made by Genworth. But the holding company now has fewer resources to pay off upcoming debt maturities, the rating agency noted.
The two-notch downgrade of Genworth's debt ratings, Moody's said, is due to "the weakened financial profile of Genworth's life insurance operations, and the reduced diversification of the group's earnings and cash flows resulting in the widening of the notching between the IFS rating of the operating subsidiaries and the senior debt rating at the holding company to three notches – which is typical for US-based insurance groups – from two notches."
Moody's said Genworth announced with its third quarter results that it was evaluating capital flexibility alternatives, including the potential for asset sales, the continuing strategic review of its U.S. Mortgage Insurance business, and the possibility of raising private or public equity, or debt capital.
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