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Fitch Publishes Genworth Rating at 'A+'; Stable Outlook
December 17, 2014 / 6:37 AM / 3 years ago

Fitch Publishes Genworth Rating at 'A+'; Stable Outlook

(The following statement was released by the rating agency) SYDNEY, December 17 (Fitch) Fitch Ratings has today published the Insurer Financial Strength (IFS) Rating for Australia-based Genworth Mortgage Insurance Australia Ltd's (GMA) operating subsidiary, Genworth Financial Mortgage Insurance Pty Limited (GFMI). The Rating is 'A+' and the Outlook is Stable. KEY RATING DRIVERS The rating reflects a robust standalone credit profile that includes strong capital ratios, a conservative investment approach, a leading market position with high barriers to entry, and solid operating performance. GFMI is able to achieve a higher rating than the US operating subsidiaries (IFS Ratings 'BBB'/Negative) of its majority shareholder Genworth Financial Inc (GNW), as a result of the strength of the regulatory ring-fencing in Australia and substantial minority shareholder base (34%). Fitch considers GNW constrained from undertaking capital actions that would weaken the credit profile of GMA for regulatory and business reasons. In the agency's opinion GNW would be limited to selling down its stake in GMA if it wanted to repatriate a significant level of capital from the Australian operations. Fitch assesses GMA on a stand-alone basis as a result of its partial IPO in 2014 and a downgrade to GNW's ratings would not result in a downgrade to GFMI's rating. GMA has a majority non-executive and locally resident board, and four of the nine board members including the Chairman are independent. The board is ultimately responsible for ensuring that GMA maintains a strong credit profile to support the franchise, and it is the boards' responsibility to ensure that GMA's risk management framework is integrated into its internal capital adequacy assessment process. The agency believes Australia's prudential and legal framework ensures a robust level of board governance and behaviour. GMA is the largest lenders mortgage insurer (LMI) by premium volume in Australia, and one of only two independent LMIs operating in the sector. In a tightly regulated environment, characterised by strong customer relationships that change infrequently, barriers to entry are high which Fitch believes helps underpin the company's competitive position. Capital ratios are strong and GMA reported coverage of the regulatory prescribed capital amount (PCA) of 1.56x at end-September 2014 (end-2013: 1.48x). A traditionally solid earnings performance has supported internal capital generation and the company currently targets a conservative dividend payout ratio of between 50% and 70%. In Fitch's internal modelling GMA's capital levels would be sufficient to withstand a range of severe economic downturns, and at the current rating level contain solid buffers. GMA's listing on the Australian stock exchange, minimal debt (financial leverage was 6% at end-2013) and a proven ability to generate capital internally supports its financial flexibility. GMA produced a combined ratio of 60% in 2013, up from 99% in 2012. The improved underwriting performance was helped by falling loan delinquency rates which in turn generated a positive prior period reserve release (3% of opening equity), in addition to the stabilisation of the poorly performing 2007 and 2008 underwriting years. Underwriting criteria has tightened since 2008, particularly in relation to low documentation loans, and the delinquency rate development for underwriting years from 2009 has improved as a result. A low-risk investment approach results in a portfolio dominated by highly rated fixed-income securities and at end-2013, 100% of investments were in cash and fixed-income securities, of which 98% were rated 'A' or higher. Fitch expects GMA to increase the level of risk in the investment portfolio to support returns in the future. However, due to the conservative starting point, any modest reallocation is unlikely to impact GMA's credit profile. GMA is a monoline insurer and is susceptible to a systemic downturn in the Australian housing market. However, there is geographic diversity in its Australian exposures which helps mitigate the potential adverse impact of a regional downturn. Historically, default rates have varied among states and regions due to the wide variation in economic stresses across Australia. Self-insurance and adverse selection remain a threat to the LMI business model, particularly as banks operating with internal capital models gain limited capital relief by using LMI. However, the benefits of credit risk transfer, and the operational risk mitigation provided by GMA, continues to support business volumes and its relationships with lenders. RATING SENSITIVITIES Triggers for a downgrade: A very severe housing downturn, most likely due to a sharp rise in unemployment and other deteriorating macroeconomic conditions, would constitute the most serious threat to GMA's rating. However, Fitch considers this unlikely and is forecasting a relatively solid Australian economic performance over the coming years. Consistent with its high rating, Fitch expects GMA to maintain strong standalone capital ratios. If coverage of its PCA fell below 1.3x for a sustained period this could result in a downgrade. A sudden increase in the dividend payout ratio, should GNW's credit profile deteriorate may also cause Fitch to place greater reliance on group linkages, which could cause a negative rating action. The agency does however recognise that the dividend payout ratio could increase in the future should growth slow and the requirement for increased capital moderate. Triggers for an upgrade: GFMI's rating is constrained by the weak credit profile of the majority shareholder. Fitch believes that in order for an issuer to attain a rating in the 'AA' category there should be no constraint on its financial flexibility. For GFMI to attain a 'AA-' rating under the current ownership structure the agency would expect to see no more than a one to three notch differential with the main operating subsidiaries of GNW. Contacts: Analysts John Birch Director +61 2 8256 0345 Fitch Australia Pty Ltd, Level 15, 77 King Street, Sydney, NSW 2000 Tim Roche Senior Director +61 2 8256 0310 Committee Chairman Keith Buckley Managing Director +1 312 368 3211 Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Leni.Vu@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Insurance Rating Methodology" dated 13 November 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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