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Wednesday, August 15, 2012
S+P gives Genworth Australia credit rating strong seal of approval
The 'AA-' insurer financial strength and issuer credit ratings on Australia-based insurer Genworth Financial Mortgage Insurance Pty Ltd. (Genworth Australia) reflect our opinion of the company's very strong capitalization, conservative financial structure, and market leadership position in the Australian lenders' mortgage insurance (LMI) industry. Offsetting rating factors include Genworth Australia's earnings vulnerability to changes in economic and property market conditions.
In our opinion, Genworth Australia's very strong risk-based capitalization should enable the company to absorb a significant level of claims if Australia were to experience a severe economic downturn. Based on Standard and Poor's Australian LMI capital model, the company's capitalization was scored at the 'AA' category level at June 30, 2012. Inputs to our capital model assessment included approximately A$2.0 billion in shareholders' equity, A$1.0 billion in unearned premium reserves, as well as reinsurance cover to fund claims.
Further supporting the company's capitalization are its conservative financial structure, improving reserving practices and reinsurance arrangements, and financial flexibility. Genworth Australia is the market leader in the Australian LMI industry. Standard and Poor's estimates that Australian LMIs insure more than A$500 billion of Australian residential mortgages, based on risk in force (RIF) at the time of loan settlement. Of this A$500 billion, Genworth Australia insures A$257.9 billion, or approximately 50% of the market.
We expect Genworth Australia to maintain its market leadership position over the medium term, given the majority of its relationships are tied to exclusivity arrangements with terms of two or more years. LMI earnings are inherently sensitive to changes in economic and property market conditions, given LMIs take the first-loss position on the insured component of the residential mortgage market.
Genworth Australia's earnings have, however, historically been strong and stable, even throughout the global financial crisis. The company did experience significant reserve strengthening in the first quarter of 2012 (see "Genworth Australia Ratings Affirmed At 'AA-' After Significant Reserve Strengthening And Delay Of IPO," published May 1, 2012), although we viewed this as a one-off occurrence.
In line with our expectations, the company reported an improved loss ratio--in U.S. GAAP terms--of 54% for the second quarter compared to 154% in the prior quarter.
We expect Genworth Australia's claims experience to continue to normalize—to loss ratios of around 50%--over the next two quarters, to deliver a profitable 2012 result, albeit down on 2011. We view Genworth Australia as non-strategically-important to the Genworth Group (core operating entities rated A/Stable), given it does not operate in the same line of business as the group's core life insurance companies. Furthermore, Genworth Australia continues to demonstrate its increasing independence by reducing its reliance on affiliate reinsurers and accessing capital markets in its own right. Genworth Australia, however, does provide a solid dividend stream to the group.
The ratings on Genworth Australia are currently segmented from the ratings on the Genworth Group's core life insurance companies (rated A/Stable), which are used as a proxy for the group credit profile. We believe that on a stand-alone basis, Genworth Australia continues to meet several operational and financial measures supportive of a higher rating than its parent. The company also has protection against financial deterioration at the group level. This is due to several factors, including: robust prudential supervision by the Australian Prudential Regulation Authority (APRA); presence of independent board members; strong depth of experience and operational expertise of local management; and a considered dividend policy. In addition, there remains a strong economic incentive to maintain the 'AA-' ratings on Genworth Australia to support the insurer's business model and value proposition.