The companies that grade insurers’ financial strength reacted quickly to news that Genworth Financial Inc. (NYSE:GNW) is increasing long-term care insurance (LTCI) claim reserves and reducing the state value of its life and LTCI businesses.
Standard & Poor’s Ratings Services lowered the long-term counterparty credit and senior unsecured debt ratings it assigns the parent company to BB plus, from BBB minus. The rating agency also lowered its financial strength ratings on Genworth’s Life Insurance Company, Genworth Life and Annuity Insurance Company, and Genworth Life Insurance Company of New York units to BBB plus, from A minus. The outlook on the ratings is negative.
Moody’s Investors Service said it has placed the Baa3 credit rating it has assigned the parent company and the A3 insurance financial strength ratings it has assigned Genworth’s life subsidiaries on review for downgrade.
Fitch Ratings cut its insurance financial strength on the Genworth life subsidiaries to BBB, from A minus.
See also: Swap traders react to LTC reserve news
Genworth announced Thursday that it is increasing LTCI claim reserves by $531 million; reviewing the state of LTCI “active lives,” or policyholders who have not filed claims; reducing the goodwill — or intangible business value — related to the state value of its LTCI business by $167 million; and reducing the goodwill value related to the stated value of its life business by $350 million.
“These charges were outside Fitch’s prior expectations,” Fitch analysts said in a response to the charges.
Genworth still has a great deal of cash at the holding company level and has no big debt payment obligations coming due until December 2016, but a drop in the company’s stock price may be hindering financial flexibility, the Fitch analysts said.
Fitch believes Genworth’s “exposure to interest sensitive business, particularly fixed annuities and long-term care, will hamper the company’s ability to meaningfully improve earnings in its U.S. life insurance segment,” the analysts said.
Fitch now expects Genworth to take a charge of $500 million to $1 billion in the fourth quarter in connection with the active life review, the analysts said. Genworth has about $15 billion in LTCI active life reserves.
S&P said the negative outlook on the ratings it has assigned Genworth reflects the need for Genworth to rebuild capital strength, the risk of further reserve strengthening, and the challenges involved with turning around the U.S. life insurance business.
“Moreover, the negative outlook captures our ongoing reassessment of management’s operational effectiveness and ability to execute strategy, and the importance and effectiveness of Genworth’s enterprise risk management program,” S&P said.
Scott Robinson, a senior vice president at Moody’s, says Moody’s believes Genworth has taken prudent actions to protect its capital position and has the capacity to absorb the announced reserve charge.
But Robinson said the reserve charge was higher than Moody’s had expected.
“While we will gain insight into the company’s long-term care reserve margins during the review process, we believe the company remains exposed to further, significant deterioration in its legacy block of business,” Robinson said.
In a discussion of factors that could lead to changes in Genworth’s life unit ratings, Robinson said regulators could help by approving rate increases and other actions that could help improve the performance of Genworth’s older LTCI policies.
Tom McInerney, president of Genworth, issued a statement expressing disappointment with the rating agency actions.
“We have solid capital positions across all of our businesses and strong liquidity at the holding company, and we are working on actions to improve capital, financial flexibility, and earnings over time,” McInerney said. “We remain sharply focused on building shareholder value.”
Genworth ended the third quarter with about $1.1 billion of cash and liquid assets at the holding company, with a buffer of $720 million in excess of one and a half times annual debt service, the company said.
Rating changes can affect a company’s cost of borrowing as well as its appeals to insurance buyers.
Genworth acknowledged that the new changes could affect the sales of some products and the company’s future borrowing costs.
“Genworth continues to work with the rating agencies on their rating evaluation of the company and has announced it will be taking a number of steps to build capital and improve statutory earnings, including pursuing additional LTC premium rate actions, seeking opportunities to reduce or capitate risk in legacy LTC blocks, and adjusting its sales mix,” the company said. “In addition, it is exploring block transactions and expanding the company’s use of reinsurance.”