NEW YORK - Standard & Poor's Ratings Services said it lowered its counterparty credit and financial strength ratings (FSR) on Genworth Mortgage Insurance Corp. and its FSR on Genworth Residential Mortgage Insurance Corp. of North Carolina (collectively GMICO) to B from BB-minus. The outlook is negative. The ratings on Genworth Financial Inc. are unaffected by this action.
According to S&P’s rating definitions, an insurer rated B has weak financial security characteristics. Adverse business conditions will likely impair its ability to meet financial commitments. S&P believes that GMICO currently fits this definition.
S&P lowered the ratings on GMICO by two notches due to two separate factors. One of the notches reflects a reassessment of GMICO's strategic importance as determined by S&P’s group methodology criteria. The second notch reflects the continued deterioration of GMICO's stand-alone credit profile. In 2009, S&P considered GMICO a nonstrategic entity to Genworth Financial Inc. However, S&P still afforded it one notch of support due to the ongoing commitment and capital support provided to the business. Management has shifted its tone regarding GMICO in recent quarterly calls, indicating GMICO does not have "an unlimited call on capital" and requiring four "screens" to be met prior to further capital being contributed. As a result, S&P has revised its view and now attribute no support to the rating.
The high level of losses in the mortgage insurance sector are occurring in an economy that is struggling to recover and that continues to exhibit significant weakness in the job and housing markets. The lack of significant improvement in payroll employment data contributed to high levels of new notices of delinquency (NODs).
Macroeconomic conditions remain unsupportive of a more rapid turnaround in the underlying fundamentals of the mortgage-insurance industry. The lack of improvement in underlying fundamentals could result in higher levels of claim incidence, lower levels of cure activity, and higher costs associated with claims settlements than expected, and ultimately call into question reserve adequacy. However, we believe this is less of an issue for GMICO than for its peers.
The current ratings contemplate continued losses through 2012 with a trajectory toward break-even operating results by the end of 2013 due to improving NOD trends.
The negative outlook on GMICO reflects the current trajectory of operating performance and the potential that adverse deviation will impair GMICO's capital position. Although new notices of delinquencies continue to decline, they would likely increase again if the economy enters another downturn and payroll employment once again declines. The elevated level of new notices and the volatility in cure activity make it difficult to foresee materially improving operating performance in the coming quarters.
S&P expects favorable seasonality in the first half of 2012 to affect GMICO's operating results. However, S&P could lower the ratings if GMICO's future results reflect further reserve strengthening and call the company's reserve adequacy into question. More likely though, S&P could downgrade GMICO as a result of operating performance that isn't materially improved from 2011 performance.
If the trajectory of 2012 statutory earnings at the flagship entity follows third-quarter 2011 performance (loss of $104 million), GMICO's claims-paying ability and capitalization will quickly deteriorate, as the company only held $722 million as of third-quarter 2011. At that point, it is S&P’s opinion that the regulatory forbearance that has allowed GMICO to write new business will likely be tested.