(The following statement was released by the rating agency) Fitch Ratings-Sydney/Singapore-May 12: Fitch Ratings has downgraded the Insurer Financial Strength (IFS) Rating of Genworth Mortgage Insurance Australia Ltd's (GMA) main operating subsidiary, Genworth Financial (NYSE:GNW) Mortgage Insurance Pty Limited (GFMI) to 'A' (Strong) from 'A+' (Strong). The Outlook is Negative. Key Rating Drivers The rating actions are based on Fitch's current assessment of the impact of the coronavirus pandemic, including its economic impact, under a set of ratings assumptions described below. These assumptions were used by Fitch to develop pro forma financial metrics for GMA that Fitch compared with both the ratings guidelines defined in its criteria and the previously established rating sensitivities for GMA. The downgrade reflects the impact of the pandemic-driven economic fallout on the Australian lender's mortgage insurance (LMI) provider's financial performance and earnings metrics, which we expect to fall outside our criteria guidelines for IFS 'A' mortgage insurers under our pro forma analysis. GMA reported a net loss of AUD126 million in 1Q20. This included a COVID-19-related deferred acquisition cost write-down of AUD182 million following a periodic liability-adequacy test. Losses from its investment portfolio also weighed in on the result. The Negative Outlook reflects potential pressure on GMA's financial performance and earnings, and its business profile as a result of measures aimed at slowing the spread of the coronavirus. GMA's combined ratio was 86% in 2019 compared with an average of 71% over 2016-2018. We expect the ratio to remain elevated over the next two years even though the 2019 increase was partly due to GMA's review of its earnings curve in 2017, which extended revenue recognition to better reflect risk emergence. We expect underwriting performance to remain weak due to higher unemployment and a worsening housing market, the key drivers of higher claim frequencies and severity. Australia's high household indebtedness raises the sector's susceptibility to these factors. Fitch expects the Australian economy to contract 5% in 2020, with unemployment averaging 8% for the year. Lenders' asset-quality metrics could take some time, potentially more than 12 months, to show significant signs of deterioration due to action taken by banks and authorities to support households, including widespread repayment deferments for affected customers. Nevertheless, Fitch expects a portion of borrowers to be unable to resume repayments once repayment deferments have ended, resulting in elevated impaired asset levels that will take much longer to resolve. The rating reflects GMA's 'Very Strong' capitalisation and leverage metrics, which partly offset its earnings weakness. The impact of the financial-market disruption on capital under our rating assumptions is somewhat limited in light of GMA's low risky-asset ratio of 6% at end-2019. Coverage of GMA's regulatory prescribed capital amount dropped to 1.78x by end-March 2020 from end-2019's 1.91x due to the 1Q20 loss, but was well above Fitch's criteria guidelines for an IFS 'A' rating. The ratio benefitted from a lower risk charge in recent years as a result of reduced volume in the more capital-intensive business of insuring mortgages with a loan/value ratio of greater than 90%, which more than offset the return of excess capital to shareholders. GMA's financial leverage remained low at 12% at end-2019 (end-2018: 10%). Fitch ranks GMA's business profile as 'Favourable' against other companies in Australia's LMI market. It is the largest LMI provider in Australia and maintains strong relationships with mortgage lenders. However, similar to the rest of the industry, GMA could see lower volume as a result of the economic downturn. Fitch scores GMA's business profile at 'a-' under its credit-factor scoring guidelines in light of this ranking. GFMI is able to achieve a higher rating than the US-based life operating subsidiaries of its majority shareholder, Genworth Financial, Inc., due to the strength of Australia's regulatory framework and substantial minority shareholder base (48%). Fitch rates GFMI based on GMA's standalone credit profile. Key Assumptions Assumptions for Coronavirus Impact (Rating Case): Fitch used the following key assumptions, which are designed to identify areas of vulnerability, in support of the pro forma ratings analysis discussed above: --Decline in key stock market indices by 35% relative to 1 January 2020. --Increase in two-year cumulative high-yield bond default rate to 16%, applied to current non-investment-grade assets, as well as 12% of 'BBB' assets. --Both upward and downward pressure on interest rates, with spreads widening (including high yield by 400bp) coupled with notable declines in government rates. --Capital markets access is limited for issuers at senior debt levels of 'BBB' and below. --Decline in the value of structured/asset-backed securities by 10%. --7pp increase in the loss ratio. RATING SENSITIVITIES The ratings remain sensitive to any material change in Fitch's rating-case assumptions with respect to the coronavirus pandemic. Periodic updates to our assumptions are possible given the rapid pace of changes in government actions in response to the pandemic, and the pace with which new information is available on the medical aspects of the outbreak. An indication of how ratings would be expected to be affected under a set of stress-case assumptions is included at the end of this section to help frame sensitivities to a severe downside scenario. Factors that could, individually or collectively, lead to negative rating action/downgrade: - A material adverse change in Fitch's ratings assumptions with respect to the coronavirus impact including assumptions relating to the Australian mortgage market. - Coverage of GMA's regulatory prescribed capital amount falling below 1.60x or its combined ratio persistently above 96%. - Deterioration in GMA's business profile, including inability to renew contracts with key mortgage lenders. - Severe deterioration in the operating environment due to rising unemployment and other macroeconomic factors. - An adverse change in our perception of the parent's influence on GMA's credit profile. Factors that could, individually or collectively, lead to positive rating action/upgrade: - We will revise the Outlook to Stable if GMA's combined ratio remains well below 96% while coverage of the regulatory prescribed capital amount remains well above 1.60x. - A material positive change in Fitch's ratings assumptions with respect to the coronavirus impact. - A positive rating action is prefaced by Fitch's ability to reliably forecast the impact of the coronavirus pandemic on the financial profile of both the Australian mortgage insurance industry and GMA. Stress Case Sensitivity Analysis - Fitch's stress case assumes a 60% stock market decline, two-year cumulative high-yield bond default rate of 22%, high-yield bond spreads widening by 600bp and more prolonged declines in government rates, heightened pressure on capital markets access, decline in the value of structured/asset-backed securities by 17%, and 14pp increase in the loss ratio. - The implied rating impact under the stress case would be an additional downgrade of one-to-three notches. Best/Worst Case Rating Scenario International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Genworth Financial Mortgage Insurance Pty Limited; Insurer Financial Strength; Downgrade; A; RO:Neg Contacts: Primary Rating Analyst Kanishka de Silva, CFA Associate Director +61 2 8256 0367 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Siew Wai Wan, Senior Director +65 6796 7217 Committee Chairperson Jeffrey Liew, Senior Director +852 2263 9939
Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Criteria (pub. 02 Mar 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10112692 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10121726 Solicitation Status https://www.fitchratings.com/site/pr/10121726#solicitation Endorsement Status https://www.fitchratings.com/site/pr/10121726#endorsement_status Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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