Fitch Affirms Australia's Genworth Financial Mortgage at 'A+'

(The following statement was released by the rating agency) Fitch Ratings-Sydney/Singapore-September 03: Fitch Ratings has affirmed the Insurer Financial Strength (IFS) Rating on Genworth Mortgage Insurance Australia Ltd's (GMA) operating subsidiary, Genworth Financial (NYSE:GNW) Mortgage Insurance Pty Limited (GFMI), at 'A+' (Strong). The Outlook is Stable. KEY RATING DRIVERS The affirmation is underpinned by GMA's strong business profile, very strong capitalisation and very strong financial performance and earnings. Capital market access supports GMA's financial flexibility, although the weak credit profile of the majority shareholder, Genworth Financial, Inc. (GNW), continues to constrain the rating. The affirmation also reflects ongoing industry developments, including increasing self-insurance, regulatory-driven change and adverse selection that present downside risk to the lenders' mortgage insurance (LMI) business model. On balance, high regulatory requirements, resilient customer relationships and ongoing use of LMI as a low-cost risk transfer option continue to support the sector. GMA is an established player in the niche LMI market and operates under a stringent regulatory regime that includes high minimum regulatory capital requirements. It held a 36% market share in Australia's LMI market, as measured by gross written premiums, in 2017 (2016: 35%). Its gross written premiums contracted by 3% in 2017, before expanding by 46% in 1H18 following the establishment of a Bermudan entity to write excess-of-loss cover. Fitch sees GMA's capitalisation as very strong, with coverage of its regulatory prescribed capital amount of 1.90x at end-1H18 (end-2016: 1.57x), which is well above the company's target range of 1.32x-1.44x. This has been due to declining volume in the more capital-intensive business of insuring mortgages with a loan/value ratio of more than 90%, as well as seasoning of its in-force portfolio. GMA's financial performance and earnings have been very strong. Pre-tax operating return on assets and return on average equity averaged at 8% and 10%, respectively, in the five years to end-2017. The average loss ratio over this period was 30%, but spiked to 53% in 1H18 due to the company's review of its earning curve, which extended revenue recognition to better reflect risk emergence. We expect the loss ratio to gradually normalise as the impact of the earning curve fades over the medium term. GMA's specialised product focus as a mono-line insurer renders it susceptible to a systemic downturn in Australia's housing market. However, its geographic diversity mitigates the potentially adverse effects of regional downturns. RATING SENSITIVITIES Key downgrade triggers: - A severe deterioration in the operating environment due to rising unemployment and other macroeconomic factors. - Coverage of GMA's regulatory prescribed capital amount falling below 1.4x, together with a marked deterioration in the company's underwriting performance - such as persistent combined ratios above 74%. Key upgrade triggers: - GFMI's rating is constrained by GNW's weak credit profile. Fitch believes that for an issuer to attain a rating in the 'AA' category, there should be no constraint on its financial flexibility. The agency would expect the ratings on GNW's main operating subsidiaries to be no more than one to three notches lower than that on GFMI before GFMI would be able to attain a 'AA-' rating under the current ownership structure. Contact: Primary Analyst Kanishka de Silva, CFA Associate Director +61 2 8256 0367 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney NSW 2000 Australia Secondary Analyst Siew Wai Wan, CFA Senior Director +65 6796 7217 Committee Chairperson Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234 , Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Criteria (pub. 30 Nov 2017) https://www.fitchratings.com/site/re/905036 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10043030 Solicitation Status https://www.fitchratings.com/site/pr/10043030#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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