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Fitch lowers Genworth rating on COVID-19 fallout

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Fitch has lowered its Insurer Financial Strength (IFS) rating on Genworth, reflecting the economic fallout of the COVID-19 pandemic on the Australian lender's mortgage insurance (LMI) provider.

Fitch says the pandemic will create more frequent and severe claims, caused by higher unemployment and a decline in property values.

The ratings agency lowered its Genworth Financial Mortgage Insurance (GFMI) rating to 'A' from 'A+’. The outlook was unchanged at negative.

Genworth’s combined ratio was 86% last year, up from an average of 71% over 2016-2018, and Fitch says that ratio will “remain elevated” over the next two years.

“We expect underwriting performance to remain weak due to higher unemployment and a worsening housing market, [which are] the key drivers of higher claim frequencies and severity,” the ratings agency says.

Genworth’s portfolio contains 1.3 million policies. Last year it issued more than 66,000 policies on home loans valued at $26.7 billion.

Australia's high household indebtedness “raises the sector's susceptibility,” said the agency, which forecasts a contraction of 5% on the economy this year and average unemployment of 8%.

Genworth reported a first-quarter statutory loss of $125.6 million as it readied for home loan defaults with a $181.8 million writedown.

Fitch says the hefty writedown and investment portfolio losses weighed in on the revised ratings, though Genworth’s very strong capitalisation and leverage metrics partly offset its earnings weakness.

It expects some home loan customers will be unable to resume repayments once deferments granted by lenders have ended, resulting in higher impaired-asset levels that will “take much longer to resolve”.

Genworth, which has relationships with more than 100 banks, building societies, credit unions and other mortgage originators, said the lower rating has no impact on its contractual arrangements with lender customers.

Meanwhile, S&P Global Ratings has downgraded its outlook on Genworth Australia to negative from stable.

“Our negative outlook reflects our view that Genworth Australia's financial profile may deteriorate beyond our expectations in the upcoming 18-24 months, and be inconsistent with the ‘A’ rating,” the credit ratings agency said on Friday.

It says the new outlook took into account the potential effect of higher unemployment and how this may translate into mortgage insurance claims as the temporary government assistance and bank payment forbearance subsides.

“While it appears Australia has managed the spread of COVID-19 well and has commenced some easing of restrictions, there remains the risk of further outbreaks to threaten trading resumption and reinvigoration of the economy,” S&P said.

“Such a scenario would place pressure on employment levels, and ultimately Genworth Australia’s insurance claims and capital adequacy.”

While Genworth’s competitive position is expected to remain robust, thanks to its dominant share of the lenders’ mortgage insurance market, the business has limited scope to diversify as it is a monoline insurer.

Additionally, about half of its business is concentrated in a single contract with the Commonwealth Bank of Australia. This contract will expire at the end of next year.

S&P has affirmed Genworth Australia’s insurer financial strength rating at ‘A’ on account of its strong competitive position.