On Friday, A.M. Best Co. assigned “bbb” rating to the senior unsecured notes of Genworth Financial Inc. (GNW). The 10-year 7.7% senior unsecured notes worth $400 million were offered by the company on June 22, 2010. The rating agency has also assigned a negative outlook.
 
The rating agency did not change its ratings on domestic life/health insurance companies and existing debt securities of Genworth.
 
Genworth expects net proceeds of $200 million from this offering. The company primarily intends to utilize the money to pay back $100 million of outstanding borrowings under each of its five-year revolving credit facilities. The remaining amount will be utilized for general corporate purposes.
 
According to the rating agency, below average performance at the U.S. Mortgage and International segments of Genworth have affected the fixed charge coverage of the company over the last few years. Nevertheless, the company’s strong liquidity driven by better operating performance has, to some extent, muted the adverse effect of the low fixed charge coverage over the past few quarters. Genworth ended the first quarter of 2010 with a cash and cash equivalent balance of $3.5 billion while cash from operations totaled $130 million during the first quarter of 2010.
 
Also, the company’s financial leverage will not be impacted much by the issuance of these senior unsecured notes. The debt-to-capitalization ratio at the end of first quarter 2010 was 20.60% compared with 21.43% at the end of fourth quarter 2009.
 
A.M. Best considers long-term care as a less creditworthy business relative to life insurance and annuities, and Genworth has a substantial exposure to long-term care. Moreover, the company’s balance sheet remains exposed to mortgages. However, the rating agency believes that, with a recovering economy, asset impairments are also moderating.
 
The mortgage insurance business will continue to be under pressure as a result of unemployment and soft housing market. However, solid results at the International segment as well as improvement in the U.S.- based Retirement and Protection segment will somewhat offset the lagging mortgage insurance business.
 
Additionally, with economic recovery gaining traction, Genworth Financial is positioned to record strong revenue and earnings over a longer term based on its strong foothold in the term life, long-term care, income annuity and mortgage insurance markets.
 
Genworth Financial’s capital strengthening initiatives, introduction of high-margin products, distribution expansion, improved pricing and strict underwriting standards will bode well going forward. However, we expect heightened unemployment rates to weigh on its mortgage insurance business in the near term. Thus, we maintain a Neutral rating on Genworth Financial. The quantitative Zacks Rank for the company is currently “3″, indicating no clear directional pressure on the shares over the near term.
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