Genworth Separates Mortgage Insurance Unit, Reduces Bond Default Risk

By Jochelle Mendonca and | January 17, 2013

Genworth Financial Inc. on Wednesday said it was reorganizing itself to separate its mortgage insurance business from the rest of the company, reducing the risk of default on its bonds and sending its shares up 9 percent.

Genworth’s shareholders — including hedge fund Highfields Capital Management — had been asking the company to take steps to insulate the loss-making mortgage business from the life and long-term care insurance business.

Bond rating firm Moody’s piled on the pressure in September when it said it would likely downgrade Genworth unless the company could protect itself from continuing losses from its mortgage insurance (MI) unit.

Genworth’s plan, disclosed a month after it named former ING executive Thomas McInerney as chief executive, will create a new holding company that will own the life and long-term care businesses, and the U.S. and European MI units.

“We view this plan as a game-changer. It addresses what has been a primary risk – that of contagion from the mortgage unit to the holding company,” BTIG analyst Mark Palmer said.

The company, which will remain responsible for its senior and subordinated bonds, also removed the U.S. MI unit from the indentures governing its notes, reducing chances that the unit could start a default on its debt.

Genworth has about $4.2 billion in outstanding debt according to Thomson Reuters data.

Moody’s said the reorganization addressed its concerns and ended the review on Genworth’s debt rating. The bond rating agency confirmed Genworth’s debt rating of ‘Baa3’ with a stable outlook.

The reorganization pushed the company’s credit spreads to their tightest level since the 2008 credit crisis.

“Overall this is great, it addresses rating agency concerns, improves risk-to-capital and creates structure for future financial flexibility,” said a Genworth shareholder who declined to be named.


Under the reorganization, the insurer will transfer the ownership of the company’s European MI subsidiaries to GMICO, its main U.S. MI unit.

The European units will provide about $200 million in additional statutory capital to the U.S. mortgage business.

Genworth will contribute an additional $100 million to GMICO as part of a deal to create a ‘NewCo’ that would issue mortgage insurance if GMICO was forced to stop writing new business by regulators.

“It (the capital infusion) is not sufficient to offset the negative credit pressure attributable to diminishing support from Genworth and the potential for GMICO being placed into run-off,” Moody’s said.

The bond rating agency downgraded the institutional financial strength rating of the U.S. MI operating units to Ba2 from Ba1, with a negative outlook.

Shares of Genworth, which have risen about 37 percent since reporting a third-quarter profit in October, were up 9 percent at $8.88 on Wednesday morning on the New York Stock Exchange.

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