BOSTON -- Shares of Genworth Financial Inc. surged Wednesday after the financial services company announced a reorganization that it said would reduce financial risks at its mortgage insurance business and put that unit under a newly created parent company.
THE SPARK: Genworth said the plan for its main U.S. mortgage insurance subsidiary would significantly improve that unit's risk-to-capital ratio, a measure of how much cash and other safe assets are held as a cushion against unexpected losses. Genworth said it will contribute $100 million to that unit, called Genworth Mortgage Insurance Co. as part of a broader capital plan. At the parent company level, Genworth said it had about $1 billion cash and assets that could be quickly converted to cash, as of Dec. 31.
The plan would also move ownership of European mortgage insurance subsidiaries from the parent company to the U.S. mortgage subsidiary. The mortgage business would become a subsidiary of a newly created parent company, which also would become parent of Genworth. Shares of Genworth would be converted into shares of the new parent. Some aspects of the reorganization require regulatory approval.
Genworth Chief Financial Officer Martin Klein said the plan for the mortgage business "reduces linkages and dependencies with the holding company, and increases our financial flexibility while bolstering capital in the business."
THE BIG PICTURE: Genworth has been hit in recent years by losses in its mortgage insurance business due to the rise in foreclosures tied to the U.S. housing crisis. However, shares of Genworth have more than doubled over the past five months, in part due to optimism that the recent recovery in the housing market will improve performance at the mortgage insurance unit. Some analysts have nevertheless remained hesitant on the stock because of Genworth's exposure to $1 billion in debt that matures in 2014 and 2015.
In addition to providing mortgage insurance, Genworth provides wealth management services and life insurance.
SHARE ACTION: Shares of the Richmond, Va., company rose 82 cents, or 10 percent, to $8.95 in midday trading. The stock has traded between $4.06 and $9.68 over the past 12 months.