Genworth Financial Inc. (GNW), the life insurer and mortgage guarantor, is being reviewed for a possible downgrade to junk by Moody’s Investors Service as the company seeks a new chief executive officer. The cost to protect against losses on the insurer’s debt climbed.
Genworth’s rating could be lowered from Baa3, the lowest investment-grade level, if it fails “to take capital actions that enhance holding company financial flexibility without hurting long-term earnings power,” the ratings firm said today in a statement on the Richmond, Virginia-based insurer.
The insurer is seeking to regain investor confidence and limit losses from backing home loans after the 2008 financial crisis and U.S. housing slump pushed Genworth into aggregate losses of more than $700 million in the four years ended Dec. 31. Michael Fraizer resigned in May as CEO after shelving a plan in April for an initial public offering of its Australia mortgage-insurance unit.
Genworth is working “on plans to strengthen our capital structure and realign our business portfolio,” acting CEO Martin Klein wrote in a letter to shareholders today. “We continue to take steps to improve the performance of our businesses, generate and manage capital, and meet the needs of our policyholders, while working to build value for our shareholders.”
The insurer is seeking a permanent CEO as it reviews its business portfolio, Chairman James Riepe said in in May. Klein, the chief financial officer, took the CEO post on an interim basis.
Moody’s reduced the financial-strength rating of Genworth’s life-insurance operation to A3 from A2, citing “a weaker credit profile” and the concentrated position in long-term care. MetLife Inc. and Prudential Financial Inc., the two-largest U.S. life insurers, are both retreating from the long-term care market after interest rates declined.
The U.S. mortgage-guaranty business was also placed on review for a cut. Mortgage insurers pay lenders when borrowers default and foreclosures fail to recoup costs.
Contracts protecting Genworth’s debt against default for five years increased 1.9 percentage points to 11 percent upfront, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $1.1 million initially and $500,000 annually to protect $10 million of Genworth’s debt.
A year ago, investors would have paid $367,000 a year to guard against losses on $10 million of Genworth’s debt, according to CMA.
Genworth slipped 3 cents to $4.91 at 4 p.m. in New York. The stock has plunged 51 percent in the past year.
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