Genworth Nears Junk at S&P as Economic Slump Hurts Firm

Genworth Financial Inc. (GNW), the insurer seeking a chief executive officer, was downgraded by Standard & Poor’s as the economic slump pressures earnings.

The rating was cut one step to BBB-, the lowest investment- grade level, as Genworth faces difficulty “expanding margins globally in the weak economy,” the ratings firm said today in a statement. The outlook is negative, stemming from losses at the mortgage-insurance unit, S&P said.

Acting CEO Martin Klein is raising prices for long-term- care coverage and weighing changes in strategy amid losses at the U.S. unit backing home loans. Genworth said it will discuss “strategy and action plans” in an Oct. 31 conference call after announcing third-quarter results.

“Until management can execute its plans, we believe there are still downward rating scenarios given the volatility in operating performance,” S&P said. “Earnings have not met our expectations for the rating level and financial flexibility continues to be strained.”

The downgrade won’t have a material impact, and liquidity at the holding company remains strong, Al Orendorff, a Genworth spokesman, said in an e-mail.

“We are disappointed that S&P took this action,” Orendorff said. “We remain sharply focused on building shareholder value by pursuing a number of strategic and financial actions.”

Moody’s Decision

Moody’s Investors Service has been considering whether to cut Genworth to junk status since June. The ratings firm has said separating the mortgage-insurance unit from the rest of the firm, which sells life insurance and long-term-care coverage in the U.S., could support the credit grade.

Klein said defending Genworth’s investment-grade status at Moody’s may be more harmful than a cut to junk, Mark Palmer, an analyst at BTIG LLC, wrote in a research note last month.

Genworth pared an advance of as much as 3.1 percent, gaining 2 cents to $5.49 at 4 p.m. in New York. It has dropped 16 percent this year, the worst performance in the 22-company Standard & Poor’s 500 Insurance Index. (S5INSU)

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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