Genworth Plunges as CEO Cites Mortgage-Spinoff Obstacles

Genworth Financial Inc. declined after acting Chief Executive Officer Martin Klein listed potential obstacles to separating the U.S. mortgage-insurance unit from the company.

The cost of winning bondholder approval “could be significant” and a spinoff may not be viable, Klein said in a conference call today. Ceasing to sell policies wouldn’t delink the unit, he said. The business posted a $25 million operating loss in the second quarter, the firm said yesterday.

“They can’t really give the market what it wants, which is a very clear game plan in terms of what the go-forward strategy is,” said Suneet Kamath, an analyst at UBS AG, in an interview after the call.

Genworth dropped 7.1 percent to $4.68 at 1:50 p.m. in New York and is down 29 percent this year, the worst performance in the 81-company Standard & Poor’s 500 Financials Index. Moody’s Investors Service said in June it may cut the Richmond, Virginia-based firm’s debt from the lowest investment-grade level after losses tied to U.S. home loans drained capital.

“We recommend investors avoid the stock given challenging operating fundamentals and limited capital flexibility,” Jimmy Bhullar, an analyst at JPMorgan Chase & Co., wrote in a research note today. “Given Genworth’s low returns, volatile earnings, limited capital flexibility, and history of missing management targets, we believe the risk-reward is unattractive.”

Klein, Zucaro

Old Republic International Corp. halted a planned spinoff of its mortgage-insurance business in June after objections from stakeholders, a group that includes bondholders and regulators, CEO Aldo Zucaro said. Moody’s reduced the Chicago-based insurer’s debt rating by one level after Zucaro stopped the spinoff.

Klein and Zucaro are seeking to expand in more profitable businesses and avoid having to commit more capital to mortgage insurance. Genworth also sells life insurance and announced yesterday it would seek rate increases for long-term care coverage.

“We need to address the complexity of our business portfolio so it is simpler for investors to understand and more attractive for them,” Klein said today.

Klein, who became acting CEO in May after the departure of Michael Fraizer, said the board has completed its review of the company’s business mix and that implementation of its plan can begin before a permanent replacement is selected. He said that for now he’d have to avoid disclosing details of the plan, including which units may be sold, to avoid what he called “undue market expectations and distractions.”


Kamath told Klein on the call it was “frustrating” to not have details of the company’s strategic plan and asked whether investors and analysts are “going to be here 12 months from now still sort of waiting for the results to come through.”

Klein said it would be “premature” to disclose its approaches to units.

“We know what they are in our minds, but we need to kind of work that through in the marketplace,” he said.

Eric Johnson, president of Carmel, Indiana-based 40/86 Advisors Inc., said Genworth’s management “did a bad job on today’s conference call.”

The insurer, which trades at about 15 percent of equity, is “a value trap, but I could be talked into taking a shot at some of the heavily discounted longer-dated bonds,” he said.


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