Genworth Surges on Plan to Isolate Mortage Insurance Unit

Genworth Financial Inc. posted the biggest gain in the Standard & Poor’s 500 Index on Chief Executive Officer Tom McInerney’s plan to distance the mortgage-guaranty unit from the rest of the company.

The insurer rallied 9.4 percent to $8.89 at 12:32 p.m. in New York trading, the biggest advance since October. Moody’s Investors Service affirmed Genworth’s credit score today after concluding a review in which the ratings firm considered a downgrade to junk status.

McInerney, who became CEO this month, is working to revamp the insurer after losses from the mortgage unit drained capital and threatened the firm’s investment-grade credit rating. The Richmond, Virginia-based company also sells life insurance and long-term care coverage. Genworth said today it will create a new parent company and the outstanding senior and subordinated notes will remain obligations of the old parent.

“The transaction validates our thesis that Genworth could unlock value” and avert a ratings downgrade, said Mark Palmer an analyst at BTIG LLC, in a note to investors today. “We believe it should provide a significant boost to the company’s shares.”

Moody’s maintained Genworth’s credit rating at Baa3, one level above junk, ending a downgrade review that began in June over concerns that mortgage-guaranty losses could weigh on the rest of the firm.

The ratings company cut the insurance financial strength grade of the U.S. mortgage guaranty units to Ba2 from Ba1 with a negative outlook, citing weaker parental support.

Five year credit-default swaps protecting the debt of the company dropped about 84 basis points to 264 basis points as of 12:10 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.