Genworth Financial Inc. will undertake a restructuring that in essence separates out its U.S. and European mortgage insurance operations from its life insurance operations. The move, the company said, will increase capital and reduce the risk-to-capital ratio by between 12 and 15 points.

Even so, the company plans include setting up a clean-sheet mortgage insurer to write new business in case Genworth Mortgage Insurance Co. can no longer do so because of elevated risk-to-capital ratios or the loss of regulatory waivers of going over the risk-to-capital ratio.

Under the reorganization a new holding company to take the Genworth Financial name will be established. The current Genworth Financial will be renamed Genworth Holdings Inc. and consist of the other businesses operated by the company. This means the mortgage insurer will no longer be in the indenture that governs Genworth Financial’s senior notes. Any insolvency involving GMICO will no longer cause a default under the terms of those notes.

This had been a worry of investors, as well as Moody’s, who called on Genworth Financial to spin off GMICO.

The mortgage insurance operations will be its own segment at Genworth Financial. The European mortgage insurance subsidiaries will come under GMICO. As a result, GMICO will gain an additional $200 million in statutory capital.

Genworth Financial will contribute $100 million to GMICO as part of the plan; this is expected to occur in the second quarter of the year.

Genworth’s Canadian mortgage insurance subsidiary is a separately traded public company. However, Genworth Financial retained majority ownership of the company. In August 2011 it contributed a 16.7% stake to GMICO, where it will remain after the reorganization.

Investors reacted strongly positive to the news. Genworth Financial was trading at $9.05 per share, up over 11% at 11:15 on Wednesday morning. Trading volume in the share at that time was nearly double the three month average, according to Yahoo Finance.

A call to Genworth regarding where the troubled Australian mortgage insurance unit fits in this scheme has not yet been returned.

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