UPDATE 1-Genworth to separate its mortgage insurance business

Jan 16 (Reuters) - Genworth Financial Inc said it would separate its mortgage insurance business into a new company, as the company looks to insulate itself from its troubled mortgage insurance unit, sending its shares up 4 percent before the bell.

Mortgage insurers have been struggling to recoup their losses after the housing bubble burst and foreclosures soared, leaving them with large claims on unpaid home loans.

Genworth on Wednesday said the restructuring will help protect the company from insolvency events related to its U.S. mortgage insurance subsidiaries and will not lead to a default under the indenture governing Genworth's senior notes.

Bond rating firm Moody's in September said it would likely downgrade Genworth unless the company could insulate itself from continuing losses from its mortgage insurance unit.

Genworth, which was spun off from industrial conglomerate General Electric, said the new plan along with an improving U.S. housing market is expected to result in breakeven or modest profitability for its mortgage insurance units during one or two quarters in 2013.

Genworth named Thomas McInerney as chief executive in December, replacing long-time CEO Michael Frazier who resigned after the insurer pushed back plans to sell a minority stake in its Australian mortgage insurance business through an initial public offering.

The reorganization, which is expected to be completed by the second quarter of 2013, comes days after the company appointed Michael Derstine as chief risk officer.

The company said it will continue to hold the outstanding senior and subordinated notes, which will be guaranteed by the new company. Genworth also plans to contribute $100 million to the new company.

Shares of Genworth, which have risen about 37 percent since reporting a third-quarter profit in October, were up 4 percent at $8.45 before the bell.