IBJNews

Hedge fund guru Paulson cashes in on CNO wager

Back to TopCommentsE-mailPrintBookmark and Share

John Paulson, who made $15 billion betting against real estate and then saw his fortune shrink as gold slumped, is proving to be an effective insurance investor.

Paulson’s hedge fund has more than doubled its money on Carmel-based CNO Financial Group Inc., the life insurer he helped recapitalize in 2009. Paulson & Co. can realize more gains when warrants it received become exercisable this month at about half CNO’s current share price.

The billionaire’s remarks on insurers like Radian Group Inc. and Hartford Financial Services Group Inc. jolted the stocks even after his fortune diminished with wrong-way bets on a U.S. economic recovery in 2011 and a worsening European debt crisis in 2012. The CNO and Radian wagers helped prop up firms that had been seen by the bond market as vulnerable to failure.

The fund “took a lot of risk and reaped a lot of reward” on CNO, said Randy Binner, an analyst at FBR Capital Markets. “To say they saved the company is fair.”

Shares dipped below 30 cents in 2009 as the insurer struggled with losses and debt. CNO surged 153 percent since Oct. 13, 2009, when Paulson’s investment was announced, better than all 22 companies in the Standard & Poor’s 500 Insurance Index.

Its comeback to $12.64 per share Tuesday helped make Paulson’s Recovery Fund the best performer of his strategies this year, with a 28-percent gain through May.

Radian jumped 6.2 percent, to $10.69, on April 19 after Paulson, 57, wrote that shares could rise to $20 by 2015. The fund bought Radian stock at the end of 2012 and this year for $6 to $8 a share, according to a letter to investors that outlined first-quarter results and was provided to Bloomberg News. The insurer closed Tuesday at $11.37.

Paulson also bought bonds of Radian and MGIC Investment Corp., according to data compiled by Bloomberg. The companies back home loans and are part of a bet on the U.S. housing market.

Genworth Financial Inc., which offers mortgage guarantees and life insurance, is another Paulson holding, acquired at an average of $7.67 a share, according to the letter. The company closed at $10.88 Tuesday.

Paulson invested about $300 million in convertible debt and a 9.9 percent equity stake in CNO in 2009 as the insurer faced a debt maturity. The hedge fund also received warrants to buy 5 million shares of common stock at $6.50 apiece. The insurer earlier that year made a deal with lenders to relax covenants.

“Paulson was an important part of a several-part solution to helping us to navigate through the financial crisis,” CNO CEO Ed Bonach, 59, said. “We knew we had a lot more potential in front of us, and still believe that.”

Bonach was finance chief in 2009, when the insurer was known as Conseco Inc.

Talks with Paulson began in August 2009 and were led by Charles Murphy, a partner at Paulson who helps pick insurance investments, Bonach said. He and Jim Prieur, then the CEO, led negotiations for CNO.

“It wasn’t a fast-money play,” Bonach said. “It wasn’t like, ‘OK, get in and let’s get out as quickly as we can.’”

CNO repurchased Paulson’s $200 million convertible debt investment last year for $355 million. Paulson began scaling back the stake in CNO in the third quarter of 2011, and held about 13.5 million shares, not including the warrants, as of March 31, according to data compiled by Bloomberg.

“We provided needed capital to CNO during a crucial time,” Murphy said in an emailed statement. “We remain a large shareholder and are supportive of their ongoing turnaround.”

CNO is working to increase return on equity to 9 percent by 2015 from 6 percent in 2012 and to move its credit rating toward investment grade. S&P lifted the score to BB- in May, the third- highest level of junk status, citing rising earnings. It had sunk as low as CCC during the crisis.

Bonach’s strategy is to focus on sales to middle-income individuals, typically around retirement age. The firm offers long-term care policies, life insurance, annuities and health coverage that supplements Medicare, the U.S. health program for the elderly and disabled.

Murphy, who previously worked at Morgan Stanley and Deutsche Bank AG, was on the board of CNO from 2010 through 2012. The insurer also agreed to $25 million with Paulson.

The rally in insurance stocks contrasts with Paulson’s investment in gold, which had tumbled about 24 percent this year through yesterday. Paulson had bet that efforts by policymakers to stoke economic growth could fuel inflation, increasing the metal’s value.

Betting on macroeconomic trends “has been a very difficult business since 2008 because of the major intervention of central banks,” said Donald Steinbrugge, managing partner at hedge-fund consulting firm Agecroft Partners LLC. “It is very difficult for someone to predict what the government is going to do.”

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
 
Subscribe to IBJ
  1. Socialized medicine works great for white people in Scandanavia. It works well in Costa Rica for a population that is partly white and partly mestizo. I don't really see Obamacare as something aimed against whites. I think that is a Republican canard designed to elicit support from white people for republican candidates who don't care about them any more than democrats care about the non-whites they pander to with their phony maneuvers. But what is different between Costa Rica nd the Scandanavian nations on one hand and the US on the other? SIZE. Maybe the US is just too damn big. Maybe it just needs to be divided into smaller self governing pieces like when the old Holy Roman Empire was dismantled. Maybe we are always trying the same set of solutions for different kinds of people as if we were all the same. Oh-- I know-- that is liberal dogma, that we are all the same. Which is the most idiotic American notion going right back to the propaganda of 1776. All men are different and their differences are myriad and that which is different is not equal. The state which pretends men are all the same is going to force men to be the same. That is what America does here, that is what we do in our stupid overseas wars, that is how we destroy true diversity and true difference, and we are all as different groups of folks, feeling the pains of how capitalism is grinding us down into equally insignificant proletarian microconsumers with no other identity whether we like it or not. And the Marxists had this much right about the War of Independence: it was fundamentally a war of capitalist against feudal systems. America has been about big money since day one and whatever gets in the way is crushed. Health care is just another market and Obamacare, to the extent that it Rationalizes and makes more uniform a market which should actually be really different in nature and delivery from place to place-- well that will serve the interests of the biggest capitalist stakeholders in health care which is not Walmart for Gosh Sakes it is the INSURANCE INDUSTRY. CUI BONO Obamacare? The insurance industry. So republicans drop the delusion pro capitalist scales from your eyes this has almost nothing to do with race or "socialism" it has to do mostly with what the INSURANCE INDUSTRY wants to have happen in order to make their lives and profits easier.

  2. Read the article - the reason they can't justify staying is they have too many medicare/medicaid patients and the re-imbursements for transporting these patient is so low.

  3. I would not vote for Bayh if he did run. I also wouldn't vote for Pence. My guess is that Bayh does not have the stomach to oppose persons on the far left or far right. Also, outside of capitalizing on his time as U. S. Senator (and his wife's time as a board member to several companies) I don't know if he is willing to fight for anything. If people who claim to be in the middle walk away from fights with the right and left wing, what are we left with? Extremes. It's probably best for Bayh if he does not have the stomach for the fight but the result is no middle ground.

  4. JK - I meant that the results don't ring true. I also questioned the 10-year-old study because so much in the "health care system" has changed since the study was made. Moreover, it was hard to get to any overall conclusion or observation with the article. But....don't be defensive given my comments; I still think you do the best job of any journalist in the area shedding light and insight on important health care issues.

  5. Probably a good idea he doesn't run. I for one do not want someone who lives in VIRGINIA to be the governor. He gave it some thought, but he likes Virginia too much. What a name I cannot say on this site! The way these people think and operate amuses me.

ADVERTISEMENT