With $78 Million Stock Buy, Hedge Fund Paulson to Own Nearly 10% of Conseco

Conseco Inc. has agreed to sell $78 million of its common stock and warrants to Paulson & Co., a large hedge fund firm, to strengthen its capital position. When the transaction closes, the investment firm will own nearly 10% of Conseco's outstanding shares, including shares the firm previously bought in the open market.

Conseco, a long-term care, health and life insurer, said it entered into the stock and warrant purchase agreement with Paulson on behalf of several investment funds the firm manages in which it would sell 16.4 million shares of stock and warrants to buy 5 million shares.

Half of the proceeds from the share issuance will be used to repay debt under its credit agreement, Conseco (NYSE: CNO) said. Tony Zehnder, a spokesman for Conseco, said he couldn't comment further because of a "quiet period."

Paulson is the world's third-largest largest hedge fund firm by assets, and generated big returns in 2007 by betting against subprime mortgage securities, according a story by MarketWatch.

The warrants Paulson will receive will have a price of $6.50 a share of stock, but can't be exercised until June 30, 2013, "except under limited circumstances," Conseco said. The warrants expire on Dec. 30, 2016.

The insurer also said it will privately offer up to $293 million of convertible senior debentures to fund a substantial portion of the purchase price of its existing convertible debentures.

The closing of the stock and warrant sale is expected to occur on the earliest closing date for the new convertible debentures it's privately offering, Conseco said.

Combined, the transactions will provide several benefits to the company, Conseco said. Retiring existing convertible debt will ease investor uncertainty about its ability to repay or refinance this debt next year. They also will help it meet other debt obligations as they come due, the insurer said.

In August, Conseco said it planned to combine three insurance companies within its Conseco Insurance Group business in an effort to boost capital. Under the deal, two subsidiaries, Conseco Insurance Co. and Conseco Health Insurance Co., would be merged into a third subsidiary, Washington National Insurance Co. (BestWire, Aug. 31, 2009).

In July, the company said two insurance company units would coinsure 104,000 noncore life insurance policies with Wilton Reinsurance Co. in a deal it said would boost capital levels. Wilton Re would pay a ceding commission of about $57.5 million and 100% coinsure and administer the policies (BestWire, July 1, 2009).

Despite investment losses, Conseco swung to profit in the first quarter, boosted by higher operating earnings in all three of its insurance businesses. Net income was $24.5 million, compared with a $7.2 million net loss the same period a year ago (BestWire, July 1, 2009).

The last time Conseco posted a profit was in the first quarter 2007 (BestWire, May 8, 2007).

Conseco Insurance Co. currently has a Best Financial Strength Rating of B (Fair).

On the morning of Oct. 19, Conseco's stock was trading at $6.57 a share, up 0.61% from the previous close.