(Bloomberg) -- John Paulson, the billionaire hedge- fund manager, exited a stake in Genworth Financial Inc. before the insurer reported a record loss, according to a person familiar with the matter.
Paulson ended his investment by Sept. 30, according to the person, who asked not to be identified because the move hasn’t been publicly disclosed. Paulson’s funds held 9 million shares of Richmond, Virginia-based Genworth as of June 30, according to a regulatory filing, a stake of about 1.8 percent.
Genworth has declined 40 percent since reporting a third- quarter loss of $844 million on Nov. 5, fueled by costs to set aside more funds for long-term care policies. Chief Executive Officer Tom McInerney, who is seeking to turn around the business by selling new coverage, was dealt another setback late yesterday, when Standard & Poor’s cut the company’s credit grade to junk.
“It becomes harder to sell insurance products with long- term guarantees like long-term care and lifeinsurance if you don’t have investment-grade ratings,” said Sean Dargan, an analyst at Macquarie Group Ltd. Genworth relies on other firms to sell its products, and those distributors may prefer to offer coverage from more creditworthy insurers, Dargan said by phone.
“One of the screens that those distribution channels use is ratings,” he said. “If you don’t have a certain rating, they kick you off the shelf.”
Paulson had said that he bought 8.4 million shares of Genworth in early 2013 at an average cost of $7.67 apiece. The stock traded as high as $17.85 in the third quarter and as low as $12.64. It declined in late July after McInerney announced the review of long-term care reserves that led to the charge disclosed this week.
Armel Leslie, a spokesman for Paulson at Peppercomm, declined to comment. The Wall Street Journal reported Paulson’s exit from Genworth earlier.
The fund manager had told investors that Genworth was worth at least $24 per share, citing a calculation of the insurer’s book value. Genworth could trade even higher if the company chose to split off its global mortgage insurer from the unit selling long-term care coverage and life insurance, Paulson said in a letter to investors discussing first-quarter results at his Paulson & Co. funds.
Paulson has benefited from wagers on insurers including CNO Financial Group Inc., which had also struggled with long-term care liabilities. He’s invested in mortgage insurers amid a rebound in the housing market, after profiting in the financial crisis from his wagers against subprime mortgages.
Genworth’s shares slid 2.9 percent to $8.41 in New York trading. The insurer’s $400 million of 4.8 percent bonds due in 2024 dropped 8.4 cents to 87 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes yield about 6.7 percent.
Genworth yesterday was cut one level to BB+ from BBB- by S&P, which cited “the need to rebuild capital strength, the risk of further reserve strengthening, and execution risk in the turnaround of the U.S. life insurance division.”
Moody’s Investors Service yesterday placed Genworth’s main unit on review for a downgrade, and Fitch Ratings said it expects Genworth to record additional pretax charges of $500 million to $1 billion in the fourth quarter.
--With assistance from Kelly Bit and Matt Robinson in New York.
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