Paulson sees substantial upside for Genworth if firm splits

(Bloomberg) -- Billionaire hedge fund investor John Paulson said Genworth Financial Inc. shares will probably rally as the company divests a stake in an Australian unit, and could gain further if the insurer splits itself in two.

“If the company chooses to spin off its mortgage-insurance and other life-insurance businesses into two separate companies, there could be substantial additional upside,” the money manager said in a letter to investors discussing first-quarter results at his Paulson & Co. funds.

Paulson has benefited from the rally of insurers including Richmond, Virginia-based Genworth and CNO Financial Group Inc. He previously pushed for a split at Hartford Financial Services Group Inc., which instead sold assets to focus on property- casualty coverage. He is best known for a successful bet against subprime mortgages, which made him a billionaire in 2007.

He has wagered on mortgage guarantors such as Radian Group Inc. and MGIC Investment Corp. to gain on a rebound in U.S. housing. Mortgage insurers cover losses when homeowners default and foreclosures fail to recoup costs.

Paulson bought 8.4 million Genworth shares early last year at an average cost of $7.67, according to the letter. The stock advanced 3.3 percent to $18.21 at 4 p.m. in New York.

The billionaire said he expects gains because the stock trades for less than book value. His estimate of the measure of assets minus liabilities is $24 a share. Paulson said the stock can trade for at least that value, after the initial public offering of the Australia mortgage insurer frees cash that can be used for buybacks and debt reduction. A split would also help the stock, he said.

Pressure on management

“We agree that GNW could create significant shareholder value” through a split, Mark Palmer, an analyst at BTIG LLC, said in a research note today, using Genworth’s ticker symbol. “We would not be surprised to see pressure build on GNW management to make the split happen.”

Genworth is the largest seller of long-term care insurance in the U.S., while also offering annuities, life insurance and home-loan guarantees. The company sold its wealth-management unit last year to a group led by Aquiline Capital Partners LLC.

Armel Leslie, a spokesman for Paulson & Co. with WalekPeppercomm, and Al Orendorff of Genworth declined to comment.

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