Oct. 14 (Bloomberg) -- John Paulson, the hedge-fund manager whose wagers against the U.S. housing market helped him earn an estimated $2.5 billion last year, agreed to increase his stake in Conseco Inc. by buying as much as $277.9 million in stock, warrants and convertible debt. The shares jumped 29 percent.

His Paulson & Co. has been investing in financial firms including Bank of America Corp. and Goldman Sachs Group Inc., betting on their recovery as the U.S. emerges from recession. Conseco, the Carmel, Indiana-based life insurer, returned to profitability this year after posting losses throughout 2007 and 2008 tied to investment declines and long-term care policies that are now held by an independent trust.

“Paulson’s track record has obviously been outstanding,” said David Havens, managing director at investment bank Hexagon Securities LLC. “Paulson has about as gold-plated a reputation as you’ll find these days.”

Paulson will own 9.9 percent of Conseco’s common stock after the private share sale, the insurer said yesterday in a statement. The warrants will also convert to common stock at $6.50 a share. Paulson agreed to buy as much as $200 million of convertible notes in a separate debt sale, Conseco said today.

Conseco, run by Chief Executive Officer James Prieur, rose the most in almost three months, increasing $1.47 to $6.46 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have dropped about 59 percent in the past two years.

‘Much Improved’

“Conseco has a sound business model and, with this financing, a much improved financial position,” Paulson said in a statement yesterday. “We have great confidence in Conseco’s future direction, in Jim Prieur, his management team and the board of directors.”

The proceeds from the debt sale will be used to repurchase existing notes, Conseco said. The new debt, due in 2016, will pay 7 percent. Conseco may sell as much as $293 million of the convertible securities, including $200 million to Paulson. The insurer will also file for a public offering of $200 million in new common stock.

The debt exchange “is a material positive and removes the primary roadblock that has been standing in the way of the company returning to a more normalized valuation,” Randy Binner, an analyst at FBR Capital Markets, said today in a note to clients. “That the company may be in a position to add equity capital to offset credit losses is a net positive in our view.”

Moody’s Investors Service changed Conseco’s outlook to “positive” from “negative” and Standard & Poor’s revised its outlook to “stable” from “negative” today.

“The change in outlook reflects Conseco’s improved financial flexibility in the short term,” S&P said in a statement.

MetLife, Prudential

Genworth Financial Inc., the life insurer and mortgage guarantor, tapped investors for about $649 million in a stock sale last month after reporting five quarterly losses. Prudential Financial Inc., the second biggest U.S. life insurer, raised more than $4 billion in stock and debt sales since June. MetLife Inc., the biggest life insurer, has sold $1.75 billion in debt since April.

Conseco’s plans to issue new shares and convertible debt exceed 20 percent of the existing outstanding stock, triggering a New York Stock Exchange rule that requires a shareholder vote, Conseco said.

Viability ‘Jeopardized’

The insurer said it invoked an exception to the rule that allows the company to forgo the vote if a delay would “seriously jeopardize the financial viability of the listed company.” The exchange “has approved Conseco’s reliance on the exception,” the insurer said.

Some of Conseco’s previous losses were tied to long-term care policies that have been held by an independent trust since November of last year. Such coverage sold by insurers in the 1990s has hurt profit after they underestimated the number of claims, the cost of care and the life expectancies of their customers.

The insurer filed for bankruptcy court protection from creditors in 2002 after Stephen Hilbert, Conseco’s founder and former chief executive, bought Green Tree Financial Corp., a mobile home lender. Conseco declared a $6.7 billion loss on that investment after customers defaulted on loans.

Paulson earned an estimated $2.5 billion last year, according to Institutional Investor’s Alpha Magazine. His Credit Opportunities Fund soared almost sixfold in 2007 on bets that subprime mortgages would plummet. Last year, his flagship fund returned 37 percent, compared with a loss of 19 percent for hedge funds on average.

To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.net.

Last Updated: October 14, 2009 17:00 EDT