John Paulson, president of hedge fund
management firm Paulson & Co, believes there is only one way
that US insurer The Hartford Financial Services Group can unlock
value for its shareholders – and that is by separating its life and
general insurance operations.
With Paulson & Co now the largest
shareholder in The Hartford, Paulson has backed his proposal in a
letter to The Hartford chairman, president and CEO Liam McGee.
Go deeper with GlobalData
According to his letter, which has been filed
with Securities and Exchange Commission, Paulson & Co now has
an 8.4% stake in The Hartford. At current market prices the stake
is worth some $790m.
Paulson’s letter followed shortly after
release by The Hartford of its 2011 results which reflect a massive
61% fall in net income from $1.68bn in 2010 to $662m.
Currently trading at about $17 per share, The
Hartford’s price is down over 40% from its 2011 high and about 80%
from levels seen in 2007, a year in which it reported a record net
income of $2.95bn. Paulson’s strategy to unlock value will
undoubtedly find solid support among many of the insurer’s
long-suffering shareholders.
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By GlobalData
According to Paulson, on 8 February 2012 The Hartford was
trading at 44% of its book value, the lowest of any major US
insurance company. In the general insurance sector, the average
company was trading at 110% of book value while in the life
insurance sector the average was 80% of book value.
Beginning his letter to McGee, Paulson wrote: “We have done
exhaustive research on the challenges and opportunities of The
Hartford and believe that a spinoff would produce an increase in
value for Hartford shareholders of 40% to 60%-plus above the
unaffected share price. This valuation range is also consistent
with Goldman Sachs’ estimate of a valuation enhancement on the
order of 70%.”
Paulson proposes that separation of The
Hartford’s life and general insurance operations would take the
form of a spinoff of the general insurance portion of the
business.
Expanding on this in his letter, Paulson
explained: “As part of our analysis, we considered all other
strategic alternatives including share buybacks, the sales of
individual businesses, the sale or initial public offer of minority
stakes in life and/or P&C [property and casualty], and others,
but none of these came close to the dramatic increase in
shareholder value to be created by a spinoff.”
Realising true value
Paulson believes that one of the biggest
obstacles to realising The Hartford’s true value in its current
form is that its structure is too complex. “Many of the largest
institutional investors in Hartford’s peers are significantly
underweight Hartford which suggests, among other things, the
complexity makes the company un-investable, even at the current
stock price,” wrote Paulson.
He also noted that because of its complexity,
The Hartford receives significantly less attention from analysts
than do its major competitors.
In a brief response to Paulson’s letter, The
Hartford stated that it welcomed his views and “looks forward to
continued dialogue with him and other shareholders”.
The insurer also noted that it recognises that
there are potential benefits to a separation of its life and
general insurance operations. The Hartford concluded: “We are
evaluating the company’s strategy and business portfolio with the
goal of delivering shareholder value. We remain objective and
pragmatic about the best ways to achieve this goal.”
