Posted on 15 Feb 2012
John A. Paulson, the billionaire hedge-fund manager who chided The Hartford's CEO last week for failing to split the company in two, has appealed directly to shareholders with a full-scale argument for dividing the historic company's life insurance from its property-casualty business.
Shares of The Hartford opened higher Wednesday, trading at $20.60, up 4 percent at midday after the late-Tuesday bombshell by Paulson sent the price up by more than $1, or 5.25 percent, to $20.85.
Paulson's firm, Paulson & Co., is The Hartford's largest shareholder, with 37.5 million shares, or 8.4 percent of the total.
Paulson stopped short of launching a proxy battle in which he would seek to unseat board members and replace them with others who would implement his plan. Rather, he said his firm has already lobbied management, and "expects to begin having such discussions or communications with shareholders" in an effort to force a split.
His efforts follow a disastrous 2011 for shares of The Hartford, which fell by 38 percent. The share price has recovered somewhat this year but is still well below the recent peak of $31 a year ago.
The Hartford, in a statement late Tuesday, said it recognizes potental benefits to splitting the company.
"While there are challenges ... we welcome Paulson's views and look forward to continued dialogue with him and other shareholders," the statement said. "We are evaluating the company's strategy and business portfolio with the goal of delivering shareholder value."
Paulson's letter included charts showing, for example, that few Wall Street analysts who follow The Hartford also follow other property-casualty companies, such as The Travelers Cos. Share value would increase after a split, he said, because the higher values generally assigned to property-casualty companies would be suddenly realized.
"As the largest investor in the company for the past year, 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 percent to 60 percent (or more) above the unaffected share price," Paulson wrote.
The debate came up during the fourth-quarter earnings call on Feb. 8, when McGee said the Hartford had considered splitting the company but concluded that the challenges outweighed the benefits.
Paulson asked McGee why the company hadn't talked more about the potential benefits of splitting the multi-line insurer. Paulson mentioned a report by analysts at The Goldman Sachs Group Inc. that suggested benefits to splitting the company.
Other analysts' reports, including one by Barclays Capital, have argued against the split.
"First of all, the analysis and the intent of the comments was to acknowledge that the challenges are significant, not to say that they could not be overcome," McGee told Paulson during the earnings call. "Second of all, our analysis, including the frictional costs, if you will, that are in the third category, would suggest that a split would not create the kind of shareholder value that, that particular report suggested. And third, in addition, I think the -- your sense of urgency about realizing greater value for shareholders is shared by me and by this team."