Posted on 12 Mar 2012
Prominent hedge-fund manager John Paulson on Friday provided more specifics on his plan to have insurer Hartford Financial Services split in two, recommending the company announce the spin-off of a major unit in April.
The unit, Hartford’s property-casualty arm, is a “dominant” player in commercial insurance with strong management, but is “buried” within the larger company, undervalued by shareholders and ignored by analysts, Paulson argued in a slideshow filed with securities regulators Friday.
Hartford’s life insurance unit, Paulson suggests, could immediately shut down its variable-annuity operations to save money and free up capital, and spend the next year reviewing the “strategy and structure” of the unit.
Paulson’s hedge fund, Paulson & Co., is Hartford’s largest shareholder. Paulson has been pushing for a split since he lashed into Hartford executives on the insurer’s quarterly conference call in early February, telling them they need to “do something drastic” to boost their stock price.
The recommendations were included in a slideshow that Paulson & Co. is using in its “continuing discussions or communications with [Hartford's] management, board of directors and shareholders, and public statements,” according to the regulatory filing that contained the slides.
Separate spokesmen for Paulson and Hartford had no comment on Paulson’s interactions with Hartford’s management and board of directors since the February conference call. The Hartford representative reiterated a company statement from Feb. 14, when Paulson issued an earlier, less-specific version of the slideshow.
“We recognize there are potential benefits to a separation of the P&C and life companies, including those outlined by Paulson & Co.,” the statement said. “While there are challenges to successfully executing a separation, we welcome Paulson’s views and look forward to continued dialogue with him and other shareholders. 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.”
On the February conference call, Hartford Chief Executive Liam McGee said he shared the “sense of urgency about realizing greater value for shareholders” but that “we do not believe that splitting them in the current environment … will create shareholder value.”
Hartford executives said a split would be complicated by several factors, including the difficulty of allocating $6.8 billion in debt now held at Hartford’s holding company without getting into trouble with ratings agencies.
In the slideshow, Paulson suggested the property-casualty business could be contributed by Hartford to a new debt-free legal entity that could raise low-cost debt and repurchase some of the parent company’s existing debt. Then the property-casualty unit could be spun off to Hartford shareholders.
If the plan were announced in April, the spin-off could be concluded in next year’s second quarter, he said.
In addition, Hartford could consider divesting its mutual fund, retirement or group benefits businesses to raise additional cash, Paulson said.
Paulson, who manages about $24 billion in assets, rose to fame with his bet against subprime mortgages during the financial crisis, which reaped him billions of dollars. But lately, his bullish call on an economic recovery and a bet in a controversial Chinese forestry company cost him dearly. One of his main funds was down 52% last year, ranking him among the worst performers among U.S. hedge-fund managers in a year when the equities market was largely flat. His position in gold, however, has fared well as commodities prices rose on uncertainties over an orderly resolution of the European sovereign-debt crisis and concerns of a global slowdown.