Hedge fund manager John Paulson — who holds an 8.4 percent stake in The Hartford and is the biggest stakeholder in the company — wants to split up the 202-year-old insurer, and he’s intensifying his effort. On Feb. 14, he filed with the SEC a letter addressed to the board of The Hartford. Just days before, he had confronted The Hartford CEO Liam McGee during the company’s earnings call and demanded that McGee split up the company’s life insurance and P/C businesses, by spinning off the P/C divison. He has also started communicating with other shareholders to make his pitch.
In his letter to The Hartford board, the billionaire investor made his case that spinning off the P/C division would boost the company’s sagging stock price. Paulson noted that The Hartford’s stock price declined 38 percent in 2011, while its P/C peers were up 14 percent and life peers were down 23 percent.
‘Create Two Pure-Play Insurers’
In his letter, Paulson said the spin-off would:
- Create two pure-play insurers — one in life and one in P/C — whose management is focused solely on each company’s own strategies, distribution channels and capital requirements.
- Enable each of the respective companies to achieve a multiple consistent with its industry, which, for the property casualty business, would mean a multiple of approximately 1.1x book value versus Hartford’s current multiple of 0.4x — the lowest of any major U.S. insurance company.
- Reduce complexity, which limits sell-side coverage and investor interest.
If P/C and life were separately traded, Paulson argued, “we believe the two companies would be valued at a combined $32 per share, resulting in immediate share price appreciation of more than 60 percent above the $19.12 price on Feb. 7th before Hartford’s fourth quarter earnings call.”
Paulson: Split Would Reduce Complexity
A tax-free spinoff of 100 percent of P/C would create both pure play P/C and Life companies that would be easier to understand and benchmark against peers, Paulson said.
He added that the biggest challenge to a spinoff that CEO McGee identified seems to be how to allocate debt.
But that could be readily addressed, Paulson said. “If debt were allocated in proportion to equity, $2.5 billion could be allocated to P/C and the balance of $4.3 billion of debt would be allocated to Life. P/C would have a debt-to-total capital ratio of 28 percent and Life’s ratio would be 24 percent.” Both would be in line with Hartford’s 25 percent ratio today and well within ‘A’ ratings leverage guidelines of S&P and Moody’s, he said.