Hartford Financial Services Group Inc. (HIG) Chief Executive Officer Liam McGee, facing investor pressure to break up the insurer, failed to satisfy billionaire shareholder John Paulson with his plan to shrink the company.
McGee didn’t address Hartford’s “main problem” with his announcement yesterday of a strategy to shut or sell parts of the 201-year-old insurer, Paulson’s hedge fund Paulson & Co. said in a statement. McGee’s plan, which Hartford said concluded its strategic review, was only a “first step,” Paulson said.
McGee is working to revive his company after losses on equity-linked variable annuities led to a taxpayer bailout in 2009. Paulson is pushing McGee to attract investors to Hartford’s business that sells home and property policies by separating it from operations that are hampered by wrong-way bets on stock markets in Japan and the U.S.
“There’s a little bit of cat and mouse here,” said Dan Theriault, an analyst at Portales Partners LLC with an “outperform” rating on Hartford shares. McGee “threw Paulson a bone and kind of bought Hartford some time.”
Hartford, based in the Connecticut city of the same name, surged more than 7 percent to $23.29 before retreating after McGee outlined the plan in a conference call with analysts. It ended yesterday with an advance of more than 1.4 percent. Hartford dropped 39 percent last year and trades at the lowest price relative to net assets among U.S. insurers with a market value greater than $5 billion.
Hartford said it will stop selling individual annuities and seek buyers for its individual-life, Woodbury Financial Services and retirement-plan operations. McGee, whose strategic planning was criticized by Paulson during a conference call last month, will maintain property and casualty, group benefits and mutual funds as well as liabilities tied to annuities.
Hartford may get about $1.5 billion from the sale of the individual-life, Woodbury and 401-K businesses, according to estimates published yesterday by Meyer Shields of Stifel Nicolaus & Co. That values the life business at about $1 billion, with a price-to-earnings ratio of 7, Shields wrote.
“Implied in management discussion is that the company will pursue other avenues, including separation, if their attempt to eliminate the drag from the variable-annuity runoff isn’t successful,” said Jon Bosse, chief investment officer at NWQ Investment Management Co., which owns more than 5 percent of Hartford. “The company would have made a much more powerful statement if they had explicitly made that commitment.”
“We do not believe today’s actions will materially increase P&C investor interest,” said Paulson & Co., which owns about 8.5 percent of the insurer. “While we appreciate the extensive work of The Hartford’s board and management, we do not believe the positive actions announced today address the main problem with The Hartford’s undervaluation.”
Shannon Lapierre, a spokeswoman for Hartford, declined to comment on Paulson’s statement.
Paulson started buying Hartford shares in the third quarter of 2009 as investment declines and annuity slumps were pushing the company to its fifth consecutive net loss. McGee, a former Bank of America Corp. executive, was hired to start as CEO the next quarter. He returned the insurer to profit and issued stock and debt in 2010 to repay a $3.4 billion U.S. bailout that had been accepted by his predecessor, Ramani Ayer.
Paulson, who had his worst year on record in 2011 after making billions of dollars from anticipating the collapse of the U.S. subprime market, needs Hartford to reach about $24.71 a share to recoup his investment, filings to the U.S. Securities and Exchange Commission and data compiled by Bloomberg showed last month.
The highest target price among analysts tracked by Bloomberg was $30 a share by Alan Devlin of Atlantic Equities LLP. The lowest was from Jimmy Bhullar of JPMorgan Chase & Co. at $22.
“We believe we have the right plan that we announced this morning to deliver enhanced shareholder value,” McGee said in response to a question from analyst Jay Gelb of Barclays Plc on whether the strategy may lead to the spinoff that Paulson advocates. Proceeds from any transactions may be used to decrease debt, reduce risk tied to annuities previously sold and to invest in the business, McGee said.
While selling the units may benefit Hartford in the short term, the company risks getting low prices for its undervalued assets amid the early stages of an economic recovery, according to Eric Berg, an analyst at RBC Capital Markets.
“We question whether it will make sense to exit these businesses when valuations are depressed and when the economy seems to be gaining,” Berg wrote yesterday in a note to clients. “We cannot help but wonder: Would Hartford have made the same moves if Mr. Paulson was not on the scene?”
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