Feb. 8 (Bloomberg) -- John Paulson, the billionaire hedge fund manager who controls the largest stake in Hartford Financial Services Group Inc., told Chief Executive Officer Liam McGee he must take action to reverse the insurer’s stock slide.
“Hartford needs to do something drastic because the stock is the lowest valuation relative to book value of any major insurance company,” Paulson said today on a conference call for analysts and investors held by Hartford, which is based in the Connecticut city of the same name.
Hartford, founded in 1810, hired advisers to evaluate splitting the life insurance and property-casualty businesses, the company said today. McGee, who joined Hartford in 2009, told analysts before Paulson spoke that dividing the firm would present “significant challenges” for the insurer.
“I’m surprised that as part of the discussion, you don’t talk about how much value could be created by separating the P&C business from the life business,” Paulson said. “With the stock performing as poorly as it has, relative to both P&C and life companies, I think you need a better explanation of what you’re going to do to enhance shareholder value.”
Hartford jumped 7.6 percent to $20.58 at 4:15 p.m. in New York. The insurer declined 39 percent last year and trades at less than half of the company’s book value, which is a measure of assets minus liabilities.
‘Sense of Urgency’
“We do not believe that splitting them in the current environment, for the reasons that we cited, will create shareholder value,” McGee told Paulson, whose Paulson & Co. owned 8.7 percent of Hartford as of Sept. 30, according to data compiled by Bloomberg. “We have an incredible sense of urgency on looking at all ideas to create shareholder value.”
McGee has cut jobs, sold a Canadian mutual funds business and started a share buyback after repaying a federal bailout. State Street Corp. and Germany’s Allianz SE each have stakes of more than 5 percent, according to the data.
Hartford was prodded to consider a split in early 2009 when deteriorating results from life insurance pushed the company into the $3.4 billion government rescue. Ramani Ayer, who preceded McGee as CEO, concluded his review in May of that year by saying he would keep the company intact.
Hartford cited its credit ratings and regulatory approvals among the “challenges” to a split in a slide presentation today. The firm said it has $6.8 billion of debt at the holding company that, in the event of a split, would have to be passed to the operating units. The life insurance subsidiaries have “limited capacity to generate statutory earnings” and can assume no more than a third of that debt, Hartford said.
Hartford’s annual profit fell 61 percent to $662 million last year on costs from natural disasters, asbestos liabilities and workers’ compensation claims, the company said yesterday. Fourth-quarter operating profit of 69 cents per share beat the average estimate of analysts served by Bloomberg by 9 cents.
“Separating the company right now would be too costly,” said Dan Theriault, an analyst at Portales Partners LLC, who has a “buy” rating on Hartford’s stock. “While it looks good on paper, I just don’t think from a practical standpoint that it can be achieved with the hoped-for benefit.”
Hartford sells savings products and life insurance policies that compete with the offerings of firms like MetLife Inc. and Prudential Financial Inc. Hartford’s rivals in the property-casualty market include Travelers Cos. MetLife, the biggest U.S. life insurer, trades at about 0.7 times its book value. New York-based Travelers trades at about book value.
Paulson, who became a billionaire by wagering against U.S. subprime mortgages, incurred record losses last year as his bets on a U.S. economic recovery went awry. One of Paulson’s biggest funds, Advantage Plus, fell 51 percent last year. The fund seeks to profit from corporate events such as takeovers and bankruptcies and was largely invested in shares of banks, insurance companies and other financial services firms, according to a third-quarter letter to investors.
Hartford’s stock offered “substantial upside,” Paulson said in his third-quarter report. The document included a chart that showed a fourth-quarter 2012 target price of $45 a share for Hartford.
“What we need you to do is overcome the obstacles to enhance the valuation for your shareholders, not merely point out that there’s obstacles,” Paulson told McGee.
“Okay, John, thank you,” McGee said. “I hear you loud and clear.”
Paulson responded, “I hope so.”
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