Hartford Financial Services Group Inc. Chief Executive Officer Liam McGee, the ex-banker hired in 2009 to restore profits, is resisting renewed pressure from Wall Street to split apart the 201-year-old insurer.
McGee, 57, challenged the assumptions yesterday of Christopher Giovanni, a Goldman Sachs Group Inc. analyst, about how much investors could gain by separating Hartford’s life-insurance and property-casualty businesses. That drew a rebuke from his biggest investor, billionaire John Paulson, who joined the firm’s quarterly earnings conference call to endorse the Goldman Sachs analysis and chide McGee for Hartford’s stock decline.
“When you’ve got major shareholders saying, ‘Do this,’ those are the owners of the company,” said Meyer Shields, an analyst with Stifel Nicolaus & Co. “You have to make sure that the steps you’re taking are maximizing shareholder value.”
Hartford dropped 39 percent in New York last year as McGee struggled to boost returns by cutting jobs, selling a claims-administration business and starting a share repurchase program. Return on equity, a measure of how well the company invests shareholder money, probably will be about 8 percent in 2012, Hartford said in a December investor presentation.
“We do not yet have visibility on how the company will meaningfully improve its ROE profile,” Jay Gelb, an analyst at Barclays Plc, said yesterday in a report titled, “Breakup of P&C and Life Units Faces Roadblocks.”
‘Sense of Urgency’
McGee told Paulson he had “an incredible sense of urgency” to make changes that would boost the stock price. Hartford, based in the Connecticut city of the same name, said yesterday it had hired advisers to consider dividing its two main businesses. The insurer concluded that the move probably wouldn’t “create shareholder value,” McGee said on the call.
“It’s time for Hartford to take aggressive action and deliver value to shareholders,” said Tamara Kravec, a managing director at Hartford shareholder NWQ Investment Management Co. “They have multiple avenues to unlock value. It takes time,” she said in an interview.
NWQ held about 4.8 percent of Hartford as of Sept. 30, according to data compiled by Bloomberg. Paulson & Co.’s stake was about 8.7 percent, while State Street Corp. and Germany’s Allianz SE each had holdings of more than 5 percent, according to the data.
Hartford, founded in 1810, has the second worst price-to-book value ratio in the 24-company KBW Insurance Index, according to data compiled by Bloomberg. The company trades at about 41 percent of its book value, a measure of assets minus liabilities, compared with 68 percent for MetLife Inc. and 96 percent for Travelers Cos. Genworth Financial Inc., at 27 percent, trades at the lowest ratio in the index.
Hartford jumped 7.6 percent to $20.58 yesterday.
The insurer could boost the value of the stock to $28.32 by creating two separate companies, Giovanni said in a Jan. 9 report. The Goldman Sachs analysis estimated that a stand-alone property-casualty company could be valued at about 1.2 times book value, while the life business by itself would be valued at about 0.25 times book value.
“Hartford needs to do something drastic,” Paulson told McGee. “I think you need a better explanation of what you’re going to do to enhance shareholder value.”
Hartford cited its credit ratings and regulatory approvals among the “challenges” to a split in a slide presentation. 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.
“We do not believe the current stock price reflects the true value of the company,” McGee said. McGee wasn’t available for an interview, said Shannon Lapierre, a spokeswoman for Hartford.
McGee took over as CEO in October 2009, about four months after his predecessor, Ramani Ayer, fended off a calls for a separation of the main businesses. In early 2009, a slump in results from life insurance pushed the company into the $3.4 billion government rescue. McGee, a former executive at Bank of America Corp., repaid the rescue in 2010.
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 on Feb. 7. Fourth-quarter operating profit of 69 cents per share beat the average estimate of analysts served by Bloomberg by 9 cents.