March 21 (Bloomberg) -- Hartford Financial Services Group Inc. gained after Chief Executive Officer Liam McGee responded to billionaire John Paulson’s call for a breakup with plans to shut or sell parts of the 201-year-old insurer.
Hartford rose 1.4 percent to $22.02 at 4:04 p.m. in New York and advanced as much as 7.3 percent during the session. Hartford, based in the Connecticut city of the same name, will stop selling individual annuities and seek buyers for its individual life, Woodbury Financial Services and retirement-plan operations, the company said today in a statement.
Paulson, Hartford’s biggest shareholder, told executives on a Feb. 8 conference call to “do something drastic” to increase the stock price, which dropped 39 percent last year. He urged McGee to split the insurer into property-casualty and life-insurance companies and suggested winding down the U.S. variable annuities business.
“While these actions are a bit more than I was expecting, they are less than John Paulson was proposing,” Robert Glasspiegel, an analyst with Janney Montgomery Scott LLC, said today in a research report. “We expect that the stock will react favorably initially.” He rates Hartford “neutral.”
“We do not believe the positive actions announced today address the main problem with The Hartford’s undervaluation,” Paulson & Co. said in a statement. The announcement should be “a first step” toward a separation of the businesses, which would appeal to shareholders who want to invest in the property-casualty operation and not the life unit, Paulson said. His hedge fund owns about 8.5 percent of Hartford.
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 Jay Gelb of Barclays Plc at $21.
The announcement concludes a strategic evaluation over the past several quarters by Hartford’s management and board, the company said. McGee, who told Paulson on Feb. 9 that the investor’s breakup plan probably wouldn’t boost shareholder value, reiterated that view today and said Hartford had been considering alternatives since the middle of last year.
“That was a part of our evaluation,” McGee said in an interview. “I discussed it transparently at our fourth-quarter earnings call and followed up with another comment, saying that while we appreciate the potential benefits of a split, we just didn’t think it made sense for shareholders of the Hartford at this time.”
Standard & Poor’s downgraded units in Hartford’s life-insurance division, citing the subsidiaries’ “stand-alone credit characteristics.” Debt issued by Hartford Life Inc. was cut to BBB-, the rating firm’s lowest for investment-grade debt. Ratings at the insurer’s holding company and property-casualty units were affirmed, S&P said.
Hartford will stop taking new annuity sales on April 27 and expects to report an after-tax charge of as much as $20 million in the second quarter. Proceeds from any transactions may be used to decrease debt, reduce risk tied to annuities previously sold, invest in the business and “potentially take other capital management actions,” the insurer said.
Hartford may get about $1.5 billion from the sale of the individual-life, Woodbury and retirement-plans businesses, according to estimates published today by Meyer Shields, an analyst at Stifel Nicolaus & Co. That values the life business at about $1 billion, with a price-to-earnings ratio of 7, Shields said.
The sales “will generate significant proceeds,” Dan Theriault, an analyst at Portales Partners LLC with an “outperform” rating on Hartford shares, said in an e-mail. “It is a big strategic step, although it falls short of the complete spinoff” that Paulson urged, Theriault said.
McGee and Paulson clashed during last month’s conference call, which was hosted by the insurer to discuss fourth-quarter earnings with analysts and investors. McGee told Paulson that he had “an incredible sense of urgency” to make changes that would boost the stock. Hartford cited its credit ratings and regulatory approvals as obstacles to breaking up the company.
“We appreciate the positive dialogue and constructive input we have had with many of our shareholders, including Paulson & Co.,” McGee said today in a conference call with analysts. “The plan we outlined this morning is the right path for The Hartford, and we are focused on its execution.”
Run of Losses
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 urged equity analysts to back his plan in a call on March 9, saying McGee had “no excuse” for waiting.
Paulson’s Advantage Plus Fund lost 51 percent in 2011, and the firm said in a third-quarter letter that financial services companies were the “primary drag.” Paulson sold its entire common-stock stakes in Citigroup Inc. and Charlotte, North Carolina-based Bank of America as of Dec. 31.
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