Wednesday, February 15, 2012

The New Activist Investor: John Paulson

On February 14 John Paulson sent a letter to Liam McGee - the Chairman, President and CEO of The Hartford Financial Services Group (Ticker: HIG).  In the letter Paulson states that a spin-off of the property and casualty insurance business would increase shareholder value by 40-60%.

Extracted from Paulson's letter:

Dear Liam:

We appreciate the opportunity to have a dialogue with you on the significant benefits to be achieved through a tax-free spinoff of Hartford’s P&C business. As the largest investor in the Company for the past year, we have done exhaustive research on the challenges and opportunities of The Hartford and believe that a spinoff would produce an increase in value for Hartford shareholders of 40 – 60%+ above the unaffected share price. This valuation range is also consistent with Goldman Sachs’ estimate of a valuation enhancement on the order of 70%.

Stated simply, the spin-off would:

  • Create two pure play insurance companies – one in life and one in P&C – whose management is focused solely on each companies’ 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 US insurance company.
  • Reduce complexity, which limits sell-side coverage and investor interest.

Given the extremely poor performance of Hartford’s stock and the fact that Hartford trades at lower valuation multiples than any of its US insurance peers, addressing these issues should be Hartford’s highest priority. That is why we were disappointed that management, on the February 8th earnings call, only addressed the potential “challenges” of a separation. Not only do we believe that you underestimate the potential value that would be created by a spin, the “challenges” you describe are both over-rated and readily manageable.

We shared our view regarding the benefits of a tax-free P&C spinoff initially in November 2011 and again in December 2011. As part of our analysis, we considered all other strategic alternatives including share buybacks, the sales of individual businesses, the sale or IPO of minority stakes in Life and/or P&C, and others, but none of these came close to the dramatic increase in shareholder value to be created by a spinoff. For your reference, we have updated and attached the slides we previously sent to your Board.

Click here to read the entire letter and presentation filed with the SEC.