On the heels of a weak quarterly earnings report for The Hartford, hedge fund manager John Paulson has stepped forward as a shareholder activist in a bid to force the insurance company into a breakup.
Paulson & Co. retains an 8.4% stake in The Hartford, making it the largest shareholder. Paulson's move comes after a bad year for hedge funds, and both his activism and breakup play with The Hartford are a new direction for him.
On Tuesday, Paulson filed a Schedule 13D with the Securities and Exchange Commission in an effort to force the company’s hand in taking quick action to break up The Hartford’s property and casualty and life insurance units. The life unit includes its wealth management, mutual funds and annuities operations.
“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,” Paulson wrote in the SEC filing, which includes a letter to Liam McGee, Hartford's chairman, president and CEO. “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% to 60% above the unaffected share price.”
The letter points to a recent trend toward corporate breakups, citing 100% spinoffs of major divisions at companies such as McGraw Hill, Abbott Laboratories, Tyco, Kraft, Ralcorp, ConocoPhillips, Procter & Gamble, Marriott, Sara Lee and ITT.
Paulson said the spin-off would create two “pure play insurance companies,” with one in life and the other in P&C, whose management is focused solely on each companies’ own strategies, distribution channels and capital requirements.
In response to the Schedule 13D filing, The Hartford issued this statement: “We recognize there are potential benefits to a separation of the P&C and life companies, including those outlined by Paulson & Co. Inc. While there are challenges to successfully executing a separation, we welcome Paulson's views and look forward to continued dialogue with him and other shareholders. We are evaluating the company's strategy and business portfolio with the goal of delivering shareholder value. We remain objective and pragmatic about the best ways to achieve this goal."
The Hartford (NYSE: HIG) on Feb. 7 reported profits of $127 million and earnings per share of $0.24 for fourth-quarter 2011 versus Q4 2010 profits of $619 million and EPS of $1.24. HIG shares are off about 30% over the past year.
The Property & Casualty Commercial unit reported an 88% loss in core earnings at $25 million in Q4 2011 versus $201 million in Q4 2010, while Wealth Management reported a 12% drop in core earnings to $228 million from $260 million a year ago.
McGee cited capital markets volatility, low interest rates and higher than normal catastrophic weather as challenges in the insurance industry.
The Hartford Financial celebrated its 200th anniversary in 2010, the same year the company announced a restructuring that would create three new units with a focus on wealth management. In April of that year, the Connecticut-based insurer said it would reorganize its insurance, annuity and wealth management businesses in an effort to streamline the company.
“We're too complex a firm right now,” said McGee during a company investor meeting at that time.
On Monday, a day before Paulson’s SEC filings, The Hartford Mutual Funds' board of directors approved moving 11 of its fixed income funds to sub-advisor Wellington Management. The move is part of The Hartford's previously announced strategy to accelerate growth in the mutual funds business, according to a company release. This includes expanding the relationship with Wellington Management to serve as the sole sub-advisor for all the funds, pending a fund-by-fund review by the board.
In January, AdvisorOne reported that the highest volatility in 50 years had hedge fund managers spooked, especially Paulson & Co., which experienced an especially dismal year. Two leveraged funds that account for most of the firm’s assets lost 35.91% and 50.67%.
Paulson has not won his reputation on the basis of being an activist shareholder, so his interest in breaking up Hartford is a new approach for him. His rise to fame came in 2007, when he made $3.5 billion by shorting subprime mortgages. He gave most of that back last year, though, as Institutional Investor estimates his gold class investments decreased in value by $3 billion.