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.