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Hedge Fund Manager Makes Case for Splitting Hartford P&C, Life Businesses

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Hedge fund manager John Paulson Tuesday increased the pressure on Hartford Insurance Group to break itself up into separate property and casualty and life businesses by taking the case directly to Hartford shareholders.

In his letter to CEO Liam McGee, filed with the SEC, Paulson contends that a spin-off would benefit both the company and its shareholders. The SEC filing included a presentation with charts and graphs outlining the proposed benefit of spinning off the P&C businesses.

Paulson adds, “Given the extremely poor performance of Hartford’s stock and the fact that Hartford trades at lower valuation multiples than any of its U.S. insurance peers, addressing these issues should be Hartford’s highest priority.”

He says, “That is why we were disappointed that management, on the February 8 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 overrated and readily manageable.”

Hartford, in response, says, “We recognize there are potential benefits to a separation of the P&C and life companies, including those outlined by Paulson & Co. Inc.”

The company adds, “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.”

Paulson also contends that a reorganization splitting the company into separate parts would substantively increase shareholder value.

Analysts, however, appear split on the long-term benefits of such action.

And, in its earnings conference call with investors last week,Hartfordofficials said a key challenge to a spinoff would be HIG allocation of holding-company debt.

Andrew Kilgerman, a managing director at UBS, for example, says, “While it’s not clear cut that benefits of monoline stock coverage and break up are as feasible and valuable as Paulson argues, a spin-off of the property and casualty operations may be another avenue to realize value.”

At the same time, Kligerman says, “We think there are merits to the multiline structure and HIG has significant organic valuation upside, but management must execute to achieve it.”

And analysts at Keefe, Bruyette & Woods, say, “Like Paulson and others, we see little synergy in the multi-line model and agree that 2 more focused companies might result in better execution and valuation.”

However, the KBW analysts add that “we’re more cautious about the near-term practicality and less optimistic about valuation upside in the near-term.”

Hartford shares jumped in after-hours trading after the Paulson letter was released. At 10 a.m.,Hartford’s price in New York Stock Exchange trading was $20.87, up $1.06 or 5.35 percent from Tuesday’s close, which was before Paulson filed his letter with the SEC.

Paulson projects that reorganization through a spinoff ofHartford’s P&C operations would raise the value of the company toHartfordshareholders to $32.

Paulson’s hedge fund, Paulson & Co. Inc., owns an 8.4 percent stake in the Hartford.