The Gadfly's Bite

It is earnings season once more, and this means that for those who follow the quarterlies of stock insurers, there are plenty of earnings calls to sit in on. These are usually toned-down affairs, where the financial nuts and bolts of a company’s current standings are explained. They don’t often have a whole lot of surprises in store, but the Hartford’s call last week was certainly the exception.

The Hartford, as we all know, is not doing very well for a number of reasons. And a recurring question its top management must ask itself is whether or not it would be wise to split its P&C and life operations, a move that could boost the stock value of the company by as much as 605, according to some analysts. The Hartford’s senior management, led by CEO Liam McGee, noted this during their earnings call, but also noted that such a split would be a difficult thing to do. No doubt it would be, but the Hartford never really went into detail as to why, and in the subsequent Q&A, various analysts threw fairly softball questions at McGee and his colleagues to go into further detail about the Hartford’s standing. These were all met with similarly softball answers that still did not get into detail. All McGee could reiterate was that such a split would be tough…and that was about it.

Enter John Paulson. Now, if you don’t know who he is, he is a hedge fund manager who made about $4.9 billion in 2010 (compared to the Hartford’s net income of only $1.7 billion in 2010). As of last September, he was worth about $15.5 billion, and he was recently listed by Forbes as the 11th wealthiest man on the planet. He also owns 8.9 percent of Hartford stock, so he’s one of those shareholders who has, shall we say, a certain amount of gravity when he offers his opinion.

Paulson burst into the earnings Q&A like a bull in a china shop, and what you don’t get from reading a transcript of the call is the tone of Paulson’s questions, and the anger in his voice. This clearly was somebody who was not happy with McGee’s handling of the Hartford, and he let into McGee with the kind of tone one might normally hear from a boss chewing out a subordinate.

I know you’re doing a strategic review, but there’s no slide talking about what the potential would be, just that there’s challenges. Goldman Sachs came out with, I think, a very good analysis a few months ago, where they showed this is — that they estimate the upside to doing a tax-free spinoff of P&C can be over 70% of what the current stock price is trading at. Now I agree that there’s going to be challenges, but isn’t your job to really overcome those challenges to achieve the maximum value for shareholders? Now I would say that Hartford needs to do something drastic because the stock is the lowest valuation relative to book value of any major insurance company. Last year, Hartford stock was down 38% while the P&C stocks were up 14% and even declined much more than the Life index, which was down 21%. So what I’d like to see you do is not merely come back and say yes, we’re looking at strategic options, but there’s challenges to achieving them. But what — first of all, do you agree that you could create as much as 70% value for your shareholders by spinning off — separating P&C? And secondly, is [indiscernible] incentive to overcome the challenges that it’s going to take to spin this off? And how long is — how long do we have to wait to hear if there’s going to be a positive recommendation to separate these two businesses?

McGee, to his credit, tried to reiterate the points he made during the earnings call, but Paulson would not be denied, and he ended up not only talking over McGee, but finally going after him in something just short of a tirade:

Well, I think you need to do a much better job of explaining that because Goldman’s report is a very good report on a path to separate the business and create what they estimate is a 70% increase in shareholder value. And then you merely say there’s some obstacles and you don’t equate what the costs are to the benefit and what value you think could be created. Because right now, with the stock performing as poorly as it has relative to both P&C and Life companies, I think you need a better explanation of what you’re going to do to enhance shareholder value, merely that you’re working hard and you’re committed, but there’s obstacles. What we need you to do is overcome the obstacles to enhance the valuation for your shareholders, not merely to point out that there’s obstacles.

At that point, what could McGee do but agree to everything Paulson had said and hope the browbeating would come to a swift end? McGee did just that, but Paulson had to get the last dig in.

Liam E. McGee: Hey, John, thank you. I hear you loud and clear.