Hedge Fund Manager Paulson Tells Hartford to Split Company in Two
Fund manager John Paulson who runs the investment company Paulson & Co., the largest shareholder of the Hartford Financial Services Group (NYSE:HIG), demanded that Hartford should break itself into two companies in order to unlock value for its shareholders. Most of Hartford’s competitors such as MetLife (NYSE:MET), Prudential Financial (NYSE:PRU), AIG (NYSE:AIG) and Manulife (NYSE:MFC) have operations concentrated in either life insurance or property & casualty (P&C) insurance. Paulson is insisting that Hartford should also spin-off its P&C insurance unit.
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Paulson has sent a letter to Hartford’s chairman and chief executive officer outlining why spinning off the P&C operations would benefit shareholders. In the letter, Paulson argues that Hartford’s stock has the lowest valuation multiple compared to its peers because a company with both life and property & casualty operations is too complex to be understood properly.
A spin-off would create two separate property & casualty and life insurance companies, making it easier to understand and benchmark against peers. Paulson also asks for a separate management with their own strategies, distribution channels and capital requirements for each company. [1]
More Returns on Investments
Risks and liabilities of a life insurance company differ significantly from those of a P&C insurance company. Life insurance companies typically a have longer duration of liabilities and are less risk averse than P&C insurance companies that face significant and unpredictable policy liabilities. P&C companies need sufficient funds to cover these unpredictable liabilities, which restricts their ability to take risks.
A spin-off will allow the investment managers of the two companies to concentrate on their unique risks and liabilities and thus be able to maximize returns on investments.
Our price estimate for Hartford Financial Services stands at $18.17, implying close to 10% discount to the market price.
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Notes:- Hartford’s Biggest Shareholder Pushes Company to Spin Off Its P/C Operation, Feb 15, 2012, Insurancenewsnet [↩]