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Hartford shareholder Paulson escalates breakup push


BOSTON (Reuters)—Famed hedge fund manager John Paulson on Tuesday demanded that insurer The Hartford Financial Services Group Inc. break itself into two companies, escalating a confrontation with management that began with screams on a conference call last week.

Investors appeared to welcome the nine-page proposal from Hartford's largest shareholder as the stock rose 6.5% in after-hours trading.

Afterward, Hartford said it recognized the potential benefits of a spinoff and looked forward to continued dialogue with Mr. Paulson and other shareholders. “We are evaluating the company's strategy and business portfolio with the goal of delivering shareholder value,” it said.

On a Feb. 8 conference call with analysts, Mr. Paulson angrily insisted that the company needed to take “drastic” action after management said a breakup into two companies faced too many challenges to work.

The exchange quickly drew attention in the investment world, not only because the normally cool Mr. Paulson became so obviously irritated, but because it illustrated how one of the industry's most powerful managers was flexing his muscle to benefit shareholders' bottom line.

On Tuesday, Mr. Paulson rejected management's assertions on insurmountable challenges and said a tax-free spinoff of the property and casualty insurance business would give shareholders as much as 60% more value than they are getting now.

“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,” Mr. Paulson said in a letter to management.

Shares of Hartford trade at a substantial discount to book value, even more so than their peers in the property insurance sector, and they also trade at a lower price-to-earnings ratio than peers in the life insurance business. The fund manager blamed the company's structure.

“The main, but not the only, reason for Hartford's low multiple is because the company combines both a life and a P&C business together,” he said.

Mr. Paulson's push is the latest challenge for Hartford, one of the oldest companies in the United States.

During the financial crisis, it was one of only three insurance companies to receive a government bailout. Chief Executive Liam McGee, a former top Bank of America executive, came in to try and turn the company around.

But following a fourth-quarter report last week that missed some Wall Street expectations, analysts said the company was likely to face increased pressure to restructure somehow.

Mr. Paulson made the argument that most large multiline insurers have chosen to split off one side of the business or the other, and he said shareholders were “entitled to expect the management and the board to show leadership” on the issue.

Insurers have been on the receiving end of investor outrage before, though rarely has it been carried this far.

In late 2010, hedge fund manager Steve Eisman threatened the management of Hartford peer Genworth Financial Inc. on a conference call, saying he would launch a proxy fight unless it improved returns. Mr. Eisman never made good on the threat.

More recently, the largest shareholder in reinsurer Transatlantic Holdings Inc. scuppered a deal with peer Allied World Assurance Co. Holdings A.G., saying the offer undervalued the company.