Wednesday, February 15, 2012

The Hartford: Paulson Advocates a Break Up

Remember last week when I commented on The Hartford’s earnings (which took a major blow specifically from the work comp line)?  I conjectured that poor earnings and a promise from the CEO to “evaluate the business portfolio” portended change…
I learned earlier this week that John Paulson, billionaire hedge fund manager and largest individual shareholder in The Hartford, has advocated just that.   On the February 8 investor conference call, Paulson suggested that CEO Liam McGree do “something drastic” to ensure the future success of the organization.  His view was based, at least in part, on a report from Goldman Sachs suggesting that significant shareholder value might be created by splitting the life and P&C lines into two different entities
McGee claims to have analyzed such a scenario and while he acknowledged the potential benefits, he notes that “the split would not create the kind of shareholder value that the Goldman Sachs report suggests.”  From my perspective, the challenges associated with such a split would include, but would not be limited to, the redundancy of back office administrative functions, the culture shock, and the loss of incentive for leveraging cross-sell opportunities. 
But what did the stock do in early afternoon trading on February 8th (as news of Paulson’s view came to light)?  Up 9.3%.  Yikes.   
Most importantly, I think this is the first of many “management vs. shareholder” fights that we’ll see in the health, life, and P&C insurance business over the next 3 to 5 years.  In light of extreme uncertainty, the right strategy for maximizing shareholder value is, at best, unclear... and, at worst, unattainable.   
Michael

1 comment:

  1. I once worked for a multi-line company in which the profit generator was the group LA&H lines. If anyone suggested in the seventies that the company would shed this line, they would have been laughed off the planet. Surviving the reign of Sandy Weill was more challenging to the culture than divesting its group business. It still thrives.

    If the historical rap is true that insurance underwriting is just a feeder for investment income, it seems that the current medium term economic environment worldwide and healthcare reform in the US present earnings challenges to the insurance industry period: multi-line or not; P&C or LA&H. Break-up is an option; not necessarily a performance solution.

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