The 112-year-old Hartford is essentially a two-sided insurer: life, and property casualty. Before the recession, each side contributed about equally to its profits. But now, property casualty has outpaced life by a country mile, and Paulson says the whole thing has gotten too complex for Wall Street analysts to understand. Spinning off its "best-in-class" property side would allow investors to value it properly.
Paulson, who owns 8.5% of Hartford's common, fired the opening shot with an SEC filing on February 14. Hartford made a peace offering on March 21, but it wasn't what Paulson wanted. The insurer would sell or spin off money-losing pieces, such as its annuities and brokerage unit, and look for ways to exit its individual life business. But Hartford wouldn't touch its property unit.
Both sides have flawed logic -- and flawed personalities. Paulson is a hedge fund manager with close ties to investment bankers such as Goldman Sachs (NYSE: GS), which, along with other Wall Street firms, make obscene amounts of money from mergers and breakups like the one he's proposing. It's not surprising that Paulson would seek a Wall Street solution to his Hartford investment: break up the company rather than fix it.
Paulson "made his bones" as an investor when he bet against the mortgage market in 2007, but hasn't been lucky as of late. Some of his funds were off by as much as 50% in 2011, and according to AR Magazine, he lost $3 billion. This could be one reason why he's so eager to recoup money from his investment in Hartford. Forbes magazine reports that he's trying to emulate raptor investors like Carl Icahn by taking a stake in a down-at-the-heels company, forcing it to spin or sell off assets, and then making quick profits. Thus far, however, he lacks Icahn's willingness to go for the jugular and fight for seats on the board.
Hartford's counter strategy of amputating the weak parts to turn itself into a property insurer isn't smart either. Its plan to sell off its money-losing annuities unit has drawn fire from Connecticut Insurance Commissioner Thomas Leonardi, who warned the Connecticut-based Hartford that even if it sells its annuities unit, it will still have to pay off the people who purchased those contracts for years to come.
According to Credit Suisse (NYSE: CS), Hartford's fire sale could free up $4 billion of capital, even though it isn't desperate for money, having just bought back $2.4 billion of debt from Allianz (NYSE: AZ). A logical supposition is that Hartford will do what insurers usually do when they have free cash: buy back shares. And from whom will it buy them? How about from Paulson, as a way to get him out of its business?
The truth is that many insurers, MetLife (NYSE: MET) and State Farm among them, have two-sided houses and do quite well, probably because they didn't sell variable annuities that made huge bets on the stock market the way Hartford did. These successful insurers say one side of the business sells to the other. In other words, people who buy property insurance to protect their homes from fire will also buy term life insurance to pay the mortgage in case of death.
But Hartford's biggest problem may be its lack of leadership. CEO Liam McGee is a former Bank of America (NYSE: BAC) non-insurance guy who says he was considering all this as early as last summer, but didn't get around to it until Paulson held his feet to the fire. Clearly, he is not as tough as Robert Benmosche, who resurrected AIG (NYSE: AIG) from a worse crisis than this. And Benmosche did it while keeping his company, except for a few foreign pieces, together.
Does the Hartford have some real flaw on it's books, or is this just a crisis created by their lead investor---simply to make the insurer's operations easier to understand for the Street?
Paulson definitely hasn't been impressive recently. In fact he hasn't done much of anything -- and he had a terrible 2011. It will be interesting to see how this unfolds, but is this even a big enough deal to staunch the bleeding in Paulson's funds?
Paulson says the whole thing has gotten too complex for Wall Street analysts to understand
It's a 100+ year old company with two parts. One doing well and one not so well. They've had these same two parts for ages. Competitors have these same two parts because there is some opportuntity for cross-selling.
No, this isn't "too complex" for analysts to understand.
I don't know enough about the situation but maybe there is more to it than that? In one of Joel Greenblatt's classic investment books, "You Can Be a Stock Market Genius," he talks about how much value can be added via company breakups and spinoffs. This may be what Paulson is after here.
Do you think there might be any value to a breakup at all? Often when you break up companies into parts that make more logical sense, you structure them for more growth and unlock value.
@Scott, I know that's the theory. But we've seen a lot of breakups in the past year, especially among energy companies (ie Marathon) And I'm starting to wonder if the underlying motivation has less to do with value than limiting liability.
Say an oil and gas company has a catastrophic accident. Are they just being prudent to separate their upstream and downstream operations -- to protect the assets in the event of lawsuits?
I knew previous leadership quite well (Ramani Ayer) and he was a believer in cross-selling. Don't know McGee at all, other than that he was a Bank of America guy with no industry background who'd had both successes - and failures - in his previous jobs.
Regarding the merger/breakup controversy, opinions may be mixed, but the Wall Street Journal did a Pulitzer-Prize winning story on how they devastate the workforce. Hartford is getting rid of its brokerage unit. I know brokers. Do you think they are out there now trying to sell Hartford products, or segueing into a new job?
I'm guessing we should put this in the failure category.
At Bank of America, McGee oversaw an effort to boost credit-card lending after the 2006 acquisition of MBNA Corp. That responsibility was removed in 2008, when card oversight was handed to Bruce Hammonds. The bank now has the largest percentage of defaults among big U.S. credit-card lenders.
@Ed, what's your speculation on a possible change of leadership at the company? Are the issues being inflamed by what you describe as the current weakness at the top?
Seriously, car insurance takes some finesse. I've had State Farm, Progressive, Chubb, (that I can recall) before switching to Geico. (I sound like a commercial)
Depending on the make, model and age of the car, you can sometimes be better off putting the vehicle in the name of the teen driver -- and getting the kid his own policy completely. That was a good strategy when I forced my oldest to drive a 93 conversion van for her first full year of driving (the car was worth very little, so it didn't cost that much to insure and in NYS at the time, it worked out better with a separate policy.)
Later, I tried Chubb because I have a historic home and needed Chubb's overpriced home insurance (which I have since replaced with Ace) and added on the cars for an alleged discount. Chubb offers one advantage: You can base the insurance on an agreed value, so if your car is totalled, you will get that agreed amount. But I thought the customer service was mediocre at best when I had an accident.
Geico has actually been really good: cost effective and good customer service through multiple accidents. Just remember you have the right to go to the auto body shop of your choice (no matter what insurance company you have) and you can push for OEM parts (as opposed to aftermarket parts that just meet OEM standards).
So my bottom line: Shop your policy once a year to see if another company offers better rates, Give Geico a try --and since you are in Ohio, also price Erie, which operates in 11 states and the District of Columbia -- and be aggressive in 1) fighting tickets and 2) shifting liability to the other driver(s) when you have accidents.
I can give you lots of tips about those last two!!
What a great idea! I never thought of shifting the car and the teen to their own, separate policy. With that, I'm sure I'll have some options that will save money. And it doesn't hurt that a stand-alone policy would help show certain teens the real cost of seemingly small mistakes.
BTW, I'm in Texas, not Ohio. Maybe you're thinking of TelecomFreq? Anyway, thanks.
But that raises an even more interesting question. How are you getting speeding tickets in Texas? The last time I drove from Midland to Seminole, the speed limit was like 90 MPH! Even I had a hard time exceeding that.
Good question. I guess we have some special skills.
You know, there was a time when Montana didn't even have any speed limits on their highways. But you could still get a ticket - it was based on the subjective judgement of the police officer. 'Reckless' or 'too fast for conditions'.
Well, I say drive a black sedan. That has reduced my teen ticket issue.
Urban legends website snopes.com claims there is no evidence to support the theory that some cars get more tickets than others and police and insurance companies deny any link between car color and tickets. But I can tell you from experience that a red MINI and a red Mercedes coupe both get more attention and more tickets than a black Ford Focus.
@Noreen, great tips about car insurance. As a shareholder of Berkshire, I shall consider switching my car insurance to Geico. The only problem is that Geico doesn't offer home insurance. I hate to manage separate accounts - Now you see while Hartford pushed so hard on cross-selling, it not only generates more revenue, but also locks the customers down.
Value Hiker, You'll have to check the situation in your state. But in NYS, Geico . has partnered with Homesite Insurance Group to provide homeowners insurance products. You can buy it through the Geico site, and get a discount on your auto policy as a bonus.
I don't have it on my house, only because, as I mentioned earlier, my house was built in 1875 and I wanted specialty coverage that will enable me to rebuild to historic specs in the event of a loss (ie plaster walls, carved mantels, inlaid wood flooring, etc -- my house is worth more dead than alive) Anyway, I did buy renter's insurance on the apartment my daughter rented while she was in college, and that $120 a year policy was enough to qualified me for a discount on my auto discount.
Also, Geico offers discounts for a host of alumi and other organizations, including Mensa -- which I bet anyone on this site is smart enough to qualify to become a member.
I just read USAA Investment Management hired Keith Sloane, former head of the Hartford mutual funds, as head of third-party distribution. It is a newly created role to help USAA expand its presence with advisers and third-party platforms, the company said in a release.
So Paulson started buying Hartford shares in the third quarter of 2009 as investment declines and annuity slumps were pushing the company to its fifth consecutive net loss. Then in 2011 Paulson's Advantage Plus Fund loses 51 percent , and the firm blames financial services companies like Hartford.
Seems to me like Paulson made dumb bet on a quick recovery by Hartford, and when that failed, he paniked and tried to make it Hartford's problem.
The blogs and comments posted on Investor Uprising do not reflect the views of Investor Uprising, PRNewswire, or its sponsors. Investor Uprising, PRNewswire, and its sponsors do not assume responsibility for any comments, claims, or opinions made by authors and bloggers. They are no substitute for your own research and should not be relied upon for trading or any other purpose.
Native Americans on reservations live by different, and more liberal rules than the rest of us. You can't sue a Native American business -- but they can sue you.
To save this item to your list of favorite Investor Uprising content so you can find it later in your Profile page, click the "Save It" button next to the item.
If you found this interesting or useful, please use the links to the services below to share it with other readers. You will need a free account with each service to share an item via that service.
Tweet This