Full letter from John Paulson to board, below and his valuation analysis after a spin-off of P&C division is embedded in scribd (Paulson believes that the company is trading at a 24% discount to liquidation value):
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1251 Avenue of the Americas 50th Floor New York, NY 10020 USA
February 14, 2012
Mr. Liam E. McGee
Chairman, President and Chief Executive Officer
The Hartford Financial Services Group, Inc.
One Hartford Plaza
Hartford, CT 06155
We appreciate the opportunity to have a dialogue with you on the significant benefits to be achieved through a tax-free spinoff of Hartford’s P&C business. As the largest investor in the Company for the past year, we have done exhaustive research on the challenges and opportunities of The Hartford and believe that a spinoff would produce an increase in value for Hartford shareholders of 40 – 60%+ above the unaffected share price. This valuation range is also consistent with Goldman Sachs’ estimate of a valuation enhancement on the order of 70%.
Stated simply, the spin-off would:
Create two pure play insurance companies – one in life and one in P&C – whose management is focused solely on each companies’ own strategies, distribution channels and capital requirements.
Enable each of the respective companies to achieve a multiple consistent with its industry, which, for the property casualty business, would mean a multiple of approximately 1.1x book value versus Hartford’s current multiple of 0.4x — the lowest of any major US insurance company.
Reduce complexity, which limits sell-side coverage and investor interest.
Given the extremely poor performance of Hartford’s stock and the fact that Hartford trades at lower valuation multiples than any of its US insurance peers, addressing these issues should be Hartford’s highest priority. That is why we were disappointed that management, on the February 8th earnings call, only addressed the potential “challenges” of a separation. Not only do we believe that you underestimate the potential value that would be created by a spin, the “challenges” you describe are both over-rated and readily manageable.
We shared our view regarding the benefits of a tax-free P&C spinoff initially in November 2011 and again in December 2011. As part of our analysis, we considered all other strategic alternatives including share buybacks, the sales of individual businesses, the sale or IPO of minority stakes in Life and/or P&C, and others, but none of these came close to the dramatic increase in shareholder value to be created by a spinoff. For your reference, we have updated and attached the slides we previously sent to your Board.
Significant Underperformance Could Be Reversed through Spinoff
Prior to the discussion of strategic alternatives on the February 8th earnings call, Hartford’s shares stood at 44% of book value – a huge discount to its closest P&C peers (1.1x on average) and closest Life peers (0.8x on average) and the lowest of any major US insurance company.
Investor dissatisfaction with Hartford’s current direction is reflected in your stock performance. Hartford’s share price fell by 38% in 2011 while P&C peers rose by 14%, and even declined more than Life peers which fell 23%.
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