Wednesday, February 15, 2012

Paulson Does Some Agitating At Hartford Financial

After the close last night, Paulson & Co filed a 13D disclosing a presentation to the BOD and a letter sent to the CEO. The goal being for Hartford Financial (HIG) to begin the process of a spin-off of it's Property & Casualty business.

Simply Paulson believes that Hartford has an industry low valuation due to the combination of both the P&C and Life business lines that competitors all spun-off long ago. He makes a compelling pitch that the ultra low valuation for the company is based on the thesis that analysts just don't follow or understand it due to the combined business lines. A Travelers (TRV) that focuses on P&C or a Lincoln Financial (LNC) that focuses on Life have higher multiples since the analysts follow either business line, but not both.

Without doing all that research I could've told them that Hartford was incredibly cheap trading at close to 40% of book value. Paulson though has an army of analysts that did some incredible research.

Hopefully this agitating does some good for the cheap valuation. While Paulson may be the single largest shareholder, as seen below Hartford is possibly the most important stock owned in the Stone Fox Capital models. Not only does it remain one of the largest holdings in the Opportunistic Levered (Arbitrage) model, but it is also the only stock in all 3 main models. Falling not only under the opportunistically cheap mantra, but also large enough for the conservative Net Payout Yields model. See ownership details below via MarketPulse on Yahoo! Finance:


Stone Fox Capital


Stone Fox Capital holds an allocation of 4.0% in $HIG in his Opportunistic Arbitrage Long Only Investment Model
Stone Fox Capital holds an allocation of 9.7% in $HIG in his Opportunistic Arbitrage Investment Model
Stone Fox Capital holds an allocation of 2.8% in $HIG in his Net Payout Yields Investment Model


As an investor it is frustrating to think that our markets have gotten to the point that analyst coverage structure determines the valuation. It didn't seem that Hartford had an issue prior to the financial crisis so it might just be a new phenomenon that will work itself out. Or maybe Paulson is correct that this is ultimately the best option for the business.

Some interesting details from the letter to the CEO:


  • Sees valuation around $32 or 60% gain after the spin-off (actually seems drastically low considering the upper $40s book value)
  • Life valuation based on Lincoln Financial trading at only 60% of book value (again seems low especially considering LNC is a core holding based it being cheap). 
  • Managements fears on debt and leverage of the separated units is overblown. Company would be inline with peers and has numerous outlets for reducing debt if needed
  • Only 3 of 19 P&C analysts cover Hartford
  • Only 3 of the 15 Life analysts that cover Hartford cover its P&C peers
  • Almost all multi-line insurers other than Hartford have already separated

Now management really needs to bring to the table the benefits of being a multi-line insurer. The competition split already and the analysts follow them separately. It is definitely a crude way to decide a business plan, but absent any bonafide benefits than the split only makes sense. 

Or else management just isn't getting the message across since the financial crisis. It has to be one or the other and Paulson's story is very compelling. He also might highlight why nobody has made a run at it. The multi-line business isn't apparently desirable to the industry. Maybe split-up suitors would come knocking at these levels. 

Management fired back that they were willing to have discussions with Paulson & Co. Trading should be interesting tomorrow. If nothing else it will shed some light to the extremely low valuation of HIG. 


Disclosure: Long HIG, LNC, TRV. Please review the disclaimer page for more details. 


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