Jump to content

Paulson files 13D on HIG


Recommended Posts

  • 1 month later...



After resisting its largest shareholder, John Paulson’s incessant pressure for almost two months, Hartford Financial Services Group Inc. (HIG) finally gave in to the demands of segregating its life insurance and property and casualty (P&C) businesses on Wednesday. Consequently, the company is on the lookout for suitable divestiture opportunities for its Individual Life and Retirement Plans segments along with Woodbury Financial Services. Woodbury is an indirectly-held, wholly-owned retail broker-dealer subsidiary, included in the Individual Life segment’s distribution network. Hartford has hired The Goldman Sachs Group Inc. (GS) and Greenhill & Co. Inc. (GHL) as financial advisors for the same but expects the divestitures to take about two years.
Link to comment
Share on other sites

  • 3 weeks later...

I've done a little bit of research on The Hartford now that they've responded to Paulson's demands.


Share Price: $21.04

Book Value: $41.72*


* (excluding AOCI and after the new DAC adjustment)


Warrant Price: $13.26

Exercise Price: $9.56**


** (after adjustments to warrant price and share amounts from dividends)


At the current share/warrant price, you're borrowing $9.56 per share at an effective interest rate of around 2.77% for ~ 45% leverage.  That seems to be a pretty decent deal if you believe that The Hartford will at some point be able to trade at or above its book value.


It seems like The Hartford got into trouble during The Crisis when they started chasing after variable annuities business by offering successively higher guarantees to customers.  When the crisis hit, they were required to bolster their reserves as their investments took a hit and that caused the company to seek out TARP funds.  Since then, it seems like the entire management team has been turned over with Liam McGhee leading the restructuring effort. 


From what I can tell, it seems like their reserving practices (in P&C) have gotten a bit better over the last few years.  One possibility is that they've gotten much better on short-tail reserving than in the past.  Another possibility that I found mentioned in an old VIC writeup is that abnormally high losses from 2001 & 2005 caused P&C insurers, including The Hartford, to model higher losses than necessary going forward, which is why post-2006, we can see redundancies falling through.  I'm uncertain whether either of these narratives are true, but they're interesting to ponder nonetheless.


A few open thoughts that I have right now:


(1) They made a big hullabaloo about how they're putting the Individual Annuity business into runoff, and if you read between the lines, it seems to indicate that there's no buyer for the annuities business.  (I believe in one of the conference call transcripts I read/heard, Liam or Chris Swift says that it's not a good time to explore alternatives for the VA business but leaves open the possibility that they might explore alternatives in the future...)  They've attempted to hedge against their VA liabilities, but I'm worried whether or not they've done a good enough job there...  This could very well be hindsight bias on my part though (thinking annuities will get them in trouble because it has gotten them in trouble before...)


(2) Maybe I've been primed to think about things this way because I read the Paulson 13D before I began my research, but, for the life of me, I can't imagine why The Hartford believes that they need to have a Mutual Fund underneath the same roof as their P&C insurance operations.  The cynic in me starts to wonder as to whether Liam has an empire building mentality...


(3) If you'll notice their wording w/ the press release, they've only stated definitively that they're putting the annuities business into runoff.  They haven't said specifically what they'll do with the Individual Life, Woodbury Financial Services and Retirement Plans businesses -- only that they'll "divest" those businesses.  This leaves open the possibility of a spinoff.


(4) When you combine (1) and (3), I can't fathom why they wouldn't just take Paulson's plan to spin off the Life business (including annuities) and fund the debt differential needs by selling the Mutual Funds (my guess is that $1.5 to $1.7 billion is definitely achievable) and the Group Benefits business (for roughly $1.5 billion) -- thus adding to the holding company cash they carry and giving them flexibility to deal with their $6.2 billion of debt in a way that makes a spinoff possible.  (The 10-K also mentions that they expect to be able to dividend $800 million up from the P&C subsidiaries in 2012, which provides even more flexibility.)


(5) Still have to look at the Asbestos liabilities...


Anyone else have thoughts on The Hartford?

Link to comment
Share on other sites

What’s interesting in Japan is that every life insurance company is essentially insolvent because they promised to pay 3%. Who’d have thought that this could lead to insolvency, but interest rates went to zero and stayed there for years. They tried to invest in equities, but got negative returns. Can you imagine 13 years with negative equity returns and interest rates below 1%? - Munger


Thanks for throwing the hat in the ring Merkhet. I did look at HIG at the end of last year but passed. I did not feel I understood enough to handicap the VA guarantees and specifically Japan. Also compared to AIG it seemed much more complex to analyze (imagine that). If someone could help in analyzing the guarantees it might be be interesting. Their P&C business has a good COR in a depressed environment.


The other thing that put them in trouble in 2008 was an aggressive investment port full of 3 and 4 letter abbreviations. It seems to be performing OK.


Regarding the whole spinoff thing, it may simplify the business but it looks like Mutual Fund is doing more than OK and provides a stable cash flow source for tough hits in the insurance business ... so why sell it. Just to provide a ST multiple expansion?



Investor Day Presentation



Investment Port pages 13-  22

VA, Guarantees and Japan 35 - 54


Link to comment
Share on other sites

Paulson's letter regarding the restructuring plan. I think he is being too ST focused.


We support today's actions, not as a conclusion of the strategic review, but as a first step in creating a clear delineation between The Hartford's P&C and non-P&C businesses.


We are pleased that The Hartford is taking steps to focus on core operations and to divest or discontinue non-core and capital intensive businesses.  We believe that putting the variable annuity business in runoff and selling the non-core individual life, retirement plans and broker dealer businesses will raise cash, free up capital, permit deleveraging and increase its financial flexibility.  Successful execution of these plans will strengthen the Company's ability to separate the P&C and non-P&C businesses in the future, which we continue to believe would create the greatest short-term and long-term shareholder value and strengthen the company.


While we appreciate the extensive work of The Hartford's board and management, we do not believe the positive actions announced today address the main problem with The Hartford's undervaluation:  the lack of interest from P&C analysts and P&C investors in The Hartford's best-in-class P&C business due to its affiliation with unrelated, low-return and complex businesses.  We do not believe today's actions will materially increase P&C investor interest in The Hartford.


Link to comment
Share on other sites



Hartford Financial Services Group Inc. HIG -2.99% agreed to pay $2.43 billion to buy back securities it sold to Allianz ALV.XE -0.45% SE in the depths of the financial crisis.


The agreement allows Hartford to replace $1.75 billion of debt it owes to Allianz—which was yielding the German insurer 10% a year—with new debt at a lower cost. A number of insurance analysts predicted Monday that Hartford could save $40 million to $75 million in interest expenses annually.

Hartford will also pay Allianz $300 million to buy back warrants that entitled the German insurer to purchase 69.4 million shares of Hartford's stock for $25.32 each. Hartford's stock rose 4.1% to $21.95.


The agreement leaves Allianz with about 5% of Hartford's outstanding shares, but otherwise closes the book on an October 2008 investment that helped shore up Hartford's balance sheet when capital markets were frozen and investors were beginning to question the company's ability to survive the financial crisis. Hartford later needed a $3.4 billion bailout from the U.S. government, which it repaid in 2010.


An Allianz spokesman said Allianz's average return on the Hartford investment had been 15% annually. The agreement disclosed Monday frees up about €1.5 billion ($2 billion) in capital that Allianz, Europe's largest insurer by premium income and market capitalization, had to set aside for the investment, which could be used for other things.


The transaction should also ease market speculation that Allianz was interested in buying Hartford outright. Such rumors regularly surfaced in Europe even though Allianz executives had repeatedly said they considered the Hartford stake to be a financial investment, rather than a strategic one. Allianz also owns Pacific Investment Management Co., or Pimco, and Fireman's Fund, an insurance and risk-management company.

Link to comment
Share on other sites

For those that are in the camp that the Japanese Yen will weaken at some point, HIG+ appears to be a logical (and cheap) choice.  If the Yen weakens as much as some folks are predicting, then the annuity issue that is a big concern today should slowly disappear.  Reminds me of the Brouhaha of Fairfax's recoverables concern.  Of course if the Yen strengthens, the problem gets worse.


In all, given a possible semi-hard market coming (or is here already) should bode well to steady the ship.  Toss in a weakening Yen, the Nikkei will rally and the annuity issue goes to the back burner.





Link to comment
Share on other sites

  • 3 weeks later...

Part of history of HIG current troubles




This is all well and good, but now the management of Hartford has taken an action that demonstrates clearly that they are still more than capable of taking actions that are not in the best interests of the company.


According to InvestmentNews.com (9/1/10 & 9/3/10) Hartford on August 23 sent a letter to customers who had purchased the older variable annuities – the ones with the high guarantees. The letter offered the policyholder a “Personal Retirement Manager Exchange Program Opportunity” (some bureaucrat won bonus points for that title) that would “allow” them to trade their old contracts for the newly priced variable annuity.


Obviously Hartford management has good reason to try to get out from under these older policies that clearly benefited the customer rather than the company. But clearly they are being (to be nice) less than transparent with the customers. While the letter says the new products offer “new features,” it is silent as to what those features might be. And, there is no warning to the policyholders as to the benefits and guarantees they will be forfeiting. This is akin to a bank offering you a new credit card with “new features” which turn out to be higher interest and fees for the bank. To say that this approach taken by Hartford management designed to rid themselves of these customer friendly policies is patently unethical is clearly understatement.


To compound their wooden-headedness, this letter was sent to policyholders without informing the agents who sold the policies, until after it had been sent. The objective was obvious: management wanted to circumvent the distribution system and go directly to the policyholder with this “offer.” The Hartford was rightly concerned that the agents would explain to their clients that the “offer” being made by Hartford was not in their best interests and encourage them to ignore it.


What makes the action of Hartford management so dim-witted was their apparent belief that they could accomplish this clumsy sleight-of-hand without the policyholders or the agents getting wind of it and react negatively toward the company. It was another of Hartford’s clumsy actions clearly counterproductive to its own interests. Or to use Tuchman’s poetry: “acting according to wish . . . not facts.”


Link to comment
Share on other sites

  • 3 weeks later...

The warrants (HIG+) appear to be the most mis-priced large cap opportunity around at these prices.  They do not expire for 7 more years and they are in the money with the reduced strike feature like the BAC warrants.  The only downside would seem that it goes belly up.  Otherwise, heads you win, tails you do not lose much.






Disclosure: Long HIG+

Link to comment
Share on other sites

Here is the Paulson's 13D including a presentation http://www.sec.gov/Archives/edgar/data/874766/000119312512061267/d301791dsc13d.htm


Statutory reports: http://ir.thehartford.com/statutory.cfm


Also re-read the TARP warrants prospectus and it seems to me it is very similar to BAC's including the adjustment of both strike price and number of warrants. Has anyone found any differences?





Link to comment
Share on other sites

  • 2 weeks later...
  • 1 month later...
  • 3 weeks later...

Well, this is a bigger deal for HIG than AIG so that is why I put it here. "Modest gain" means close to book value?


AIG to Acquire Woodbury Financial Services from The Hartford



The transaction is expected to generate a modest gain for The Hartford and have no material impact to The Hartford’s 2013 earnings. The agreement is expected to close by the end of 2012, subject to regulatory approval and other customary closing conditions.




Woodbury Financial seen as cheap addition to AIG's broker/dealer biz



That the insurer is involved in the bidding for Woodbury Financial comes as a bit of a surprise. While SunAmerica President and CEO Jay Wintrob said in March that the company might look at the businesses that The Hartford put up for sale, he referred specifically to the company's individual life and variable annuity operations, not its broker/dealer.


"I guess The Hartford now has put up for sale or announced their individual life, variable annuity businesses," he said at a conference, according to a transcript. "There is no reason we can't look at that."


But Woodbury Financial would nevertheless fit easily with its existing operations, analysts said. AIG could bring the firm under the umbrella of AIG Advisor Group Inc., which already houses three other broker/dealers. There, it would add substantially to the group's assets under management and its headcount and overall capabilities.


Woodbury Financial had approximately $1.6 billion in assets under management at the end of 2011, according to its most recent filing. AIG Advisor Group's three broker/dealers — SagePoint Financial Inc., FSC Securities Corp. and Royal Alliance Associates Inc. — had about $7.67 billion of combined AUM as of Dec. 31, 2011.


"They would presumably be able to roll the proprietary products that are sold today, which are Hartford products, over to SunAmerica products," Sanford C. Bernstein analyst Josh Stirling told SNL. "There's also some combination of the two platforms, technology and back office, which naturally leads to greater scale and cost savings. I think it sounds like a logical, tactical sort of thing to do."


Adding those resources through Woodbury Financial would likely come cheap, he added. The Hartford committed to selling the broker/dealer in March as part of its companywide restructuring. It set a six-month timetable, giving it until September to settle on a buyer. That type of a public auction, combined with the urgency of a tight deadline, means that The Hartford will likely have to settle for selling the business at a lower-than-normal price.


"I wouldn't call it a fire sale," Drexel Hamilton LLC analyst Gloria Vogel told SNL. "Having said that, I would think that the speed with which they would want to do a transaction would dictate that they would need to keep it attractively priced."


She declined to put a value on Woodbury Financial, but Credit Suisse analyst Thomas Gallagher estimated in a March note that the firm might fetch $250 million to $300 million. Woodbury Financial in 2011 generated $253.7 million in product revenues but ended the year at a net loss of $18,378.


Although growing SunAmerica lags far behind AIG's main priorities of escaping government control and improving unit Chartis Inc., some suggested that acquiring another broker/dealer could be aimed at repositioning the company as a larger player in the annuities market over the long term. AIG and SunAmerica did not suffer from the sector's downturn in the same way that others did during the financial crisis, Stirling said, and there is an opportunity now to grab market share just as companies such as The Hartford are shrinking their presence. Although the annuity business' prospects are dim, investing shrewdly now could end up paying off down the line.



"I think their preference would be to buy back stock from the Treasury to reduce the overhang," Vogel said. "But if they thought there was the potential to get some accretion from some kind of transaction, I think they would pursue it."


Link to comment
Share on other sites

Minuscule transaction, but the business did not have scale and actually I think I read they were losing money. Since it is a business that doesn't need much capital I suppose it was easy to show a profit selling a little above book. AIG can plug and play this with a lower overhead.


AIG Buying Hartford Financial Group Brokerage Unit



AIG will pay up to $90 million for Woodbury Financial Services, an independent broker-dealer based in Minnesota with some 1,400 financial advisers. The acquisition is the first since the financial crisis for AIG's domestic life and retirement services division, currently known as SunAmerica Financial Group.


Hartford will also receive a $25 million dividend from the Woodbury unit, bringing its proceeds to as much as $115 million when the deal closes later this year, said Hartford Chief Executive Liam McGee.


The transaction is one of several planned transactions announced in March by Hartford as part of a decision to focus on its property-casualty insurance, group-benefits and mutual-funds businesses. The sale of Woodbury is expected to generate a modest gain for Hartford and won't have a material impact on its 2013 earnings, Hartford said. Mr. McGee said the sales process for the company's life-insurance and retirement-plans businesses are proceeding as expected.

Link to comment
Share on other sites

I found in Twitter this presentation about The Hartford. I wish they've dug deeper into guarantees and equity exposure but I think they are very right about the strength of the P&C divisions. Also misses an analysis of the investment portfolio, leverage, interlocking subs, and risk-based capital.



Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
  • Create New...