MetLife, the biggest U.S. life insurer, trades at about 0.7 times its book value. New York-based Travelers trades at about the value of its net assets.
"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," Paulson said in a letter to McGee published in a statement Feb. 14. "Hartford trades at lower valuation multiples than any of its U.S. insurance peers. Addressing these issues should be Hartford's highest priority."
Paulson's estimate of $32 a share assumes that the property-casualty business can command a valuation of about 1.1 times its shareholder equity and that the life unit would trade at 0.6 times its book value after a breakup, the filing showed.
Hartford said it has $6.8 billion of debt at the holding company that, in the event of a split, would have to be passed to the operating units. The life insurance subsidiaries have "limited capacity to generate statutory earnings" and can assume no more than a third of that debt, it said.
$2 Billion Bet
Paulson, who spent $2 billion buying credit-default swaps on subprime mortgages in 2007 before the housing market collapsed in a trade that helped him become a billionaire, recommended 11 steps to help Hartford pay its debt.
He said Hartford could suspend share buybacks and that profit in coming quarters would ease the burden. The company could also stop selling new products at the U.S. variable annuities division to conserve capital and find buyers for its mutual-fund and group-benefits businesses, Paulson said.
McGee told Paulson on Feb. 8 that a separation probably wouldn't "create shareholder value," and the company cited credit ratings and the need for regulatory approvals among the challenges in a slide presentation the same day.
"Management didn't just brush this off, and they're not opposed to it -- it's just they can't do it," Robert Glasspiegel, an analyst at Langen McAlenney, a division of Janney Capital Markets in Hartford, said in a telephone interview. "I understand the logic. But I just don't see how you could execute it. It's not feasible."
Gary Ransom, an analyst at Dowling & Partners in Farmington, Connecticut, said in a report to clients that Hartford's life business isn't profitable enough to service more than a third of the company's debt, which has increased almost 50 percent since 2007.
That means its property-casualty unit, if it was spun off, wouldn't be able to shoulder the remaining liabilities and maintain its credit rating without raising more money, he said.