In November 2011, two years into my work as CEO of The Hartford, we got a letter from Paulson & Company, the hedge fund run by John Paulson. With 9% of our shares, he had recently become our largest shareholder. At the time, The Hartford combined its traditional focus on property & casualty insurance with a large operation in variable annuities and other life insurance products. In the run-up to the 2008 financial crisis, the company had aggressively expanded into those annuities. While some other insurance companies’ stock had recovered much of their value, The Hartford’s stock was still trading at less than half of book.
Paulson advised us to spin off the life insurance side as a stand-alone company and focus on P&C. Given the challenges The Hartford continued to face, he must have had a pretty powerful argument for outsiders.
We thanked him, but said we were already working on a different plan to fix the business. Unimpressed, he joined the next quarterly earnings call, in February 2012, and excoriated us to do something drastic and soon.
Still, we stuck to our guns and continued with our work. Soon we announced a somewhat different strategy, to sell our individual life insurance and retirement businesses piecemeal and put the annuities into runoff. Paulson said that wasn’t good enough, that his plan was still better. But as we sold off the businesses to strategic buyers at a good price, bringing in substantial free capital, he came around. When I retired in June 2014, he issued a statement praising me for leading a “generational transformation of The Hartford.”
We understood where Paulson was coming from
When a prominent investor like Paulson sends you a letter, it stirs you into action. We knew that we had to intensify our existing strategy work. But we didn’t circle the wagons as I’ve seen a lot of companies do. We didn’t treat the attack as a battle where there was going to be a winner and a loser, even after that harsh earnings call. The Wall Street Journal ran a front-page article with scowling mug shots of Paulson and me facing off, but I didn’t take the bait. It helped that I got started in financial services working with the apparel industry, so I was used to being screamed at. I had already been called every name in the book.
I realized early enough that it wasn’t personal—these business standoffs rarely are. It wasn’t even about The Hartford. Hedge funds are pretty blunt instruments. They see arbitrage opportunities and make big bets, and often don’t fully understand the complexities of your company. Paulson had a macro bet in early 2010 that the economy would recover, and The Hartford was a big way to leverage that bet—we had so far to go up. But his macro bet wasn’t paying off by late 2011, so he was doing what he could to recover. He just wanted to get a return on his investment.
Some companies engage the media to defend their position, but we chose not to. We just worked behind the scenes with Paulson and others, especially the sell-side analysts. Most of them agreed that something had to happen at The Hartford, but didn’t think Paulson’s idea would work.
Fortunately the institutional investors didn’t rally to Paulson either. Partly that was because, in 2012, most were still hesitant to align with an activist. Big investors are now much more willing to join an attack, so staying professional in these situations is all the more important. We also kept abreast of things: if Paulson’s team was calling a major investor of ours, we knew about it.
We made sure we did our homework
It helped a lot that we had already started working on the very problem that Paulson addressed. He was right about a lot of his analysis, especially the diagnosis. But we had already gone past that with our plan. So we weren’t stuck comparing his proposal to the status quo.
Hedge funds and private equity managers have a straightforward approach in coming up with their proposals. They start from the bottom up and question everything. They have to do that to maximize value. But if they can do it, so can the companies themselves.
Hedge funds have the most success with managements that have stopped looking at their companies with the eyes of dispassionate stakeholders. They focus on situations where the market is undervaluing an aspect of the business and management is doing nothing about it.
for them to build relationships with
We relied mainly on our own instincts
As for the outside advisors helping us with Paulson, they gave us good advice. But I learned that most of the “experts” really don’t know as much as you might think. They can tell you things you kind of already know if you read The Wall Street Journal. They can ask useful questions about the work you’re doing, and they can validate your plan of action. They also have their ear to the ground so they can alert you to new developments. But not much more.
With all corporate advisors, especially ones from large financial firms involved in many sides of a particular trade, you also have to keep in mind that they’re always looking ahead. They’re trying to avoid stands that make it harder for them to build relationships with other companies. They want to help you, but they don’t want to get too far out because somebody might lose some revenue. So if you let their ideas get into your head, you can end up more confused than before you talked to them.
Ironically, a sell-side analyst with our advisors’ firm actually came out with a report saying Paulson had a good plan for The Hartford. He had relied too much on the information that Paulson fed him. Our advisors were embarrassed; they claimed they had no idea because there’s a Chinese wall between the two parts of the company. But the experience just shows you how the game is played.
Instead of relying heavily on advisors, we trusted our own instincts. I pushed our team to test out the different scenarios, our current plan versus Paulson’s, not just share price but how you could divide the capital, debt and liabilities. And under those scenarios, it simply wasn’t attractive.
We drew on a strong relationship with the board
The Paulson attack could easily have split the board apart and led to my firing. That happens more times than not. Of course our board was feeling some pressure. But if you have a strong board, you can overcome the pressure and stay focused on the company’s interests.
Some of that strength came from having a couple of directors with real market savvy. They were demanding on the analysis, but they were also calm. They had been through similar ordeals in their careers.
But a big part of our strength came from all the work that the board and I had done to build trust. By 2012, we had enough respect for each other that Paulson wasn’t able to exploit existing grievances. We stayed unified.
It helped that I didn’t see the board as something to be managed or controlled. They weren’t a threat or a burden to me, but something I wanted, even needed, to help me run the company better. I had joined the company to turn it around from its near death in 2008. But rather than go over how The Hartford had got into this mess, I focused on stabilizing and strengthening the company. I was transparent about my intentions and educated the board as to how things were going now. I just had faith that things would work out okay in the end.
Then when the Paulson attack came, I encouraged further trust by not getting defensive. I didn’t change how I related to them. We were under a lot of pressure, but I didn’t go home each night wondering if a director would try to fire me. I worried about lots of things, but not that. So I could keep relating to the board in an upfront way, and that built trust further. I continued to be transparent with them, even if it showed some vulnerability on my part. The board pushed back at times when they didn’t agree with me on an issue. But what could have split us apart ended up accelerating our gelling into a team.
We took the attack seriously…
Paulson was a major owner, so we had to take his proposal seriously regardless of the merits. As I told the board, every shareholder has a right to their view, so we won’t get defensive. Good things can come from shareholders’ perspective. In the height of the attack, I was calling Paulson almost weekly with updates.
A management team, when presented an idea from an activist, can’t just presume it is a bad idea or approach it from their own biases. They have to keep working it to be sure that they’re right, because most activists put a lot of work into their proposal. You need to treat it with that kind of respect.
Right off the bat, we had a strong reason for doubting his proposal. Even if the spinoff had made business sense, our insurance regulator never would have allowed it. The plan would have put too much risk on the policyholders. But we couldn’t speak for the regulator, so we had to focus on the business rationale.
I literally sent our executives back three or four times on the Paulson approach and said “Make it work.” Emotionally and intellectually I didn’t want it to work—the difficulty of ever executing that plan made it a path I didn’t want to go down. But if it could create value, we had an obligation to shareholders to seriously consider and perhaps pursue it.
I couldn’t go out publicly and say this isn’t going to work unless I was completely confident. Paulson was such a successful investor, and things had gotten so public with him and us, that for me to have any credibility in opposing him, we had to be right based on facts for shareholders.
… but we also leveraged it
We certainly didn’t want to be attacked. But it was serendipitous: it gave us cover to pursue what we were going to do anyway. People weren’t happy about the new direction, so the attack helped us move to some painful changes in the organization. We would have had a tougher time executing our strategy without it, and it would have taken a few months longer. That, in turn, would have put off our selling of the three life businesses, and we might have missed the opportunity to sell them at a good price to strategic buyers. Paulson indirectly did us a favor.
Still, it looked to many people, inside and outside the company, that we were forced into the changes. That rubbed me the wrong way. I eventually got over that because we stood our ground, we did something on our terms, and it worked.
As a retired CEO, I think a lot about legacies. Sometimes your achievements are positive ones, where you make something happen that wouldn’t have happened otherwise. But other legacies have to do with preventing something bad from occurring. If we’d handled the Paulson attack differently—whether we knuckled under or fought him hard, the situation could have gotten much worse. Forget about losing my job—the company would have lost valuable time in moving to a new strategy. The Hartford wouldn’t be nearly as strong as it is now. We kept this 200-year-old institution going. It’s now in a position to add more value for society in years to come.