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John Paulson's Hartford Breakup Push Comes Up Short: Street Whispers

Updated to reflect Paulson & Co. comments.

NEW YORK ( TheStreet) -- For John Paulson, Thursday's "milestone" announcement that Hartford Financial Services (HIG - Get Report) will sell its individual life insurance business to Prudential (PRU - Get Report) is likely miles away from where the hedge fund magnate wants to be on the investment, which topped out at over $1 billion in early 2011.

Paulson & Co -- the hedge fund that made billions by shorting the U.S. subprime housing market -- is currently battling with Hartford to break the company up in an activist push that's so far done little to move shares. Now the question is whether the math standing behind Paulson's proposed break up will ever be borne out.

On Valentine's Day, Paulson pushed Hartford to consider breaking itself up in two parts, separating its underperforming life insurance businesses from a property and casualty unit Paulson argued was grossly undervalued. Paulson wrote in the scathing February letter to management that Hartford may be undervalued by 40% to 60% because of a deep undervaluation of the company's P&C business.

To meet breakup demands, Hartford's heeded Paulson's call in three separate asset sales. Well sort, of.

Instead of following through on a split of life insurance from P&C operations, Hartford sold off assets piecemeal, divesting its retirement business to Mass Mutual for $400 million earlier in September and selling its Woodbury Financial Services business to AIG (AIG - Get Report) for an undisclosed amount in late July. Thursday's individual life insurance sale to Prudential fetched The Hartford $605 million.

So far, Hartford's execution on Paulson's Valentine's Day breakup pitch hasn't netted much except heartbreak for the struggling hedge funder. Since Feb. 14, Hartford's shares have fallen below $20, keeping Paulson's current $600-million plus investment likely deep in the red.

"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," wrote Paulson in the February letter. He estimated that a spin would give the two separate companies a $32 a share value, a significant boost to share prices that hover near $20.

In response, Hartford outlined a radically different plan in March that left Paulson unimpressed. The company outlined the life insurance and financial service unit sales that it's executed on, while maintaining that its remaining life insurance unit meshes well with P&C. As of Thursday's sale, Hartford sees its divestitures as a milestone for the company.

"Today's announcement represents a significant milestone in the execution of The Hartford's strategy to deliver greater value to shareholders," Liam E. McGee, Hartford's chief executive, said in a statement. "In about six months, we have completed three agreements, all executed at attractive valuations to strong financial institutions that have a strategic interest in the businesses," he added, referring to a plan mapped out in mid-March.

The question is now if Paulson's math on the intrinsic value of a breakup will ever be tested along his lines.

"Hartford has made substantial progress in a short period of time to become a more focused property and casualty company, which we believe will have a positive impact on its valuation," said Paulson & Co. analyst Charles Murphy, in an email sent to TheStreet responding to Thursday's announcement.
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