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) will sell its individual life insurance business to Prudential ( PRU) 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) 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.

For Paulson, a so far pyrrhic victory on a breakup of Hartford - the hedge fund's fifth largest holding according the a June 30 filing with the Securities and Exchange Commission - underscores a rough string of post-crisis investments.

Earlier in September, Bloomberg reported a 11% jump in Paulson's Gold Fund in August only helped to pare fund losses to 15% for the year, as gains in the hedge fund's flagship Advantage Fund and Enhanced fund also simply cut at year-to-date losses. At the start of August, Bloomberg pegged overall fund losses at roughly 20%, adding to 2011 losses in the neighborhood of 50%.

In addition to a rally in gold prices in the past two months, Paulson's also benefitted from non-activist investments that may be closer to the hedge funder's specialty.

By deferring to his roots in merger arbitrage -- the art of guessing which companies will be taken over - Paulson's likely found his biggest successes of the year. Three of Paulson's investments, a stake in engineering specialist Cooper Industries and increased positions in Quest Software and Gaylord Entertainment -- the owner of the Grand Ole Opry in Nashville -- were M&A targets in the second quarter.

Still, with respect to Hartford, there's reason for Paulson to remain cautiously optimistic. When Hartford unveiled it asset sale plans, Wells Fargo analyst John Hall noted that the plan could be a first step in an eventual split as Paulson outlined. "While these actions fall short of a full split of the company's non-life and life operations, we think they will position the Hartford to better pursue a split in the future," wrote Hall on Mar. 21. On Friday, Hall upgraded Prudential shares to buy, while cutting The Hartford from market perform to sell.

For more on Paulson & Co's investment battles in 2012, see why the fund is getting burned in offshore insurance.

>>View John Paulson's Portfolio

TheStreet Ratings gives Hartford Financial Services Group a C- grade .

-- Written by Antoine Gara in New York