The Hartford 2008 Annual Report Download - page 469

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. Investment by Allianz SE in The Hartford
On October 17, 2008, the Company entered into an Investment Agreement (the “Investment Agreement”), with Allianz SE
(“Allianz”) under which, among other things, the Company agreed to issue and sell in a private placement to Allianz for
aggregate cash consideration of $2.5 billion: (i) $1.75 billion of the Company’s 10% Fixed-to-Floating Rate Junior
Subordinated Debentures due 2068 (the “Debentures”); (ii) 6,048,387 shares of the Company’s Series D Non-Voting
Contingent Convertible Preferred Stock (the “Series D Preferred Stock”), initially convertible (as discussed below) into
24,193,548 shares of the Company’s common stock at an issue price of $31.00 per share, resulting in proceeds of $750; and
(iii) warrants (the “Warrants”) to purchase the Company’s Series B Non-Voting Contingent Convertible Preferred Stock (the
“Series B Preferred Stock”) and Series C Non-Voting Contingent Convertible Preferred Stock (the “Series C Preferred
Stock” and, together with the Series B Preferred Stock and the Series D Preferred Stock, the “Preferred Stock”) structured to
entitle Allianz, upon receipt of necessary approvals, to purchase 69,115,324 shares of common stock at an initial exercise
price of $25.32 per share.
The Company has also agreed that, for the one-year period following October 17, 2008, it will pay certain amounts to
Allianz if the Company effects or agrees to effect any transaction (or series of transactions) pursuant to which any person or
group (within the meaning of the U.S. federal securities laws) is issued common stock or certain equity-related instruments
constituting more than 5% of the Company’s fully-diluted common stock outstanding at the time for an effective price per
share (determined as provided in the Investment Agreement) of less than $25.32. Amounts so payable depend on the
effective price for the applicable transaction (or the weighted average price for a series of transactions) and range from $50
if the effective price per share is between $25.31 and $23.00, $150 if the effective price per share is between $22.99 and
$20.00, $200 if the effective price per share is between $19.99 and $15.00 and $300 if the effective price per share is $14.99
or less.
Debentures
The 10% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068 bear interest at an annual fixed rate of 10% from
the date of issuance to, but excluding, October 15, 2018, payable semi-annually in arrears on April 15 and October 15. From
and including October 15, 2018, the Debentures will bear interest at an annual rate, reset quarterly, equal to three-month
LIBOR plus 6.824%, payable quarterly in arrears. The Company has the right, on one or more occasions, to defer the
payment of interest on the Debentures. The Company may defer interest for up to ten consecutive years without giving rise
to an event of default. Deferred interest will accumulate additional interest at an annual rate equal to the annual interest rate
then applicable to the Debentures. If the Company defers interest for five consecutive years or, if earlier, pays current
interest during a deferral period, which may be paid from any source of funds, the Company will be required to pay deferred
interest from proceeds from the sale of certain qualifying securities.
In connection with the offering of the debentures, the Company entered into a “Replacement Capital Covenant” for the
benefit of holders of one or more designated series of the Company’s indebtedness, initially the Company’s 6.1% notes due
2041. Under the terms of the Replacement Capital Covenant, if the Company redeems the Debentures at any time prior to
October 15, 2048 it can only do so with the proceeds from the sale of certain qualifying replacement securities. Subject to
the Replacement Capital Covenant, the Company can redeem the Debentures at its option, in whole or in part, at any time on
or after October 15, 2018 at a redemption price of 100% of the principal amount being redeemed plus accrued but unpaid
interest.
The Debentures were issued with the detachable Warrants. The allocation of the $1.75 billion proceeds between the
Debentures and Warrants was based on the relative fair values of these financial instruments at the time of issuance. As
such, the Debentures were recorded at a fair value of $1,201 and are classified as long term debt.
Preferred Stock
Each share of Preferred Stock is initially convertible into four shares of common stock, subject to receipt of specified
governmental, regulatory and other approvals (including receipt of stockholder approval as described above in the case of
the Series C Preferred Stock), which vary by Series. If the Company declares dividends on Common Shares, the Company
will simultaneously declare the same dividend on the assumed conversion of the Series D Preferred shares. Dividends on the
Series D Preferred Stock are non-cumulative. The conversion ratio under the Preferred Stock is subject to adjustment in
certain circumstances. The Preferred Stock is classified as equity and the proceeds of $750 were recorded net of issuance
costs of $23.
On January 9, 2009, Allianz converted its 6,048,387 shares of Series D Preferred Stock into 24,193,548 shares of common
stock.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009