The Hartford 2009 Annual Report Download - page 222

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-73
15. Equity
Increase in Authorized Common Shares
On May 27, 2009, at the Company's annual meeting of shareholders, shareholders approved an increase in the aggregate authorized
number of shares of common stock from 750 million to 1.5 billion.
Preferred Stock
The Company has 50,000,000 shares of preferred stock authorized, see Note 21 for a discussion of Allianz SE’ s investment in The
Hartford and discussion below on the Company’ s participation in the Capital Purchase Program.
The Company’s Participation in the Capital Purchase Program
On June 26, 2009, as part of the Capital Purchase Program (“CPP”) established by the U.S. Department of the Treasury (“Treasury”)
under the Emergency Economic Stabilization Act of 2008 (the “EESA”), the Company entered into a Private Placement Purchase
Agreement with Treasury pursuant to which the Company issued and sold to Treasury 3,400,000 shares of the Company’ s Fixed Rate
Cumulative Perpetual Preferred Stock, Series E, having a liquidation preference of $1,000 per share (the “Series E Preferred Stock”),
and a ten-year warrant to purchase up to 52,093,973 shares of the Company’ s common stock, par value $0.01 per share, at an initial
exercise price of $9.79 per share, for an aggregate purchase price of $3.4 billion.
Cumulative dividends on the Series E Preferred Stock will accrue on the liquidation preference at a rate of 5% per annum for the first
five years, and at a rate of 9% per annum thereafter. The Series E Preferred Stock has no maturity date and ranks senior to the
Company’ s common stock. The Series E Preferred Stock is non-voting. Pursuant to our agreement with Treasury in connection with
Treasury's CPP investment in the Company, prior to the earlier of June 26, 2012 and the date on which the Series E Preferred Stock has
been redeemed in whole or Treasury has transferred all of the Series E Preferred Stock to non-affiliates, the Company may not, without
the consent of Treasury, declare or pay a regular cash dividend for an amount greater than $0.05 per quarter.
The Company may redeem the Series E Preferred Stock with the consent of the Office of Thrift Supervision, after consultation with
Treasury.
Upon issuance, the fair values of the Series E Preferred Stock and the associated warrants were computed as if the instruments were
issued on a stand alone basis. The fair value of the Series E Preferred stock was estimated based on a five-year holding period and cash
flows discounted at a rate of 13% resulting in a fair value estimate of approximately $2.5 billion. The Company used a Black-Scholes
options pricing model including an adjustment for American-style options to estimate the fair value of the warrants, resulting in a stand
alone fair value of approximately $400. The most significant and unobservable assumption in this valuation was the Company’ s share
price volatility. The Company used a long-term realized volatility of the Company’ s stock of 62%. In addition, the Company assumed
a dividend yield of 1.72%.
The individual fair values were then used to record the Preferred Stock and associated warrants on a relative fair value basis of $2.9
billion and $480, respectively. The warrants of $480 were recorded to additional paid-in capital as permanent equity. The preferred
stock amount was recorded at the liquidation value of $1,000 per share or $3.4 billion, net of discount of $480. The discount is being
amortized over a five-year period from the date of issuance, using the effective yield method and is recorded as a direct reduction to
retained earnings and deducted from income available to common stockholders in the calculation of earnings per share. The
amortization of discount totaled $40 for the year ended December 31, 2009.
Discretionary Equity Issuance Program
On June 12, 2009, the Company announced that it had commenced a discretionary equity issuance program, and in accordance with that
program entered into an equity distribution agreement pursuant to which it would offer up to 60 million shares of its common stock from
time to time for aggregate sales proceeds of up to $750.
On August 5, 2009, the Company increased the aggregate sales proceeds from $750 to $900.
On August 6, 2009, the Company announced the completion of the discretionary equity issuance program. The Hartford issued 56.1
million shares of common stock and received net proceeds of $887 under this program.
Stock Repurchase Program
The Board has authorized a $1 billion stock repurchase program. The Company’ s repurchase authorization permits purchases of
common stock, which may be in the open market or through privately negotiated transactions. The Company also may enter into
derivative transactions to facilitate future repurchases of common stock. The timing of any future repurchases will be dependent upon
several factors, including the market price of the Company’ s securities, the Company’ s capital position, consideration of the effect of
any repurchases on the Company’ s financial strength or credit ratings, restrictions arising from the Company’ s participation in the CPP,
and other corporate considerations. The repurchase program may be modified, extended or terminated by the Board at any time. The
Hartford has $807 remaining for stock repurchase under this program.