The Hartford 2010 Annual Report Download - page 205

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-77
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.
Issuance of Common Stock
On March 23, 2010, The Hartford issued approximately 59.6 million shares of common stock at a price to the public of $27.75 per share
and received net proceeds of $1.6 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.
Issuance of Series F Preferred Stock
On March 23, 2010, The Hartford issued 23 million depositary shares, each representing a 1/40th interest in The Hartford’ s 7.25%
mandatory convertible preferred stock, Series F, at a price of $25 per depositary share and received net proceeds of approximately $556.
The Company will pay cumulative dividends on each share of the mandatory convertible preferred stock at a rate of 7.25% per annum
on the initial liquidation preference of $1,000 per share. Dividends will accrue and cumulate from the date of issuance and, to the extent
that the Company is legally permitted to pay dividends and its board of directors declares a dividend payable, the Company will, from
July 1, 2010 until and including January 1, 2013 pay dividends on each January 1, April 1, July 1 and October 1, in cash and (whether or
not declared prior to that date) on April 1, 2013 will pay or deliver, as the case may be, dividends in cash, shares of its common stock, or
a combination thereof, at its election. Dividends on and repurchases of the Company’ s common stock will be subject to restrictions in
the event that the Company fails to declare and pay, or set aside for payment, dividends on the Series F preferred stock.
The 575,000 shares of mandatory convertible preferred stock, Series F, will automatically convert into shares of common stock on April
1, 2013, if not earlier converted at the option of the holder, at any time, or upon the occurrence of a fundamental change. The number of
shares issuable upon mandatory conversion of each share of mandatory convertible preferred stock will be a variable amount based on
the average of the daily volume weighted average price per share of the Company’ s common stock during a specified period of 20
consecutive trading days with the number of shares of common stock ranging from 29.536 to 36.036 per share of mandatory convertible
preferred stock, subject to anti-dilution adjustments.
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 exercise
price of $9.79 per share, for an aggregate purchase price of $3.4 billion.
Cumulative dividends on the Series E Preferred Stock accrued on the liquidation preference at a rate of 5% per annum. The Series E
Preferred Stock had no maturity date and ranked senior to the Company’ s common stock. The Series E Preferred Stock was non-voting.
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 was
amortized from the date of issuance, using the effective yield method and 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.