The Hartford 2010 Annual Report Download - page 223

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-95
21. Investment by Allianz SE in The Hartford (continued)
Preferred Stock
Each share of Preferred Stock was 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. The conversion ratio under the Preferred Stock was 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.
Warrants
The Warrants, which have a term of ten years, are exercisable to purchase to 69,314,987 shares of common stock at an exercise price of
$25.25 per share. The discretionary equity issuance program, see Note 15, triggered an anti-dilution provision in The Hartford’ s
investment agreement with Allianz, which resulted in the adjustment of the warrant exercise price and to the number of shares that may
be purchased. The exercise price under the Warrants is subject to adjustment in certain circumstances.
The Warrants were immediately exercisable, pending the receipt of specified regulatory approvals, for the Series B Preferred Stock,
which were initially convertible, in the aggregate, into 34,806,452 shares of common stock. The Warrants to purchase the Series B
Preferred Stock were reported as equity and were allocated a relative fair value of $276 at issuance.
In addition to the receipt of specified regulatory approvals, the conversion into 34,308,872 shares of common stock of the Series C
Preferred Stock underlying certain of the Warrants was subject to the approval of the Company’ s stockholders in accordance with
applicable regulations of the New York Stock Exchange. Under the Investment Agreement, the Company was obligated to pay Allianz
$75 if such stockholder approval was not obtained at the first stockholder meeting to consider such approval, and $50 if such
stockholder approval was not obtained at a second such meeting. Because the conversion of the Series C Preferred Stock was subject to
stockholder approval and the related payment provision represents a form of net cash settlement outside the Company’ s control, the
Warrants to purchase the Series C Preferred Stock and the stockholder approval payment were recorded as a derivative liability at a
relative fair value of $273 at issuance. As of December 31, 2008, the Warrants to purchase the Series C Preferred Stock had a fair value
of $163. The Company recognized a gain of $110, after-tax, for the year ended December 31, 2008, representing the change in fair
value of the Warrants to purchase the Series C Preferred Stock.
On March 26, 2009, the Company’ s shareholders approved the conversion of the Series C Preferred Stock underlying certain warrants
issued to Allianz in October 2008 into 34,308,872 shares of The Hartford’ s common stock. As a result of this shareholder approval, the
Company is not obligated to pay Allianz any cash payment related to these warrants and therefore these warrants no longer provide for
any form of net cash settlement outside the Company’ s control. As such, the warrants to purchase the Series C Preferred Stock were
reclassified from other liabilities to equity at their fair value. As of March 26, 2009, the fair value of these warrants was $93. For the
year ended December 31, 2009, the Company recognized a gain of $70, representing the change in fair value of the warrants through
March 26, 2009.
Additionally, the issuance of common and preferred stock during the first quarter of 2010 triggered an anti-dilution provision in The
Hartford’ s Investment Agreement with Allianz, which resulted in the adjustment to the warrant exercise price to $25.23 from $25.25 and
to the number of shares that may be purchased to 69,351,806 from 69,314,987.