The Hartford 2008 Annual Report Download - page 316

Table of Contents
Junior Subordinated Debentures
On June 6, 2008, the Company issued $500 aggregate principal amount of 8.125% fixed-to-floating rate junior subordinated
debentures (the “debentures”) due June 15, 2068 for net proceeds of approximately $493, after deducting underwriting
discounts and expenses from the offering. The debentures bear interest at an annual fixed rate of 8.125% from the date of
issuance to, but excluding, June 15, 2018, payable semi-annually in arrears on June 15 and December 15. From and
including June 15, 2018, the debentures will bear interest at an annual rate, reset quarterly, equal to three-month LIBOR plus
4.6025%, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. 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.
The debentures carry a scheduled maturity date of June 15, 2038 and a final maturity date of June 15, 2068. During the
180-day period ending on a notice date not more than fifteen and not less than ten business days prior to the scheduled
maturity date, the Company is required to use commercially reasonable efforts to sell certain qualifying replacement
securities sufficient to permit repayment of the debentures at the scheduled maturity date. If any debentures remain
outstanding after the scheduled maturity date, the unpaid amount will remain outstanding until the Company has raised
sufficient proceeds from the sale of qualifying replacement securities to permit the repayment in full of the debentures. If
there are remaining debentures at the final maturity date, the Company is required to redeem the debentures using any
source of funds.
Subject to the replacement capital covenant described below, the Company can redeem the debentures at its option, in whole
or in part, at any time on or after June 15, 2018 at a redemption price of 100% of the principal amount being redeemed plus
accrued but unpaid interest. The Company can redeem the debentures at its option prior to June 15, 2018 (a) in whole at any
time or in part from time to time or (b) in whole, but not in part, in the event of certain tax or rating agency events relating to
the debentures, at a redemption price equal to the greater of 100% of the principal amount being redeemed and the
applicable make-whole amount, in each case plus any accrued and unpaid interest.
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 June 15,
2048 it can only do so with the proceeds from the sale of certain qualifying replacement securities.
For a discussion of the 10.0% junior subordinated debentures from the investment of Allianz SE in The Hartford, see Note
21.
Capital Lease Obligations
The Company recorded capital leases of $92 and $128 in 2008 and 2007, respectively. Capital lease obligations are included
in long-term debt, except for the current maturities, which are included in short-term debt, in the consolidated balance sheet
as of December 31, 2008 and 2007, respectively. See Note 12 for further information on capital lease commitments.
Consumer Notes
Institutional began issuing consumer notes through its Retail Investor Notes Program in September 2006. A consumer note
is an investment product distributed through broker-dealers directly to retail investors as medium-term, publicly traded fixed
or floating rate, or a combination of fixed and floating rate, notes. Consumer notes are part of the Company’s spread-based
business and proceeds are used to purchase investment products, primarily fixed rate bonds. Proceeds are not used for
general operating purposes. Consumer notes maturities may extend up to 30 years and have contractual coupons based upon
varying interest rates or indexes (e.g. consumer price index) and may include a call provision that allows the Company to
extinguish the notes prior to its scheduled maturity date. Certain Consumer notes may be redeemed by the holder in the
event of death. Redemptions are subject to certain limitations, including calendar year aggregate and individual limits. The
aggregate limit is equal to the greater of $1 or 1% of the aggregate principal amount of the notes as of the end of the prior
year. The individual limit is $250 thousand per individual. Derivative instruments are utilized to hedge the Company’s
exposure to market risk in accordance with Company policy.
As of December 31, 2008 and 2007, $1,210 and $809, respectively, of consumer notes were outstanding. As of
December 31, 2008, these consumer notes have interest rates ranging from 4.0% to 6.3% for fixed notes and, for variable
notes, based on December 31, 2008 rates, notes indexed to the consumer price index plus 80 to 267 basis points, or indexed
to the S&P 500, Dow Jones Industrials, foreign currency, or the Nikkei 225. The aggregate maturities of consumer notes are
as follows: $11 in 2009, $30 in 2010, $131 in 2011, $291 in 2012 and $751 thereafter. For 2008 and 2007, interest credited
to holders of consumer notes was $59 and $11, respectively. During 2008, the Company made the decision to discontinue
future issuances of consumer notes, this decision does not impact consumer notes currently outstanding.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009