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HIG Warrants


stahleyp
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I saw a blurb about this in the WSJ today. The treasury is auction off 52.1 million warrents of the Hartford that it received from TARP. Warrants expire on 6/26/2019 with a strike of $9.79. Seems like it might be an opportunity if the price is right. This looks like something similar to want Chou was talking about with BAC. What do you guys think? Any idea how we find a cusip or trading symbol? From an article I found, looks like the minimum bid is $10.50.

 

Here is the sec filing:

 

http://www.sec.gov/Archives/edgar/data/874766/000095012310087253/y86606e424b7.htm#125012310087253/y86606e424b7.htm#109

 

 

Here is a blurb about the dividend payouts. From what I can tell, it looks like the adjustments are pretty favorable:

 

"In the case of cash dividends or other distributions. If we fix a record date for making a distribution to all holders of our common stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point), the exercise price in effect prior to such record date will be reduced immediately thereafter to the price determined by multiplying the exercise price in effect immediately prior to the reduction by the quotient of (x) the market price (as defined below) of our common stock on the last trading day preceding the first date on which our common stock trades regular way on the principal national securities exchange on which our common stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the fair market value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of our common stock (such amount and/or fair market value is referred to as the Per Share Fair Market Value) divided by (y) such market price on the date specified in clause (x). Any such adjustment will be made successively whenever such a record date is fixed. The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence. In the case of adjustment for a cash dividend that is, or is coincident with, a regular quarterly cash dividend, the Per Share Fair Market Value would be reduced only by the per share amount of the portion of the cash dividend that would constitute an ordinary cash dividend. If, after the declaration of any such record date, the related distribution is not made, the exercise price and the number of warrant shares then in effect will be readjusted, effective as of the date when our board of directors determines not to make such distribution, to the exercise price and the number of warrant shares that would then be in effect if such record date had not been fixed. "

 

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Looks like these priced at $13.70 each. Option to buy at $9.79 with almost 9 years to expiration. If we take $13.70(price may be lower today with market downturn)+$9.79 strike price = $23.49.

HIG is currently trading at $22.37. So essentially, you are buying a 9 year option for $1.12, that adjust downward for dividends? Am I reading this right?

 

 

 

http://www.businessinsurance.com/article/20100922/NEWS/100929965

 

 

Trading now.  Symbol is HIGWS for certain platforms. currently at $13.93+$9.79 = $23.72 vs $22.29 on market. Not quite as a good deal, but still is intriguing.

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What do you think about the company?

 

I'd like to think this one as a somewhat speculative investment. I don't understand all that going on the balance sheet and I don't know anyone who does. With that being said, here's why I'm interested.

 

The stock is trading about .5x book. Others large insurers like Prudential and Metlife are around .8-.9 book.

 

John Paulson owns quite a bit of it almost 10% of the common. Joel Tillinghast has also been buying a fair amount of the past several months (as of end of april) moving from about 1 million shares to 5.2 million. So for a $1 or $2 in time value, you have nearly 9 years to see how things play out.

 

I was hoping that someone who knows the company or insurance industry better might be kind enough to share a few words. I also don't know a ton about warrants and want to make sure I have a good understanding.

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Let's see.....did so poorly investing that they needed to do a scam deal to acquire a bank and get a TARP bailout. Since then, I have heard from many sources that they are writing business at crazy rates. My own Allstate agent said people were coming in to his office with Hartford quotes that were 50% lower than his best rates. I would expect underwrting results to weigh on them for years. They suck at investing. They suck at underwriting. They needed TARP money to stay alive. Those are the reasons I passed.

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Let's see.....did so poorly investing that they needed to do a scam deal to acquire a bank and get a TARP bailout. Since then, I have heard from many sources that they are writing business at crazy rates. My own Allstate agent said people were coming in to his office with Hartford quotes that were 50% lower than his best rates. I would expect underwrting results to weigh on them for years. They suck at investing. They suck at underwriting. They needed TARP money to stay alive. Those are the reasons I passed.

 

very insightful. i appreciate it your input! :)

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  • 1 year later...

Given the cheapness of the stock and if you compare the combined ratio of Hartford vs Allstate on the consumer side, they have better performance but not as good as Mercury or Progressive.  Do you know the specifics of Mr. Stockwells concerns.  They don't look like a Mercury but appear to be a good deal for the price and the warrants provide some cheap leverage.

 

Packer

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Time to recheck those warrant provisions

 

http://www.bloomberg.com/news/2012-08-17/prudential-said-to-emerge-as-lead-bidder-for-hartford-life-unit.html

 

Prudential Financial Inc. (PRU) has emerged as the lead bidder for Hartford Financial Services Group Inc. (HIG)’s individual life insurance business, which may sell for about $1 billion, said two people with knowledge of the matter.

 

More info on The Hartford here

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/paulson-files-13d-on-hig/

 

 

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  • 2 months later...

Small position. Not completely convinced with the CEO as with other financials. But they are doing what they said they would do and the warrants are crazy cheap.

 

The warrants' strike+current price is less than 0.6x current TBV, and they expire in 2019. Another way to look at them is that they are already in the money while paying only $2 per warrant for the 2019 time value option. That is not happening with BAC, AIG or most of the other warrants

 

I just nibbled at the warrants - Plan, did you ever get into HIG or still passing?

 

thanks - C.

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The warrants' strike+current price is less than 0.6x current TBV, and they expire in 2019. Another way to look at them is that they are already in the money while paying only $2 per warrant for the 2019 time value option. That is not happening with BAC, AIG or most of the other warrants

 

If I ever got into arbitrage with shorting or options, long HIG warrants offset by common would be near the top of my list.

 

Every time I compare my estimates for HIG warrant risk/reward against BAC and AIG, it's always a miss (sometimes a near-miss) for HIG.  Maybe we'll get lucky and the board favorites will shoot to the moon before HIG makes a move! (a guy can hope!)

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Thanks Plan.

 

JRH - I suppose the one potential issue with short common/long warrant is the carry cost for the short (plus div). Of course volatility could deflate the warrant price as well but then again I'd wager we're in for rather more than less volatility (also at mid 30s it's not that high). Would you try and do a ratio transaction to get to an initially delta-neutral position or what's your approach to doing something like that?

 

Cheers - C.

 

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Thanks Plan.

 

JRH - I suppose the one potential issue with short common/long warrant is the carry cost for the short (plus div). Of course volatility could deflate the warrant price as well but then again I'd wager we're in for rather more than less volatility (also at mid 30s it's not that high). Would you try and do a ratio transaction to get to an initially delta-neutral position or what's your approach to doing something like that?

 

Cheers - C.

 

Sun, I honestly don't know; I'm not knowledgeable on managing the risks involved in shorting/options, so I simply don't do it.  I was really talking out loud to even suggest the approach, as it's based on my incomplete assessment of the factors.  Here's what I think I know about HIG, though:

 

- I think HIG is likely undervalued, though I have a wide confidence interval on that because of the insurance industry and management.

- I agree with Plan that HIG's management has at least been doing as they said they would, which is promising but isn't enough to make me really comfortable with them yet.  Because of that alone, I wouldn't make it a big position.

- I think the warrants are underpriced relative to the common, and generally have been for some time.

- My guess is that it is very likely that stock price meets book value somewhere in between the two sometime in the future (let's say, within the life of the warrants).  Smaller chances that the outcome is either better (stock price goes to/above book) or worse (book collapses to current stock price or they never meet).  By those estimates, the warrants look better to me than the common on a risk-adjusted basis.

- Because of the low strike price, it's not swinging for the fences quite like with the AIG or BAC warrants.  Obviously there are pluses and minuses to that.

- Current stock and warrant prices make me assume that the market thinks HIG is bound to tread a lot of water in the coming years.  I'd assume that means there is a mistrust of book or a mistrust of management (or both).

 

Lots of speculation!  For the record, I trust Plan's take on the dynamics of the insurance business more than my own, so judge accordingly!

 

- John

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  • 4 months later...

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