SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
HSB Group, Inc.
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
--------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------------
5) Total fee paid:
--------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
--------------------------------------------
2) Form, Schedule or Registration Statement No.:
--------------------------------------------
3) Filing Party:
--------------------------------------------
4) Date Filed
--------------------------------------------
<PAGE>
- ---------
LOGO
- ---------
HSB GROUP, INC.
NOTICE OF ANNUAL MEETING
March 6, 1998
To the Shareholders:
Notice is hereby given that the Annual Meeting of Shareholders of HSB
Group, Inc. will be held on Tuesday, April 21, 1998, at 2:00 P.M., at the office
of the Company, One State Street, Hartford, Connecticut, for the following
purposes:
1. To elect three directors for three-year terms;
2. To consider and act upon a proposal to approve the amended Short-Term
Incentive Plan;
3. To consider and act upon a proposal to approve the amended Long-Term
Incentive Plan;
4. To appoint independent public accountants for the ensuing year; and
5. To transact any other business proper to come before the meeting.
A Proxy Statement to assist you in the consideration of the foregoing
matters is attached.
The Board of Directors has fixed February 17, 1998, at the close of
business, as the record date and time for the determination of the shareholders
entitled to notice of and to vote at said Annual Meeting and any adjournment
thereof.
It is hoped that you will be able to attend this meeting. If you cannot,
please sign and return the enclosed proxy card in the envelope provided.
By order of the Board of Directors.
/s/ R. K. Price
R. K. PRICE
Corporate Secretary
HSB Group, Inc.
One State Street
P.O. Box 5024
Hartford, Connecticut 06102-5024
<PAGE>
PROXY STATEMENT
GENERAL
The enclosed proxy is solicited by the Board of Directors of HSB Group,
Inc. for use at the Annual Meeting of Shareholders to be held April 21, 1998,
and at any and all adjournments thereof. The Company is a Connecticut
corporation and its principal office is located at One State Street, P.O. Box
5024, Hartford, Connecticut 06102-5024, (860) 722-1866.
You are urged to read this Proxy Statement and to fill in, date, sign and
return the enclosed form of proxy. The giving of a proxy does not affect your
right to vote should you attend the meeting and the proxy may be revoked at any
time before it is voted. Properly executed proxies that have not been revoked
will be voted as specified.
Arrangements will be made with brokers, nominees and fiduciaries to
distribute proxy material to their principals, and their postage and clerical
expenses in so doing will be paid by the Company. The entire cost of soliciting
proxies on behalf of management will be borne by the Company. Directors,
officers and regular employees of the Company may solicit proxies personally if
proxies are not received promptly. The Company has retained Corporate Investor
Communications, Inc. ("CIC") to aid in the solicitation of proxies. CIC's fee is
not expected to exceed $4,000 in addition to out-of-pocket expenditures.
Only holders of Company common stock of record at the close of business on
February 17, 1998 are entitled to notice of, and to vote at, the meeting. Each
shareholder of record on said date is being mailed the Annual Report of the
Company for the fiscal year ended December 31, 1997 with the Notice, Proxy
Statement and Proxy card on or about March 6, 1998. On February 17, 1998, there
were 19,409,870 outstanding shares of Company common stock, each entitled to one
vote.
Abstentions and broker non-votes are included in the total number of shares
represented for matters to be voted upon at the meeting for quorum purposes.
Abstentions and broker non-votes will not be counted as either FOR or AGAINST a
nominee or matter and will have no effect upon the voting results for any of the
proposals.
1
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Articles of Incorporation provide that the number of
directors will be determined from time to time by a resolution of a majority of
the Board of Directors. The directors are divided into three classes consisting,
as nearly as possible, of one third of the total number of directors
constituting the entire Board. Each class is elected for a three-year term at
successive annual meetings. At the Annual Meeting, the number of directorships
will be nine.
Three directors are to be elected for terms of three years and until their
successors are elected and qualified. Unless otherwise instructed, the shares
represented by the enclosed proxy will be voted for Richard H. Booth, Colin G.
Campbell and Simon W. Leathes. In the event any nominee is unable to serve as a
director on the date of the Annual Meeting, the proxies may be voted for a
substitute nominee recommended by the Board of Directors. A plurality of the
votes cast by the shares entitled to vote is required for the election of each
director.
Mr. Campbell was elected to his present term at the 1995 Annual Meeting.
Mr. Booth and Mr. Leathes were appointed to the Board in July 1996 and February
1997, respectively.
Stated below are the names and ages of the nominees and directors
continuing in office, the principal occupation of each during at least the last
five years, the date on which each individual was first elected as a director of
the Company, and other directorships and business and civic affiliations of such
persons. The information set forth on the following pages with respect to each
nominee's and director's principal occupation, other directorships and
affiliations and beneficial ownership of Company common stock has been furnished
by the nominee or director. No information is being provided for John M.
Washburn, Jr. and Wilson Wilde, who will retire from the Board of Directors
effective with the 1998 Annual Meeting in accordance with the Company's Bylaws.
On June 24, 1997, all of the outstanding shares of common stock of The
Hartford Steam Boiler Inspection and Insurance Company were exchanged for shares
of common stock of the Company; therefore, references to the Company herein with
dates prior to June 24, 1997 are references to The Hartford Steam Boiler
Inspection and Insurance Company.
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
For Three-Year Term Expiring in 2001
Richard H. Booth
Mr. Booth, 50, is Executive Vice President of Phoenix Home Life
Mutual Insurance Company, a position he has held since October of
1994. Prior to joining Phoenix, Mr. Booth served as President,
Chief Operating Officer and a director of The Travelers
-------- Corporation from 1991 to 1994. Mr. Booth is a director of MECH
Financial Inc., Phoenix Duff & Phelps Corporation, Aberdeen Asset
PHOTO Management, PLC and CuraGen Corporation. He is a member of the
Board of Trustees and Treasurer of the Wadsworth Atheneum. He is
-------- also a member of the Board of Trustees of the Old State House,
the Investment Committee of the University of Hartford, the
Corporate Associates Advisory Board of The Nature Conservancy,
Connecticut Chapter, the Community Advisory Board of the Claude
Pepper Older American Independence Center of the University of
Connecticut Health Center and a board member of the World Affairs
Council.
Mr. Booth has served as a director of the Company since July
1996.
2
<PAGE>
Colin G. Campbell
Mr. Campbell, 62, is President of Rockefeller Brothers Fund, a
position he has held since 1988. Mr. Campbell is a director of
-------- Pitney Bowes, SYSCO Corporation, Rockefeller Financial Services
and HSB Engineering Insurance Limited, an affiliate of the
PHOTO Company. He is Chairman of the University of Cape Town Fund and
Winrock International Institute for Agricultural Development. He
-------- is a trustee of the Colonial Williamsburg Foundation and Charles
E. Culpeper Foundation, and Chairman of Public Broadcasting
Services.
Mr. Campbell has served as a director of the Company since
September 1983.
Simon W. Leathes
Mr. Leathes, 50, is Chief Executive Officer and Group Finance
Director of Hambros PLC in the United Kingdom, a position he has
held since January, 1997. He had served as Group Finance Director
- -------- of Hambros since 1996. Prior to joining Hambros PLC, he served as
Chief Financial Officer of Caspian Securities Ltd. in the United
PHOTO Kingdom from 1995 to 1996. From 1980 through 1995, Mr. Leathes
was with S.G. Warburg Group PLC in the United Kingdom, most
- -------- recently serving as Chief Financial Officer/Group Finance
Director from 1992 to 1995. Mr. Leathes is a director of HSB
Engineering Insurance Limited, an affiliate of the Company.
Mr. Leathes has served as a director of the Company since
February 1997.
MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE
Term Expiring in 1999
Joel B. Alvord
Mr. Alvord, 59, is President and Managing Director of Shawmut
Capital Management, Inc., a position he has held since 1996. Mr.
Alvord also serves as Chairman of the Executive Committee and a
- -------- Director of Fleet Financial Group, having been its Chairman since
1995. He became Chairman and Chief Executive Officer of Shawmut
PHOTO National Corporation in 1988 and was elected to Chairman of Fleet
Financial Group in November 1995 following the merger of Shawmut
- -------- National Corporation with Fleet Financial Group. Mr. Alvord is a
director of CUNO Incorporated, the American Skiing Company, the
Harvard Eating Disorders Center and the American Repertory
Theater, a trustee of The Wang Center for the Performing Arts,
Boston, and an Overseer of the Museum of Fine Arts, Boston and
The Boston Symphony Orchestra.
Mr. Alvord has served as a director of the Company since December
1971.
Richard G. Dooley
Mr. Dooley, 68, is a consultant to Massachusetts Mutual Life
Insurance Company. Mr. Dooley joined Massachusetts Mutual in 1955
- -------- and served in a variety of positions before being named Executive
Vice President and Chief Investment Officer in 1978, a position
PHOTO he held until his retirement in 1993. Mr. Dooley is a director of
Advest Group, Inc., Jefferies Group, Inc., Kimco Realty Corp.,
- -------- Investment Technology Group, Inc. and certain Massachusetts
Mutual-sponsored investment companies. He is a trustee of Saint
Anselm College.
Mr. Dooley has served as a director of the Company since May
1984.
3
<PAGE>
Gordon W. Kreh
Mr. Kreh, 50, is President, Chief Executive Officer and a
director of the Company. He joined The Boiler Inspection and
Insurance Company of Canada, a subsidiary of the Company, in
1971, before moving to the Company's home office in 1975. He
became an officer of the Company in 1980 and was elected Vice
- -------- President in 1984. In 1988, he was named Senior Vice President of
Engineering Insurance Group, an affiliate of the Company, and
PHOTO became its President in 1989. He was elected Senior Vice
President of the Company in 1992, President in 1993 and assumed
- -------- his present position in April of 1994. Mr. Kreh is a board member
of the American Insurance Association, and a director of The
Hartford Steam Boiler Inspection and Insurance Company, The
Boiler Inspection and Insurance Company of Canada and HSB
Engineering Insurance Limited, affiliates of the Company. He is
also president of the board of directors of the Greater Hartford
Arts Council and a trustee of the Wadsworth Atheneum.
Mr. Kreh has served as a director of the Company since September
1993.
Lois D. Rice
Mrs. Rice, 65, is a Guest Scholar, Program in Economic Studies,
at the Brookings Institution, a position she has held since
October 1991. From 1981 until 1991, she served as Senior Vice
- -------- President, Government Affairs and a director of Control Data
Corporation. Mrs. Rice is a director of McGraw-Hill Companies,
PHOTO International Multifoods, Fleet Financial Group and UNUM Corp.
She is a trustee of The Urban Institute, the Center for Naval
- -------- Analysis and the Public Agenda Foundation. Mrs. Rice also serves
as a member of the President's Foreign Intelligence Advisory
Board.
Mrs. Rice has served as a director of the Company since April
1990.
Term Expiring in 2000
William B. Ellis
Mr. Ellis, 57, is Senior Fellow at the Yale University School of
Forestry and Environmental Studies, a position he has held since
September 1995. In August 1995, he retired from his position as
- -------- Chairman of the Board of Northeast Utilities and its principal
subsidiaries, as well as from Connecticut Yankee Atomic Power
PHOTO Company, after serving as Chief Executive Officer of those
companies from 1983 to 1993. Mr. Ellis is a director of Advest
- -------- Group, Inc., Catalytica Combustion Systems, Inc., Massachusetts
Mutual Life Insurance Company and The Greater Hartford Chamber of
Commerce. He is also a member of the Board of The National Museum
of Natural History of the Smithsonian Institution and a member of
the Conservation Science Advisory Board of The Nature
Conservancy.
Mr. Ellis has served as a director of the Company since April
1991.
E. James Ferland
Mr. Ferland, 55, is Chairman, President and Chief Executive
- -------- Officer of Public Service Enterprise Group Incorporated and
Chairman and Chief Executive Officer of its principal subsidiary,
PHOTO Public Service Electric and Gas Company, a position he has held
since 1986. Mr. Ferland is a director of Foster Wheeler
- -------- Corporation and the Nuclear Energy Institute.
Mr. Ferland has served as a director of the Company since
November 1986.
4
<PAGE>
Meetings and Remuneration of the Directors
During 1997, the Board of Directors held nine meetings and twenty-four
committee meetings. Each director attended at least 75% of the meetings of the
Board and committees on which he or she served combined.
The Governance Committee of the Board of Directors has adopted a formal
policy for the compensation of directors in order to further link director
compensation with the long-term interests of shareholders. According to the
policy, director compensation should: a) enable the Company to attract and
retain the talent needed to fulfill the responsibilities of the Board of
Directors in a superior and independent fashion; b) align the interests of the
directors with the long-term interests of shareholders through stock ownership;
c) compensate directors for their time, efforts and capacity to assist the
Company in the achievement of its long-term goals; and d) be validated in its
efficacy through review by an independent compensation consultant.
The annual retainer for each director who is neither a present nor retired
employee of the Company or of a subsidiary is $15,000. Each non-employee
director is paid a fee of $1,200 for attendance at a Board or a committee
meeting and an additional $350 for each committee meeting chaired. Directors who
are present or retired employees of the Company or a subsidiary do not receive
such compensation for service on the Board or committees thereof and are not
eligible to participate in the plans described below for non-employee directors.
Non-employee directors are not eligible to participate in any of the plans
discussed in the Human Resources Committee Report on Executive Compensation.
Directors may be reimbursed for reasonable travel expenses incurred in attending
Board and committee meetings.
Each non-employee director received an award of 550 stock equivalent units
under the Directors Stock and Deferred Compensation Plan (the "Directors Plan")
for the 1997 plan year. The Directors Plan was amended effective January 1, 1998
to provide that future awards will be made in the form of 550 shares of
restricted stock. (If an award would be currently taxable to a director based on
the laws of the country in which such director is located, the award will be in
the form of 550 stock equivalent units.) Restricted stock awarded under the plan
is forfeitable until such time as the director retires after age 70, dies,
becomes disabled, resigns in certain circumstances with the consent of a
majority of the board of directors, or upon a change in control of the Company,
whichever event occurs earliest.
Under the Directors Plan, a director may elect to defer payment of all or a
portion of his or her cash compensation (annual retainer and meeting fees) to a
future date specified by the director. A participating director may elect to
have amounts held in his or her deferred account (i) credited annually with
interest (accrued at the rate of the average of the yields at issuance of
five-year U.S. Treasury Notes issued during the prior twelve-month period plus
1%) on the average daily balance held in such accounts for the preceding plan
year; or (ii) converted into stock equivalent units or shares of restricted
stock equal to the amount of deferred cash compensation divided by the fair
market value of Company common stock on the date such compensation would
otherwise have been paid.
Stock equivalent unit and cash account balances held under the Directors
Plan are paid out in cash or Company common stock, either in a lump sum or in
installments, at the director's election. For the 1997 plan year, dividend
equivalents, in an amount equal to the amount of dividends that would have been
payable had each stock equivalent unit credited to a director constituted a
share of Company common stock, were payable in cash following the end of the
plan year. Beginning with the 1998 plan year, directors may elect to have
dividend equivalents paid in cash or converted into additional stock equivalent
units or shares of restricted stock following the end of the plan year.
In 1992 the Board of Directors established a Charitable Endowment Program
for members of the Board of Directors who have at least one year of service as a
director. A portion of the program is currently funded by life insurance. The
Company intends to make tax deductible charitable contributions of $1 million to
charities recommended by each director, paid out over a period of ten years
following the death of the director. Directors derive no financial benefit from
the program since any insurance proceeds and charitable deductions accrue solely
to the Company.
5
<PAGE>
The Company's Board of Directors annually appoints certain directors to
serve on standing committees of the Board of Directors, which currently include
the Audit, Human Resources, Governance, Finance and Executive Committees.
The Audit Committee's primary responsibility is to review and report to the
Board on the Company's accounting policies, the adequacy of its financial and
internal auditing controls, and the reliability of financial information
reported to the public. The Committee has the authority to approve the scope of
the annual audit and to authorize the release of annual financial statements.
The Audit Committee held four meetings during 1997. Mr. Ferland (Chairman), Mr.
Booth, Mr. Leathes and Mr. Washburn, none of whom is an employee of the Company
or a subsidiary, presently serve on the Audit Committee.
The Human Resources Committee reviews remuneration for the Company's
executives as described in the Human Resources Committee Report on Executive
Compensation located on page 8. The Committee reviews the Company's benefit
plans and policies and practices with respect to employee relations. The
Committee acts as Plan Administrator for the 1985 Stock Option Plan, the 1995
Stock Option Plan, the Directors Stock and Deferred Compensation Plan, and the
Long-Term and Short-Term Incentive Plans. The Human Resources Committee held six
meetings during 1997. Mr. Ellis (Chairman), Mr. Campbell, Mr. Leathes and Mrs.
Rice, none of whom is an employee of the Company or a subsidiary, presently
serve on the Human Resources Committee.
The Governance Committee reviews the organization and performance of the
Board of Directors and reviews and recommends director compensation. The
Committee also reviews the Company's policies and practices with respect to
community relations and recruits and nominates candidates for Board membership
in conjunction with the Chief Executive Officer. In accordance with the
Company's Bylaws, any nomination by a shareholder must have been made by proper
written notice given to the Corporate Secretary not later than February 23, 1998
in order to be considered for the 1998 Annual Meeting. The Governance Committee
held five meetings during 1997. Mr. Campbell (Chairman), Mr. Alvord, Mr. Dooley,
Mr. Ellis and Mrs. Rice, none of whom is an employee of the Company or a
subsidiary, presently serve on the Governance Committee.
Other committees of the Board of Directors are the Finance Committee and
the Executive Committee. The Finance Committee reviews the investment plan of
the Company, investor relation activities, and other matters involving the
Company's financial resources. Mr. Dooley (Chairman), Mr. Alvord, Mr. Booth, Mr.
Ferland and Mr. Washburn, none of whom is an employee of the Company or a
subsidiary, presently serve on the Finance Committee, which held nine meetings
in 1997. The Executive Committee acts on behalf of the Board of Directors in the
interim between meetings of the Board when prompt, formal action is necessary.
Mr. Wilde (Chairman), Mr. Alvord, Mr. Campbell, Mr. Dooley, Mr. Ellis and Mr.
Ferland presently serve on the Executive Committee, which did not meet in 1997.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The Company is unaware of any shareholder who on February 17, 1998 was
the beneficial owner of 5 percent or more of Company common stock outstanding
except as noted in the following table.
AMOUNT AND NATURE
TITLE OF NAME AND ADDRESS OF BENEFICIAL PERCENT OF
CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
- --------------------------------------------------------------------------------
Common Employers Reinsurance (1) (1)
Stock Corporation
5200 Metcalf
Overland Park, Kansas
(1) On December 31, 1997, the Company and Employers Reinsurance Corporation
("ERC") entered into a Purchase Agreement pursuant to which a business trust
formed by the Company sold $300 million of 7% convertible subordinated capital
securities to ERC. The securities are convertible into the common stock of HSB
Group, Inc. at $85 a share at any time, subject to regulatory approval, or
approximately 3,529,412 shares of common stock of the Company, which on a fully
diluted basis would constitute 15.3% of the Company's outstanding shares.
Pursuant to the Purchase Agreement, ERC has agreed to vote any shares
6
<PAGE>
acquired upon conversion with respect to certain matters in accordance with the
recommendations of the Company's Board of Directors, or, in the event such
agreement is held invalid or in violation of any law, in the same proportion as
the Company's other holders of voting securities.
The number of shares of Company common stock beneficially owned as of
February 17, 1998 by each nominee and director, by each executive officer named
in the Summary Compensation Table, which in each case, other than Mr. Kreh,
represents less than 1% of the Company common stock outstanding as of such date,
and by all current directors and executive officers as a group, is shown in the
table below. Assuming the exercise of all currently exercisable options, Mr.
Kreh would beneficially own 1.7% of Company common stock as of February 17,
1998. The table also sets forth the number of stock equivalent units credited to
non-employee directors participating in the Directors Stock and Deferred
Compensation Plan, which is explained in detail on page 5. Individuals are fully
at risk as to the value of stock equivalent units held in their deferred
accounts, which will be converted to an equal number of shares of Company common
stock, or their equivalent cash value, at the election of the director, upon his
or her termination of board service.
Unless otherwise indicated, each officer, nominee and director has sole
voting and investment power (or shares such powers with a family member) with
respect to Company common stock shown as held directly. All shares shown as held
indirectly reflect sole voting and investment power exercised by the individual
specified unless otherwise indicated.
<TABLE>
<CAPTION>
Stock Equivalent Total Number of Shares
Beneficial Owner Directly Held Indirectly Held Units and Stock Equivalent Units
- ---------------- ------------- --------------- ----- --------------------------
<S> <C> <C> <C> <C>
Joel B. Alvord 1,644 3,558 5,202
Saul L. Basch 63,574(1) 63,574
Richard H. Booth 1,250 550 1,800
Colin G. Campbell 2,186 1,200(2) 2,954 6,340
Richard G. Dooley 6,791 6,580 13,371
Michael L. Downs 136,512(3) 136,512
William B. Ellis 1,000 3,578 4,578
E. James Ferland 1,000 2,000(4) 3,755 6,755
John J. Kelley 144,965(5) 144,965
Gordon W. Kreh 255,831(6) 90,050(7) 345,881
Simon W. Leathes 650 458 1,108
Lois D. Rice 752 200(8) 4,147 5,099
John M. Washburn, Jr. 10,503 2,000(4) 6,784 19,287
Robert C. Walker 85,427(9) 85,427
Wilson Wilde 891 160(4) 1,051
</TABLE>
All Current Directors and Executive Officers
as a Group (18 in number): 1,007,006 (10)
(1) Includes 60,000 shares subject to options to purchase shares of Company
common stock which are exercisable on or before April 17, 1998.
(2) 400 shares held in trusts for benefit of children and 800 shares held as
trustee of trusts for benefit of nieces and nephews, over which Mr.
Campbell exercises shared voting and investment power.
(3) Includes 115,000 shares subject to options to purchase shares of Company
common stock which are exercisable on or before April 17, 1998.
(4) Shares held by spouse.
(5) Includes 134,200 shares subject to options to purchase shares of Company
common stock which are exercisable on or before April 17, 1998.
(6) Includes 233,750 shares subject to options to purchase shares of Company
common stock which are exercisable on or before April 17, 1998.
(7) 2,300 shares held by spouse; 4,000 shares and 83,750 options exercisable on
or before April 17, 1998 transferred by Mr. Kreh held by children.
(8) As trustee.
7
<PAGE>
(9) Includes 80,000 shares subject to options to purchase shares of Company
common stock which are exercisable on or before April 17, 1998.
(10) Includes 892,200 shares subject to options to purchase shares of Company
common stock which are exercisable on or before April 17, 1998. Assuming
the exercise of all such options, the percentage of Company common stock
owned by directors and executive officers as a group would be 4.96% of the
Company common stock outstanding.
Section 16(a) Beneficial Ownership Reporting Compliance
Ownership of and transactions in Company stock by executive officers and
directors of the Company are required to be reported to the Securities and
Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of
1934. To the Company's knowledge, based solely on a review of the copies of
reports that were furnished to the Company and written representations that no
other reports were required, all required reports were made in a timely manner
with respect to the fiscal year ended December 31, 1997.
HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Executive compensation programs for the Senior Vice Presidents and Chief
Executive Officer of the Company (the "executives") are administered by the
Human Resources Committee of the Board of Directors (the "Committee"). A
nationally recognized compensation consultant also reviews and analyzes the
Company's executive compensation policies and practices in order to advise the
Committee as more fully described below. The Committee believes that the
structure of the Company's compensation programs provides a direct link between
Company performance and executive compensation.
Under the direction of the Committee, executive compensation programs are
structured to provide performance-based incentives to achieve the Company's
short and long-term goals, and to enable the Company to attract and retain key
individuals. In 1997, two groups of comparison companies were used to determine
competitive executive pay levels and practices. Comparison Group I, used for
reviewing competitive pay levels for executives, was composed of 18 leading
property/casualty insurance companies (including five of the eight insurance
companies in the S&P 500 Property/Casualty Insurance Index used in the
Performance Graphs located on page 17). Comparison Group II, used for reviewing
competitive compensation practices, was composed of the top twenty companies on
Fortune's list of most admired companies (none of which are included in the S&P
500 Property/Casualty Insurance Index used in the Performance Graphs located on
page 17). Compensation practices analyzed included the level and mix of
compensation components, actual and targeted stock ownership levels and the
design of short and long-term incentives. In assessing competitive compensation
practices, the Committee believes that it is appropriate to review compensation
practices at high-performing, well-run companies.
Base salary and variable compensation paid under the Company's incentive
plans (Short-Term and Long-Term Incentive Plans and the 1995 Stock Option Plan)
in 1997 to executives as a group, and for Mr. Kreh individually, were below the
median range of that paid to executives by the companies in Comparison Group I
according to information compiled by the Company's compensation consultant. It
is the Committee's intent to target future compensation in the median of the
range of that paid to executives by the companies in Comparison Group I.
Base salary adjustments are made for executives based upon an analysis of
individual performance, changes in responsibilities, and comparative data for
base salaries paid to executives with similar responsibilities in Comparison
Group I. Annual salary adjustments for executives are recommended by the Chief
Executive Officer and approved by the Human Resources Committee in its
discretion. The Committee determines adjustments for the Chief Executive Officer
in its discretion. For 1997, base salary adjustments for executives other than
Mr. Kreh were made for competitive reasons based upon comparisons with
Comparison Group I. Mr. Kreh received a 29.63% base salary increase based on the
Committee's analysis of the comparative data for base salaries paid to
executives with similar responsibilities in Comparison Group I.
8
<PAGE>
The Company's Short-Term Incentive Plan provides for the annual award of
bonuses to officers of the Company, including the executives, and any other
employees designated by the Committee, based upon the Company's attainment of
certain net income per share targets, and other operating results. The plan is
proposed to be amended in order to assure objective criteria for determining
annual formula-based awards to qualify them for a deduction under the Internal
Revenue Code as described in detail beginning on page 17. The following
description is applicable to awards made for the plan year ending in 1997.
For 1997, the Committee evaluated Company results achieved for growth in
revenue, growth in operating income, insurance combined ratio, return on equity
and engineering services' margin, as compared, where appropriate, to published
results achieved or anticipated for the property/casualty insurance industry as
a whole. In 1997, the Actual Percentage of Budgeted Net Income Per Share
exceeded the target level set by the Committee at the beginning of the year. In
1997, the Committee determined that the Company substantially outperformed the
property/casualty insurance industry for return on equity, insurance combined
ratio and revenue growth (the Company's return on equity for 1997 was 19.1% and
the insurance combined ratio was 91.7%). Mr. Kreh was awarded $700,000 under the
plan based on the Committee's evaluation of Mr. Kreh's contributions to these
results. The Committee determined the total dollars available for awards under
the plan and Mr. Kreh determined the executives' awards for 1997, based on his
evaluation of 1997 results and each executive's contributions to such results.
If shareholders approve the proposed amended Short-Term Incentive Plan,
payouts beginning with the one for the 1998 plan year will be made under the
terms of the amended plan as described beginning on page 17.
Long-term incentives are provided to executives through awards made under
the Company's Long-Term Incentive Plan. The plan is proposed to be amended as
described beginning on page 19. The following description is applicable to
awards made for the 1995-1997 Performance Period. Under the plan, the Committee
establishes specific Performance Goals for each participant (or all participants
as a group) at the beginning of each Performance Period based on one or more of
the following Performance Measures: insurance combined ratio; expense ratio; net
income per share; return on equity; total shareholder return; return on assets;
revenues; engineering services' margin; increase in book value; and market
share. For each Performance Goal, an award schedule of Performance Contingent
Units is established for minimum, target and maximum attainment of such goal,
based on a percentage of a participant's base salary rate at the beginning of
the period (adjusted for any promotional increases during the Performance
Period) divided by the average of the high and low trading prices of Company
common stock on the first trading date of the Performance Period.
The actual Performance Contingent Award to be paid to a participant at the
conclusion of the Performance Period is based on the level of attainment of the
Performance Goals established for such period. If the minimum level of
achievement is not reached for any of the Performance Goals, the payout is zero.
Payments made under the plan relating to any Performance Period for a
participant may not exceed $1 million. Awards are prorated for actual length of
service as an eligible executive during the Performance Period. Any payments are
made in cash or in shares of Company common stock (which may be restricted
shares), as determined by the Committee. At the discretion of the Committee,
dividend equivalents may be paid in conjunction with award payouts made under
the plan, equal to the amount of cash dividends that would have been paid during
the Performance Period with respect to an award of Performance Contingent Units
if the award had been made in Company common stock. The current plan provides
for Performance Periods of three years. As explained in more detail under
Proposal No. 3, beginning on page 19, the revised plan provides for Performance
Periods of three years, or such other duration as set by the Committee. However,
in order to gradually phase in the new program, the revised plan will be
implemented with two shorter initial Performance Periods which will end in 1998
and 1999, if the plan as amended is approved by shareholders at the 1998 Annual
Meeting. Performance Measures for these Performance Periods will be set during
the ninety day period provided for under Internal Revenue Code Section 162(m),
but had not yet been set by the Committee at the time of preparation of this
report.
9
<PAGE>
The Committee determined that payouts to be made under the plan for the
Performance Period ending in 1997 would be made in shares of restricted stock in
order to further link executives' interests with long-term Company performance.
These shares cannot be sold or transferred and will be forfeited if the
executive leaves the Company within a period of five years for reasons other
than death, disability, retirement, involuntary termination other than for
cause, or resignation with the consent of the Human Resources Committee of the
Board of Directors of the Company.
For the three-year Performance Period ending in 1997, the Committee
established specific Performance Goals at the beginning of the Performance
Period based on the following Performance Measures: net income per share,
expense ratio and return on equity. For each Performance Goal, an award schedule
of Performance Contingent Units was established for minimum, target and maximum
attainment of such goals, based on a percentage of the participant's base salary
rate at the beginning of the period (adjusted for any promotional increases
during the period), divided by the average of the high and low trading prices of
Company common stock on January 3, 1995. For the 1995 through 1997 Performance
Period, the net income per share threshold was not met and the expense ratio,
and the return on equity targets were exceeded. Awards made to executives under
the plan for the three-year Performance Period ending in 1997, including Mr.
Kreh's award of 3,216 shares of restricted stock, were calculated under the
award schedule established by the Committee based on these results.
During 1997, executive officers were eligible for awards under the
Company's 1995 Stock Option Plan. Plan awards provide executives with long-term
incentives and serve to further align executives' long-term interests with those
of shareholders. Stock options are awarded based upon the market price of
Company common stock on the date of the grant and provide a vehicle to reward
executives only if the price of Company common stock increases above the grant
price.
Awards to be made to specific participants are determined by the Committee
in its discretion. The Company's outside compensation consultant reviews each
executive's award in comparison to awards made to individuals employed by
companies in Comparison Group I and makes recommendations as to whether the
awards made to Company executives should be adjusted. Several factors were
considered in determining the size of stock option grants to executive officers
in 1997, including competitive practices at companies in Comparison Group I, the
Committee's perception of the recipient's ability to affect the results of the
Company over time and individual levels of responsibility. Awards made to
executives in 1997, including Mr. Kreh's award of 75,000 stock options, were
determined by the Committee in its discretion based on its evaluation of these
criteria.
The Committee and management have also agreed to the establishment of stock
ownership guidelines for executives. Shares owned directly or beneficially,
restricted shares and shares held in the Company's 401(k) and employee stock
ownership plan accounts are counted for purposes of the guidelines, while
unexercised stock options are not. Mr. Kreh's ownership goal was set at 30,000
shares, which he is expected to have achieved by the end of 1998. The goal for
other executives is ownership of 6,000 shares within five years of their
becoming an executive of the Company. Three of the executives have reached this
goal and the others are expected to achieve it within the stated time frame.
Under Section 162(m) of the Internal Revenue Code, publicly held
corporations may not deduct certain types of compensation paid to the Chief
Executive Officer and the next four most highly compensated individuals to the
extent such compensation exceeds $1 million. Certain types of compensation are
excluded from this limitation, including performance-based compensation paid
under plans that are approved by shareholders and administered by outside
directors.
Compensation derived from the exercise of stock options under the Company's
plans and awards made under the current provisions of the Long-Term Incentive
Plan are exempt from the limit on the corporate tax deduction. If the proposed
amendments to the Short-Term and Long-Term Incentive Plan are approved, awards
made pursuant to objective formulas under those plans as amended will be exempt
from the limit as described beginning on page 17. The proposed amendments
provide the Committee with the ability to make discretionary awards which may
not be deductible under Section 162(m), as the Board has determined that it is
in the best interests of the Company to retain some flexibility for
extraordinary situations. Compensation
10
<PAGE>
paid to executives during 1997 was fully deductible. For 1998, the Company
anticipates that a portion of Mr. Kreh's compensation will not be deductible as
a result of the award paid to him under the Short-Term Incentive Plan in 1998
for superior performance in 1997.
Respectfully submitted by the Human Resources Committee of the Board of
Directors of the Company
William B. Ellis (Chairman)
Colin G. Campbell
Simon W. Leathes
Lois D. Rice
11
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth cash compensation for the five most
highly compensated executive officers of the Company serving as executive
officers on December 31, 1997 for services rendered in all capacities to the
Company and its subsidiaries during the last three fiscal years.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Securities
Restricted Underlying All Other
Stock Options LTIP Compen-
Name and Principal Position Year Salary Bonus Award(s)(1) (Number Payouts(2) sation(3)
of shares)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gordon W. Kreh, President 1997 $568,654 $700,000 $186,817 75,000 0 $ 4,750
and Chief Executive Officer 1996 $527,692 $135,000 $121,636 75,000 0 $ 4,750
1995 $484,615 $300,000 0 47,500 $ 50,625 $ 6,532
Saul L. Basch, Senior 1997 $325,962 $330,000 $ 62,272 20,000 0 $ 4,750
Vice President, Treasurer 1996 $310,385 $ 60,000 $ 22,539 20,000 0 $ 4,500
and Chief Financial Officer 1995(4) $ 75,000 $ 30,000 0 20,000 $ 1,689 0
Michael L. Downs 1997 $325,962 $330,000 $ 74,762 30,000 0 $ 4,750
Senior Vice President 1996 $301,154 $ 30,000 $ 47,313 30,000 0 $ 4,500
1995 $248,462 $125,000 0 30,000 $ 11,645 $ 6,532
John J. Kelley 1997 $325,962 $310,000 $ 76,098 30,000 0 $ 2,553
Senior Vice President 1996 $302,692 $ 60,000 $ 49,549 30,000 0 $ 2,250
1995 $267,308 $125,000 0 30,000 $ 18,563 $ 5,922
Robert C. Walker, Senior 1997 $283,039 $230,000 $ 69,185 20,000 0 $ 4,750
Vice President and 1996 $267,308 $ 50,000 $ 42,522 20,000 0 $ 4,500
General Counsel 1995 $234,615 $100,000 0 20,000 $ 10,313 $ 4,605
</TABLE>
(1) For 1997, represents Long-Term Incentive Plan awards for 1995-1997
Performance Period, which were paid out in shares of restricted stock with a
five-year vesting period as explained in more detail in the Human Resources
Committee Report on Executive Compensation located on page 8. The value of
restricted stock shown in this column is calculated by multiplying the closing
price of Company common stock on the date the restricted shares were granted by
the number of shares awarded. Recipients are entitled to receive dividends on
restricted stock to the extent paid on Company common stock generally. The total
number of restricted shares held on 12/31/97 by each of the named executive
officers, and the aggregate value of such shares, calculated by multiplying them
by the closing price of Company common stock on such date is as follows: Mr.
Kreh, 2,666 shares, $147,130 aggregate value; Mr. Basch, 494 shares, $27,263
aggregate value; Mr. Downs, 1,037 shares, $57,229 aggregate value; Mr. Kelley,
1,086 shares, $59,934 aggregate value; and Mr. Walker, 932 shares; $51,435
aggregate value.
(2) The LTIP payouts column shows cash payouts made under the Company's
Long-Term Incentive Plan for the performance period that ended in 1995. Payouts
for the performance periods that ended in 1996 and 1997 were made in shares of
restricted stock, as reflected in the Restricted Stock Awards column.
(3) For 1997, reflects Company contributions under the Company's Thrift
Incentive Plan.
(4) Compensation for Mr. Basch reflects the fact that he was not employed by the
Company for a full year in 1995.
12
<PAGE>
STOCK OPTION AND LONG-TERM INCENTIVE PLAN TABLES
The following tables show information with respect to stock options and
potential awards under the Company's Long-Term Incentive Plan for the
individuals named in the Summary Compensation Table.
Option Grants in Last Fiscal Year (ended 12/31/97)
<TABLE>
Individual Grants Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Percent of Appreciation for
Number of Total Option Term(2)
Securities Options
Underlying Granted to Exercise
Options Employees or Base Expira-
Name Granted in Fiscal Price tion
(1) Year ($/Share) Date 5% 10%
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gordon W. Kreh 75,000 20.2% $45.81 2/23/2007 $ 2,160,712 $5,475,692
Saul L. Basch 20,000 5.4% $45.81 2/23/2007 $ 576,189 $1,460,184
Michael L. Downs 30,000 8.1% $45.81 2/23/2007 $ 864,284 $2,190,276
John J. Kelley 30,000 8.1% $45.81 2/23/2007 $ 864,284 $2,190,276
Robert C. Walker 20,000 5.4% $45.81 2/23/2007 $ 576,189 $1,460,184
</TABLE>
(1) Options granted are nonstatutory stock options. The exercise price of the
option is equal to the fair market value of the stock on the date of the grant.
Payment for the shares as to which an option is exercised may be made in cash or
in shares of Company common stock or a combination of cash and stock. These
options may not be exercised any earlier than one year or any later than ten
years from the date of the grant. Participants will be permitted to satisfy any
federal, state or local tax requirements due upon exercise of a stock option by
delivering to the Company already-owned Company common stock or by directing the
Company to retain stock otherwise issuable upon such exercise to the
participant, having a fair market value equal to the amount of the tax. Options
and stock appreciation rights will generally be nontransferrable during the
lifetime of the participant, except that the Human Resources Committee may, in
its discretion, grant nonqualified stock options that may be transferred
pursuant to a qualified domestic relations order, or to an immediate family
member or a trust for the benefit of an immediate family member.
(2) These figures are calculated pursuant to SEC rules by multiplying the number
of options granted by the difference between the option exercise price and a
future hypothetical stock price, assuming the value of Company common stock
appreciates 5% or 10% each year over the original option price, compounded
annually, for the life of the options. These figures are not intended to
forecast possible future appreciation, if any, of the Company's stock price.
Aggregated Option Exercises in Last Fiscal Year (ended 12/31/97) and FY-End
Option Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-money
Shares Options at Options at
Acquired on Value Fiscal Year-end Fiscal Year-end
Name Exercise Realized (#) ($)
(#) ($) Exercisable/ Exercisable/
Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gordon W. Kreh 0 $0 242,500(1)/75,000 $1,768,886/$693,937
Saul L. Basch 0 $0 40,000/20,000 $ 236,300/$185,050
Michael L. Downs 0 $0 85,000/30,000 $ 753,261/$277,575
John J. Kelley 0 $0 104,200/30,000 $ 790,312/$277,575
Robert C. Walker 0 $0 60,000/20,000 $ 531,350/$185,050
</TABLE>
(1) Of which 83,750 have been transferred to children.
13
<PAGE>
Long-Term Incentive Plan -- Awards in Last Fiscal Year (ended 12/31/97)(1)
<TABLE>
<CAPTION>
Number of Performance Estimated Future Payouts under
Shares, or Other Non-stock Price-based Plans
Units or Period until
Other Maturation or
Name Rights Payout Threshold Target Maximum
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gordon W. Kreh (1) 1997-1999 3,319 4,367 6,987
Saul L. Basch (1) 1997-1999 1,291 1,698 4,075
Michael L. Downs (1) 1997-1999 1,291 1,698 4,075
John J. Kelley (1) 1997-1999 1,291 1,698 4,075
Robert C. Walker (1) 1997-1999 1,127 1,482 3,558
</TABLE>
(1) This table reflects the schedule of awards established by the Human
Resources Committee at the beginning of 1997 and represents the potential number
of Performance Contingent Units that may be awarded to participants for the
1997-1999 Performance Period for the indicated levels of performance. If
shareholders approve the amended Long-Term Incentive Plan as described beginning
on page 19, participants will forfeit any right to awards that would have been
determined in accordance with the foregoing schedule. A detailed description of
the plan as in effect prior to amendment is contained in the Human Resources
Committee Report on Executive Compensation on page 8. The actual number of
performance units awarded at the end of a performance period, if any, is not yet
determinable because the number of units earned is based on Company performance
during the Performance Period. If the proposed amended and restated plan is
adopted, the revised plan will be implemented with two shorter initial
performance periods as explained beginning on page 19. The award schedules for
these periods had not yet been determined as of the date of preparation of this
Proxy Statement, but will be determined within the time limit set forth in the
revised plan.
Both the current and revised plan provide that if threshold, target or maximum
goals are reached, payouts of Performance Contingent Unit Awards under the plan
will be made in shares of Company common stock (which may be restricted shares)
or their corresponding cash value at the end of a Performance Period.
Performance Contingent Unit Awards are prorated for length of service during a
Performance Period, and for varying degrees of performance between the threshold
and maximum levels of performance. (For the Performance Period that ended on
December 31, 1997, payouts were made in shares of restricted stock as indicated
in the Summary Compensation Table located on page 12).
Retirement Plans
The following table shows the estimated annual amounts payable on a life annuity
basis to a participant retiring on 12/31/97 at age 65 under the Company's
qualified defined benefit pension plan based on compensation that is covered
under the plan and years of service with the Company. The table also includes
amounts payable under nonqualified supplemental pension plans that provide
benefits that would otherwise be denied participants by reason of certain
Internal Revenue Code limitations on qualified plan benefits. All of the
executives named in the Summary Compensation Table participate in these plans.
(A small portion of Mr. Kreh's annual retirement benefit shown in the table will
be paid from The Boiler Inspection and Insurance Company of Canada's retirement
plan based on Mr. Kreh's initial service and earnings with that affiliate.)
14
<PAGE>
<TABLE>
Years of Service
Final
Average
Earnings 5 10 15 20 25 30 35
- -------- - -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C>
200,000 15,267 30,534 45,802 61,069 76,337 82,337 88,337
300,000 23,267 46,534 69,802 93,069 116,337 125,337 134,337
400,000 31,267 62,534 93,802 125,069 156,337 168,337 180,337
500,000 39,267 78,534 117,802 157,069 196,337 211,337 226,337
600,000 47,267 94,534 141,802 189,069 236,337 254,337 272,337
700,000 55,267 110,534 165,802 221,069 276,337 297,337 318,337
800,000 63,267 126,534 189,802 253,069 316,337 340,337 364,337
900,000 71,267 142,534 213,802 285,069 356,337 383,337 410,337
1,000,000 79,267 158,534 237,802 317,069 396,337 426,337 456,337
1,100,000 87,267 174,534 261,802 349,069 436,337 469,337 502,337
1,200,000 95,267 190,534 285,802 381,069 476,337 512,337 548,337
1,300,000 103,267 206,534 309,802 413,069 516,337 555,337 594,337
1,400,000 111,267 222,534 333,802 445,069 556,337 598,337 640,337
1,500,000 119,267 238,534 357,802 477,069 596,337 641,337 686,337
</TABLE>
Benefits payable under the Company's Retirement Plan are based on the average of
the participant's highest three consecutive years of earnings in the 5-year
period before retirement, and on years of service. Earnings covered under the
plan include compensation listed in the Summary Compensation Table under the
"Salary", "Bonus", "Restricted Stock Awards" and "LTIP Payouts" columns.
(Restricted stock awarded under the Company's stock option plans that vested
prior to December 31, 1996 is included in the definition of earnings under the
plan based on the stock's value on the vesting date. Restricted stock awarded
under the Company's Long-Term Incentive Plan is included as earnings under the
plan in the year the shares are awarded, based on the fair market value of the
shares on the award date.) Credited years of service as of December 31, 1997 for
the individuals named in the Summary Compensation Table is as follows: Mr. Kreh,
27 years; Mr. Basch, two years; Mr. Downs, 25 years; Mr. Kelley, 26 years; and
Mr. Walker, four years.
In addition, the executive officers named in the Summary Compensation Table
are covered under a supplemental retirement/death benefit program. Under this
program, if the executive officer should die prior to his retirement, his
beneficiary will be entitled to an annual death benefit equal to 50% of the
executive's base salary for fifteen years. At retirement, the executive is
entitled to an annual retirement supplement equal to 35% of his base salary for
fifteen years. An executive's right to this benefit vests over a five-year
period, beginning on the date he is appointed an executive officer.
Employment Arrangements
The members of the Board of Directors believe that it is in the best
interests of the shareholders for the Company to have employment agreements with
each of the executive officers named in the Summary Compensation Table (and
certain other key employees) to (i) encourage them to remain in the Company's
employ during the uncertain times which attend a threatened or actual change in
control of the Company; and (ii) provide specified benefits in the event of
certain terminations unrelated to a change in control event. Under the terms of
the agreements, generally, a change in control shall be deemed to have occurred
if (i) any person acquires securities of the Company representing 25% or more of
the Company's then outstanding securities; (ii) current directors and those
replacement or additional members of the Board subsequently approved by a vote
of at least two-thirds of the Board, cease to make up at least two-thirds of the
Board; (iii) a merger or consolidation of the Company occurs such that the
shareholders of the Company prior to such merger own less than 60% of the
surviving corporation; or (iv) a complete liquidation or dissolution of the
Company or disposition of all or substantially all of the assets of the Company
occurs. A threatened change in control shall be deemed to have occurred if (i)
the Company enters an agreement, which if consummated would result in a change
in control; (ii) the Company or any person announces an intention to take
actions which if consummated would constitute a change in control; (iii) any
person acquires securities of the
15
<PAGE>
Company representing 10% or more of the Company's then outstanding securities;
or (iv) the Board determines that a threatened change in control has occurred.
Upon a change in control, the following will occur: (i) under the Company's
Long-Term Incentive Plan, the fair market value of Performance Contingent Units
allocated to the executive for each three-year Performance Period within which
the date of the change in control falls, prorated for actual service within each
Performance Period prior to such date, will be paid, and the restrictions on any
shares of restricted stock awarded will lapse and any amounts deferred will be
paid; (ii) under the Company's Short-Term Incentive Plan, an award will be paid
calculated as though target performance was achieved for the year within which
the change in control occurs; and (iii) under the Company's Stock Option Plan,
all stock options outstanding on the date of the change in control will become
immediately exercisable and the restrictions on any restricted stock previously
awarded will lapse.
If an executive's employment with the Company is terminated within the term
of the agreement following a change in control or, under certain circumstances,
a threatened change in control, other than for cause or resignation (other than
for good reason, which means termination as a result of, among other things, the
involuntary assignment of such executive to duties inconsistent with the
executive's position prior to such event or a reduction of the executive's
current compensation or benefits), the executive becomes entitled to the
following: (i) three times the sum of the executive's base salary in effect at
the time of such event and the three-year average of sums paid to the executive
under the Company's Short-Term and Long-Term Incentive Plans; (ii) a fully
vested supplemental retirement benefit, as described above under Retirement
Plans; (iii) credit for an additional three years of service under the Company's
retirement plans; (iv) three years of welfare benefits provided at the Company's
then current subsidy rate; (v) reimbursement of any costs incurred by the
executive to enforce the agreement; (vi) outplacement services; and (vii)
payment to the executive equal to the amount of any excise tax imposed upon the
executive with respect to the foregoing payments as a result of the occurrence
of such event.
The agreements also provide certain severance benefits in the event that
the Company terminates the employment of the executive other than for cause or
in connection with a change in control. In such event, the executive would be
entitled to receive severance payments in installments over a period of two
years equal to two times the executive's base salary, outplacement services and
reimbursement of any costs incurred to enforce the agreement if the executive is
successful in such effort.
The Company has established a trust (which would be funded upon a
threatened change in control) pursuant to which payments under these agreements
and certain other benefit plans will be paid in the event of a threatened or
actual change in control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are none.
TRANSACTIONS WITH MANAGEMENT
Fleet Financial Group, of which Mr. Alvord served during 1997 as a
director, performed various services for the Company in 1997, among which were
acting as the trustee for the Company's Retirement Plan and Employee Stock
Ownership Plan. The Company and certain of its subsidiaries also maintained
various accounts with Fleet Financial Group during 1997. In the opinion of the
Company, the fees for these services were comparable to those charged by other
financial institutions. The Company and its subsidiaries maintain banking
relationships with various other financial institutions.
The Company has committed to invest $2 million as a limited partner in a
private equity limited partnership which invests principally in targeted
businesses in the financial services industry. Mr. Alvord is a major equity
owner of the limited liability company which serves as the general partner of
the partnership.
16
<PAGE>
PERFORMANCE GRAPHS
The following two line-graphs compare cumulative, five-year and ten-year
total shareholder returns on Company common stock on an indexed basis with the
S&P 500 Stock Index and the S&P 500 Property/Casualty Insurance Index, based on
an initial investment on December 31, 1992 and December 31, 1987, respectively,
of $100, assuming that all dividends, if any, were reinvested.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HSB Group, Inc. 100 79.38 74.47 98.14 95.57 119.04
S & P Insurance
(Property/Casualty) - 500 100 98.23 103.04 139.51 169.53 246.60
S & P 500 100 110.08 111.53 153.45 188.68 251.63
</TABLE>
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HSB Group, Inc. 100 166.07 249.90 235.51 287.40 303.14 240.62 225.73 297.50 289.71 360.85
S & P 500 100 116.61 153.56 148.79 194.12 208.91 229.97 233.00 320.56 394.16 525.67
S & P Insurance
(Property/
Casualty) - 500 100 103.02 150.61 147.17 184.25 215.77 211.95 222.33 301.03 365.78 632.10
</TABLE>
PROPOSAL 2
PROPOSAL TO AMEND AND RESTATE THE SHORT-TERM INCENTIVE PLAN
The Short-Term Incentive Plan provides for annual incentive awards to
officers of the Company, including the executives, provided certain performance
measures are achieved. The plan is intended to provide an additional incentive
for officers of the Company to make significant contributions to the performance
and
17
<PAGE>
growth of the Company, and to attract and retain in the employ of the Company
employees of exceptional ability.
The Board of Directors has adopted, subject to shareholder approval, an
amended Short-Term Incentive Plan to be effective January 1, 1998. The revised
Short-Term Incentive Plan has been designed to qualify certain payments to
participants under the plan as performance-based compensation under Section
162(m) of the Internal Revenue Code. The plan has not been previously approved
by shareholders.
In the event that the revised Short-Term Incentive Plan is not approved by
shareholders, awards would continue to be determined in accordance with the
current plan as in effect prior to amendment; therefore, a portion of such
awards may not be deductible to the Company to the extent that (when combined
with other non-exempt compensation) they exceed the limit set forth in Section
162(m) of the Internal Revenue Code.
The following is a summary of the material features of the amended
Short-Term Incentive Plan. This summary is qualified in its entirety by
reference to the complete text of the plan which has been filed electronically
with the Securities and Exchange Commission as an appendix to this Proxy
Statement. If approved by shareholders at the 1998 Annual Meeting, the amended
Short-Term Incentive Plan will become effective as of January 1, 1998.
Administration
The plan is administered by the Human Resources Committee of the Board (the
"Committee"). The Committee has the authority to designate officers and
employees to whom awards may be granted and to determine the terms and
conditions of any such awards. The Committee has the authority to adopt
guidelines for carrying out the plan as it may deem appropriate, and is
authorized to interpret the terms of the plan.
Eligibility
All officers of the Company (other than any officer who is the chief
executive officer of any direct or indirect subsidiary of the Company and is a
participant in the bonus plan of such subsidiary, or any individual expressly
excluded by the Committee) are eligible under the plan. The Committee also has
the authority to designate certain other key employees of the Company as
participants in the plan. The number of individuals currently eligible to
participate in the plan is twelve.
Plan Features
Under the revised plan, at the beginning of each year, the Committee will
establish target awards based on the Company achieving a certain level of Net
Income Per Share ("formula awards"). Net income is defined as after-tax income
per share, consolidating all subsidiaries, inclusive of realized capital gains
and losses. The Committee will have the authority to exercise discretion to
reduce (but not increase) the final amount of any formula awards to "covered
employees" (the executives named in the compensation table) based on criteria
such as individual and Company performance. Formula awards made to covered
employees are designed to meet the requirements of Section 162(m) of the Code
regarding performance-based compensation. The Committee will also have the
ability to make discretionary non-formula awards to participants under the plan
that will not meet Section 162(m) requirements, in order for the Board to
preserve flexibility to reward individuals for extraordinary achievements not
contemplated at the time a schedule was established for formula awards. The
actual award amounts that will be granted to specific individuals in the future
is not presently determinable.
For a formula award under the plan to be deductible under Section 162(m),
the plan must include a dollar limit payable to a participant for a plan year.
The Board has set this limit at $2 million for formula awards. The limit for
formula awards under the revised plan has been set higher than the level at
which awards have been made under the plan in the past, and the Committee does
not currently expect to significantly increase the level of awards to be made
under the plan in the future. The significant dollar limit and the provision
permitting non-formula discretionary awards were included in the revised plan in
order to achieve tax deductibility for awards in most cases and still preserve
flexibility for the Board to reward achievements
18
<PAGE>
related to non-recurring extraordinary events. The plan as in effect prior to
amendment contained a percentage of salary limitation but no specific dollar
limitation. The plan also provides that the Committee may require deferral of,
or may permit a participant to elect to defer, all or part of an award. The
deferral of an award until retirement could, for example, be required by the
Committee in order to enable such a payment to be tax deductible by the Company
at the time it is paid out to a retired employee. Payment of awards may be made
in the form of stock (which may be restricted), stock units or cash. The maximum
number of shares of common stock which are authorized for delivery to
participants under the plan is 250,000.
Amendment of the Plan
Under the terms of the plan, the Committee is permitted to amend, suspend
or discontinue the plan subject to any requirement for shareholder approval
imposed by applicable law.
Shareholder Vote Required for Approval
Approval of Proposal 2 requires that the number of votes cast in favor of
the proposal exceed the number of votes cast opposing the proposal. The Board of
Directors unanimously recommends a vote FOR Proposal 2.
PROPOSAL 3
PROPOSAL TO AMEND AND RESTATE THE LONG-TERM INCENTIVE PLAN
The current Long-Term Incentive Plan was approved by shareholders on April
18, 1995 and is scheduled to expire on December 31, 1998. The purpose of the
plan is to provide incentives for executives of the Company to increase the
earnings of the Company on a long-term basis; to attract and retain in the
employ of the Company individuals of outstanding abilities; and to more closely
align the interests of executives with shareholders of the Company. The plan has
been designed to qualify certain payments to participants under the plan as
performance-based compensation under Section 162(m) of the Internal Revenue
Code.
The Board of Directors of the Company adopted, subject to shareholder
approval, several amendments to the plan, including the following significant
changes, to be effective January 1, 1998: an extension of the term of the plan
to December 31, 2003; an increase in the number of shares available for delivery
to participants thereunder to 250,000; an increase in the maximum amount payable
to a participant with respect to Performance Contingent Awards for a Performance
Period to $2 million; a provision for the Committee to make non-formula
discretionary awards; and a modification to the Performance Period definition to
permit the Committee to set Performance Periods of three years or such other
period as the Committee may determine. Based on significant transactions entered
into by the Company during 1997 including changes to its capital structure, as
discussed in the 1997 Annual Report, the Board determined that the previously
established schedules for Performance Periods ending in 1998 and 1999 were no
longer relevant or appropriate. As a result, if the plan as amended is approved
by shareholders at the 1998 Annual Meeting, executives will waive any rights
under the previous award schedules and the revised plan will be implemented with
two shorter initial Performance Periods which will end in 1998 and 1999.
By approving the amended Long-Term Incentive Plan, shareholders will be
approving, among other things, the performance measures, eligibility
requirements and limits on certain awards contained therein, and the
authorization of an additional 100,000 shares of common stock of the Company for
delivery to participants under the plan. In the event that the revised Long-Term
Incentive Plan is not approved by shareholders, tax-deductible formula awards
would continue to be determined in accordance with the current plan as in effect
prior to amendment and the Board would consider making potentially
non-deductible awards in recognition of the Company changes referred to above.
The following is a summary of the material features of the Long-Term
Incentive Plan, as amended. This summary is qualified in its entirety by
reference to the complete text of the plan which has been filed electronically
with the Securities and Exchange Commission as an appendix to this Proxy
Statement. If approved by shareholders at the 1998 Annual Meeting, the amended
Long-Term Incentive Plan will become effective as of January 1, 1998 and will
expire on December 31, 2003.
19
<PAGE>
Administration
The plan is administered by the Human Resources Committee of the Board (the
"Committee"). The Committee has the authority to designate officers and
employees to whom awards may be granted and to determine the terms and
conditions of any such awards. The Committee has the authority to adopt
guidelines for carrying out the plan as it may deem appropriate, and is
authorized to interpret the terms of the plan.
Eligibility
All Senior Officers of the Company (presently defined as Chief Executive
Officer, President, Executive Vice President, Senior Vice President, Corporate
Secretary and Treasurer), other than any individual expressly excluded by the
Committee, are eligible under the plan. The Committee also has the authority to
designate certain other officers or key employees of the Company as participants
in the plan. The number of individuals currently eligible to participate in the
plan is seven.
Plan Features
Performance Periods are defined as periods of three consecutive years
beginning each January 1 or such other period as the Committee may specify.
Prior to or within ninety days following the commencement of each Performance
Period, the Committee shall establish in writing, for each participant (or for
all participants as a group), specific objective Performance Goals for
Performance Contingent Awards based on one or more of the following Performance
Measures: combined ratio; expense ratio; net income per share; return on equity;
total shareholder return; return on assets; revenues; operating margin; increase
in book value; and market share. For each Performance Goal, an award schedule of
Performance Contingent Units is established for minimum, target and maximum
attainment of such goal, based on a percentage of a participant's base salary
rate (adjusted for any promotional increases during the Performance Period)
divided by the average of the high and low trading prices of Company common
stock on the first trading date of the Performance Period. Performance
Contingent Units are defined as the right to receive up to 100% of the value of
shares of common stock of the Company, which value may be paid in share units,
shares (including restricted shares) of common stock of the Company or cash as
determined by the Committee.
The actual Performance Contingent Award to be paid to a participant under
the schedule described above at the conclusion of the Performance Period shall
be based on the level of attainment of the Performance Goals established for
such period. Performance Contingent Awards are prorated for actual length of
service during the Performance Period. Following the end of a Performance
Period, the Committee shall ascertain and certify in writing whether and the
degree to which the Performance Goals for such period have been met. Any
payments shall be made in cash, in share units or shares of Company common stock
(which may either be restricted or not), as determined by the Committee. At the
discretion of the Committee, dividend equivalents may be paid in conjunction
with payouts made under the plan, equal to the amount of cash dividends that
would have been paid during the Performance Period with respect to an award of
Performance Contingent Units if the award had been made in Company common stock.
The Committee shall have the authority to reduce Performance Contingent Awards
otherwise payable to participants but shall not have the authority to increase
any Performance Contingent Award calculated under the terms of the award
schedule. Performance Contingent Awards made pursuant to the schedule described
above are designed to meet the requirements of Section 162(m) of the Internal
Revenue Code regarding performance-based compensation. The Committee will also
have the ability to make discretionary awards to participants under the plan
that will not meet Section 162(m) requirements, as the Board has determined that
it is in the best interests of the Company to preserve flexibility to reward
executives for achievements related to extraordinary events not contemplated at
the time the schedule is established for Performance Contingent Awards. The
actual amounts that will be granted under the plan to specific individuals in
the future is not presently determinable.
For a Performance Contingent Award under the plan to be deductible under
Section 162(m), the plan must include a dollar limit payable to a participant
for a plan year. The Board has set this limit at $2 million for Performance
Contingent Awards. The limit for Performance Contingent Awards under the revised
plan
20
<PAGE>
has been set higher than the level at which awards have been made under the plan
in the past, and the Committee does not currently expect to significantly
increase the level of awards to be made under the plan in the future. The limit
was increased to $2 million and the provision permitting non-formula
discretionary awards was included in the revised plan in order to achieve tax
deductibility for awards in most cases and still preserve flexibility for the
Board to reward achievements related to non-recurring extraordinary events. The
plan also provides that the Committee may require deferral of, or may permit a
participant to elect to defer, all or part of an award. The deferral of an award
until retirement could, for example, be required by the Committee, in order to
enable such a payment to be tax deductible by the Company at the time it is paid
out to a retired employee.
Amendment of the Plan
Under the terms of the plan, the Committee is permitted to amend, suspend
or discontinue the plan subject to any requirement for shareholder approval
imposed by applicable law.
Shareholder Vote Required for Approval
Approval of Proposal 3 requires that the number of votes cast in favor of
the proposal exceed the number of votes cast opposing the proposal. The Board of
Directors unanimously recommends a vote FOR Proposal 3.
PROPOSAL 4
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors recommends that the firm of Coopers & Lybrand L.L.P.
be appointed as independent public accountants for the Company for the year
ending December 31, 1998. Coopers & Lybrand L.L.P. has served as the Company's
independent public accountants since 1965.
Representatives of Coopers & Lybrand L.L.P. will be present at the meeting
to make a statement if they wish to do so, and will be available to respond to
appropriate questions raised by shareholders.
Unless otherwise directed, the shares represented by the enclosed proxy
card will be voted for the appointment of Coopers & Lybrand L.L.P. as
independent public accountants for 1998. Approval of Proposal 4 requires that
the number of votes cast in favor of the proposal exceed the number of votes
cast opposing the proposal.
The Board of Directors unanimously recommends a vote FOR Proposal 4.
DEADLINE FOR SHAREHOLDER PROPOSALS
Shareholders who wish to submit written proposals for possible inclusion in
next year's proxy statement must make certain that they are received no later
than November 6, 1998. Proposals should be sent to the Corporate Secretary, HSB
Group, Inc., One State Street, P.O. Box 5024, Hartford, Connecticut 06102-5024.
OTHER BUSINESS TO COME BEFORE THE MEETING
The management does not know of any matters to be presented for
consideration at the meeting other than the matters described in the Notice of
Annual Meeting; but if other matters are properly presented, it is the intention
of the persons named in the accompanying proxy to vote on such matters in
accordance with their judgment. Shareholders desiring to nominate persons for
election as directors or to bring other business before shareholders at the
meeting must provide the appropriate written notice required by the Company's
Bylaws, copies of which are available upon request to the Corporate Secretary of
the Company.
21
<PAGE>
ADDITIONAL INFORMATION AVAILABLE
THE COMPANY FILES AN ANNUAL REPORT ON FORM 10-K WITH THE SECURITIES AND
EXCHANGE COMMISSION. SHAREHOLDERS MAY RECEIVE A COPY OF THE 10-K BY SENDING A
WRITTEN REQUEST TO THE OFFICE OF THE TREASURER, HSB GROUP, INC., ONE STATE
STREET, P.O. BOX 5024, HARTFORD, CONNECTICUT 06102-5024.
By Order of the Board of Directors,
R. K. PRICE
Corporate Secretary
Printed on recycled paper 750-PS-97
22
<PAGE>
Appendix A
As amended and restated effective 1/1/98
HSB GROUP, INC. SHORT-TERM INCENTIVE PLAN
1. Purpose of Plan
The purposes of this Plan are: (a) to provide an additional incentive for
officers and other selected key employees to make significant contributions to
the performance and growth of the Company, and (b) to attract and retain in the
employ of the Company persons of exceptional ability.
2. Definitions
As used in the Plan, the following terms shall have the meanings set forth
below:
a) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated
under Section 12 of the Exchange Act.
b) "Award" shall mean any award payable under this Plan.
c) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
d) "Board" shall mean the Board of Directors of the Company.
e) "Change in Control" shall be deemed to have occurred if the events set
forth in any one of the following paragraphs shall have occurred:
(i) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities acquired
directly from the Company or its affiliates) representing 25% or more
of the combined voting power of the Company's then outstanding
securities, excluding any Person who becomes such a Beneficial Owner
in connection with a transaction described in clause (A) of paragraph
(iii) below; or
(ii) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on
December 23, 1996, constitute the Board and any new director (other
than a director whose initial assumption of office is in connection
with an actual or threatened election contest, including but not
limited to a consent solicitation, relating to the election of
directors of the Company) whose appointment or election by the Board
or nomination for election by the Company's shareholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on December 23, 1996 or
whose appointment, election or nomination for election was previously
so approved or recommended; or
(iii) there is consummated a merger or consolidation of the Company or
any direct or indirect subsidiary of the Company with any other
corporation, other than (A) a merger or consolidation which would
result in the voting securities of the Company outstanding immediately
prior to such merger or consolidation continuing to represent (either
by remaining outstanding or by being converted into voting securities
of the surviving entity or any parent thereof), in combination with
the ownership of any trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any subsidiary of the
Company, at least 60% of the combined voting power of the securities
of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (B) a
merger or consolidation effected to implement a recapitalization of
the Company (or similar transaction) in which no Person is or becomes
the Beneficial Owner, directly or indirectly, of securities of the
Company (not including in the securities Beneficially Owned by such
Person any securities acquired directly from the Company or its
Affiliates) representing 25% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or
disposition by the Company of all or substantially all of the
Company's assets to an entity, at least 60% of the combined voting
power of the voting securities of which are owned by shareholders of
the Company in substantially the same proportions as their ownership
of the Company immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred by virtue of the consummation of any
transaction or series of integrated transactions immediately following
which the record holders of the common stock of the Company
immediately prior to such transaction or series of transactions
continue to have substantially the same proportionate ownership in an
entity which owns all or substantially all of the assets of the
Company immediately following such transaction or series of
transactions.
f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
g) "Committee" shall mean the Human Resource Committee of the Board or
any future committee of the board performing similar functions.
h) "Company" shall mean HSB Group, Inc. and, except in determining under
this Plan whether or not any Change in Control of the Company has
occurred, shall include any successor to its business and/or assets
which assumes this Plan by operation of law, or otherwise.
i) "Covered Employee" shall mean a "covered employee" within the meaning
of Section 162(m) of the Code.
j) "Disability" shall mean any condition which would entitle an employee
of the Company to receive benefits under the Company's Long-Term
Disability Plan.
k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
l) "Fair Market Value" shall mean the average of the high and low prices
per share of the Company's Shares as reported by the New York Stock
Exchange Composite Transaction Reporting System (NYSE) on the date for
which the Fair Market Value is being determined, or if no quotations
are available for the Company's Shares, for the next preceding date
for which a quotation is available. If the Company's Shares are not
then listed on the NYSE, Fair Market Value shall be reasonable
determined by the Committee in its sole discretion.
m) "Net Income" shall mean after-tax income per share, before cumulative
effect of accounting changes, as determined under generally accepted
accounting principles, consolidating all subsidiaries and inclusive of
realized capital gains and losses.
n) "Participant" shall mean an employee of the Company to whom an award
has been made under the Plan.
o) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (i) the Company or
any of its subsidiaries; (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any of its
Affiliates; (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, or (iv) a corporation
owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the
Company.
p) "Plan" shall mean the HSB Group, Inc. Short-Term Incentive Plan.
q) "Plan Year" shall mean a calendar year.
r) "Retirement" shall mean the termination of employment under
circumstances which entitle an employee to receive retirement benefits
under the Company's Employees' Retirement Plan.
s) "Shares" shall mean the Common Stock of the Company.
t) "Stock Grant" shall mean a grant of Shares or of a right to receive
Shares (or their cash equivalent or a combination of both) in the
future subject to such conditions and restrictions as the Committee
shall determine at the time of grant.
u) "Target Award" shall mean an Award level that may be paid if a certain
level of Net Income is achieved for a Plan Year.
3. Administration of the Plan
The Plan shall be administered by the Committee as defined herein. Each member
of the Committee shall be a "disinterested director" within the meaning of Rule
16b-3 of the General Rules and Regulations promulgated under the Exchange Act
and an "outside director" within the meaning of Section 162(m) of the Code. The
Committee is authorized to interpret the Plan and shall adopt guidelines for
carrying out the Plan as it may deem appropriate. Such guidelines shall be
consistent with the Plan and may include, but need not be limited to, the size
and terms of awards to be made and the conditions for payment of such awards.
Decisions of the Committee shall be final, conclusive and binding upon all
parties concerned, unless otherwise determined by a vote of a majority of the
disinterested members of the Board of Directors.
4. Eligibility for Awards
Any employee who is an Officer of the Company (other than any Officer who is the
chief executive officer of any Affiliate of the Company and is a participant in
the annual bonus plan of such subsidiary, or any individual expressly excluded
by the Committee) on or prior to December 31 of each Plan Year is eligible to
participate in the Plan and receive an Award pursuant to Section 5 except as
provided in Section 6. The Committee may in its discretion designate other key
employees to participate in the Plan. Eligibility will be determined at the
close of each Plan Year.
5. Basis of Awards
At the beginning of each Plan Year, the Committee shall establish Target Awards
and the level of Net Income which must be achieved for a Plan Year in order for
Target Awards to be payable to Participants. The maximum amount of any Award to
be paid to a Participant under the Plan is $2,000,000. The Committee shall have
the sole authority to determine the amount of any Award within the above maximum
for each Participant. In determining such Award, the Committee shall consider
the contribution made by the Participant towards achievement of the Net Income
and such other factors as the Committee considers appropriate.
6. Awards to Covered Employees
a) If the Committee determines at the time that a Target Award is
established for a Participant that such Participant is, or may be as
of the end of the tax year for which the Company would claim a tax
deduction for such Award, a Covered Employee, then the Committee may
provide that this Section 6 is applicable to such Award under such
terms as the Committee shall determine.
b) If an award is subject to this Section 6, then the level of Net Income
which must be achieved for a Plan Year will be established by the
Committee within 90 days of the beginning of a Plan Year or within
such other time period set forth under Section 162(m) of the Code or
any regulations thereunder in order for such level to be considered
"pre-established".
c) The Committee may, in its discretion reduce the Award payable to a
Covered Employee at any time prior to payment based on such criteria
it may establish. Notwithstanding any provision in this Plan to the
contrary, the Committee may not adjust upwards the amount payable
pursuant to any award subject to this Section 6, nor may it waive the
achievement of Net Income pre-established by the Committee pursuant to
this Section 6 except in the case of a Participant who no longer is a
Covered Employee at the time such award is paid.
d) Prior to the payment of any Award to a Covered Employee pursuant to
this Section 6, the Committee shall certify in writing that the Net
Income level applicable to such Award has been met.
e) The Committee shall have the power to impose such other restrictions
on awards subject to this Section 6 as it may deem necessary or
appropriate to ensure that such Awards satisfy all requirements for
"performance-based compensation" within the meaning of section 162(m)
of the Code, and any regulations thereunder.
7. Timing and Form of Payment of Awards
The Committee will have the sole discretion to determine the form of payment of
an Award for each Participant. Awards may be payable in cash or in the form of a
Stock Grant, or a combination of the foregoing and shall be subject to such
other conditions and restrictions as the Committee shall establish.
8. Deferral of Payment
a) A Participant may, with permission of the Committee elect to defer
receipt of all or a specified part of any Award. Such an election
shall be subject to such terms and conditions as are prescribed by the
Committee. Deferral elections are irrevocable and must be made during
the time period and in the manner prescribed by the Committee.
b) To the extent that the Committee, in its discretion, determines that
the payment of an Award would not be deductible by the Company
pursuant to Section 162(m) of the Code, the Committee may defer
payment of all or the non-deductible portion of such Award until such
time as such amount would be deductible. The terms and conditions of
any such deferral shall be prescribed by the Committee.
c) The right of a Participant to receive any unpaid portion of any amount
deferred hereunder shall be an unsecured claim against the general
assets of the Company.
9. Tax Withholding
The Company shall have the right to require Participants to remit to the Company
an amount sufficient to satisfy any tax withholding requirements or to deduct
from any payments made pursuant to the Plan amounts sufficient to satisfy tax
withholding requirements.
10. No Right to an Award or Continued Employment
a) Nothing contained in this Plan or in any resolution adopted or to be
adopted by the Board of Directors will constitute the granting of an
Award hereunder. The granting of an Award pursuant to the Plan will
take place only when authorized by the Committee. No Award and no
rights of ownership thereunder will be transferable otherwise than
pursuant to Section 12. There is no obligation imposed on the
Committee for uniformity of treatment of Participants under the Plan.
b) Nothing in the Plan shall interfere with or limit in any way the right
of the Company to terminate any Participant's employment at any time,
nor confer upon any Participant any right to continue in the employ of
the Company.
11. Rights on Termination of Employment
a) If a Participant in this Plan shall terminate employment with the
Company on account of death, Retirement or Disability or otherwise
terminates employment with the written consent of the Committee prior
to the end of any Plan Year in respect of which such Participant may
be eligible for an Award, the amount of the award, if any, payable to
the Participant or his or her beneficiary, shall be prorated based
upon the number of full and partial months of employment within such
Plan Year.
b) A Participant whose employment terminates by dismissal with or without
cause, or who voluntarily terminates his or her employment without
consent prior to the expiration of a Plan Year, will not be entitled
to receive an award under the Plan. Notwithstanding the foregoing, a
Participant whose employment terminates within two years following a
Change in Control and prior to the end of any Plan Year shall be
entitled to receive an Award as though such termination was with the
written consent of the Committee.
c) In no event shall an Award or a portion thereof, the payment of which
has been deferred pursuant to Section 8 be subject to forfeiture.
12. Designation of Beneficiary
A Participant may file with the Corporate Secretary of the Company a designation
of a beneficiary or beneficiaries on the appropriate form, which designation may
be changed or revoked by the Participant's sole action, provided that the change
or revocation is filed with the Corporate Secretary. In case of the death of the
Participant, before or after termination of employment, any Award to which he or
she is entitled and any deferred portions of a deceased Participant's Award
shall be delivered to the beneficiary or beneficiaries so designated or, if no
beneficiary has been designated or survives such Participant, will be delivered
to, or in accordance with the directions of, the executor or administrator of
such Participant's estate.
13. Change in Control
a) In the event of a Change in Control of the Company, this Plan shall
continue to be binding upon the Company, any successor in interest to
the Company and all persons in control of the Company or any successor
thereto and no transaction or series of transactions shall have the
effect of reducing or canceling the Award of a Participant that has
been declared but not paid unless consented to in writing by such
affected Participant.
b) As soon as practicable following a Change in Control, a Participant
shall be paid a lump sum amount in cash equal to the Target Award
payable to the Participant (in lieu of any other award payable
hereunder for the Plan Year within which the Change in Control occurs)
and any Awards previously deferred in accordance with Section 8
hereof, plus interest accrued thereon up until the date of payment.
c) Upon a Change in Control the restrictions and deferral limitations and
other conditions applicable to any Stock Grant made pursuant to
Section 7 shall lapse as of the date of such Change in Control.
14. Unfunded Obligations; Trust Agreement
a) The Company will pay from its general assets all awards to be made
hereunder. However, the Company may in its discretion establish a
trust, escrow agreement or similar arrangement in order to aid the
Company in meeting its obligations hereunder.
b) Any assets transferred by the Company into any such arrangement shall
remain at all times assets of the Company and subject to the claims of
the Company's general creditors in the event of bankruptcy or
insolvency of the Company. No security interest in such assets shall
be created in a Participant's favor and a Participant's rights under
this Plan and under any such arrangement shall be those of a general
unsecured creditor of the Company.
15. Assignment and Alienation
Benefits under this Plan may not be anticipated, assigned (either at law or in
equity), alienated, or subjected to attachment, garnishment, levy, execution or
other legal or equitable process. If any Participant or beneficiary under this
Plan becomes bankrupt or attempts to anticipate, alienate, sell, transfer,
assign, pledge, encumber or charge any benefit under this Plan, such benefit
shall, in the discretion of the Committee, cease and terminate, in which event
the Committee may hold or apply the same or any part thereof for the benefit of
such Participant, his or her beneficiary, spouse, children, other dependents or
any of such individuals, in such proportion as the Committee may deem proper.
16. Modification or Termination of the Plan
a) The Committee may at any time terminate or from time to time modify or
suspend, and if suspended, may reinstate any or all of the provisions
of this Plan, subject to any requirement for shareholder approval
imposed by applicable law, except that no modification of this Plan
may be made which will adversely affect any rights or obligations with
respect to any awards theretofore made under the Plan.
b) The Corporate Secretary of the Company shall be authorized to make
minor or administrative changes in the Plan or changes required by or
made desirable by law or government regulation.
17. Other Plans and Special Awards
a) Nothing contained in this Plan shall prohibit the Committee or the
Board from granting other awards or establishing other incentive
compensation plans providing for the payment of incentive compensation
to employees, including Participants.
b) Notwithstanding Section 6 and the intention of the Committee to
maintain tax deductibility of awards granted hereunder to Covered
Employees pursuant to Section 162(m) of the Code, the Committee
reserves the right to grant awards which do not meet the requirements
of Section 162(m) as to deductibility (for example, awards based on
measures other than Net Income or otherwise not established in
accordance with Section 6 ) in order to recognize unanticipated
business conditions or events which have, or are expected to have, a
significant effect on the Company.
18. Shares Subject to the Plan
a) Subject to Section 18 ( b), the maximum number of Shares that may be
delivered to Participants and their beneficiaries under the Plan shall
be 250,000. Any Shares covered by a Stock Grant which are subsequently
forfeited, withheld to cover tax withholding or settled in cash shall
be deemed to have not been delivered for purposes of determining the
maximum number of Shares available for delivery under the Plan.
b) In the event of any change in the Shares of the Company by reason of
any stock dividend, stock split, recapitalization, reorganization,
merger, consolidation, split-up, combination, or exchange of shares,
or rights offering to purchase Shares at a price substantially below
Fair Market Value, or of any similar change affecting the Shares, the
number of Shares covered by a Stock Grant which have not been
delivered, and the number of Shares which may be delivered hereunder,
shall be appropriately adjusted consistent with such change in such
manner as the Board in its discretion may deem equitable to prevent
substantial dilution or enlargement of the awards and rights granted
or made available to Participants hereunder. Any fractional Shares
resulting from such adjustments shall be eliminated.
19. Effective Date
This Plan as amended and restated shall be effective as of January 1, 1998,
subject to approval by shareholders at their annual meeting in 1998, and shall
remain in effect until such time as it shall be terminated by the Committee.
<PAGE>
As Amended and restated effective 1/1/98
HSB GROUP, INC.
LONG-TERM INCENTIVE PLAN
1. Purposes of Plan
The purposes of this Plan are: (a) to provide an additional incentive for
Senior Officers and other selected key employees to increase the earnings
of the Company on a long-term basis; (b) to attract and retain in the
employ of the Company persons of outstanding abilities; and (c) to more
closely align the interests of the Senior Officers and other selected key
employees with those of the shareholders of the Company.
2. Definitions
(a) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated
under Section 12 of the Exchange Act.
(b) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Change in Control" shall be deemed to have occurred if the events set
forth in any one of the following paragraphs shall have occurred:
(i) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities acquired
directly from the Company or its affiliates) representing 25% or more
of the combined voting power of the Company's then outstanding
securities, excluding any Person who becomes such a Beneficial Owner
in connection with a transaction described in clause (A) of paragraph
(iii) below; or
(ii) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on
December 23, 1996, constitute the Board and any new director (other
than a director whose initial assumption of office is in connection
with an actual or threatened election contest, including but not
limited to a consent solicitation, relating to the election of
directors of the Company) whose appointment or election by the Board
or nomination for election by the Company's shareholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on December 23, 1996 or
whose appointment, election or nomination for election was previously
so approved or recommended; or
(iii) there is consummated a merger or consolidation of the Company or
any direct or indirect subsidiary of the Company with any other
corporation, other than (A) a merger or consolidation which would
result in the voting securities of the Company outstanding immediately
prior to such merger or consolidation continuing to represent (either
by remaining outstanding or by being converted into voting securities
of the surviving entity or any parent thereof), in combination with
the ownership of any trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any subsidiary of the
Company, at least 60% of the combined voting power of the securities
of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (B) a
merger or consolidation effected to implement a recapitalization of
the Company (or similar transaction) in which no Person is or becomes
the Beneficial Owner, directly or indirectly, of securities of the
Company (not including in the securities Beneficially Owned by such
Person any securities acquired directly from the Company or its
Affiliates) representing 25% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or
disposition by the Company of all or substantially all of the
Company's assets to an entity, at least 60% of the combined voting
power of the voting securities of which are owned by shareholders of
the Company in substantially the same proportions as their ownership
of the Company immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
have occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of
the common stock of the Company immediately prior to such transaction or
series of transactions continue to have substantially the same
proportionate ownership in an entity which owns all or substantially all of
the assets of the Company immediately following such transaction or series
of transactions.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Committee" shall mean the Human Resource Committee of the Board or
any future committee of the Board performing similar functions.
(g) "Company" shall mean HSB Group, Inc. and, except in determining under
this Plan whether or not any Change in Control of the Company has
occurred, shall include any successor to its business and/or assets
which assumes this Plan by operation of law, or otherwise.
(h) "Disability" shall mean any condition which would entitle an employee
of the Company to receive benefits under the Company's Long-Term
Disability Plan.
(i) "Dividend Equivalent" shall mean an amount equal to the cash dividends
that would have been paid with respect to an award of Performance
Contingent Units paid hereunder if the award constituted Stock, duly
issued and outstanding on the date on which a dividend is payable on
the Shares.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(k) "Fair Market Value" shall mean the average of the high and low prices
per share of the Company's Shares as reported by the New York Stock
Exchange Composite Transaction Reporting System (NYSE) on the date for
which the Fair Market Value is being determined, or if no quotations
are available for the Company's Shares, for the next preceding date
for which such a quotation is available. If Company Shares are not
then listed on the NYSE, Fair Market Value shall be reasonably
determined by the Committee in its sole discretion.
(l) "Participant" shall mean an employee of the Company to whom an award
has been made under the Plan.
(m) "Performance Contingent Award" shall mean an award of Performance
Contingent Units.
(n) "Performance Contingent Unit" shall mean the right to receive up to
100% of the value of Shares, which value may be paid in cash or a
Stock Grant, as determined by the Committee, contingent upon the
achievement of Performance Goals established by the Committee.
(o) "Performance Goals" shall mean specific levels of one or more
Performance Measures at a corporate and/or business unit level
established in writing by the Committee for a particular Performance
Period.
(p) "Performance Measures" shall mean any of the following:
- Insurance Combined Ratio
- Expense Ratio
- Net Income Per Share
- Return on Equity
- Total Shareholder Return
- Return on Assets
- Revenues
- Operating Margin
- Increase in Book Value
- Market Share
(q) "Performance Period" shall mean a three-year period, or such other
period established by the Committee during which any Performance Goals
set by the Committee with respect to a Performance Contingent Award
are to be measured.
(r) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (i) the Company or
any of its subsidiaries, (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any of its
Affiliates, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, or (iv) a corporation
owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the
Company.
(s) "Plan" shall mean the HSB Group, Inc. Long-Term Incentive Plan.
(t) "Retirement" shall mean the termination of employment under
circumstances which entitle an employee to receive retirement benefits
under the Company's Employees' Retirement Plan.
(u) "Shares" shall mean the Common Stock of the Company.
(v) "Stock Grant" shall mean a grant of Shares or of a right to receive
Shares (or their cash equivalent or a combination of both) in the
future subject to such conditions and restrictions as the Committee
shall determine at the time of grant.
3. Administration of the Plan
The Plan shall be administered by the Committee as defined herein. Each
member of the Committee shall be a "disinterested director" within the
meaning of Rule 16b-3 of the General Rules and Regulations promulgated
under the Exchange Act and an "outside director" within the meaning of
Section 162(m) of the Code. The Committee is authorized to interpret the
Plan and shall adopt guidelines for carrying out the Plan as it may deem
appropriate. Such guidelines shall be consistent with the Plan and may
include, but need not be limited to, the size and terms of awards to be
made and the conditions for payment of such awards. Decisions of the
Committee shall be final, conclusive and binding upon all parties
concerned, unless otherwise determined by a vote of a majority of the
disinterested members of the Board of Directors.
4. Shares Subject To the Plan
Subject to Section 9 of the Plan the maximum number of Shares that may be
delivered to Participants and their beneficiaries under the Plan shall be
250,000. Any Shares covered by a Stock Grant which are subsequently
forfeited, withheld to cover tax withholding or settled in cash shall be
deemed to have not been delivered for purposes of determining the maximum
number of Shares available for delivery under the Plan.
5. Eligibility
(a) All Senior Officers of the Company (presently defined as Chief Executive
Officer, President, Executive Vice President, Senior Vice President,
Corporate Secretary, Treasurer, General Counsel, and Chief Financial
Officer) other than any individual expressly excluded by the Committee, are
eligible to participate in this Plan. An individual who is elected by the
Board as a Senior Officer following the commencement of a Performance
Period shall, unless otherwise determined by the Committee, be eligible for
an award for such Performance Period(s) based on such individual's Base
Salary in effect at the time of such election, and prorated for the number
of full months within such Performance Period that such individual was a
Senior Officer.
(b) The Committee, in its sole discretion, may designate from time to time
certain other officers or key employees of the Company, its affiliates
and subsidiaries who may participate in this Plan.
6. Establishment of Performance Goals and Performance Contingent Awards
(a) Prior to or within ninety days (or such shorter period as is required
under Section 162(m) of the Code) following the commencement of each
Performance Period, the Committee shall establish in writing for each
Participant, or all Participants as a group, specific Performance
Goals based on one or more Performance Measures. For each Performance
Goal an award schedule of Performance Contingent Units shall be
established for minimum, target and maximum attainment of such goal.
The actual Performance Contingent Award to be paid to a Participant at
the conclusion of the Performance Period shall be based on the level
of attainment of the Performance Goals established for such period.
The Committee may designate that Performance Contingent Awards shall
be credited with Dividend Equivalents during the Performance Period
which shall be paid when and if such awards are paid.
(b) After Performance Goals have been established, they shall not be
modified in respect to the Performance Period to which they relate.
7. Payment of Performance Contingent Awards and Dividend Equivalents
(a) Following the end of a Performance Period, the Committee shall
ascertain and certify in writing whether and the degree to which the
Performance Goals for such period have been met. A Participant shall
be entitled to receive payment of an amount not exceeding the Fair
Market Value of the maximum award of Performance Contingent Units
established by the Committee pursuant to Section 6 hereof based upon
the level of attainment of the Performance Goals determined by the
Committee. The Committee shall have the authority to reduce the award
of any Participant even if the Performance Goals attributable to such
award have been met. The Committee shall have no authority hereunder
to increase any award calculated under this Plan, except in accordance
with Section 16.
(b) As soon as practicable following certification by the Committee
pursuant to Section 7(a), payment of awards to Participants shall be
made. Payments shall be made in cash, a Stock Grant or a combination
of the foregoing as prescribed by the Committee and shall be subject
to such other conditions and restrictions as the Committee shall
establish.
(c) Payment of any award of Dividend Equivalents shall be made at the same
time as payment of the Performance Contingent Award to which it
relates and shall be made in cash or a Stock Grant as prescribed by
the Committee.
(d) The maximum aggregate Fair Market Value of Performance Contingent
Units (determined as of the first trading day of the Performance
Period) and Dividend Equivalents which may be awarded to any
Participant for any Performance Period shall not exceed $2 million.
8. Deferral of Payment
(a) A Participant may, with permission of the Committee elect to defer
receipt of all or a specified part of any Performance Contingent Award
and related Dividend Equivalents. Such an election shall be subject to
such terms and conditions as are prescribed by the Committee. Deferral
elections are irrevocable and must be made during the time period and
in the manner prescribed by the Committee.
(b) To the extent that the Committee, in its discretion, determines that
the payment of a Performance Contingent Award would not be deductible
by the Company pursuant to Section 162(m) of the Code, the Committee
may defer payment of all or the non-deductible portion of such award
until such time as such amount would be deductible. The terms and
conditions of any such deferral shall be prescribed by the Committee.
(c) The right of a Participant to receive any unpaid portion of any amount
deferred hereunder shall be an unsecured claim against the general
assets of the Company.
9. Adjustments in the Event of Change in Common Stock of the Company
In the event of any change in the Shares of the Company by reason of any
stock dividend, stock split, recapitalization, reorganization, merger,
consolidation, split-up, combination, or exchange of shares, or rights
offering to purchase Shares at a price substantially below Fair Market
Value, or of any similar change affecting the Shares, the number of
Performance Contingent Units awarded which have not been paid and the
number of Shares covered by a Stock Grant which have not been delivered,
and the number of Shares which may be delivered hereunder, shall be
appropriately adjusted consistent with such change in such manner as the
Board in its discretion may deem equitable to prevent substantial dilution
or enlargement of the awards and rights granted to, or available for
Participants hereunder. Any fractional shares resulting from such
adjustments shall be eliminated.
10. No Right to an Award or Continued Employment
(a) Nothing contained in this Plan or in any resolution adopted or to be
adopted by the Board of Directors will constitute the granting of an
award hereunder. The granting of an award pursuant to the Plan will
take place only when authorized by the Committee. No award and no
rights of ownership thereunder will be transferable otherwise than
pursuant to Section 12. There is no obligation imposed on the
Committee for uniformity of treatment of Participants under the Plan.
(b) Nothing in the Plan shall interfere with or limit in any way the right
of the Company to terminate any Participant's employment at any time,
nor confer upon any Participant any right to continue in the employ of
the Company.
11. Rights on Termination of Employment
(a) If a Participant in this Plan shall terminate employment with the
Company on account of Retirement or Disability or otherwise terminate
employment with the written consent of the Company prior to the
expiration of any Performance Period(s) in respect of which such
Participant may be eligible for an award, or if a subsidiary at which
a Participant is employed shall cease to be a subsidiary of the
Company prior to the expiration of any Performance Period(s), the
award(s) paid to such Participant shall be prorated according to the
number of months of employment in each such Performance Period.
(b) A Participant whose employment terminates by dismissal with or without
cause, or who voluntarily terminates employment without consent prior
to the expiration of a Performance Period, shall lose any right to
receive payment of such award.
(c) In no event shall an award or a portion thereof the payment of which
has been deferred pursuant to Section 8 be subject to forfeiture.
12. Death of a Participant
(a) A Participant may file with the Corporate Secretary of the Company a
designation of a beneficiary or beneficiaries on the appropriate form,
which designation may be changed or revoked by the Participant's sole
action, provided that the change or revocation is filed with the
Corporate Secretary. In case of the death of the Participant, before
or after termination of employment, any earned but unpaid portion of
an award to which he or she is entitled and any deferred portions of a
deceased Participant's award shall be delivered to the beneficiary or
beneficiaries so designated or, if no beneficiary has been designated
or survives such Participant, shall be delivered to, or in accordance
with the directions of, the executor or administrator of such
Participant's estate.
(b) If a Participant shall die during a Performance Period, such
Participant's beneficiary shall only be entitled to receive the award
declared for the Performance Period ending in the year of the
Participant's death.
13. Tax Withholding
The Company shall have the right to require Participants to remit to the
Company an amount sufficient to satisfy any tax withholding requirements or
to deduct from any payments made pursuant to the Plan amounts sufficient to
satisfy tax withholding requirements.
14. Modification or Termination
(a) The Committee may at any time terminate or from time to time modify or
suspend, and if suspended, may reinstate any or all of the provisions
of this Plan, subject to any requirement for shareholder approval
imposed by applicable law, except that no modification of this Plan
may be made which will adversely affect any rights or obligations with
respect to any awards theretofore made under the Plan.
(b) The Corporate Secretary of the Company shall be authorized to make
minor or administrative changes in the Plan or changes required by or
made desirable by law or government regulation.
15. Change in Control
(a) In the event of a Change in Control of the Company, this Plan shall
continue to be binding upon the Company, any successor in interest to
the Company and all persons in control of the Company or any successor
thereto, and no transaction or series of transactions shall have the
effect of reducing or canceling the award of a Participant that has
been declared but not paid unless consented to in writing by such
affected Participant.
(b) As soon as practicable following a Change in Control, a Participant
shall be paid a lump sum amount in cash equal to the aggregate value
of the Performance Contingent Awards payable to the Participant for
each of the Performance Periods within which the date of the Change in
Control occurs, calculated as to each such Performance Period by
multiplying the award that the Participant would have earned on the
last day of such Performance Period, assuming the achievement of each
of the Performance Goals at the target level established for such
Performance Period, by the fraction obtained by dividing the number of
full months and any fractional portion of a month during such
Performance Period prior to the Change in Control by the total number
of months contained in such Performance Period. For purposes of the
preceding sentence, the amount of cash delivered in payment of the
value of the Performance Contingent Awards shall equal the number of
Performance Contingent Units constituting such each such award
multiplied by the greater of (i) the highest Fair Market Value per
share of Stock at any time during the 60-day period preceding the
Change in Control and (ii) if applicable, the price of a Share which
is paid or offered to be paid, by any person or entity, in connection
with the transaction constituting the Change in Control. The amount
paid hereunder shall be in lieu of any other awards payable under this
Plan for the Performance Periods within which the Change in Control
occurs.
(c) Upon a Change in Control, the restrictions and deferral limitations
applicable to any Stock Grant made pursuant to Section 7 hereunder
shall lapse as of the date of such Change in Control.
(d) As soon as practicable following a Change in Control, any awards or
Dividend Equivalents previously deferred in accordance with Section 8
hereof, plus interest accrued thereon up until the date of payment,
shall be paid in full.
16. Other Plans and Special Awards
(a) Nothing contained in this Plan shall prohibit the Committee or the
Board from granting other awards or establishing other incentive
compensation plans providing for the payment of incentive compensation
to employees, including Participants.
(b) Notwithstanding Section 6 and the intention of the Committee to
maintain tax deductibility of awards granted hereunder pursuant to
Section 162(m) of the Code, the Committee reserves the right to grant
awards which do not meet the requirements of Section 162(m) as to
deductibility (for example, awards based on measures other than
Performance Measures or not established in accordance with Section 6 )
in order to recognize unanticipated business conditions or events
which have, or are expected to have, a significant effect on the
Company.
17. Unfunded Obligations; Trust Agreement
(a) The Company will pay from its general assets all awards to be made
hereunder. However, the Company may in its discretion, establish a
trust, escrow agreement or similar arrangement in order to aid the
Company in meeting its obligations hereunder.
(b) Any assets transferred by the Company into any such arrangement shall
remain at all times assets of the Company and subject to the claims of
the Company's general creditors in the event of bankruptcy or
insolvency of the Company. No security interest in such assets shall
be created in a Participant's favor and a Participant's rights under
this Plan and under any such arrangement shall be those of a general
unsecured creditor of the Company.
18. Assignment and Alienation
Benefits under this Plan may not be anticipated, assigned (either at law or
in equity), alienated, or subjected to attachment, garnishment, levy,
execution or other legal or equitable process. If any Participant or
beneficiary under this Plan becomes bankrupt or attempts to anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge any benefit
under this Plan, such benefit shall, in the discretion of the Committee,
cease and terminate, in which event the Committee may hold or apply the
same or any part thereof for the benefit of such Participant, his or her
beneficiary, spouse, children, other dependents or any of such individuals,
in such manner and in such proportion as the Committee may deem proper.
19. Effective Date and Termination of the Plan
This Plan, as amended, shall become effective as of January 1, 1998 subject
to the approval of the shareholders at their annual meeting in 1998. Unless
earlier terminated by the Committee subject to Section 14, the Plan shall
terminate on December 31, 2003. No Performance Contingent Award shall be
made pursuant to this Plan after the termination date, but awards made
prior to its termination date may extend beyond that date.
<PAGE>
EDGAR APPENDIX
The following is the text of the Company's 1998 form of proxy and memo to
employees participating in Company plans:
PROXY
HSB GROUP, INC.
ONE STATE STREET, P.O. BOX 5024, HARTFORD, CONNECTICUT 06102-5024
ANNUAL MEETING OF STOCKHOLDERS - APRIL 21, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Joel B. Alvord, Richard G. Dooley, Gordon
W. Kreh and Lois D. Rice each with the power to appoint his or her substitute,
and hereby authorizes them to represent and to vote, as designated on the
reverse side, all the shares of common stock of the Company held on record by
the undersigned on February 17, 1998 at the Annual Meeting of Stockholders to be
held on April 21, 1998 or any adjournment thereof, upon all matters properly
coming before said Annual Meeting, including but not limited to the matters set
forth on the reverse side, hereby revoking any proxy heretofore given.
IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSALS 1,2,3, AND 4.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE SIDE
THIS IS YOUR PROXY.
YOUR VOTE IS IMPORTANT.
Regardless of whether you plan to attend the Annual Meeting of Stockholders, you
can be sure your shares are represented at the meeting by promptly returning
your proxy in the enclosed envelope.
COMPANY HIGHLIGHTS DURING 1997
Highlights of the Company's 1997 financial results include:
- - a 24.2% increase in net income per share on a diluted basis to $3.29;
- - a 9.5% increase in net earned premium from insurance operations to $491.2
million;
- - a 9.8% increase in Engineering Services revenue to $61.3 million;
- - a 91.7% combined ratio - far better than the industry average of
approximately 102%;
- - a decline in the insurance expense ratio to 47.3% from 49.1%;
- - a 14.0% increase in net investment income to $36.8 million; and
- - a return on equity of 19.1%.
- - 1997 was also the 32nd consecutive year that the Company paid increased
dividends to stockholders.
/X/ Please mark votes as in this example.
The Board of Directors recommends a vote FOR proposals 1,2,3, and 4.
1. Election of Directors.
Nominees: Richard H. Booth, Colin G. Campbell, Simon W. Leathes
FOR ALL NOMINEES / /
WITHHELD FROM ALL NOMINEES / /
/ /---------------------------
For all nominees except as noted above
2. Approval of proposal to amend the Short-Term Incentive Plan
/ / FOR
/ / AGAINST
/ / ABSTAIN
3. Approval of proposal to amend the Long-Term Incentive Plan
/ / FOR
/ / AGAINST
/ / ABSTAIN
4. Appointment of independent public accountants
/ / FOR
/ / AGAINST
/ / ABSTAIN
MARK HERE IF YOU HAVE MADE COMMENTS / /
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
Please sign exactly as your name appears. If acting as attorney, executor,
trustee or in other representative capacity, sign name and print title. Please
date proxy and return in the enclosed post-paid return envelope.
Signature: ----------------------------- Date: -----------------
Signature: ----------------------------- Date: -----------------
<PAGE>
To: All Employees
From: R. K. Price, Senior Vice President and Corporate Secretary
Date: March 16, 1998
If you are a participant in any of the Company's stock plans (Payroll Investment
Plan, Employee Stock Ownership Plan, Thrift Incentive Plan - HSB Stock Fund, the
Long-Term Incentive Plan or the Stock Option and Restricted Stock Plan), you
should receive proxy materials for this year's Annual Meeting to be held on
April 21, 1998 through the U.S. mail shortly.
Annual reports and proxy materials were distributed beginning on March 6, 1998
via bulk mail in order to save on postage expenses. As many of you know, HSB has
used bulk mail for several years for this reason, and, although cost effective,
it can result in some delays in delivery.
If you hold shares registered other than in your name alone (e.g., jointly with
another individual or as custodian for a minor's account) you may receive
additional copies of the materials. You are encouraged to return any excess
copies of the Annual Report to your department or Branch Office, and extra
copies of the proxy statement to Jean Cohn, Law Department, Home Office.
Included with the proxy materials is a card upon which to register your vote in
connection with actions proposed to be taken at the Annual Meeting. The proxy
card lists the number of shares allocated to your account under each of the
plans in which you participate, as well as any shares you hold directly. The
following abbreviations are used to identify your holdings:
COM - Shares held directly or through the Payroll Investment Plan
RST - Restricted Stock held in the Company's plans
TIP - Shares allocated to your account under the Thrift Incentive Plan if you
participate in the HSB Stock Fund
ESO - Shares allocated to your account under the Employee Stock Ownership Plan
(ESOP)
Whether you own one share or a thousand, it is very important that your shares
be represented at the Annual Meeting. As a shareholder, you have the right and
an obligation to have your vote count at the Annual Meeting. I encourage you to
use this opportunity by completing the proxy card and sending it back in the
envelope provided.
If you do not receive your materials by April 10, 1998, or if you misplace your
card, please contact Jean Cohn, Home Office, Ext. 5724.
