SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-13135
HSB GROUP, INC.
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-1475343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 5024, ONE STATE STREET,
HARTFORD, CONNECTICUT 06102-5024
(Address of principal executive offices) (Zip Code)
(860) 722-1866
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since the last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the registrant's common stock without par
value, as of September 30, 1998: 29,369,779
<PAGE>
HSB GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements
Consolidated Statements of Operations for the
Quarters ended September 30, 1998 and 1997 and
the Nine Months ended September 30, 1998 and 1997
(unaudited)....................................................... 3
Consolidated Statement of Comprehensive Income for the Quarters
ended September 30, 1998 and 1997 and the Nine Months
ended September 30, 1998 and 1997 (unaudited)..................... 4
Consolidated Statements of Financial Position as
of September 30, 1998 (unaudited) and December 31, 1997 .......... 5
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1998 and 1997 (unaudited).............. 6
Notes to Consolidated Financial Statements (unaudited)............ 7
Item 2 - Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations..................... 11
PART II OTHER INFORMATION
Item 1 - Legal Proceedings........................................ 21
Item 6 - Exhibits and Reports on Form 8-K......................... 22
SIGNATURES.............................................................. 23
2
<PAGE>
HSB GROUP, INC.
Consolidated Statements of Operations
Unaudited
(in millions, except per share data)
<TABLE>
<CAPTION>
Quarter Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums $ 99.5 $ 121.3 $ 289.3 $ 360.9
Engineering services 25.3 15.5 67.7 45.2
Net investment income 15.5 9.1 46.6 25.8
Realized investment gains 7.9 2.3 18.4 6.2
---------- -------- -------- --------
Total revenues 148.2 148.2 422.0 438.1
---------- -------- -------- --------
Expenses:
Claims and adjustment 44.2 54.1 129.1 157.0
Policy acquisition 18.0 23.5 45.3 67.5
Underwriting and inspection 26.4 34.2 83.5 105.5
Engineering services 23.4 14.5 62.1 42.3
Interest 0.2 0.4 0.5 0.9
---------- -------- -------- --------
Total expenses 112.2 126.7 320.5 373.2
---------- -------- -------- --------
Gain on sale of IRI - - 39.0 -
Income from continuing operations
before income taxes and
distributions on capital securities $ 36.0 $ 21.5 $ 140.5 $ 64.9
Income taxes (benefit):
Current 9.8 14.2 39.1 26.8
Deferred (0.5) (8.9) 2.0 (10.3)
----------- --------- -------- --------
Total income taxes $ 9.3 $ 5.3 $ 41.1 $ 16.5
Distribution on capital securities
of subsidiary trust, net of income
tax benefits of $2.5; $0.4;
$7.4; and $0.4. 4.6 1.0 13.8 1.0
---------- -------- ----- ---
Income from continuing operations $ 22.1 $ 15.2 $ 85.6 $ 47.4
Discontinued operations:
Loss from operations, net of
income tax benefits of $--; $--;
$3.2;-and $--. - - (6.6) -
Gain on disposal, net of income
taxes of $--; $--;$23.7; and $--. - - 36.9 -
---------- -------- -------- --------
Total discontinued operations $ - $ - $ 30.3 $ -
---------- -------- -------- --------
Net income $ 22.1 $ 15.2 $ 115.9 $ 47.4
========= ========= ========= ========
Per share data:
Net income per common share-basic:
Income from continuing operations $ 0.75 $ 0.51 $ 2.91 $ 1.57
Net income $ 0.75 $ 0.51 $ 3.95 $ 1.57
Net income per common share-assuming dilution:
Income from continuing operations $ 0.72 $ 0.51 $ 2.71 $ 1.56
Net income $ 0.72 $ 0.51 $ 3.57 $ 1.56
Dividends declared per share $ 0.42 $ 0.40 $ 1.22 $ 1.16
Average shares outstanding and
common stock equivalents 35.3 29.9 35.3 30.2
See Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
HSB GROUP, INC.
Consolidated Statements of Comprehensive Income
Unaudited
(in millions)
<TABLE>
<CAPTION>
Quarter Ended Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net income $ 22.1 $ 15.2 $ 115.9 $ 47.4
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period (net of taxes (benefits)
of ($11.8); $0.5; $2.9 and $7.7) (21.9) 1.0 5.4 14.4
Add : reclassification adjustments for gains
included in net income (5.1) (1.3) (11.9) (3.6)
------------ ----------- ----------- -----------
(27.0) (0.3) (6.5) 10.8
Foreign currency translation adjustments (1.0) - (1.7) (0.2)
------------ ----------- ----------- -----------
Other comprehensive income (28.0) (0.3) (8.2) 10.6
------------ ----------- ------------ -----------
Comprehensive income $ (5.9) $ 14.9 $ 107.7 $ 58.0
============ =========== =========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
4
<PAGE>
HSB GROUP, INC.
Consolidated Statements of Financial Position
(In millions, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
------------- --------------
<S> <C> <C>
Assets:
Cash $ 11.8 $ 45.3
Short-term investments, at cost 92.4 379.2
Fixed maturities, at fair value
(cost - $546.5; $241.1) 555.9 248.4
Equity securities, at fair value
(cost - $329.2; $231.3 ) 409.4 323.8
------------- --------------
Total cash and invested assets 1,069.5 996.7
Reinsurance assets 595.6 124.5
Insurance premiums receivable 155.1 138.0
Engineering services receivable 26.9 12.2
Fixed assets 42.8 36.4
Prepaid acquisition costs 38.8 42.5
Capital lease 14.7 15.3
Investment in Radian - 83.4
Other assets 165.8 88.2
------------- --------------
Total assets $ 2,109.2 $ 1,537.2
============= ==============
Liabilities:
Unearned insurance premiums $ 473.6 $ 287.3
Claims and adjustment expenses 522.8 276.7
Short-term borrowings 4.4 42.4
Long-term borrowings 25.1 25.1
Capital lease 27.9 27.9
Deferred income taxes 30.7 31.5
Dividends and distributions on capital securities 18.3 13.3
Ceded reinsurance payables 88.1 3.9
Other liabilities 96.1 74.9
------------- --------------
Total liabilities 1,287.0 783.0
------------- --------------
Company obligated mandatorily redeemable capital
securities of subsidiary Trust I holding
solely junior subordinated deferrable
interest debentures of the Company, net
of unamortized discount of $1.1 and
$1.1 million, respectively 108.9 108.9
Company obligated mandatorily redeemable
convertible capital securities of
subsidiary Trust II holding solely junior
subordinated deferrable interest debentures
of the Company 300.0 300.0
Shareholders' equity:
Common stock (stated value; shares authorized
50.0; shares issued 32.0; shares
outstanding 29.4; 29.4) 10.0 10.0
Additional paid-in capital 34.3 31.6
Accumulated other comprehensive income 51.6 59.8
Retained earnings 323.8 248.8
Benefit plans (6.4) (4.9)
------------- --------------
Total shareholders' equity 413.3 345.3
------------- --------------
Total $ 2,109.2 $ 1,537.2
============= ==============
Shareholders' equity per common share
(restated for stock split) 14.08 11.75
See Notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE>
HSB Group, Inc.
Consolidated Statements of Cash Flows
Unaudited
(In Millions)
Nine Months Ended
September 30,
----------------------
1998 1997
--------- ----------
Operating Activities:
Net income $ 115.9 $ 47.4
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6.3 5.1
Deferred income taxes (benefit) 2.0 (10.0)
Realized investment gains, including market
adjustment for derivative instruments (18.4) (6.2)
Gain from the disposition of Radian (after tax) (30.3) -
Gain from the disposition of IRI (after tax) (25.2) -
Change in balances net of effects from purchases and
sales of subsidiaries:
Insurance premiums receivable (17.1) (20.4)
Engineering services receivable (12.1) (1.2)
Prepaid acquisition costs 3.7 (4.9)
Reinsurance assets (471.1) 16.5
Unearned insurance premiums 186.3 25.2
Claims and adjustment expenses 246.1 (24.1)
Ceded reinsurance payable 84.2 8.1
Investment in Radian - (5.3)
Other (27.3) (12.0)
--------- ----------
Cash provided by operating activities 43.0 18.2
--------- ----------
Investing Activities:
Fixed asset additions, net (12.6) 0.1
Investments:
Sale (purchase) of short-term investments, net 286.8 (35.4)
Purchase of fixed maturities (378.3) (51.4)
Proceeds from sale of fixed maturities 44.1 26.0
Redemption of fixed maturities 29.8 13.1
Purchase of equity securities (275.6) (178.1)
Proceeds from disposition of Radian 128.9 -
Proceeds from disposition of IRI 49.1 -
Proceeds from sale of equity securities 191.4 167.0
Purchase of Solomon Associates, net of cash acquired (2.1) -
Purchase of Kemper books of business (29.5) -
--------- ---------
Cash provided by (used in) investment activities 32.0 (58.7)
--------- ---------
Financing Activities:
Proceeds from Company-obligated mandatorily redeemable
capital securities of subsidiary trust - 108.9
Increase (decrease) in short-term borrowings (38.0) 14.8
Dividends and distributions on capital securities (52.0) (33.4)
Reacquisition of stock (27.8) (51.6)
Exercise of stock options 9.3 4.0
--------- ----------
Cash provided by (used) in financing
activities (108.5) 42.7
--------- ----------
Net increase (decrease) in cash (33.5) 2.2
Cash at beginning of period 45.3 4.5
--------- ----------
Cash at end of period $ 11.8 $ 6.7
========= ==========
Interest paid $ 1.9 $ 2.0
--------- ----------
Federal income tax paid $ 41.7 $ 25.7
--------- ----------
See notes to Consolidated Financial Statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The interim consolidated financial statements in this report include
adjustments based on management's best estimates and judgments,
including estimates of future loss payments, which are necessary to
present a fair statement of the results for the interim periods
reported. These adjustments are of a normal, recurring nature. The
financial statements are prepared on the basis of generally accepted
accounting principles and should be read in conjunction with the
financial statements and related notes in the 1997 Annual Report.
Certain amounts for 1997 have been reclassified or restated to conform
with the 1998 presentation.
2. Discontinued Operations
On January 2, 1998, the Company exercised its option to put its 40
percent share in Radian International LLC (Radian LLC) to The Dow
Chemical Company (Dow), for approximately $129 million, net of
expenses. Radian LLC was formed in January 1996 as a joint venture with
Dow to provide environmental, engineering, information technology,
remediation and strategic chemical management services to industries
and governments world-wide. In connection with the formation of the new
company, the Company contributed substantially all of the assets of its
wholly-owned subsidiary, Radian Corporation to Radian LLC. The results
of Radian LLC were classified as discontinued operations following
ratification in July 1997 by the Board of Directors of management's
decision to exercise its put. The Company's share of Radian LLC's
losses incurred subsequent to such decision of approximately $6.6
million after-tax was deferred until the closing of the sale on January
2, 1998. The after-tax gain of $30.3 million recognized in 1998 is net
of deferred losses noted above. In 1996 and prior to June 1997, the
Company's share of the joint venture's results were recorded as equity
in Radian.
3. Industrial Risk Insurers
On January 6, 1998, The Hartford Steam Boiler Inspection and Insurance
Company (HSBIIC) sold its 23.5 percent share in Industrial Risk
Insurers (IRI) to Employers Reinsurance Corporation (ERC), one of the
world's largest reinsurance companies, in accordance with a previously
announced purchase and sale agreement between ERC and IRI's
twenty-three member insurers. The gain on the sale of IRI was $39.0
million pre-tax and $25.2 million after-tax. IRI is a voluntary,
unincorporated joint underwriting association, which provides property
insurance for the class of business known as "highly protected risks"
(HPR) -- larger manufacturing, processing, and industrial businesses
which have invested in protection against loss through the use of
sprinklers and other means. Contemporaneous with the close of the sale,
IRI was reconstituted with ERC (with a 99.5 percent share) and HSBIIC
(with a .5 percent share) as the sole members. The new association has
been renamed HSB Industrial Risk Insurers. HSBIIC writes the business
for HSB Industrial Risk Insurers using its insurance licenses and
provides certain other management and technical services. In addition,
through various quota share reinsurance agreements with ERC and HSB
Industrial Risk Insurers, HSBIIC transferred its manufacturing book of
business to HSB Industrial Risk Insurers and will retain 85% of the
equipment breakdown insurance and 15% of the property insurance of the
combined insurance portfolio.
7
<PAGE>
4. Recent Accounting Developments
In June 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130 " Reporting
Comprehensive Income" which requires items that comprise comprehensive
income be reported in a financial statement display with the same
prominence as other financial statements. This presentation will
include such items as market value adjustments of securities, foreign
currency translation, and certain adjustments made for benefit plans,
which are currently reported as components of the changes in
shareholders' equity. This statement is effective beginning in 1998
with retroactive restatement of prior periods required.
Also in June of 1997 the FASB issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information". This standard
requires companies to report financial and descriptive information
about reportable operating segments. It includes disclosure
requirements relating to products and services, geographic areas and
major customers. This statement will be effective beginning year end
1998.
5. Legal Proceedings
HSBIIC is involved in two arbitration or litigation proceedings
regarding the extent to which certain explosion events are insured
under boiler and machinery policies of HSBIIC or under the all-risk
property insurance policies issued by other companies. Management
believes HSBIIC's policies do not provide coverage for losses resulting
from the explosion events that are the subject of these proceedings.
HSBIIC has accrued $6.5 million with respect to these cases for
potential loss adjustment expenses, including legal costs, to defend
HSBIIC's position. One case is on appeal; the other case is involved in
both arbitration and litigation proceedings. The final hearing in the
arbitration proceeding has concluded and the Company is currently
awaiting a decision. A trial date has not been set for either case. In
the event that HSBIIC is held liable for one or both of the remaining
claims, amounts in excess of HSBIIC's net maximum aggregate retention
of $8.5 million is recoverable from reinsurers. Claim amounts
potentially recoverable from reinsurers in the event of a possible
adverse outcome in these cases could range, in the aggregate, from $40
million to $195 million.
The obligations of HSBIIC's reinsurers with respect to these cases are
not in dispute. Therefore, management believes that any adverse
outcomes in these cases will not, in the aggregate, have a material
effect on either the results of operations or financial condition of
the Company. HSBIIC's reinsurance contracts do not require HSBIIC to
reimburse its reinsurers for any losses such reinsurers might incur
should these cases not be decided in HSBIIC's favor. Nevertheless,
reinsurers often quote rates for future coverages based upon their or
other reinsurers' experience on a particular account. Therefore, in the
event HSBIIC's reinsurers pay significant sums pursuant to the
arbitration or litigation proceedings described above, it is likely
HSBIIC's reinsurance rates would increase in future periods. However,
given the insured capacity that exists in reinsurance markets
worldwide, coupled with HSBIIC's ability to negotiate a redesign or
restructuring of its reinsurance program, it does not necessarily mean
that such an increase would be material.
8
<PAGE>
The Company is also involved in various other legal proceedings as
defendant or co-defendant that have arisen in the normal course of its
business. In the judgment of management, after consultation with
counsel, it is improbable that any liabilities which may arise from
such litigation will have a material adverse impact on the results of
operations or the financial position of the Company.
6. Earnings per share
In February 1997, FASB issued SFAS No. 128, "Earnings per Share". This
statement established standards for computing and presenting earnings
per share (EPS). It replaced the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement and a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. The requirements of this statement became effective for
year end 1997 financial statements with prior restatement required.
Accordingly, comparative information presented in the Consolidated
Statements of Operations have been restated in compliance with SFAS No.
128. On April 21, 1998 the Board of Directors approved a three-for-two
stock split for shares held of record on May 1, 1998. Additional shares
resulting from the split were distributed on May 22, 1998. In
accordance with SFAS No. 128, all earnings per share presentations have
been adjusted to reflect the impact of the stock split, including
retroactive restatement of prior periods. Previously, the Company
reported EPS of $ 0.76 and $2.35 per share for the quarter and nine
months ended September 30,1997, respectively .
9
<PAGE>
Computation of Earnings per Share
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, 1998 September 30, 1998
---------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations $ 22.1 $ 85.6
Basic EPS:
Income available to common
shareholders 22.1(A) $ 85.6(E)
Weighted Average Common Shares
Outstanding 29.3(B) 29.3(F)
Income from continuing operations
per common share-basic: $ 0.75(A/B) 2.91(E/F)
Effect of dilutive securities:
After-tax interest on convertible
capital securities $ 3.4 $ 10.2
Convertible capital securities 5.3 5.3
Stock options 0.7 0.7
Diluted EPS:
Income available to common and $ 25.5(C) 35.3 (D) $ 95.8(G) 35.3(H)
assumed conversions:
Income from continuing operations
per common share-assuming
dilution: $ 0.72(C/D) $ 2.71(G/H)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, 1997 September 30, 1997
---------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations $ 15.2 $ 47.4
Less: convertible preferred stock
dividends $ 0.3 $ 1.0
Basic EPS:
Income available to common
shareholders 14.9(A) $ 46.4(E)
Weighted Average Common Shares
Outstanding 29.0(B) 29.4(F)
Income from continuing operations
per common share-basic: $ 0.51(A/B) $1.57(E/F)*
Effect of dilutive securities:
Preferred stock dividends $ 0.3 $ 1.0
Convertible preferred stock 0.6 0.6
Stock options 0.3 0.2
Diluted EPS:
Income available to common and
assumed conversions: $ 15.2(C) 29.9(D) $ 47.4(G) 30.2(H)
Income from continuing operations
per common share-assuming
dilution: $ 0.51(C/D) $1.56(G/H)*
* Computation excludes rounding.
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
RESULTS OF OPERATIONS
Consolidated Overview
(dollar amounts in millions)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
------------------ --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross earned premium $ 212.5 $ 151.6 $ 567.8 $ 456.6
Ceded premium 113.0 30.3 278.5 95.7
-------- --------- ------- --------
Insurance premium $ 99.5 $ 121.3 $ 289.3 $ 360.9
Engineering services revenue 25.3 15.5 67.7 45.2
Net investment income 15.5 9.1 46.6 25.8
Realized investment gains 7.9 2.3 18.4 6.2
-------- --------- --------- ----------
Total revenues $ 148.2 $ 148.2 $ 422.0 $ 438.1
======== ========= ======== ===========
Pre-tax Income from continuing operations:
Pre-tax income excluding sale of IRI $ 36.0 $ 21.5 $ 101.5 $ 64.9
Pre-tax gain on sale of IRI -- -- 39.0 --
----------- --------- --------- -----------
Pre-tax income 36.0 21.5 140.5 64.9
Income taxes on continuing operations 9.3 5.3 41.1 16.5
Distributions on Capital Securities, net of tax 4.6 1.0 13.8 1.0
----------- ---------- --------- ------------
Income From continuing operations 22.1 15.2 85.6 47.4
After-tax gain on Radian Disposal -- -- 30.3 --
---------- --------- --------- -------------
Net income $ 22.1 $ 15.2 $ 115.9 $ 47.4
======= ======== ======= ==============
Net income per common share:
Basic $ .75 $ .51 $ 3.95 $ 1.57
Diluted $ .72 $ .51 $ 3.57 $ 1.56
</TABLE>
Net income for the nine months ended September 30, 1998 included after-tax gains
on the sale of HSB's interests in Industrial Risk Insurers (IRI) of $ 25.2
million and Radian International LLC of $ 30.3 million. The Radian International
LLC gain is net of after-tax operating losses of $ 6.6 million that were
deferred in 1997 when the decision was made to exercise HSB's option to
11
<PAGE>
put the Company's interest to The Dow Chemical Company. As a result, HSB's
interest in Radian International LLC was classified as a discontinued operation.
HSB's after-tax earnings increased 45.4 percent from the third quarter of 1997
and, excluding the above sales, increased 26.4 percent in the first nine months
of 1998 compared to 1997 due to improved engineering revenues and margins and
higher net realized gains.
Gross earned premiums grew 40.2 percent in the quarter and 24.4 percent year to
date compared to the prior year. Much of this growth is attributable to HSB
Industrial Risk Insurers. Contemporaneous with the sale of IRI, the IRI
association was reconstituted with Employers Reinsurance Corporation (ERC) (with
a 99.5 percent share) and The Hartford Steam Boiler Inspection and Insurance
Company (HSBIIC) (with a .5 percent share) as sole members. The new association
has been renamed HSB Industrial Risk Insurers. HSBIIC writes the business for
HSB Industrial Risk Insurers using its insurance licenses and provides certain
other services. HSBIIC transferred its highly protected risk (HPR) manufacturing
book of business to HSB Industrial Risk Insurers and through various quota share
reinsurance arrangements with ERC, HSBIIC retains 85 percent of the equipment
breakdown business and 15 percent of the property business of the combined
insurance portfolio. This arrangement is the largest contributing factor in the
growth of both the gross earned premium and the ceded premium. As a result, the
unearned insurance premiums, the reinsurance assets, and the ceded reinsurance
payables reflected in the Consolidated Statements of Financial Position have
increased significantly. The third quarter combined ratio improved to 87.9
percent in 1998 from 92.0 percent in 1997 and the year to date combined ratio
improved to 88.7 percent in 1998 from 91.3 percent in 1997. Engineering services
revenue increased 63.0 percent for the third quarter and 49.6 percent year to
date and margins in this business grew to 7.6 percent from 6.3 percent in the
third quarter of 1997 and to 8.3 percent from 6.5 percent year to date.
The effective tax rate on income from continuing operations for the third
quarter and year to date were 23.5 percent and 28.2 percent for 1998 compared to
24.4 percent and 25.4 percent for 1997. Typically tax rate fluctuations occur as
underwriting and engineering services results and realized gains change the mix
of pre-tax income between fully taxable earnings and tax preferred earnings that
can be obtained by investing in certain instruments. In 1998 the taxes
associated with the sale of IRI contributed to a higher first quarter effective
tax rate. The Company continues to manage its use of tax advantageous
investments to maximize after tax earnings.
Recent Accounting Developments
- ------------------------------
In June of 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This standard requires companies to report
financial and descriptive information about reportable operating segments. It
includes disclosure requirements relating to products and services, geographic
areas and major customers. This statement will be effective with calendar year
1998, however application is not required for interim financial statements in
the initial year. It is possible that this standard may redefine our segment
information. However, the Company has not yet determined how SFAS No. 131 will
be applied.
12
<PAGE>
Insurance Operations
- --------------------
Insurance operations include the insurance results of HSBIIC, HSB Engineering
Insurance Limited (HSB-EIL), The Boiler Inspection and Insurance Company of
Canada (BI&I) The Allen Insurance Company, Ltd, HSB of Connecticut and HSB of
Texas.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
---------------- ------------------
(in millions)
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross earned premium $ 212.5 $ 151.6 $ 567.8 $ 456.6
Ceded premium 113.0 30.3 278.5 95.7
--------- --------- -------- ---------
Insurance premium 99.5 121.3 289.3 360.9
Claims and adjustment expenses 44.2 54.1 129.1 157.0
Underwriting, acquisition
and other expenses 44.4 57.7 128.8 173.0
--------- --------- -------- --------
Underwriting gain $ 10.9 $ 9.5 $ 31.4 $ 30.9
========= ========= ======== ========
Loss ratio 44.4% 44.6% 44.6% 43.5%
Expense ratio (Excluding Goodwill
Amortization) 43.5% 47.4% 44.1% 47.8%
----- ----- ----- -----
Combined ratio 87.9% 92.0% 88.7% 91.3%
===== ===== ========== ========
</TABLE>
Gross earned premiums in the third quarter and year to date increased 40.2
percent and 24.4 percent from the comparable periods in 1997. This increase was
primarily attributable to the new arrangement with HSB Industrial Risk Insurers.
Gross earned premiums from IRI increased $ 51.7 million in the third quarter of
1998 and $ 118.4 million year to date 1998 compared to the respective periods in
1997. Gross earned premiums representing coverage outside the U.S. for non HSB
Industrial Risk Insurers business increased 11.3 percent in the third quarter
and 6.2 percent year to date from the comparable periods in 1997. In certain
areas of our direct domestic and foreign business, the market is experiencing
price erosion. HSB will not write business at rates which would lessen our
ability to maintain underwriting profit.
Increases in ceded premium of 272.9 percent in the third quarter and 191.0
percent year to date were the result of both the new HSB Industrial Risk
Insurers arrangement previously discussed and related reinsurance with ERC, and
changes in the Company's reinsurance programs which now utilize more quota share
reinsurance on certain of our books of business. We anticipate
13
<PAGE>
these new reinsurance contracts and the HSB Industrial Risk Insurers arrangement
will continue to result in high growth in gross earned premium but lower growth
in net earned premium.
The loss ratio declined from 44.6 percent in the third quarter of 1997 to 44.4
percent in the current quarter and increased from 43.5 percent in the first nine
months of 1997 to 44.6 percent in the first nine months of 1998. Year to date
1998 results were impacted by severe ice storms in Canada. In 1997 flood related
losses impacted the loss ratio. Gross claims and adjustment expenses for the
first nine months of 1998 and 1997 were $ 478.5 million and $ 216.6 million,
respectively. Gross claims in 1998 include approximately $ 130 million from
Hurricane Georges on exposures written by HSB Industrial Risk Insurers. On a net
basis the impact on losses for the third quarter and year was $ 1.7 million. The
significant increase in claims reserves, reinsurance assets and unearned
insurance premium reserves from prior years are primarily due to HSBIIC's new
relationship with HSB Industrial Risk Insurers as discussed above.
The expense ratio improved to 43.5 percent in the third quarter of 1998 from
47.4 percent in the third quarter of 1997 and to 44.1 percent year to date 1998
from 47.8 percent year to date 1997. The new quota share reinsurance agreements
and the HSB Industrial Risk Insurers arrangement with ERC, both of which result
in ceding commissions to HSBIIC have positively impacted our expense ratio by
approximately 12 percentage points year to date. A portion of such ceding
commission is intended to reimburse HSB for the additional costs of managing HSB
Industrial Risk Insurers. Ceding commissions should continue to positively
impact the expense ratio throughout 1998.
HSBIIC completed an acquisition of the monoline boiler and machinery business of
Kemper Insurance Companies, effective July 1, 1998. The two companies also
completed an arrangement for HSBIIC to reinsure boiler and machinery coverage
written as part of Kemper's commercial package policies. Kemper's total
estimated boiler and machinery premiums were $ 80 million in 1997.
Engineering Services Operations
- -------------------------------
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
------------------ --------------------
1998 1997 1998 1997
----- ---- ---- ----
<S> <C> <C> <C> <C>
Net engineering services revenue $ 25.3 $ 15.5 $ 67.7 $ 45.2
Net engineering services expenses 23.4 14.5 62.1 42.3
------- ------- ------- -------
Operating gain $ 1.9 $ 1.0 $ 5.6 $ 2.9
======= ======== ======= =======
Net margin 7.6% 6.3% 8.3% 6.5%
</TABLE>
Engineering services operations include the results of HSBIIC's, BI&I's, and
HSB-EIL's engineering services, HSB Reliability Technologies (HSBRT), Solomon
Associates, Inc (SAI) and the Company's other engineering services subsidiaries.
14
<PAGE>
In April 1998 HSB acquired SAI based in Dallas, Texas. SAI is an engineering
management consulting firm that provides comparative performance benchmarking
consulting to the refining, petro-chemical and power generation industries. In
1997, SAI had gross sales of $13 million. SAI establishes efficiency and
productivity benchmarks for 80 percent of the worldwide petroleum refining
industry. This acquisition expands HSB's engineering management consulting
services and benchmarking capability.
Engineering services revenues increased $ 9.8 million in the third quarter and
$22.5 million year to date compared to the same periods in 1997. The growth in
revenues year to date was primarily due to increases generated by HSBRT as their
revenues increased 20.2 percent, HSB-EIL's revenues of $ 7.8 million generated
through recent acquisitions, SAI revenues of $ 3.7 million, as well as revenues
generated by some recent small acquisitions. The improvement in operating gain
from the prior year reflects efforts to improve staff utilization and a refocus
in certain areas on pricing strategies. We are still incurring costs to develop
new products which have the objective of increasing growth rates.
On July 1, 1998, HSB purchased Kemper's ASME inspection services business that
certifies boiler and pressure vessel compliance with the codes and standards of
the American Society of Mechanical Engineers. Total estimated 1997 revenues were
approximately $ 7.5 million.
The Company has been focusing on identifying acquisition candidates in the niche
engineering management consulting service business, primarily in process
industries, in order to grow the engineering service segment of the business.
Investment Operations
- ---------------------
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
--------------- --------------------
1998 1997 1998 1997
-------- -------- ---- ----
<S> <C> <C> <C> <C>
Net investment income $ 15.5 $ 9.1 $ 46.6 $ 25.8
Realized investment gains 7.9 2.3 18.4 6.2
----------- --------- ---------- --------
Pretax income from
investment operations $ 23.4 $ 11.4 $ 65.0 $ 32.0
============= ======== ========== =========
</TABLE>
15
<PAGE>
Net investment income for the third quarter and year to date increased
significantly compared to the same periods in 1997 due to the investment of
proceeds from capital securities issued during the second half of 1997. In
addition, proceeds from the January sales of HSB's interests in IRI and Radian
International LLC significantly increased investable funds. Realized investment
gains were significantly impacted in 1998 by call premiums on fixed income
investments. In the third quarter of 1997 realized gains were reduced by $ 10.1
million and year to date 1997 by $ 29.5 million to reflect the estimated fair
value of three "zero cost" collar contracts entered into at the end of 1996
which were used to mitigate the effects of market risk on the U.S. common stock
portfolio. These collars were closed out by year end 1997.
The Company's investment strategy continues to be to maximize total return on
the investment portfolio through investment income and capital appreciation.
Investment strategies for any given year are developed based on many factors
including operational results, tax implications, regulatory requirements,
interest rates, dividends to shareholders and market conditions. The investment
portfolio includes a wide variety of high quality equity securities and both
domestic and foreign fixed maturities. The Company continues to manage its use
of tax advantageous investments to maximize after tax investment earnings.
Statement of Comprehensive Income
- ---------------------------------
In addition to the impact of HSB's results of operations, the Statement of
Comprehensive Income displays the effects of price movements on HSB's invested
assets. During the third quarter of 1998 the stock market went through a
correction, resulting in HSB's cumulative holding gains decreasing by $21.9
million as compared to a gain of $1.0 million in 1997. Year to date change in
cumulative holding gains in 1998 was an increase of $5.4 million as compared to
an increase of $14.4 million in 1997.
Liquidity and Capital Resources
- -------------------------------
Balances at
September 30 December 31
1998 1997
------------ ----------
Total assets $ 2,109.2 $ 1,537.2
Short-term investments 92.4 379.2
Cash 11.8 45.3
All other invested assets 965.3 572.2
Short-term borrowing 4.4 42.4
Common shareholder's equity 413.3 345.3
Liquidity refers to the Company's ability to generate sufficient funds to meet
the cash requirements of its business operations. The Company receives a regular
inflow of cash from maturing investments and engineering services and insurance
operations. The mix of the investment portfolio is managed to respond to
expected claim pay-out patterns and other cash requirements. The Company also
maintains a highly liquid short-term portfolio to provide for immediate cash
needs and to offset a portion of interest rate risk relating to certain capital
securities.
16
<PAGE>
Cash provided from operations was $ 43.0 million in the first nine months of
1998 compared to $18.2 million for the same period in 1997. Premiums collected
increased in the first nine months of 1998 compared to the first nine months of
1997 while claims paid declined.
Capital resources consist of shareholders' equity, capital securities and debt
outstanding and represent those funds deployed or available to be deployed to
support business operations and investment activities. Common shareholders'
equity of $ 413.3 million at September 30, 1998 increased by $ 68.0 million
since December 31, 1997. The increase primarily reflects net income of $ 115.9
million year to date; offset by common dividends of $ 35.7 million and common
stock repurchases of $ 27.9 million offset by issuances of $ 23.4 million.
At September 30, 1998, the Company had significant short-term and long-term
borrowing capacity. The Company is currently authorized to issue up to $ 75
million of commercial paper. Commercial paper outstanding at September 30, 1998
was $ 3 million.
The Company is involved in two arbitration or litigation proceedings regarding
the extent to which certain explosion events are insured under boiler and
machinery policies of HSBIIC or under the all-risk property insurance policies
issued by other companies. Management believes the Company's policies do not
provide coverage for losses resulting from the explosion events that are the
subject of these proceedings. In the opinion of management any adverse outcomes
in these cases will not, in the aggregate, have a material effect on either the
results of operations or financial condition of the Company. More information
pertaining to these legal proceedings may be found under note 5 of the Notes to
Consolidated Financial Statements herein.
The Company writes business in European markets primarily through its U.K.
subsidiary, HSB Engineering Insurance Limited. The adoption of a common currency
(the euro) by eleven of the fifteen member countries of the European Union on
January 1, 1999 is not expected to result in a substantial change in the
business or a significant increase in costs in the short term. In part, this is
due to the fact that much of the business is U.S. dollar denominated. The UK is
not a first wave euro country and as such the primary impact will be in Spain
and the Irish Republic. Over time, as and if the U.K. adopts the euro as its
currency there may be more of an impact, however the number of affected
transactions are such that a manual backup system is practicable. The Company
will continue to monitor developments and assess impacts on markets, pricing,
etc.
Year 2000
- ---------
Year 2000 Plan and State of Readiness
In 1996 the Company began a comprehensive effort to assess and address issues
affecting the Company which related to the inability of computer equipment and
embedded computer chips to distinguish between the year 1900 and the year 2000.
As has been well publicized, many computer systems and date controlled equipment
may cease to function or may function in a different manner when the year 2000
arrives because they are programmed to recognize only the last two digits of the
year.
As a part of this effort, the Company established a Year 2000 Program to address
four key areas: (i) applications software, primarily consisting of the Company's
policy management, claims, financial recording and reporting, human resource
systems, and engineering databases and systems; (ii) infrastructures, such as
mainframe and corporate servers, workstations and
17
<PAGE>
networking components; (iii) embedded technology in facilities in which the
Company conducts its operations and in testing equipment used by the Company's
engineering staff ; and (iv) key business partners and suppliers. In addition,
the Company is evaluating potential coverage exposures arising out of the Year
2000 and its impact on insured equipment. The Company's Year 2000 Program
consists of six partially overlapping stages for the key areas listed above :
(i) assessment and analysis; (ii) development, renovation and replacement; (iii)
implementation; (iv) testing and certification; (v) contingency planning; and
(vi) audit and review. The Company is using members of its internal IT staff as
well as external consultants and programmers to complete various tasks in
connection with its Year 2000 Program and is currently on schedule.
The Company has completed the assessment and analysis phase for its policy
management, claims, and financial recording and reporting, and human resource
systems and engineering databases and systems. The Company expects to have
largely completed the development, renovation, replacement and implementation
phases for all of these applications by year-end 1998 with the exception of
human resource and certain non-critical financial reporting and engineering
systems which are expected to be compliant by mid-1999.
The Company has completed the assessment and analysis phase with respect to
infrastructure items. The mainframe is Year 2000 compliant and the Company
expects to complete the migration to Year 2000 compliant servers and supporting
hardware and software by September 1999. Replacement of the various components
of non-compliant workstations and peripheral equipment also is expected to be
completed by September 1999. Many of the third-party software applications
utilized by the Company in its desktop environment are already Year 2000
compliant. The Company expects to complete the installation of such compliant
programs on virtually all of its workstations during the first half of 1999.
In the area of embedded chip technology, the Company's principal exposure
relates to the prevalence of such technology in office buildings in which the
Company leases space for conducting its business operations. The Company has
sent questionnaires to the leasing vendors for all of its principal facilities
with respect to Year 2000 readiness and has received assurances of readiness
from most of its vendors.
The Company is currently in the process of identifying and contacting key
suppliers of services and business partners, such as client companies, agents
and brokers, with whom the company has significant business relations and who
may either electronically provide to, or receive from, the Company certain
financial and other information. The Company expects to compile the assessment
of the potential impact on the Company of such parties' Year 2000 state of
readiness and remediation plans by the end of the first quarter of 1999 and
conduct renovation and/or replacement and compliance testing, as appropriate.
The Company is relying upon Year 2000 readiness statements of other entities and
has not independently verified the accuracy of such statements.
Costs
It is currently estimated that the Company's aggregate spending in connection
with the Year 2000 Program will be in the range of $26 million of which
approximately $14.9 million has been expended through September 30, 1998.
Certain of these costs are being expensed as they are
18
<PAGE>
incurred and are being funded through operating cash flow. The Company has
expensed $.2 million for 1996, $1.5 million for 1997, and $3.6 million for the
first nine months of 1998. It is estimated that expenditures of $1.4 million for
the fourth quarter of 1998 and $4.8 million for 1999 will be expensed as
incurred. The remainder of the $26 million estimate relates to systems that the
Company anticipated replacing in the normal course of information technology
development but the timetable for which was accelerated in contemplation of the
Year 2000 event. Costs of replacement and renovation of information systems and
infrastructure which would have occurred in the normal course of business
without the advent of Year 2000 are excluded from these amounts. The current
estimate also does not include any costs associated with the implementation of
contingency plans which are in the process of being developed.
The Company does not expect the costs relating to its Year 2000 program to have
a material effect on its results of operations, liquidity or financial
condition. However, the Year 2000 Program is an ongoing process and the
estimated costs, as well as the estimated completion dates for various phases of
the program, are subject to change.
Risks
The failure of one or more critical software applications or components of the
Company's infrastructure to be Year 2000 compliant could cause a material
disruption in the normal business operations of the Company. Such disruptions
could include the inability to process policies, register and collect premiums
and engineering receivables, process claims or schedule inspections and
engineering services. Due to the difficulty in estimating the scope and duration
of such failures, the Company is unable to determine at this time whether the
consequences of such failures will have a material impact on the Company's
results of operations, liquidity, or financial condition. Moreover, the
Company's operations are interdependent with systems of business partners and
service providers, such as financial institutions, communication service
providers and utilities, over which the Company has no control. The failure of
one or more of such business partners or service providers to be Year 2000
compliant could have a material adverse impact on the Company. However, the
Company believes that with the implementation of its Year 2000 Program as
scheduled, including the contingency plans discussed below, the risk of material
disruptions to its normal business operations should be significantly reduced.
As an insurance company, the Company maintains a significant portfolio of
investments in cash, short-term fixed income, and equity securities. Inasmuch as
the advent of the Year 2000 may cause events, business interruptions and altered
economic facts and circumstances, the value of the Company's investments may be
affected favorably or unfavorably. The Company is selectively monitoring the
Year 2000 compliant status of the corporate issuers of the securities in its
investment portfolio primarily through reviewing public disclosure documents.
State government and municipal bonds held by the Company are general obligations
and/or are credit-enhanced and therefore the Company does not perceive there to
be a significant credit risk with these securities in the absence of a severe
Year 2000 disruption affecting governments and businesses generally. An
immaterial portion of the Company's portfolio is invested in non-public issuers
where public disclosure documents are unavailable. Due to the difficulty in
estimating the scope and duration of such events, the Company is unable to
determine at this time whether the consequences of such developments will have a
material impact on the Company's investment portfolio and therefore, on the
Company's results of operations, liquidity or financial condition.
19
<PAGE>
Contingency Plans
As a component of the Year 2000 Program, the Company is concurrently developing
contingency plans intended to mitigate the possible disruption of business
operations arising out of the Year 2000 event. These plans will be continuously
refined during 1999 as the Company completes compliance testing on its internal
applications software and infrastructure and further assesses the Year 2000
readiness status of its business partners. Contingency plans may include
securing back-up power for the Company's data center, manual processing,
short-term fixes to non-compliant programs or business partner interfaces and
modifying the Company's asset selection criteria for its investment activities.
Insurance Coverage Issues
The Company continues to evaluate the potential coverage exposures arising out
of the Year 2000 event and its impact on insured equipment. The Company has
filed with the various jurisdictions an endorsement to its equipment breakdown
forms which reiterates that coverage is not provided for the inherent inability
of computers and computerized equipment to properly recognize a particular date
or time, such as the Year 2000. The endorsement is being included in policies in
all states which have approved the endorsement. In the four jurisdictions which
have not approved the endorsement, a notice reiterating the Company's coverage
intent with respect to Year 2000 exposures is being sent to policyholders. The
Company has recently filed a similar endorsement for use with its all-risk
policy and expects to receive approvals consistent with those received for its
equipment breakdown endorsement. Many of the insurers that the Company reinsures
for equipment breakdown coverage are issuing similar endorsements to their
policies. The Company is conducting an on-going communications program with its
client company insurers and agents to disseminate to the ultimate policyholders
its Year 2000 loss control suggestions and policy coverage position.
Quantification of the Company's exposure to Year 2000 losses and loss adjustment
expenses are not reasonably estimable at this time as applicable policy and
reinsurance contract wordings have not been legally tested in the context of
such losses.
Forward-Looking Statements
Certain statements contained in this report are forward-looking and are based on
management's current expectations. Actual results may differ materially from
such expectations depending on the outcome of certain factors described with
such forward-looking statements and other factors including: significant natural
disasters and severe weather conditions; changes in interest rates and the
performance of the financial markets; changes in the availability, cost and
collectibility of reinsurance; changes in domestic and foreign laws, regulations
and taxes; the entry of new or stronger competitors and the intensification of
pricing competition; the loss of current customers or the inability to obtain
new customers; changes in the coverage terms selected by insurance customers,
including higher deductibles and lower limits; adverse development on losses and
loss adjustment expenses related to claims arising in prior periods; new
insurance and reinsurance contract interpretations, including coverage issues
related to Year 2000 events; changes in asset valuations; consolidation and
restructuring in the financial services industry; changes in the Company's
participation in joint underwriting associations, and in particular IRI; changes
in the demand and customer base for engineering and inspection services offered
by the
20
<PAGE>
Company, whether resulting from changes in the law or otherwise; the ability of
the Company and key suppliers and business partners to adequately and timely
address issues relating to the Year 2000 event; and other general market
conditions.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
HSBIIC is involved in two arbitration or litigation proceedings
regarding the extent to which certain explosion events are insured
under boiler and machinery policies of HSBIIC or under the all-risk
property insurance policies issued by other companies. Management
believes HSBIIC's policies do not provide coverage for losses resulting
from the explosion events that are the subject of these proceedings.
HSBIIC has accrued $6.5 million with respect to these cases for
potential loss adjustment expenses, including legal costs to defend
HSBIIC's position. One case is on appeal; the other case is involved in
both arbitration and litigation proceedings. The final hearing in the
arbitration proceeding has been concluded and the Company is currently
awaiting a decision. A trial date has not been set for either case. In
the event that HSBIIC is held liable for one or both of the remaining
claims, amounts in excess of HSBIIC's net maximum aggregate retention
of $8.5 million is recoverable from reinsurers. Claim amounts
potentially recoverable from reinsurers in the event of a possible
adverse outcome in these cases could range, in the aggregate, from $40
million to $195 million.
The obligations of HSBIIC's reinsurers with respect to these cases are
not in dispute. Therefore, management believes that any adverse
outcomes in these cases will not, in the aggregate, have a material
effect on either the results of operations or financial condition of
the Company. HSBIIC's reinsurance contracts do not require HSBIIC to
reimburse its reinsurers for any losses such reinsurers might incur
should these cases not be decided in HSBIIC's favor. Nevertheless,
reinsurers often quote rates for future coverages based upon their or
other reinsurers' experience on a particular account. Therefore, in the
event HSBIIC's reinsurers pay significant sums pursuant to the
arbitration or litigation proceedings described above, it is likely
HSBIIC's reinsurance rates would increase in future periods. However,
given the insured capacity that exists in reinsurance markets
worldwide, coupled with HSBIIC's ability to negotiate a redesign or
restructuring of its reinsurance program, it does not necessarily mean
that such an increase would be material.
The Company is also involved in various other legal proceedings as
defendant or co-defendant that have arisen in the normal course of its
business. In the judgment of management, after consultation with
counsel, it is improbable that any liabilities which may arise from
such litigation will have a material adverse impact on the results of
operations or the financial position of the Company.
21
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit 10(ii) - Limited Liability Company Agreement of HSB Industrial Risk
Insurers, L.L.C.
Exhibit 10(iii)(a) - HSB Group, Inc. 1985 Stock Option Plan, amended and
restated as of September 21, 1998
Exhibit 10(iii)(b) - HSB Group, Inc. Directors Stock and Deferred
Compensation Plan, amended and restated effective September 21, 1998
Exhibit 10(iii)(c) - HSB Group, Inc. Long-Term Incentive Plan, as amended
and restated effective September 21, 1998
Exhibit 10(iii)(d) - HSB Group, Inc. 1995 Stock Option Plan, as amended and
restated effective September 21, 1998
Exhibit 27.1 - Financial Data Schedule
Exhibit 27.2 - Financial Data Schedule
(b) Reports on Form 8-K
(i) Form 8-K dated July 13, 1998 announcing the completion of the Company's
acquisition of the monoline boiler and machinery business of Kemper
Insurance Companies, effective July 1, 1998.
(ii) Form 8-K dated July 20, 1998 reporting the second quarter earnings and
announcing the declaration of a dividend of 42 cents per share payable on
October 29, 1998.
(iii) Form 8-K dated July 23, 1998 announcing the election of a new
director.
(iv) Form 8-K dated September 24, 1998 announcing the election of Gordon W.
Kreh to the position of chairman of the board of directors of the Company.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HSB GROUP, INC.
Date: November 13, 1998 By: /s/ Saul L. Basch
Saul L. Basch
Senior Vice President,
Treasurer and
Chief Financial Officer
Date: November 13, 1998 By: /s/ Robert C. Walker
Robert C. Walker
Senior Vice President and
General Counsel
23
Exhibit 10(ii)
LIMITED LIABILITY COMPANY AGREEMENT
OF
HSB INDUSTRIAL RISK INSURERS, L.LC.
THIS LIMITED LIABILITY COMPANY AGREEMENT ("Agreement") of HSB Industrial Risk
Insurers, L.L.C. (the "Company") dated as of _____________________________ is
between Employers Reinsurance Corporation ("ERC"), a Missouri corporation, with
principal offices at 5200 Metcalf, Overland Park, Kansas and The Hartford Steam
Boiler Inspection and Insurance Company ("HSB"), with principal offices at One
State Street, Hartford, Connecticut. ERC and HSB are sometimes individually
referred to in this Agreement as a "Member" and collectively as "Members".
WHEREAS, ERC, through its subsidiary organization, IRI Management Services
L.L.C. (IMS), has acquired certain of the tangible and intangible assets of
Industrial Risk Insurers ("IRI") and its affiliated Canadian association,
Canadian Industrial Risk Insurers ("CIRI"), both of which are joint underwriting
associations offering first party property insurance to highly protected risk
("HPR") accounts in industrial/manufacturing occupancies;
WHEREAS, HSB owns and operates a property insurance business known as HSB
Special Risks-Manufacturing Division offering first party property insurance to
HPR accounts in industrial/manufacturing occupancies with principal facilities
located in the United States;
WHEREAS, ERC and HSB desire to form a limited liability company for the purpose
of operating a combined venture offering property insurance for HPR
industrial/manufacturing occupancies and to which ERC will contribute the IRI
book of business and a royalty-free license to use the assets of IMS, including
the IRI trademark/tradename and HSB will contribute its U.S. Special
Risk-Manufacturing book of business and a royalty-free license to use the HSB
trademark/tradename; and
NOW THEREFORE, for and in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions.
In addition to terms otherwise defined herein, the following terms are used
herein as defined below. The following definitions are applicable to both
the singular and the plural forms of each term defined below.
<PAGE>
"Affiliates" means, with respect to any Person, at the time in question,
any other Person controlling, controlled by or under common control with
such Person.
"Agreement" means this Limited Liability Company Agreement of HSB
Industrial Risk Insurers L.L.C., as the same may be amended or restated
from time to time.
"Announcement Date" means the first public announcement of the transaction
which culminates in a Change in Control.
"Board" means the Board of Managers of the Company.
"Capital Contributions" means, with respect to any Member, the property and
cash contributed as capital by such Member to the Company in accordance
with Article IV hereof.
"Change in Control" means the acquisition of 50% or more of the voting
securities of HSB Group, Inc., the parent company of HSB, other than by ERC
or any of its Affiliates.
"Connecticut Act" means the Connecticut Limited Liability Company Act, as
it may be amended from time-to-time.
"ERC Reinsurance Agreement" means the Reinsurance Agreement between ERC, as
ceding company, and HSB, as reinsurer, dated as of January 1, 1998.
"HSB-IRI Business" means HPR property insurance business written pursuant
to the Operating Agreement on industrial/manufacturing risks with principal
facilities located in the United States or Canada, and including any
multi-national locations of such risks, and which initially comprises the
business underwritten by IRI and the U.S. Special Risk Manufacturing
business underwritten by HSB on the effective date of the Operating
Agreement.
"HSB Reinsurance Agreement" means the Reinsurance Agreement between HSB as
reinsurer and ERC as ceding company dated as of January 1, 1998.
"Initial Members" means Employers Reinsurance Corporation and The Hartford
Steam Boiler Inspection and Insurance Company.
"Interest" means the ownership interest of a Member in the Company (which
shall be considered personal property for all purposes), consisting of (i)
such Member's Percentage Interest in profits, losses, allocations and
distributions, (ii) such Member's right to vote or grant or withhold
consents with respect to Company matters as provided herein or in the
Connecticut Act, and (iii) such Member's other rights and privileges as
herein provided.
<PAGE>
"IRI Reinsurance Agreement" means the Reinsurance Agreement between HSB as
ceding company and IRI as reinsurer dated as of January 1, 1998.
"Majority in Interest of the Members" means Members whose Percentage
Interests aggregate to greater than 50 percent of the Percentage Interests
of all Members.
"Members" means the Initial Members and/or all other Persons admitted as
additional or substituted Members pursuant to this Agreement, so long as
they remain Members. All Members admitted as additional or substituted
Members must agree to the provisions of this Agreement by a written
acknowledgment signed by the Member before they may be admitted.
"Operating Agreement" means the Operating Agreement dated as of January
1,1998 by and among the Company, ERC, HSB and IRI.
"Percentage Interest" means a Member's share of the profits and losses of
the Company and the Member's percentage right to receive distributions of
the Company's assets. The Percentage Interest of the Initial Member shall
initially be the percentage set forth in Schedule I hereto and such
Schedule shall be amended from time to time in accordance with the
provisions hereof. The combined Percentage Interest of all Members shall at
all times equal 100 percent.
"Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, trust, unincorporated association, or
government or any agency or political subdivision thereof, or any other
entity of whatever nature.
"Related Agreements" means the IRI Reinsurance Agreement, the ERC
Reinsurance Agreement, the HSB Reinsurance Agreement and the Operating
Agreement.
"Two Thirds in Interest of the Members" means Members whose Percentage
Interests aggregate to greater than 66 2/3 percent of the Percentage
Interests of all Members.
ARTICLE II
FORMATION OF LLC
2.1 Name and Formation.
The Members hereby form a limited liability company pursuant to the Act on
the terms and for the purposes set forth in this Agreement. The name of the
Company shall be HSB Industrial Risk Insurers, L.L.C., or such other name
as the Members may from time to time hereafter designate. Mr. John M.
Connelly of Employers Reinsurance Corporation, as Organizer, has executed
and filed the Articles of Organization with the Secretary of State of the
State of Connecticut in compliance with ss.34-121 of the Connecticut Act.
The
<PAGE>
Company will be formed and its existence will commence upon endorsement of
the Articles of Organization by the Secretary of the State.
2.2. Purposes.
The purposes of the Company shall be to engage in the HSB-IRI Business and
to engage in any other lawful act, activity or purpose for which LLC's may
be formed under the Connecticut Act, as such business activities may be
determined by the Member(s) from time to time.
2.3. Offices and Statutory Agent .
(a) The principal office of the Company shall be 85 Woodland Street,
Hartford, Connecticut 06102-5010, or such other place inside or
outside the State of Connecticut as the Members may designate from
time to time.
(b) The statutory agent for service of process within the State of
Connecticut is IRI Management Services, L.L.C. and doing business at
85 Woodland Street, Hartford, Connecticut 06102-5010.
2.4 Term.
The existence of IRI Management Services, L.L.C. will continue until
dissolved and terminated in accordance with Section 6.5 of this Agreement.
ARTICLE III
RIGHTS AND DUTIES OF THE MEMBERS AND CONDUCT OF THE BUSINESS OF THE COMPANY
3.1. Members.
The names, business addresses, Capital Contributions and Percentage
Interests of the Initial Members of the Company are set forth on Schedule I
attached hereto. Additional Members may be admitted as provided for herein
and Schedule I will be amended when other Members are admitted from time to
time to show the name, residence or business address, Capital Contribution
and Percentage Interest of the additional Member(s) and any agreed upon
changes in Percentage Interests.
3.2. Management of the Company.
(a) Except as otherwise provided herein, management of the Company shall
be conducted by a Board of Managers (collectively, "the Board" and
individually, a "Manager") which will be responsible for all the
business and affairs of the
<PAGE>
Company. Members acting as Managers shall do so in their capacity as
Members and each Member-Manager shall be an agent of the Company. The
power to act for or bind the Company shall be vested exclusively in
the Board. The Board of Managers may delegate its authorities and
responsibilities for management of the business affairs of the Company
to third parties, but such delegation shall not relieve the Board of
any of its obligations under this Agreement. With respect to the
HSB-IRI Business, the Members expressly delegate to HSB those
authorities and responsibilities set forth in the Operating Agreement.
Except as otherwise provided in this Agreement or in the Related
Agreements, no Member shall have any authority to act for, or to
assume any obligations or responsibilities on behalf of, any other
Member.
(b) Subject to obtaining any necessary approvals hereunder, the Board
shall have the power and authority to execute and deliver contracts,
instruments, certificates, filings, notices or other documents on
behalf of the Company, including any document required to be filed
pursuant to the Connecticut Act. Except as otherwise required by
applicable law, any such document shall require the signature of only
one Manager.
(c) The number of Managers on the Board of Managers shall be seven (7).
Until another Member is admitted, the Board of Managers will be
comprised as follows: four (4) Managers will be designated by ERC
(each an "ERC Designated Manager") and three (3) Managers will be
designated by HSB (each an "HSB Designated Manager"). All Managers
shall serve at the pleasure of the Member which designated them. The
Managers designated by the Initial Members are listed on Schedule II
which shall be amended upon the admission of another Member and/or
designation of different Managers. All ERC Designated Managers shall
be employees of ERC or one or more of its Affiliates, including IRI,
and all HSB Designated Managers shall be employees of HSB or one of
its Affiliates. The number of Managers may be increased or decreased
from time to time by an amendment to this Agreement provided that the
relative proportion of ERC and HSB Designated Managers remains
constant, until such time that any new Members are admitted to the
Company. The number of Managers shall never be less than three (3).
Except as otherwise provided herein, decisions of the Board shall be
made by an affirmative vote of not less than a majority of the
Managers.
(d) Any Manager shall continue to serve in such capacity until the Member
appointing such Manager shall have notified the other Members in
writing of his replacement. In the event of the death or resignation
of a Manager, the Member who appointed that Manager shall elect a
successor within thirty (30) days.
(e) A Member may, by written notice to the other Members, designate a
person to serve as an Alternate for a Manager designated by such
Member, and each such Alternate shall be entitled to, in the absence
of the Manager for whom he has been
<PAGE>
designated as an Alternate, to attend meetings, to have such
Alternate's presence counted for purposes of establishing a quorum and
to vote on behalf of the Manager for whom he is acting as Alternate at
any meeting of the Board of Managers.
3.3. Member Meetings.
The first annual Member meeting shall be held on February ___, 1998.
Thereafter the annual meeting of the Members shall be held on the last
working Monday in April of each year provided such day is not a legal
holiday. When such day is a legal holiday, the meeting shall be held on the
first working day following such holiday. At such annual meeting, the
Members shall elect Managers to succeed those whose terms expire or to fill
any vacancies and shall transact any other business that may properly come
before the meeting. Special meetings of the Members may be called for any
purpose at any time by any Member or by the Board. All Meetings shall be
held at the registered office of the Company or at such other place within
or without the State of Connecticut as shall be determined by the Members.
Meetings may be held by conference telephone or other means of
communication by means of which all participants can hear each other.
Participation in such meeting in such manner shall constitute attendance
and presence in person at the meeting of the person or persons so
participating.
A Member who is designated (at the prior meeting) the Secretary for each
meeting shall provide notice of the meeting to the Members, stating the
place, day and hour of the meeting, and in case of a special meeting, the
purpose(s) for which the meeting is called. The notice shall be mailed to
each Member of record at its address as it appears on the records of the
Company not less than ten days nor more than fifty days before the day of
the meeting.
At any meeting of the Members, the presence, in person or by proxy, of
persons entitled to vote a majority of the voting interest of the Company
shall constitute a quorum of the Members for all purposes, unless or except
the presence of Members holding a higher aggregate Percentage Interest is
required by this Agreement. If there are not enough Members present at a
meeting in person or by proxy to constitute a quorum, the holders of a
Majority in Interest of the Members present may adjourn the meeting to a
specified date not longer than thirty (30) days after the adjournment. An
additional notice regarding the rescheduled meeting shall be sent to all
Members. If a quorum is present at the rescheduled meeting, the Members may
transact any business which was to be transacted at the adjourned meeting.
At each meeting, the appointed Secretary shall furnish a complete list of
the Members present at the meeting in person or by proxy and their
respective Percentage Interest in the Company.
At each meeting of the Members, every Member shall be entitled to vote in
person or by a written proxy delivered to the Secretary of said meeting and
signed by such Member or by its duly authorized attorney and designating a
Member or Members of the Company as
<PAGE>
such proxy. A written proxy shall be valid for three years unless the
person executing it specifies a different length of time.
Any action required or permitted to be taken at a meeting of the Members
may be taken without a meeting if each of the Members consent in writing to
such action.
3.4. Board Meetings.
The first meeting of the Board shall be held at the registered office of
the Company within thirty (30) days after the first Member meeting. The
Board may hold subsequent meetings and may have an office and keep the
books of the Company at the registered office of the Company or in such
place or places within or without the State of Connecticut (unless and
except as otherwise provided by the Connecticut Act) as the Managers may
determine. Meetings may be held by conference telephone or other means of
communication by means of which all participants can hear each other.
Participation in such meeting in such manner shall constitute attendance
and presence in person at the meeting of the person or persons so
participating.
The regular meetings of the Board shall be held quarter-annually, one after
the first Member meeting and the remaining three held on the last working
Monday of the months of April, July and October or as determined by
resolution of the Board.
The Board may hold special meetings whenever requested by one-third of the
Managers. No notice shall be required for any regular meeting of the Board.
The Board member appointed by the Board as Secretary shall give notice of
each special meeting by mailing the same at least five (5) days before the
meeting or by facsimile notice at least three (3) days before the meeting
to each Manager. Unless otherwise indicated in the notice, any and all
business to be performed by the Board pursuant to this Agreement may be
transacted at any special or regular Board meeting; provided however, that
if at least one Manager designated by each Member is not present at such
meeting, only such business as set forth in the notice for such meeting may
be considered and voted upon. A majority of the full Board as then
presently existing shall constitute a quorum for the transaction of
business, but if at any meeting of the Board there is less than a quorum
present, a majority of those present may adjourn the meeting and reschedule
the meeting for a date when a quorum is present.
Each Manager may bring one or more other advisors to any meeting, provided
that such advisors shall not have the right to vote on any matter brought
before the Board of Managers; and provided further, that the Managers shall
have the right to call executive sessions of the Board and to exclude any
person not a Manager from such executive session.
Any action required or permitted to be taken at a meeting of the Board of
Managers may be taken without a meeting if each of the Managers consent in
writing to such action.
<PAGE>
3.5. Executive Committee and Other Committees.
The Board of Managers, by resolution adopted by a majority of the Board,
may designate three or more Managers (at least one of which must be a
Manager designated by HSB) to constitute an Executive Committee. The
Executive Committee shall have the powers and authority of the Board as
stated in the resolution; provided, however, such committee shall not do
any act not authorized by this Agreement to be done by the Board or not
otherwise delegated to the Board by the Members. The Executive Committee
shall serve at the pleasure of the Board and shall keep minutes of its
meetings and report the same to the Board.
The Board may, by resolution adopted by a majority of the Board, appoint
permanent or temporary committees and assign such duties and delegate such
powers to said committees as the Board deems necessary and proper and as
consistent with this Agreement, provided that no such committee shall have
any authority to make any determination, or designate any person to make
any determination, in each case, regarding any of the matters set forth in
Section 3.10 hereof without the approval of the Members in accordance with
such Section 3.10. HSB shall be entitled to designate at least one member
on each such committee.
3.6. Underwriting Committee and Claim Committee
The Board of Managers shall appoint an Underwriting Committee and a Claim
Committee.
(a) The Underwriting Committee shall be comprised of two standing members,
one of which shall be an employee of ERC designated by ERC and the
other shall be an employee of HSB designated by HSB. The initial
members of the Underwriting Committee are identified on Schedule II.
The standing members may designate one or more additional individuals
to serve as members on the committee as they may from time to time
deem useful in carrying out their assigned duties. The powers and
duties of the Underwriting Committee shall be to develop and recommend
for Member approval, underwriting guidelines, rules and practices for
the conduct of the HSB-IRI Business, including the appropriate
methodology for allocating written premium between property and boiler
and machinery coverages, and to exercise such other powers and
authority as the Board of Managers may determine and specify in
writing from time to time hereafter.
(b) The Claim Committee shall be comprised of two standing members, one of
which shall be an employee of ERC designated by ERC and the other
shall be an employee of HSB designated by HSB. The initial members of
the Claim Committee are identified on Schedule II. The standing
members may designate one or more additional individuals to serve as
members on the committee as they may from time to time deem useful in
carrying out their assigned duties. The
<PAGE>
powers and duties of the Claim Committee shall be to develop claims
handling guidelines, rules and practices for the conduct of the
HSB-IRI Business, including the allocation of losses between property
and boiler and machinery coverages (consistent with Exhibit A to the
ERC Reinsurance Agreement), and to exercise such other powers and
authority as the Board of Managers may determine and specify in
writing from time to time hereafter.
3.7 Committee Governance.
Unless otherwise specified in the writing designating the committee, a
majority of the members of such committee may elect its Chair, fix its
rules of procedures, fix the time and place of meetings and specify what
notice of meetings, if any, shall be given. Written records of the
proceedings of any committee shall be maintained and furnished to the Board
of Managers. Any action required or permitted to be taken at any committee
meeting may be taken without a meeting if each of the members of such
committee consent in writing to such action.
3.8 No Compensation to Managers and Committee Members
The Managers and other committee members shall receive no compensation from
the Company for performing their services as Managers and committee
members. Each Member shall be solely responsible for the payment of
salaries, benefits, retirement allowances and travel and lodging expenses
for all Managers appointed by it.
3.9 Board Actions.
Subject to the provisions of this Agreement and the Operating Agreement,
the President and the other officers of the Company shall have the power,
acting individually or jointly, to represent and bind the Company in all
matters, in accordance with the scope of their respective duties, except
that the following actions or types of transactions shall not be taken or
consummated without the affirmative vote, approval or consent of at least a
majority of Managers on the Board:
(a) decisions regarding any capital expenditure or capital project in
excess of Five Hundred Thousand Dollars ($500,000);
(b) decisions regarding borrowing, finance leases, or the creation of
security interests, liens or mortgages in or on any property or assets
of the Company, in amounts that exceed Five Hundred Thousand Dollars
($500,000);
(c) decisions regarding any loan, advance or giving credit in amounts that
exceed Five Hundred Thousand Dollars ($500,000);
(d) decisions regarding the disposition of assets having either a book or
market value of more than Five Hundred Thousand Dollars ($500,000);
<PAGE>
(e) material decisions regarding the initiation, defense, conduct or
settlement of litigations, arbitrations or other disputes involving
amounts in excess of Five Hundred Thousand Dollars ($500,000);
(f) entering into, making any material amendment to or terminating any
material contract or transaction;
(g) selection of independent auditors;
(h) acquiring, purchasing or subscribing for, or selling or otherwise
disposing of, any shares, debentures, mortgages or securities in any
company or any other entity;
(i) establishing any new branch, office or other permanent establishment
or forming any subsidiary company or entity of the Company;
(j) any other strategic issue or material decision that at least three (3)
Managers determine in good faith should require approval or other
determinations by the Board.
3.10 Member Actions.
The following matters in particular shall be determined by the unanimous
affirmative vote, approval or consent of the Members:
(a) any amendment to this Agreement or to the Articles of Organization of
the Company;
(b) the issuance of any additional Interests or, in connection with the
transfer/assignment of an Interest, the admission of any additional or
substitute Members and the terms and conditions of, and time for, such
admissions as well as the amount of the Capital Contribution of the
additional Member(s);
(c) authorizing a Member or a non-member Manager to do any act that
contravenes this Agreement or any amendment to this Agreement;
(d) any merger or consolidation of or involving the Company;
(e) any sale, exchange, lease, conveyance or other transfer or disposition
of all, or substantially all, of the assets of the Company;
(f) a change in name of the Company;
(g) engaging in a business other than as provided for in this Agreement or
as originally determined by the Initial Member;
<PAGE>
(h) adoption of underwriting guidelines rules and practice, including the
appropriate methodology for allocating written premium between
property and boiler and machinery coverages; and
(i) approval of any annual budget, strategic plan or business plan for the
Company and any material changes thereto.
The following matters in particular shall be determined by the affirmative
vote, approval or consent of at least Two-Thirds in Interest of the Member;
or if the number of Members at the time a matter is to be voted on is less
than three, by the unanimous affirmative vote, approval or consent of the
Members:
(a) appointment or removal of the President and Chief Executive Officer
(b) creation of executive compensation and employee benefit programs
(c) payment of distributions to the Members (except distributions in
connection with the Related Agreements, routine year-end distributions
as provided herein and distributions in connection with the
dissolution and winding up of the Company);
(d) the withdrawal of a Member;
(e) the assignment of any of the property of the Company in trust for the
benefit of creditors, or the making or filing, or acquiescence in
making or filing by any other person, of a petition or other action
requesting the reorganization or liquidation of the Company under the
bankruptcy laws; and
(f) decisions regarding any capital expenditure or capital project in
excess of One Million Dollars ($1,000,000);
(g) decisions regarding borrowing, finance leases, or the creation of
security interests, liens or mortgages in or on any property or assets
of the Company, in amounts that exceed One Million Dollars
($1,000,000);
(h) decisions regarding any loan, advance or giving credit in amounts that
exceed One Million Dollars ($1,000,000);
(i) decisions regarding the disposition of assets having either a book or
market value of more than One Million Dollars ($1,000,000);
(j) material decisions regarding the initiation, defense, conduct or
settlement of litigations, arbitrations or other disputes involving
amounts in excess of One Million Dollars ($1,000,000);
<PAGE>
(k) decisions concerning the allocation of revenues and expenses
attributable to any fee for service business of IRI not treated as an
offset from HSB's reimbursement obligation under paragraph 6.5 of the
Operating Agreement.
(l) entering into or amending any written contract, or consummating any
other transaction, with any Member or any Affiliate of any Member, or
in connection with which any Member or any Affiliate of any member has
a direct or indirect financial interest, other than the Related
Agreements;
(m) any other matter that is subject to the agreement, consent or approval
of the Members hereunder.
3.11 Membership of Board of Directors. Underwriting Committee and Claim
Committee of IRI
For as long as HSB and ERC (and/or their Affiliates) remain the only
Members of the Company and the only members of IRI, the same members as
serve on the Board of Managers of the Company shall serve as the members of
the Board of Directors of IRI and the same members that serve on any
committee of the Board of Managers shall serve as the members of the
committees of the Board of Directors of IRI having comparable duties and
authorizations.
3.12 President and Chief Executive Officer
From time to time as appropriate, the Members shall elect a President and
Chief Executive Officer of the Company who shall serve as such until the
earlier of his death or resignation or his removal in accordance with the
terms of this Agreement. The initial President and Chief Executive Officer
shall be Michael L. Downs. The President and Chief Executive Officer shall
have the responsibility for managing the day-to-day business operations and
affairs of the Company and supervising its other officers, subject to the
direction, supervision and control of the Board. In general, the President
shall have such other powers and perform such other duties as usually
pertain to the office of the President, and as from time to time may be
assigned to him by the Board, subject to the provisions of Sections 3.9 and
3.10 and the terms and conditions of the Operating Agreement.
The President and Chief Executive Officer of the Company shall also serve
as the President and Chief Executive Officer of IRI.
3.13 Conduct of the Business of the Company.
The Initial Members agree to cause the HSB-IRI Business to be conducted in
accordance with the underwriting guidelines, rules and practice approved by
the Members in accordance with Section 3.10 hereof and the Related
Agreements, as may be amended from time to time hereafter.
<PAGE>
(a) If at some future date, one or both of the Initial Members desire to
integrate, combine, or incorporate the HSB-IRI Business, or any
portion thereof, with blended products (e.g. property insurance
combined with one or more other coverages, such as casualty or workers
compensation, or with financial products) the Initial Members agree to
preserve the rights and opportunities to which HSB is entitled with
respect to the HSB IRI Business under the Operating Agreement and the
Reinsurance Agreements in any such blended product business
activities.
(b) In the event that substantial and materially adverse developments
threaten to frustrate the commercial viability of the HSB-IRI Business
as structured, ERC and HSB agree to initiate discussions leading to
modification of this Agreement and the Related Agreements. Any such
modifications shall preserve, to the greatest extent possible, the
rights, obligations and opportunities to which the parties are
entitled under this Agreement and the Related Agreements.
ARTICLE IV
FINANCING; CAPITAL ACCOUNTS AND DISTRIBUTIONS
4.1. Capital Contributions.
The Initial Members have contributed to the Company the property and cash
set forth in Schedule I hereto. Persons or entities hereafter admitted as
Members of the Company shall make such contributions of cash (or promissory
obligations), property or services to the Company as shall be determined by
the Members, acting unanimously, at the time of each such admission. Except
as otherwise agreed by all Members, the Initial Members and any other
Member shall have no obligation to make any capital contributions beyond
their initial capital contribution to the Company.
4.2. Future Financing of the Company.
The Company may require additional funds for capital expenditures or
working capital requirements in the future and any such additional funding
shall be obtained from any of the following sources as the Members shall
unanimously agree: (a) cash reserves of the Company; (b) loans from banks
or other financial institutions; (c) additional Capital Contributions made
to the Company by the Members in proportion to their Percentage Interests
in amounts to be determined by the Members; (d) loans made to the Company
by Members and/or related companies of the Members; or (e) any other
funding source agreed upon by the Members.
4.3. Capital Accounts.
(a) A single, separate capital account shall be maintained for each
Member. Each Member's capital account shall be credited with the
amount of money and the fair
<PAGE>
market value of property (net of any liabilities secured by such
contributed property that the Company assumes or takes subject to)
contributed by that Member to the Company; the amount of any Company
liabilities assumed by such Member (other than in connection with a
distribution of Company property) and such Member's distributive share
of Company profits (including tax exempt income) as determined by the
Member's Percentage Interest. Each Member's capital account shall be
debited with the amount of money and the fair market value of property
(net of any liabilities that such Member assumes or takes subject to)
distributed to such Member; the amount of any liabilities of such
Member assumed by the Company (other than in connection with a
contribution); and such Member's distributive share of Company losses
(including items that may be neither deducted nor capitalized for
federal income tax purposes) as determined by the Member's Percentage
Interest.
(b) The capital accounts shall be maintained and adjusted in accordance
with the Internal Revenue Code, Section 704(b) and (c) and the
Regulations (1.704-1(b)). In the event the Members or the Board
determine that it is prudent to modify the manner in which the capital
accounts or any debits or credits thereto are computed in order to
comply with such laws and regulations, the Members or the Board may
make such modification, provided that it is not likely to have a
material effect on the amounts distributed to any Member upon
dissolution as provided herein.
(c) Any Member, including any substitute Member, who shall receive an
Interest (or whose Interest shall be increased) by means of a transfer
to it of all or a part of the Interest of another Member, shall have a
capital account that reflects the capital account associated with the
transferred Interest.
4.4 Expenses of the Company.
All of the Company expenses shall be billed directly to and paid by the
Company. The Company is specifically authorized to make reimbursements to
any Member that provides goods, materials or services used for or by the
Company provided such are authorized in advance in writing or are paid
pursuant to a written agreement approved by the Members. In no event shall
any amount charged to the Company as a reimbursable expense by any Member
exceed the amount that the Company would be required to pay to independent
parties for comparable goods, materials or services.
4.5. Distributions.
Distributions of cash or other assets of the Company shall be made at such
times and in such amounts as the Members may determine, except that
distributions shall be routinely made at each year-end unless the Members
determine it would not be prudent to do so. Distributions shall be made to
(and profits and losses shall be allocated among) Members pro rata in
accordance with their respective Percentage Interests.
<PAGE>
ARTICLE V
TAX AND ACCOUNTING MATTERS; BOOKS AND RECORDS
5.1 Tax Matters.
(a) The Board will designate a Member-Manager who will act as the "tax
matters partner" within the meaning of Section 6231 of the Internal
Revenue Code. The tax matters partner shall promptly advise each
Member and the Board of any audit proceeding proposed to be conducted
with respect to the Company.
(b) It is the intention of the Initial Members and shall be the intention
of all subsequently admitted Members that the Company shall be taxed
as a "partnership" for federal and state income tax purposes. All
provisions of this Agreement are to be construed so as to preserve
that tax status. The Members will take all reasonable actions,
including the amendment to this Agreement and the execution of other
documents, as may be required in order for the Company to qualify for
and receive "partnership" treatment for federal and state income tax
purposes.
(c) All items of Company income, gain, loss, deduction, credit or the like
shall be allocated among the Members in accordance with their
respective Percentage Interest as set forth in Schedule I.
(d) Each of the Members shall execute or cause to be executed from time to
time all other instruments, certificates, notices and documents, and
shall do or cause to be done all such filing, recording, publishing
and other acts, in each case, as may be necessary or appropriate from
time to time to comply with all applicable requirements for the
formation and/or operation and, when appropriate, termination of a
limited liability company in the State of Connecticut and all other
jurisdictions where the Company shall desire to conduct its business.
5.2 Books and Records.
The Company shall maintain or cause to be maintained separate, full and
accurate books and records of the Company, and the Members or any
authorized representatives of the members will have the right to inspect,
examine and copy the same, and to meet with employees of the Company
responsible for preparing the same, at reasonable times during business
hours and upon reasonable notice.
5.3 Reports to Members.
The Members Committee shall provide or shall cause to be provided to, each
Member such financial reports and statement in such form and with such
frequency as such Member may reasonably request. The fiscal year of the
Company shall be a calendar
<PAGE>
year. The books and records of the Company shall be maintained in
accordance with generally accepted accounting principles and the Internal
Revenue Code and Regulations.
ARTICLE VI
TRANSFERS OF INTERESTS; BUY-OUT RIGHTS; WITHDRAWAL OF
MEMBERS; DISSOLUTION
6.1 Transfers of Company Interests.
No Member may sell, assign, pledge or otherwise transfer or encumber
(collectively "transfer") all or any part of its Interest in the Company,
and no transferee of all or any part of the Interest of a Member shall be
admitted as a substitute Member, without having obtained the prior written
consent of at least Two-Thirds in Interest of the non-transferring Members,
or in the event that there are less than three members, the consent of the
non-transferring Member. In no event shall a transfer of a Member's
Interest include an assignment or transfer of the right to participate in
the management and affairs of the Company or to become or exercise any
rights of a Member. Until the assignee of a Member's Interest becomes a
Member upon the consent of Members as described above, the assignor
continues to be a Member and have all the powers attendant to membership
provided herein. The Members shall amend Schedule I hereto from time to
time to reflect transfers made in accordance herewith. Any purported
transfer in violation of this Section shall be null and void and shall not
be recognized by the Company.
6.2 Buy-Out Rights.
(a) For a period of 180 days following the effective date of a Change in
Control of HSB, ERC shall have the right to purchase HSB's Member
Interest in the Company at a price equal to X times Y (the "Buy-Out
Price") where:
X = the total Pre-Tax Earnings (as defined herein) earned by HSB for
the four calendar quarters immediately preceding the calendar quarter
within which the Announcement Date occurs; and
Y = closing price of HSB Group, Inc. common stock on the day preceding
the Announcement Date divided by the aggregate net income per share
for the previous four quarters; provided that in no event shall Y be
less than 10 or more than 15.
"Pre-Tax Earnings" for the purpose of computing the Buy-Out Price
shall be the sum of :
<PAGE>
(i) the net amount of ceding commission earned by HSB after performing
the calculation under Paragraph 7.3 of the Operating Agreement, less
Operating Costs as defined in the Operating Agreement;
(ii) the underwriting income of HSB ( which for purposes of this
formula will not be less than zero) on a GAAP basis earned by HSB
under the Reinsurance Agreements, after giving effect to any Outward
Reinsurance ceded in accordance with Paragraph 4.2 of the Operating
Agreement; and
(iii) an allocable portion of HSB's investment income attributable to
the cash held by IRI in connection with (i) and (ii).
(b) In order to exercise such right, ERC must deliver written notice
relating thereto to HSB within the 180 day period following the Change
in Control to HSB, and within thirty (30) days of receiving such
notice, HSB shall send a notice to ERC setting forth the Buy-Out
Price. Within fifteen (15) days of receiving such notice of the
Buy-Out Price, ERC shall send a notice to HSB stating that it has
either decided to (i) purchase HSB's Member Interest at the Buy-Out
Price (a "Buy-out Acceptance Notice") or (ii) not purchase HSB's
Member Interest. In the event that ERC fails to give such notice
within such fifteen (15) day period, ERC shall be deemed to have
elected not to purchase HSB's Member Interest.
(c) A purchase and sale of HSB's Member Interest pursuant to this Section
6.2, shall take place at the office of the Company on such date within
thirty (30) days of the date of delivery of the Buyout Acceptance
Notice as specified by ERC (subject to extension if required to obtain
any regulatory approvals and to permit the expiration of any
applicable statutory waiting periods).
(d) ERC may assign its right to purchase HSB's Member Interests pursuant
to this Section 6.2 to any of its Affiliates.
(e) On the closing date of any purchase of HSB's Member Interest pursuant
to this Section 6.2, the Operating Agreement shall be considered
terminated without any further action required on the part of the
parties thereto to effect such termination.
6.3 Withdrawal of Members.
No Member shall have the right to withdraw from the Company except with the
consent of two-thirds in Interest of all other Members, or in the event
that there are less than three Members at the time of such proposed
withdrawal, with the consent of the remaining Member, and upon such terms
and conditions as may be specifically agreed upon between such other
Members and the withdrawing Member. The withdrawing Member shall be
entitled to receive any distribution which the Member was entitled to
receive prior to the withdrawal. Unless otherwise agreed to by the
remaining Members, the
<PAGE>
withdrawing Member shall not be entitled to payment for the Member's
Interest in the Company and, beginning on the date of withdrawal, the
withdrawing Member shall no longer be a Member of the Company.
6.4 Return of Capital.
No Member shall have any liability for the return of any Member's Capital
Contribution which Capital Contribution shall be payable solely from the
assets of the Company at the absolute discretion of the Members.
6.5. Dissolution.
Subject to the provisions of Section 6.6 of this Agreement, the Company
shall be dissolved and its affairs wound up and terminated upon the first
to occur of the following:
(a) the determination of all the Members to dissolve the Company;
(b) the insolvency of a Member or any other event causing a dissolution of
the Company under Section 34-180 of the Connecticut Act; or
(c) the occurrence of any event that makes it unlawful for the business of
the Company to be carried on or for the Members to carry it on as a
limited liability company.
6.6. Continuation of the Company.
Notwithstanding the provisions of Section 6.5(b) herein, the Company shall
not be dissolved if within ninety (90) days after the occurrence of an
event described in Section 6.5(b), the business of the Company is continued
by the agreement of all the remaining Members.
ARTICLE VII
DISPUTE RESOLUTION
7.1. Negotiation between Executives.
(a) The Members shall attempt in good faith to resolve any dispute arising
out of or relating to this Agreement promptly by negotiations between
executives who have authority to settle the controversy. Any Member
may give the other Members written notice of any dispute not resolved
in the normal course of business. Within 20 days after delivery of
said notice, executives of the Members shall meet at a mutually
acceptable time and place, and thereafter as often as they reasonably
deem necessary, to exchange relevant information and to attempt to
resolve the dispute. If the matter has not been resolved within 60
days of the disputing
<PAGE>
Member's notice, or if the Members fail to meet within 20 days, any
Member may initiate mediation of the controversy or claim as provided
hereinafter.
(b) If a negotiator executive intends to be accompanied at a meeting by an
attorney, the other negotiator executive shall be given at least three
working days' notice of such intention and may also be accompanied by
an attorney. All negotiations pursuant to this clause are confidential
and shall be treated as compromise and settlement negotiations for
purposes of the Federal Rules of Evidence and state rules of evidence.
7.2 Mediation.
If the dispute has not been resolved by negotiation as provided above, the
parties shall endeavor to settle the dispute by submitting it to the Center
for Public Resources (CPR) Institute for Dispute Resolution, New York, New
York for mediation under the then current CPR Model Procedure for Mediation
of Business Disputes. The neutral third party will be selected from the CPR
Panel of Neutrals. If the parties encounter difficulty in agreeing on a
neutral, they will seek the assistance of CPR in the selection process.
ARTICLE VIII
MISCELLANEOUS
8.1 Limitation of Liability.
The debts, obligations and liabilities of the Company, whether arising in
contract, tort or otherwise shall be solely the debts, obligations and
liabilities of the Company and no Member of the Company shall be obligated
personally for any such debt, obligation or liability of the Company solely
by reason of being a Member.
8.2. Standard of Care and Indemnification of Members or non-Member Managers.
(a) No Member or member of the Board of Managers, or any committee there
of shall have any personal liability whatsoever to the Company or any
other Member on account of such Member's or Person's status thereof or
by reason of such Member's or Person's acts or omissions in connection
with the conduct of the business of the Company; provided, however,
that nothing contained herein shall protect any Member or member of
the Board of Managers, or any committee thereof, against any liability
to the Company or the Members to which such Member or non-Member
Manager would otherwise be subject by reason of: (i) any act or
omission of such Member or Person that involves actual fraud or
willful misconduct or (ii) any transaction from which such Member or
Person derived improper personal benefit.
<PAGE>
(b) The Company shall indemnify and hold harmless each Member and
non-Member Manager and the affiliates of any Member (each an
"Indemnified Party") against any and all losses, claims, damages,
expenses and liabilities (including, but not limited to, any
investigation, attorneys' fees, expert witness fees and other
reasonable expenses incurred in connection with, and any amounts paid
in settlement of, any action, suits, proceedings, or claims) of any
kind or nature whatsoever that such Indemnified Party may at any time
become subject to or liable for by reason of the formation, operation
or termination of the Company or the Indemnified Party's actions in
connection with the conduct of the affairs of the Company (including,
without limitation, indemnification against negligence, gross
negligence or breach of duty); provided, however, that no Indemnified
Party shall be entitled to indemnification if and to the extent that
the liability otherwise to be indemnified for results from (i) any act
or omission of such Indemnified Party that involves actual fraud or
willful misconduct or (ii) any transaction from which such Indemnified
Party derives improper personal benefit. The indemnities provided
hereunder shall survive termination of the Company and this Agreement.
Each Indemnified Party shall have a claim against the property and
assets of the Company for payment of any indemnity amounts due
hereunder, which amounts shall be paid or properly reserved for prior
to the making of distributions by the Company to Members. Costs and
expenses that are subject to indemnification hereunder shall, at the
request of the Indemnified Party, be advanced by the Company to or on
behalf of such Indemnified Party prior to final resolution of a
matter, so long as such Indemnified Party shall have provided the
Company with a written undertaking to reimburse the Company for all
amounts so advanced if it is ultimately determined that the
Indemnified Party is not entitled to indemnification hereunder.
(c) The contract rights to indemnification and to the advancement of
expenses conferred in this Section 8.2 shall not be exclusive of any
other right that any party may have or hereafter acquire under any
statute, agreement, vote of the Members or otherwise.
(d) The Company may maintain insurance, at its expense, to protect itself
and any Member or non-Member Manager of the Company, or another
limited liability company, corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss,
whether or not the Company would have the power to indemnify such
party against such expense, liability or loss under the Connecticut
Act.
(e) The Company may, to the extent authorized from time to time by the
Members, grant rights to indemnification and to advancement of
expenses to any employee or agent of the Company to the fullest extent
of the provisions of this Section with respect to the indemnification
and advancement of expenses of Members and non-Member Managers of the
Company.
<PAGE>
8.3 Notices.
Notices required or permitted by this Agreement shall be in writing and
shall be delivered personally (by courier or otherwise), sent by facsimile
transmission (confirmation received) or sent by certified, registered or
express mail, postage prepaid. Any such notice will be deemed given when so
delivered personally or sent by facsimile transmission or, if mailed, three
days after the date of deposit into the United States mails. All notices or
communications under this agreement shall be addressed as follows or to
such other address as any party may designate by notice given in accordance
with this agreement to the other parties.
If to ERC:
Employers Reinsurance Corporation
5200 Metcalf
Overland Park, Kansas 62201
Attention: General Counsel
Facsimile No.: (913) 676-5483
If to HSB:
The Hartford Steam Boiler Inspection and Insurance Company
P.O. Box 5024
One State Street
Hartford, CT 06102-5024
Attention: General Counsel
Facsimile No.: (860) 722-1818
If to LLC:
HSB Industrial Risk Insurers L.L.C.
85 Woodland Street
Hartford, CT 06102
Attention: Chief Executive Officer
Facsimile No.: (860) 520-7559
8.4. Amendments.
This Agreement may be amended only by the unanimous written consent of the
Members.
<PAGE>
8.5 Execution in Counterparts.
This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the
same instrument.
8.6. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Connecticut without giving effect to any choice of law
or conflict of law provision or rule (whether of the State of Connecticut
or any other jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of Connecticut.
8.7. Headings. The Section headings of this Agreement are for convenience only
and shall not in any way affect the interpretation hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the date first above written.
MEMBER
EMPLOYERS REINSURANCE CORPORATION
------------------------------------
By: John M. Connelly
Title: Senior Vice President,
General Counsel and Secretary
MEMBER
THE HARTFORD STEAM BOILER
INSPECTION AND INSURANCE COMPANY
------------------------------------
By: Robert C. Walker
Title: Senior Vice President and
General Counsel
<PAGE>
Schedule I
Member Name & Address Capital Percentage
Contribution Interest
Employers Reinsurance Corporation IRI Book of Business
5200 Metcalf with a value of $_________
Overland Park, Kansas 66201 $ [cash ]__________________ 90%
IRI trademark license
license to use IMS assets
The Hartford Steam Boiler HSB U.S. Special Risk
Inspection and Insurance Manufacturing Book of
Company Business with a value of
P.O. Box 5024 $ _________________ 10%
One State Street
Hartford, Connecticut 06102-5024 $ [cash] _________________
HSB trademark license
TOTAL: $__________________ 100%
<PAGE>
Schedule II
Managers Designated By:
Kaj Ahlmann Employers Reinsurance Corporation
John M. Connelly Employers Reinsurance Corporation
Robert Dellinger Employers Reinsurance Corporation
Hoyt Wood Employers Reinsurance Corporation
Gordon W. Kreh The Hartford Steam Boiler Inspection
and Insurance Company
Saul L. Basch The Hartford Steam Boiler Inspection
and Insurance Company
Michael L. Downs The Hartford Steam Boiler Inspection
and Insurance Company
Members of Underwriting
Committee
Hoyt Wood Employers Reinsurance Corporation
Michael Downs The Hartford Steam Boiler Inspection
and Insurance Company
Members of Claim Committee
John M. Connelly Employers Reinsurance Corporation
Robert C. Walker The Hartford Steam Boiler Inspection
and Insurance Company
Exhibit 10(iii)(a)
Amended and restated as of September 21, 1998
HSB Group, Inc.
1985 STOCK OPTION PLAN
ARTICLE I - PLAN ADMINISTRATION AND ELIGIBILITY
1.1 Purpose
The purpose of the 1985 Stock Option Plan is to attract and retain persons
of ability as employees of the Company and its Subsidiaries and to motivate
such employees to exert their best efforts to contribute to the long-term
growth of the Company by encouraging ownership in the Company. The Plan is
further designed to promote a closer identity of interest between key
employees and the Company's stockholders. The Plan has been amended and
restated, effective January 1, 1987, to provide for the payment of a
Related Tax Benefit upon the exercise of certain options and for awards of
Restricted Stock.
1.2 Definitions
(a) "Appreciation" shall mean the excess of the Fair Market Value of a
share over the option price per share specified in an option agreement
multiplied by the number of shares subject to the option or portion
thereof which is surrendered.
(b) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated
under Section 12 of the Exchange Act.
(c) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
(d) "Beneficiary" shall mean the legal representative of the estate of a
deceased Optionee or the person or persons who shall acquire the right
to exercise an option or Stock Appreciation Right by bequest or
inheritance or by reason of the death of the Optionee. In the case
where a Participant's right to shares of Restricted Stock vest as
provided in Section 2.6(d) on or prior to his date of death, the term
"Beneficiary" shall also mean the legal representative of the estate
of the Participant or the person or persons who shall acquire the
right to such vested shares of Stock
<PAGE>
by bequest or inheritance or by reason of the death of such
Participant.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "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 (i) 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 (i) 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
<PAGE>
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 (ii) 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.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(h) "Committee" shall mean the Human Resources Committee of the Board or
any future committee of the Board performing similar functions.
(i) "Company" shall mean HSB Group, Inc. except in
<PAGE>
determining under Section 1.2(f) hereof 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.
(j) "Disability" shall mean any condition which would entitle an employee
of the Company or a Subsidiary to receive benefits under the Company's
Long-Term Disability Plan or any long-term disability plan maintained
by the Subsidiary.
(k) "Exchange Act" shall mean the Securities 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 Stock 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 Stock, for the next preceding date for
which such a quotation is available. If shares of Company Stock are
not then listed on the NYSE, Fair Market Value shall be reasonably
determined by the Committee, in its sole discretion.
(m) "Incentive Stock Option" shall mean an option described in Section
422A of the Code.
(n) "Nonstatutory Stock Option" shall mean an option which does not
qualify as an Incentive Stock Option under Section 422A of the Code.
(o) "Optionee" shall mean an employee of the Company or one of its
Subsidiaries to whom an option is granted.
(p) "Participant" shall mean an employee of the Company or one of its
Subsidiaries to whom an option is granted or to whom Restricted Stock
is awarded.
(q) "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
<PAGE>
Company in substantially the same proportions as their ownership of
stock of the Company.
(r) "Plan" shall mean HSB Group, Inc. 1985 Stock Option Plan, as amended.
(s) "Related Tax Benefit" shall mean the payment to an Optionee, upon the
exercise of a Nonstatutory Stock Option designated by the Committee as
subject to a Related Tax Benefit, of an amount, computed in accordance
with the following formula where X equals the lower of the percent
established by the Committee at the time of grant of the Related Tax
Benefit, or the highest marginal rate imposed under Section 1 of the
Code for the taxable year in which the exercise occurs:
(i) X percent of the excess of the Fair Market Value of one share of
Stock over the respective option price per share multiplied by
the number of whole and fractional shares of Stock distributed by
the Company to the Optionee with respect to such an exercised
option or portion of such an option, the Fair Market Value to be
determined as of the date of such distribution; divided by
(ii) One (1) minus X percent.
(t) "Restricted Stock" shall mean one or more shares of Stock awarded to
an eligible employee under Section 2.6 of the Plan and subject to the
terms and conditions set forth in Section 2.6.
(u) "Retirement" shall mean the termination of employment under
circumstances which entitle an employee to receive retirement benefits
under the Company's Employees' Retirement Plan or any Subsidiary's
retirement plan.
(v) "Stock" shall mean the Common Stock of the Company.
(w) "Stock Appreciation Right" shall mean a right to surrender to the
Company all or any portion of an option and, as determined by the
Committee, to receive in exchange therefor cash or whole shares of
Stock (valued at current Fair Market Value) or a combination thereof
having an aggregate value equal to the excess of the current Fair
Market Value of one (1) share over the option price of one (1) share
specified in such option grant multiplied by the number of shares
subject
<PAGE>
to such option or the portion thereof which is surrendered.
(x) "Subsidiary" shall mean any corporation of which at least 50% of the
voting stock is owned by the Company and/or one or more of its other
Subsidiaries.
1.3 Administration
The Plan shall be administered by the Committee as defined herein. No
member of the Committee shall be eligible to be granted an option under the
Plan. 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 shall have the
responsibility of interpreting the Plan and establishing and amending such
rules and regulations necessary or appropriate for the administration of
the Plan or for the continued qualification of any Incentive Stock Options
granted hereunder. In addition, the Committee shall have the authority to
designate the employees who shall be granted options and awarded Restricted
Stock under the Plan and the amount and nature of the options, related
rights and awards to be granted to each such employee. All interpretations
of the Plan or of any options, related rights or awards issued under it
made by the Committee or any subcommittee shall be final and binding upon
all persons having an interest in the Plan. No member of the Committee
shall be liable for any action or determination taken or made in good faith
with respect to this Plan or any option granted hereunder.
1.4 Eligibility
Executive and middle management employees of the Company or its
Subsidiaries shall be eligible to receive grants of stock options and
awards of Restricted Stock under the Plan.
<PAGE>
1.5 Stock Subject to the Plan
(a) The maximum number of shares which may be optioned or awarded under
the Plan shall be 2,600,000 shares of Stock. Preferred Stock may be
used in lieu of grants of Stock under the Plan subject to further
authorization of the Board of the Company. The limitation on the
number of shares which may be optioned or awarded under the Plan shall
be subject to adjustment under Section 3.2 of this Plan.
(b) If any outstanding option under the Plan for any reason expires,
lapses or is terminated, the shares of the Stock which were subject to
such option shall be restored to the total number of shares available
for grant pursuant to the Plan. Shares as to which there is a
surrender in whole or in part of an option upon the exercise of a
Stock Appreciation Right shall not again be available for grant
pursuant to the Plan. Stock delivered upon the exercise of a Stock
Appreciation Right shall not be charged against the number of shares
of Stock available for the grant of options.
(c) Upon the exercise of an option or a Stock Appreciation Right, or
payment of a Restricted Stock award, the Company may distribute newly
issued shares or shares previously repurchased on behalf of the
Company through a broker or other independent agent designated by the
Committee. Such repurchases shall be subject to such rules and
procedures as the Committee may establish hereunder and shall be
consistent with such conditions as may be prescribed from time to time
by law or by the Securities and Exchange Commission ("SEC") in any
rule or regulation or in any exemptive order or no-action letter
issued by the SEC to the Company or the broker with respect to the
making of such purchase or otherwise.
<PAGE>
ARTICLE II - OPTIONS, RELATED TAX BENEFITS, STOCK APPRECIATION RIGHTS AND
RESTRICTED STOCK
2.1 Granting of Options
The Committee may grant Incentive Stock Options (ISOs), Nonstatutory Stock
Options or any combination thereof, provided that the aggregate Fair Market
Value (determined at the time the option is granted) of the shares of Stock
with respect to which ISOs are exercisable for the first time by an
employee during any calendar year (under this Plan and any other option
plan of the Company or its Subsidiaries) shall not exceed $100,000. No such
maximum limitation shall apply to Nonstatutory Stock Options.
2.2 Terms and Conditions of Options
Each option granted under the Plan shall be authorized by the Committee and
shall be evidenced by a written agreement, in a form approved by the
Committee, containing the following terms and conditions and such other
terms and conditions as the Committee may deem appropriate:
(a) Option Term - Each option agreement shall specify the term for which
the option thereunder is granted and shall provide that the option
shall expire at the end of such term. In no event shall any option be
exercisable any earlier than one year after the date of such grant.
The Committee shall have authority to grant options exercisable in
cumulative or non-cumulative installments. No option shall be
exercisable after the expiration of ten years from the date upon which
such option is granted. Notwithstanding anything to the contrary
contained herein, in the event of a Change in Control, all outstanding
options shall immediately become exercisable.
(b) Option Price - The option price per share shall be determined by the
Committee at the time an option is granted, and shall not be less than
the Fair Market Value of one share of Stock on the date the option is
granted.
(c) Exercise of Option -
(1) Options may be exercised only by proper written notice to the
Company or its duly authorized agent accompanied by the proper
amount of payment for the shares, as provided under Section
2.2(d) hereunder.
<PAGE>
(2) No ISO granted prior to January 1, 1987 shall be exercised while
there is outstanding any other ISO previously granted to the
employee, pursuant to the Plan or any other plan of the Company
or any Subsidiary (or a predecessor of any such corporations) to
purchase shares of Stock or stock of any Subsidiary (or any
predecessor of any such corporations). For purposes of this
section, an ISO shall be treated as outstanding until such option
is exercised in full or expires by reason of the lapse of time.
An ISO shall be considered exercised in full when either the
underlying option or the related Stock Appreciation Right is
exercised.
(3) The Committee may postpone any exercise of an option or a Stock
Appreciation Right or the delivery of Stock following the lapse
of certain restrictions with respect to awards of Restricted
Stock for such time as the Committee in its discretion may deem
necessary, in order to permit the Company with reasonable
diligence (i) to effect or maintain registration of the Plan or
the shares issuable upon the exercise of the option or the Stock
Appreciation Right or the lapse of certain restrictions
respecting awards of Restricted Stock under the Securities Act of
1933, as amended, or the securities laws of any applicable
jurisdiction, or (ii) to determine that such shares and Plan are
exempt from such registration; the Company shall not be obligated
by virtue of any option agreement or any provision of the Plan to
recognize the exercise of an option or the exercise of a Stock
Appreciation Right or the lapse of certain restrictions
respecting awards of Restricted Stock to sell or issue shares in
violation of said Act or of the law of the government having
jurisdiction thereof. Any such postponement shall not extend the
term of an option; neither the Company nor its directors or
officers shall have any obligation or liability to the Optionee
of an option or Stock Appreciation Right, or to the Optionee's
Beneficiary with respect to any shares as to which the option or
Stock Appreciation Right shall lapse because of such
postponement.
(4) To the extent an option is not exercised for the total number of
shares with respect to which such options become exercisable, the
number of
<PAGE>
unexercised shares shall accumulate and the option shall be
exercisable, to such extent, at any time thereafter, but in no
event later than ten years from the date the option was granted
or after the expiration of such shorter period (if any) which the
Committee may have established with respect to such option
pursuant to Subsection (a) of this Section 2.2.
(d) Payment of Purchase Upon Exercise - Payment for the shares as to which
an option is exercised shall be made in one of the following ways:
(1) payment in cash or if permitted by the Committee, by tendering
shares of Stock of the Company (by either actual delivery of
shares or by attestation, with such shares valued at Fair Market
Value as of the day of exercise) held by the purchaser for at
least six months; or in any combination thereof, as determined by
the Committee; or
(2) if permitted by the Committee, a Participant may elect to
authorize a third party to sell shares of Stock (or a sufficient
portion of the shares) acquired upon exercise of the option and
remit to the Company a sufficient portion of the sales proceeds
to pay the entire exercise price and any tax withholding
resulting from such exercise.
(e) Nontransferability - No option or Stock Appreciation Right granted
under the Plan shall be transferable other than by will or by the laws
of descent and distribution subject to Section 2.5 hereunder. During
the lifetime of an Optionee, an option or Stock Appreciation Right
shall be exercisable only by such Optionee.
(f) Laws and Regulations - The Committee shall have the right to condition
any issuance of shares to any Optionee or Participant hereunder on
such Optionee's or Participant's undertaking in writing to comply with
such restrictions on the subsequent disposition of such shares as the
Committee shall deem necessary or advisable as a result of any
applicable law or regulation. In the case of Stock issued or cash paid
upon exercise of options or associated Stock Appreciation Rights, or
payment of a Related Tax Benefit or the lapse of restrictions with
respect to Restricted Stock awarded to a Participant under the
<PAGE>
Plan, the Optionee, Participant or other person receiving such Stock
or cash shall be required to pay to the Company or a Subsidiary the
amount of any taxes which the Company or Subsidiary is required to
withhold with respect to such Stock or cash. The Company or a
subsidiary may, in its sole discretion, permit an optionee or
participant or other person receiving such Stock or cash to satisfy
any federal, state or local (if any) tax withholding requirements, in
whole or in part by (i) delivering to the Company or subsidiary shares
of Stock held by such optionee, participant or other person having a
Fair Market Value equal to the amount of the tax or (ii) directing the
Company or subsidiary to retain Stock otherwise issuable to the
optionee, participant or other person under the Plan having a Fair
Market Value equal to the amount of the tax. If Stock is used to
satisfy tax withholding, such stock shall be valued based on the Fair
Market Value when the tax withholding is required to be made.
(g) Modification - The Committee shall have authority to modify an option
agreement without the consent of the Optionee, provided that such
modification does not affect the exercise price or otherwise
materially diminish the value of such option agreement to the
Optionee, and provided further, that except in connection with an
amendment to the Plan, the Committee shall not have authority to make
any modification to any particular option agreement that materially
increases the value of the option agreement to the Optionee.
2.3 Related Tax Benefit
(a) The Committee may, but shall not be required to designate an option,
either at date of grant of a Nonstatutory Stock Option or thereafter,
as being subject to a Related Tax Benefit. A Related Tax Benefit shall
be payable to the Optionee only upon the exercise of the option with
which it is associated and payment shall be made at the time of such
exercise. The conditions and limitations of a Related Tax Benefit
shall be determined by the Committee and the Committee shall have the
authority to amend the formula set forth in Subsection (s) of Section
1.2 at any time without the consent of the Optionee.
(b) On and after January 1, 1987, an Optionee may, with respect to any
unexercised Incentive Stock Option, apply to the Committee to elect to
convert, at the discretion of the Committee, such option to a
<PAGE>
Nonstatutory Stock Option. The Committee may, but shall not be
required to, approve such conversion to a Nonstatutory Stock Option.
Effective upon approval of such conversion by the Committee, the
option that was an Incentive Stock Option prior to such conversion
shall cease to be an option described in Section 422A of the Code and
shall be deemed to be a Nonstatutory Stock Option. Following the
approval of such conversion, the Committee may, in accordance with the
provisions of Section 2.3(a), designate such Nonstatutory Stock Option
as being subject to a Related Tax Benefit in accordance with the
provisions of this Section 2.3.
(c) A Related Tax Benefit shall be payable in cash or, at the discretion
of the Committee, in Stock or a combination of cash and Stock such
that the sum of the amount of cash, if any, and the Fair Market Value
of the Stock (as of the date of exercise) is equal to the amount of
such Related Tax Benefit. Payment of any Related Tax Benefit shall be
subject to the provisions of Section 2.2(f) respecting the payment of
taxes which the Company or Subsidiary is required to withhold.
2.4 Stock Appreciation Rights
(a) The Committee may, but shall not be required to, grant a Stock
Appreciation Right to the Optionee either at the time an option is
granted or by amending the option agreement at any time during the
term of such option. A Stock Appreciation Right shall be exercisable
only during the term of the option with which it is associated. The
Stock Appreciation Right shall be an integral part of the option with
which it is associated and shall have no existence apart therefrom.
The conditions and limitations of the Stock Appreciation Right shall
be determined by the Committee and shall be set forth in the option
agreement or amendment thereto. An amendment granting a Stock
Appreciation Right shall not be deemed to be a grant of a new option
for purposes of the Plan.
(b) A Stock Appreciation Right may be exercised by:
(1) filing with the Secretary of the Company a written election,
which election shall be delivered by the Secretary to the
Committee specifying:
(i) the option or portion thereof to be surrendered; and
<PAGE>
(ii) the percentage of the Appreciation which the Optionee
desires to receive in cash, if any; and
(2) surrendering such option for cancellation or partial
cancellation, as the case may be, provided, however, that any
election to receive any portion of the Appreciation in cash shall
be of no force or effect unless and until the Committee shall
have consented to such election.
(c) No election to receive any portion of the Appreciation in cash shall
be filed with the Secretary and no Stock Appreciation Right shall be
exercised to receive any cash unless such election and exercise shall
occur during the period (hereinafter referred to as the "Cash Window
Period") beginning on the third business day following the date of
release for publication by the Company of a regular quarterly or
annual statement of sales and earnings and ending on the twelfth
business day following such date. The Committee may consent to the
election of a holder to receive any portion of the Appreciation in
cash at any time after such election has been made. If such election
is consented to, the Stock Appreciation Right shall be deemed to have
been exercised during the Cash Window Period in which, or next
occurring after which, the Optionee completed all acts required of him
under the preceding paragraphs to exercise the Stock Appreciation
Right. Any Stock Appreciation Right exercised during said Cash Window
Period shall be valued and deemed exercised as of the date during such
Cash Window Period when the average of the high and low prices for the
shares of Stock as reported by the NYSE is the highest.
2.5 Exercise of Option or Stock Appreciation Right in the Event of Termination
of Employment or Death
(a) Options and associated Stock Appreciation Rights shall terminate
immediately upon the termination of the Optionee's employment with the
Company or a Subsidiary unless the option agreement of such Optionee
provides otherwise. The conditions established by the Committee in the
agreement for exercising options and Stock Appreciation Rights
following termination of employment are limited by the following
restrictions.
(1) If termination of employment is by reason of the death of the
Optionee, no exercise by the Optionee's Beneficiary may occur
more than two years after the Optionee's death.
<PAGE>
(2) If termination of employment is the result of Disability or
Retirement, no exercise by the Optionee or his Beneficiary may
occur more than two years following such termination of
employment.
(3) If termination of employment is for a reason other than death,
Disability, Retirement or "involuntary termination for cause", no
exercise by the Optionee may occur more than three months
following such termination of employment. As used herein
"involuntary termination for cause" shall mean termination of
employment by reason of the Optionee's commission of a felony,
fraud or willful misconduct which has resulted, or is likely to
result, in substantial and material damage to the Company or its
Subsidiaries. Whether an involuntary termination is for "cause"
will be determined in the sole discretion of the Committee.
(b) If the Optionee should die after termination of employment, such
termination being for a reason other than Disability, Retirement or
involuntary termination for cause, but while the option is still
exercisable, the option or associated Stock Appreciation Right, if
any, may be exercised by the Beneficiary of the Optionee no later than
one year from the date of termination of employment of the Optionee.
(c) Under no circumstances may an option or Stock Appreciation Right be
exercised by an Optionee or Beneficiary after the expiration of the
term specified in the option agreement.
2.6 Awarding of Restricted Stock
(a) The Committee shall from time to time in its absolute discretion
select from among the eligible employees the Participants to whom
awards of Restricted Stock shall be granted and the number of shares
subject to such awards. Each award of Restricted Stock under the Plan
shall be evidenced by an instrument delivered to the Participant in
such form as the Committee shall prescribe from time to time in
accordance with the Plan. The Restricted Stock subject to such award
shall be registered in the name of the Participant and held in escrow
by the Committee during the Restricted Period (as defined herein).
<PAGE>
(b) Upon the award to a Participant of shares of Restricted Stock pursuant
to Section 2.6(a), the Participant shall, subject to Subsection (c) of
this Section 2.6, possess all incidents of ownership of such shares,
including the right to receive dividends with respect to such shares
and to vote such shares.
(c) Shares of Restricted Stock awarded to a Participant may not be sold,
assigned, transferred, pledged, hypothecated or otherwise disposed of,
except by will or the laws of descent and distribution, for a period
of five years, or such shorter period as the Committee shall
determine, from the date on which the award is granted (the
"Restricted Period"). The Committee may also impose such other
restrictions and conditions on the shares as it deems appropriate and
any attempt to dispose of any such shares of Restricted Stock in
contravention of such restrictions shall be null and void and without
effect. In determining the Restricted Period of an award, the
Committee may provide that the foregoing restrictions shall lapse with
respect to specified percentages of the awarded shares on successive
anniversaries of the date of such award. In no event shall the
Restricted Period end with respect to awarded shares prior to the
satisfaction by the Participant of any liability arising under Section
2.2(f).
(d) The restrictions described in Section 2.6(c) shall lapse upon the
completion of the Restricted Period with respect to specific shares of
Restricted Stock and the Participant's right to such shares shall vest
on such date or, if earlier, on the date that the Participant's
employment terminates on account of the death, Disability or
Retirement of the Participant. The Company shall deliver to the
Participant, or the Beneficiary of such Participant, if applicable,
within 30 days of the termination of the Restricted Period, the number
of shares of Stock that were awarded to the Participant as Restricted
Stock and with respect to which the restrictions imposed under Section
2.6(c) have lapsed, less any stock returned by the Company to satisfy
tax withholding pursuant to Section 2.2(f), if applicable.
(e) Except as provided in Sections 2.6(d) and (f), if the Participant's
continuous employment with the Company or a Subsidiary shall terminate
for any reason prior to the expiration of the Restricted Period of an
award, any shares remaining subject to restrictions shall thereupon be
forfeited by the Participant and
<PAGE>
transferred to, and reacquired by, the Company or a Subsidiary at no
cost to the Company or Subsidiary.
(f) The Committee shall have the authority (and the instrument evidencing
an award of Restricted Stock may so provide) to cancel all or any
portion of any outstanding restrictions prior to the expiration of the
Restricted Period with respect to any or all of the shares of
Restricted Stock awarded to an employee hereunder on such terms and
conditions as the Committee may deem appropriate.
(g) In the event of a Change in Control, all restrictions on any
outstanding shares of Restricted Stock shall lapse as of the date of
such Change in Control.
ARTICLE III - GENERAL PROVISIONS
3.1 Authority
Appropriate officers of the Company designated by the Committee are
authorized to execute and deliver option agreements, and amendments
thereto, in the name of the Company, as directed from time to time by the
Committee.
3.2 Adjustments in the Event of Change in Common Stock of the Company
In the event of any change in the Stock 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 Stock at a price substantially below Fair Market
Value, or of any similar change affecting the Stock, the number and kind of
shares which thereafter may be obtained and sold under the Plan and the
number and kind of shares subject to options in outstanding option
agreements and the purchase price per share thereof and the number of
shares of Restricted Stock awarded pursuant to Section 2.6(a) with respect
to which all restrictions have not lapsed, 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
rights granted to, or available for, Participants in the Plan. Any
fractional shares resulting from such adjustments shall be eliminated.
However, without the consent of the Optionee, no adjustment shall be made
in the terms of an ISO which would disqualify it from treatment under
Section 421(a) of the Code or would be considered a modification, extension
or renewal of an option under Section 425(h) of the Code.
<PAGE>
3.3 Rights of Employees
The Plan and any option or award granted under the Plan shall not confer
upon any Optionee or Participant any right with respect to continuance of
employment by the Company or any Subsidiary nor shall they interfere in any
way with the right of the Company or Subsidiary by which an Optionee or
Participant is employed to terminate his employment at any time. The
Company shall not be obligated to issue Stock pursuant to an option or an
award of Restricted Stock for which the restrictions hereunder have lapsed
if such issuance would constitute a violation of any applicable law. No
Optionee shall have any rights as a stockholder with respect to any shares
subject to his option prior to the date of issuance to such optionee of a
certificate or certificates for such shares. Except as provided herein, no
Participant shall have any rights as a stockholder with respect to any
shares of Restricted Stock awarded to such participant.
3.4 Amendment, Suspension and Discontinuance of the Plan
The Board may from time to time amend, suspend or discontinue the Plan,
provided that the Board may not, without the approval of the holders of a
majority of the outstanding shares entitled to vote, take any of the
following actions unless such actions fall within the provisions of Section
3.2 herein:
(a) increase the number of shares reserved for options pursuant to Section
1.5;
(b) alter in any way the class of persons eligible to participate in the
Plan;
(c) permit the granting of any option at an option price less than that
provided under Section 2.2(b) hereof; or
(d) extend the term of the Plan or the term during which any option may be
granted or exercised.
No amendment, suspension or discontinuance of the Plan shall impair an
Optionee's rights under an option previously granted to an Optionee without
the Optionee's consent.
<PAGE>
3.5 Governing Law
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Connecticut.
3.6 Effective Date of the Plan
The Plan as amended and restated shall be effective on January 1, 1987,
subject to the requisite approval of stockholders. No option shall be
granted pursuant to this Plan later than April 15, 1995, but options
granted before such date may extend beyond it in accordance with their
terms and the terms of the Plan.
Exhibit 10(iii)(b)
As amended and restated effective September 21, 1998
THE HSB GROUP, INC. DIRECTORS STOCK AND DEFERRED COMPENSATION PLAN
1. Purposes of the Plan.
The purposes of The HSB Group, Inc. Directors Stock and Deferred
Compensation Plan are: (a) to attract and retain persons of ability as
directors of the Company; (b) to more closely align directors' interests
with those of shareholders; and (c) to encourage the highest level of
contribution by directors to the financial success of the Company by
providing a significant portion of their compensation in the form of equity
in the Company.
2. Definitions.
"Annual Award" shall mean the annual award made to a Director of Deferred
Shares.
"Board" shall mean the Board of Directors of the Company.
"Cash Compensation" shall mean the total of the annual cash retainer and
fees for attending and/or chairing any meeting of the Board or a committee
of the Board payable to a Director for any Plan Year.
"Change in Control" shall have occurred for purposes of this Plan if :
(a) any "person" (as defined in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the
Company representing twenty-five (25%) or more of the Company's
then outstanding securities;
(b) during any period within two (2) consecutive years there shall
cease to be a majority of the Board of Directors comprised as
follows: individuals who at the beginning of such period
constitute the Board of Directors and any new director(s) whose
election by the Board of Directors or nomination for election by
the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election
or nomination for election was previously so approved; or
(c) the shareholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than (i) a
merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity)
more than 80% of the combined voting power of voting securities
after such merger or consolidation or (ii) a merger or
consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no "person" (as
hereinabove defined) acquires more than 25% of the combined
voting power of the Company's then outstanding securities; or
(d) the shareholders of the Company approve (i) a plan of complete
liquidation of the Company or (ii) the sale or other disposition
of all or substantially all the Company assets.
"Committee" shall mean the Governance Committee of the Board or any future
committee of the Board performing similar functions.
"Company" shall mean HSB Group, Inc.
"Deferral Election" shall mean the election to defer receipt of Cash
Compensation in accordance with Section 7.
"Deferred Account" shall mean the account established and maintained for a
Director under the Plan pursuant to an election made pursuant to Section 7.
"Deferred Share" shall mean the right to receive the Fair Market Value of a
share of Stock in the form of Stock subject to the conditions set forth in
the Plan.
"Director" shall mean a non-employee director of the Company.
"Dividend Equivalent" shall mean an amount equal to the dividend that would
have been paid with respect to a Deferred Share if such unit had
constituted a share of Stock, duly issued and outstanding on the date a
dividend is payable on the Stock.
"Fair Market Value" shall mean the average of the high and low prices per
share of the Company's Stock 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 Stock, for the next preceding date for which such a
quotation is available. If shares of Company Stock are not then listed on
the NYSE, Fair Market Value shall be reasonably determined by the Committee
in its sole discretion.
"Plan" shall mean The HSB Group, Inc. Directors Stock and Deferred
Compensation Plan.
"Plan Year" shall mean the calendar year.
"Stock" shall mean the common stock of the Company.
3. Administration of the Plan.
The Plan shall be administered by the Committee as defined herein. The
Committee is authorized to interpret the Plan and shall adopt guidelines
for carrying out the Plan as it may deem appropriate. Decisions of the
Committee shall be final, conclusive and binding upon all parties
concerned, unless otherwise determined by the Board of Directors.
4. Stock Subject to the Plan.
Subject to the provisions of Section 11 of the Plan, the maximum number of
shares of Stock which may be delivered to Directors under the Plan shall be
150,000. Any shares of Stock withheld to cover tax withholding shall be
deemed to have not been delivered for purposes of determining the maximum
number of shares of Stock available for delivery under the Plan.
5. Annual Awards
Annual Awards shall be made in the form of Deferred Shares subject to the
provisions of Article 6.
6. Award of Deferred Shares.
As of the last day of each Plan Year, an award of Deferred Shares shall be
made to each Director in an amount equal to 825 multiplied by a fraction
where the numerator is the number of full or partial months within such
Plan Year that such individual served as a Director and the denominator is
12. In the event that such Director's service on the Board terminates for
any reason prior to the end of the Plan Year, as soon as practicable
following such termination such Director's award will be determined in
accordance with the formula in the preceding sentence but as of the date of
such Director's termination.
7. Election to Defer Receipt of Cash Compensation.
(a) A Director shall have the right to make on an annual basis an election
to defer payment of all, or a percentage of, the total Cash
Compensation to be earned during the ensuing Plan Year (a "Deferral
Election"). In order to make a Deferral Election pursuant to this
Section 7, a Director shall deliver to the Corporate Secretary of the
Company no later than the last business day prior to the commencement
of the first Plan Year to which such election relates a written notice
setting forth the percentage of Cash Compensation to be deferred and
whether such cash should be (i) converted into Deferred Shares in
accordance with subsection (b) below; or (ii) credited as cash to a
Deferred Account maintained for such Director on the date such
compensation would otherwise be paid. Individuals who become Directors
during a Plan Year shall have thirty days following their election or
appointment to make a Deferral Election for the remainder of the Plan
Year. Any Deferral Election made pursuant to this Section 7 shall
remain in effect for subsequent Plan Years until a new election form
is delivered to the Corporate Secretary in accordance with this
section.
(b) As soon as practicable following the end of a Plan Year, each Director
who made a Deferral Election in the form of Deferred Shares will be
credited as of the last day of the Plan Year with the number of
Deferred Share units, including fractional Deferred Share units, equal
to the amount of the Cash Compensation, the payment of which has been
deferred, divided by the Fair Market Value of shares of Stock on the
date such compensation would otherwise have been paid. In the event
that a Director's service on the Board terminates for any reason prior
to the end of a Plan Year, the calculation referred to in the
preceding sentence shall be made as soon as practicable following such
Director's date of termination.
8. Dividend Equivalents Payable on Deferred Shares and Interest Paid on
Deferred Cash Accounts.
(a) Dividend Equivalents shall be credited on Deferred Shares held by
Directors based upon dividends paid on shares of Stock between the
date such Deferred Shares are credited to Directors and the date they
are ultimately paid out in accordance with the Plan.
(b) Dividend Equivalents shall, at the election of the Director, be either
(i) paid in the form of cash as soon as practicable following the end
of a Plan Year; or (ii) converted into Deferred Shares following the
end of a Plan Year based on the number of Deferred Shares credited to
a Director's account as of the dividend record dates falling within
such Plan Year multiplied by the Dividend Equivalent amount per share
of Stock payable during such Plan Year divided by the Fair Market
Value of Stock on the last day of the Plan Year.
(c) Dividend Equivalents will be payable on Deferred Shares granted under
Section 6 for the Plan Year for which a grant is made in accordance
with subsections (a) and (b) above as though such Deferred Shares had
been granted as of the first day of such Plan Year, provided however,
such Dividend Equivalents shall not be credited to a Director until
the Deferred Shares to which they relate are credited to the Director
in accordance with Section 6.
(d) Dividend Equivalents will be payable on Deferred Shares credited
pursuant to a Deferral Election pursuant to Section 7 in accordance
with subsections (a) and (b) above as though such Deferred Shares had
been credited to a Director on the date the Cash Compensation to which
the Deferral Election relates would otherwise have been paid, provided
however, such Dividend Equivalents shall not be credited to a
Director's account until the Deferred Shares to which they relate are
credited to the Director in accordance with Section 7.
(e) At the end of each Plan Year, and at the time of payment of any
amounts held in a Deferred Account, interest at the rate of 8.5% shall
be credited to each Deferred Account on the average daily balance held
in such accounts for the preceding Plan Year or portion thereof.
9. Time and Form of Payment.
(a) Payment in settlement of Deferred Shares and any amounts held in a
Deferred Account will commence as soon as practicable after the date
the Director ceases to be a member of the Board, unless, with respect
to amounts held in a Deferred Account, a Director has specified an
alternate date in his or her Deferral Election.
(b) Payment in settlement of Deferred Shares and any amounts held in a
Deferred Account will be made in a lump sum or, if elected by a
Director at least one year prior to the date such Director ceases to
be a member of the Board, in a specified number (not to exceed ten) of
annual installments. Such election may be modified or revoked by the
Director, provided that no such modification or revocation will be
given effect unless it is made prior to the date specified in the
preceding sentence.
(c) Amounts held in a Deferred Account in the form of cash shall be paid
out in cash and Deferred Shares held by a Director shall be paid in an
equivalent number of shares of Stock.
(d) Whenever a fractional share would otherwise be required to be issued
in accordance with the terms of this Section 9, the Fair Market Value
of such fractional share shall be paid in cash.
10. Payment in the Event of Death.
(a) In the event of a Director's death, payment of amounts credited to
such Director's Deferred Account shall be paid in cash and payment of
Deferred Shares shall be made in shares of Stock, except for any
fractional share the Fair Market Value of which shall be paid in cash.
(b) Payment shall be made as soon as practicable following the death of
the Director in a single lump sum to the beneficiary designated in
writing by the Director, of if no designation was made, to the person
legally entitled thereto, as designated under the will of the
Director, or to such heir or heirs as determined under the laws of
intestacy of the Director's domicile.
11. Adjustments in the Event of Change in Common Stock of the Company.
In the event that there is any change in the Stock by reason of any stock
dividend, stock split, combination of shares, exchange of shares, warrants
or rights offering to purchase Stock at a price below its fair market
value, reclassification, recapitalization, merger, consolidation, spin-off
or other change in capitalization, appropriate adjustment shall be made in
the number and kind of shares or other property subject to the Plan and the
number and kind of shares or other property credited to the Directors under
the Plan, and any other relevant provisions of the Plan by the Committee,
whose determination shall be binding and conclusive on all persons.
12. Change in Control.
In the event of a Change in Control, the following shall occur on the date
thereof (the "Change in Control Date"): (i) the last day of the then
current Plan Year shall be deemed to occur on the Change in Control Date;
(ii) pursuant to Sections 5, 6, and 7, Directors shall be credited with
Deferred Shares, as if for this purpose Directors' service as Directors
ceased on the Change in Control Date; (iii) Dividend Equivalents on
Deferred Shares, including those credited under clause (ii), and interest
on any Deferred Accounts shall be credited in accordance with Section 8;
and (iv) the Company shall pay a lump sum cash payment in settlement of the
amount of cash credited to each Director's Deferred Account and the number
of Deferred Shares then credited to such Director, including cash and
Deferred Shares credited pursuant to clauses (ii) and (iii) above. For
purposes of the preceding sentence, the amount of cash delivered in payment
of Deferred Shares shall equal such units 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 of Stock which is paid or offered to be paid, by any
person or entity, in connection with the transaction constituting the
Change in Control.
13. Rights with respect to Deferred Shares.
Except to the extent otherwise set forth in the Plan, Directors shall not
have any of the rights of a shareholder with respect to the Deferred Shares
credited to them.
14. General Restrictions.
(a) No shares of Stock shall be issued under the Plan prior to compliance
by the Company, to the satisfaction of its counsel, with any
applicable law. The Company shall not be obligated to, but may in its
discretion, take any action under applicable federal or state law
(including registration or qualification of the Plan or the Stock)
necessary for compliance therewith in order to permit the issuance of
shares hereunder.
(b) The Company may impose such restrictions on the sale or other
disposition of shares of Stock issued under the Plan as it deems
necessary to comply with applicable securities laws.
15. Withholding.
The Company may defer making payment or delivery of shares of Stock under
the Plan until satisfactory arrangements have been made for the payment of
any Federal, state or local income taxes required to be withheld with
respect to such payment or delivery, including without limitation by the
withholding of shares that would otherwise be so delivered, by withholding
from any other payment due to the Director, or by a cash payment to the
Company by a Director.
16. No Right to Nomination for Reelection.
Nothing in the Plan shall be deemed to create any obligation on the part of
the Board to nominate any Director for reelection by the Company's
shareholders or to limit the rights of the shareholders to remove any
Director.
17. Amendment and Termination of the Plan.
The Board may at any time amend or terminate the Plan, in whole or in part,
however, no amendment or termination shall without the written consent of a
Director, reduce the Director's rights with respect to awards previously
granted hereunder or any fees previously earned the payment of which has
been deferred pursuant to the terms of the Plan.
18. Governing Law.
The Plan and all actions taken thereunder shall be construed in accordance
with and governed by the laws of the State of Connecticut.
Exhibit 10(iii)(c)
As Amended and restated effective 9/21/98
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
<PAGE>
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.
<PAGE>
(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
<PAGE>
- 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
(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.
<PAGE>
(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, provided that the Committee may not, without shareholder
approval, take any of the following actions unless such actions fall
within the provisions of Section 9 of the Plan: (i) increase the
number of Shares reserved for delivery under the Plan; (ii) change the
class of persons eligible to participate in the Plan; or (iii)
increase the maximum amount of awards to be made to Participants as
determined pursuant to Section 7(d) of the Plan; and 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.
<PAGE>
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
<PAGE>
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
<PAGE>
termination date, but awards made prior to its termination date may extend
beyond that date.
Exhibit 10(iii)(d)
As amended and restated
effective 9/21/98
HSB GROUP, INC.
1995 STOCK OPTION PLAN
ARTICLE I - PLAN ADMINISTRATION AND ELIGIBILITY
1.1 Purpose of Plan
The purpose of the 1995 Stock Option Plan is to attract and retain persons
of ability as employees of the Company and its Subsidiaries and to motivate
such employees to exert their best efforts to contribute to the long-term
growth of the Company by encouraging ownership in the Company. The Plan is
further designed to promote a closer identity of interest between key
employees and the Company's shareholders.
1.2 Definitions
(a) "Appreciation" shall mean the excess of the Fair Market Value of a
share over the specified option price per share multiplied by the
number of shares subject to the option or portion thereof which is
surrendered.
(b) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated
under Section 12 of the Exchange Act.
(c) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
(d) "Beneficiary" shall mean the legal representative of the estate of a
deceased Optionee or the person or persons who shall acquire the right
to exercise an option or Stock Appreciation Right by bequest or
inheritance or by reason of the death of the Optionee. In the case
where a Participant's right to shares of Restricted Stock vest as
provided in Section 2.5(d) on or prior to the Participant's date of
death, the term "Beneficiary" shall also mean the legal representative
of the estate of the Participant or the person or persons who shall
acquire the right to such vested shares of Stock by bequest or
inheritance or by reason of the death of such Participant.
<PAGE>
(e) "Board" shall mean the Board of Directors of the Company.
(f) "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 (i) 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 (i) 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
<PAGE>
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 (ii) 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.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended.
<PAGE>
(h) "Committee" shall mean the Human Resources Committee of the Board or
any future committee of the Board performing similar functions.
(i) "Company" shall mean HSB Group,Inc. and, except in determining under
Section 1.2(f) hereof 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.
(j) "Disability" shall mean any condition which would entitle an employee
of the Company or a Subsidiary to receive benefits under the Company's
Long-Term Disability Plan or any long-term disability plan maintained
by the Subsidiary.
(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 Stock 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 Stock, for the next preceding date for
which such a quotation is available. If shares of Company Stock are
not then listed on the NYSE, Fair Market Value shall be reasonably
determined by the Committee, in its sole discretion.
(m) "Incentive Stock Option" shall mean an option described in Section 422
of the Code.
(n) "Nonstatutory Stock Option" shall mean an option which does not
qualify as an Incentive Stock Option under Section 422 of the Code.
(o) "Optionee" shall mean an employee of the Company or a Subsidiary to
whom an option is granted.
(p) "Participant" shall mean an employee of the Company or a Subsidiary to
whom an option is granted or to whom Restricted Stock is awarded.
(q) "Person" shall have the meaning given in Section
<PAGE>
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.
(r) "Plan" shall mean the HSB Group, Inc. 1995 Stock Option Plan, as
amended.
(s) "Restricted Stock" shall mean one or more shares of Stock awarded to
an eligible employee under Section 2.5 of the Plan and subject to the
terms and conditions set forth in Section 2.5.
(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 or any Subsidiary's
retirement plan.
(u) "Stock" shall mean the Common Stock of the Company.
(v) "Stock Appreciation Right" shall mean a right to surrender to the
Company all or any portion of an option and, as determined by the
Committee, to receive in exchange therefor cash or whole shares of
Stock (valued at current Fair Market Value) or a combination thereof
having an aggregate value equal to the excess of the current Fair
Market Value of one (1) share over the option price of one (1) share
specified in such option grant multiplied by the number of shares
subject to such option or the portion thereof which is surrendered.
(w) "Subsidiary" shall mean any corporation of which at least 50% of the
voting stock is owned by the Company and/or one or more of the
Company's other Subsidiaries.
1.3 Administration
<PAGE>
The Plan shall be administered by the Committee as defined herein. No
member of the Committee shall be eligible to be granted an option under the
Plan. 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 shall have the
responsibility of interpreting the Plan and establishing and amending such
rules and regulations necessary or appropriate for the administration of
the Plan or for the continued qualification of any Incentive Stock Options
granted hereunder. In addition, the Committee shall have the authority to
designate the employees who shall be granted options and awarded Restricted
Stock under the Plan and the amount and nature of the options, related
rights and awards to be granted to each such employee. All interpretations
of the Plan or of any options, related rights or awards issued under it
made by the Committee shall be final and binding upon all persons having an
interest in the Plan. No member of the Committee shall be liable for any
action or determination taken or made in good faith with respect to this
Plan or any option granted hereunder.
1.4 Eligibility
Executive and middle management employees of the Company or its
Subsidiaries shall be eligible to receive grants of stock options and
awards of Restricted Stock under the Plan.
1.5 Stock Subject to the Plan
(a) The maximum number of shares which may be optioned or awarded under
the Plan shall be 2,775,000 shares of Stock. Preferred Stock may be
used in lieu of grants of Stock under the Plan subject to further
authorization of the Board of the Company. Notwithstanding the
foregoing, in no event shall the Committee grant any Participant
Incentive Stock Options, Nonstatutory Stock Options, Stock
Appreciation Rights or Restricted Stock in any single calendar year
for more than 150,000 shares of Stock. The limitation on the number of
shares which may be optioned or awarded under the Plan or to an
individual Participant shall be subject to adjustment under Section
3.2 of this Plan.
<PAGE>
(b) If any outstanding option under the Plan for any reason expires,
lapses or is terminated, the shares of the Stock which were subject to
such option shall be restored to the total number of shares available
for grant pursuant to the Plan. Shares as to which there is a
surrender in whole or in part of an option upon the exercise of a
Stock Appreciation Right shall not again be available for grant
pursuant to the Plan. Stock delivered upon the exercise of a Stock
Appreciation Right shall not be charged against the number of shares
of Stock available for the grant of options.
(c) Upon the exercise of an option or a Stock Appreciation Right, or
payment of a Restricted Stock award, the Company may distribute newly
issued shares or shares previously repurchased on behalf of the
Company through a broker or other independent agent designated by the
Committee. Such repurchases shall be subject to such rules and
procedures as the Committee may establish hereunder and shall be
consistent with such conditions as may be prescribed from time to time
by law or by the Securities and Exchange Commission ("SEC") in any
rule or regulation or in any exemptive order or no-action letter
issued by the SEC to the Company or the broker with respect to the
making of such purchase or otherwise.
ARTICLE II - OPTIONS, STOCK APPRECIATION RIGHTS AND RESTRICTED STOCK
2.1 Granting of Options
The Committee may grant Incentive Stock Options (ISOs), Nonstatutory Stock
Options or any combination thereof, provided that the aggregate Fair Market
Value (determined at the time the option is granted) of the shares of Stock
with respect to which ISOs are exercisable for the first time by an
employee during any calendar year (under this Plan and any other option
plan of the Company or its Subsidiaries) shall not exceed $100,000. No such
maximum limitation shall apply to Nonstatutory Stock Options.
2.2 Terms and Conditions of Options
Each option granted under the Plan shall be authorized by the Committee and
shall be evidenced by an instrument delivered
<PAGE>
to the Participant, in a form approved by the Committee, containing the
following terms and conditions and such other terms and conditions as the
Committee may deem appropriate.
(a) Option Term - Each option shall specify the term for which the option
thereunder is granted and shall provide that the option shall expire
at the end of such term. In no event shall any option be exercisable
any earlier than one year after the date of such grant. The Committee
shall have authority to grant options exercisable in cumulative or
non-cumulative installments. No option shall be exercisable after the
expiration of ten years from the date upon which such option is
granted. Notwithstanding anything to the contrary contained herein, in
the event of a Change in Control, all outstanding options shall
immediately become exercisable.
(b) Option Price - The option price per share shall be determined by the
Committee at the time an option is granted, and shall not be less than
the Fair Market Value of one share of Stock on the date the option is
granted.
(c) Exercise of Option -
(1) Options may be exercised only by proper written notice to the
Company or its duly authorized agent accompanied by the proper
amount of payment for the shares, as provided under Section
2.2(d) hereunder.
(2) The Committee may postpone any exercise of an option or a Stock
Appreciation Right or the delivery of Stock following the lapse
of certain restrictions with respect to awards of Restricted
Stock for such time as the Committee in its discretion may deem
necessary, in order to permit the Company with reasonable
diligence (i) to effect or maintain registration of the Plan or
the shares issuable upon the exercise of the option or the Stock
Appreciation Right or the lapse of certain restrictions
respecting awards of Restricted Stock under the Securities Act of
1933, as amended, or the securities laws of any applicable
jurisdiction, or (ii) to determine that such shares and Plan are
exempt from such
<PAGE>
registration; the Company shall not be obligated by virtue of any
option or any provision of the Plan to recognize the exercise of
an option or the exercise of a Stock Appreciation Right or the
lapse of certain restrictions respecting awards of Restricted
Stock to sell or issue shares in violation of said Act or of the
law of the government having jurisdiction thereof. Any such
postponement shall not extend the term of an option; neither the
Company nor its directors or officers shall have any obligation
or liability to the Optionee of an option or Stock Appreciation
Right, or to the Optionee's Beneficiary with respect to any
shares as to which the option or Stock Appreciation Right shall
lapse because of such postponement.
(3) To the extent an option is not exercised for the total number of
shares with respect to which such options become exercisable, the
number of unexercised shares shall accumulate and the option
shall be exercisable, to such extent, at any time thereafter, but
in no event later than ten years from the date the option was
granted or after the expiration of such shorter period (if any)
which the Committee may have established with respect to such
option pursuant to Subsection (a) of this Section 2.2.
(d) Payment of Purchase Upon Exercise - Payment for the shares as to which
an option is exercised shall be made in one of the following ways:
(1) payment in cash or if permitted by the Committee, by tendering
shares of Stock of the Company (by either actual delivery of
shares or by attestation, with such shares valued at Fair Market
Value as of the day of exercise) held by the purchaser for at
least six months; or in any combination thereof, as determined by
the Committee; or
(2) if permitted by the Committee, a Participant may elect to
authorize a third party to sell shares of Stock (or a sufficient
portion of the shares) acquired upon exercise of the option and
remit to the Company a sufficient portion of the sales
<PAGE>
proceeds to pay the entire exercise price and any tax withholding
resulting from such exercise.
(e) Nontransferability - No option granted under the Plan shall be
transferable other than by will or by the laws of descent and
distribution subject to Section 2.4 hereunder, unless the Committee
shall permit (on such terms and conditions as it shall establish) such
option to be transferred to a member of the Participant's immediate
family or to a trust or similar vehicle for the benefit of such
immediate family members, or to an "alternate participant" pursuant to
a Qualified Domestic Relations Order as defined in the Code. During
the lifetime of an Optionee, an option shall be exercisable only by
such Optionee, or if applicable, a transferee. For purposes of Section
2.4 hereunder, a transferred option may be exercised by the transferee
to the extent that the Participant would have been entitled had the
option not been transferred.
(f) Laws and Regulations - The Committee shall have the right to condition
any issuance of shares to any Optionee or Participant hereunder upon
such Optionee's or Participant's undertaking in writing to comply with
such restrictions on the subsequent disposition of such shares as the
Committee shall deem necessary or advisable as a result of any
applicable law or regulation. In the case of Stock issued or cash paid
upon exercise of options or associated Stock Appreciation Rights, or
the lapse of restrictions with respect to Restricted Stock awarded to
a Participant under the Plan, the Optionee, Participant or other
person receiving such Stock or cash shall be required to pay to the
Company or a Subsidiary the amount of any taxes which the Company or
Subsidiary is required to withhold with respect to such Stock or cash.
The Company or a Subsidiary may, in its sole discretion, permit an
Optionee or Participant or other person receiving such Stock or cash
to satisfy any Federal, state or local (if any) tax withholding
requirements, in whole or in part by (i) delivering to the Company or
subsidiary shares of Stock held by such Optionee, Participant or other
person having a Fair Market Value equal to the amount of the tax or
(ii) directing the Company or Subsidiary to retain Stock otherwise
issuable to the Optionee, Participant or other person under the Plan
having a Fair Market Value equal to the
<PAGE>
amount of the tax. If Stock is used to satisfy tax withholding, such
Stock shall be valued based on the Fair Market Value when the tax
withholding is required to be made.
(g) Modification - The Committee shall have authority to modify an option
without the consent of the Optionee, provided that such modification
does not affect the exercise price or otherwise materially diminish
the value of such option to the Optionee, and provided further, that
except in connection with an amendment to the Plan, the Committee
shall not have authority to make any modification to any particular
option that materially increases the value of the option to the
Optionee.
2.3 Stock Appreciation Rights
(a) The Committee may, but shall not be required to, grant a Stock
Appreciation Right to the Optionee either at the time an option is
granted or by amending the option at any time during the term of such
option. A Stock Appreciation Right shall be exercisable only during
the term of the option with which it is associated. The Stock
Appreciation Right shall be an integral part of the option with which
it is associated and shall have no existence apart therefrom. The
conditions and limitations of the Stock Appreciation Right shall be
determined by the Committee and shall be set forth in the option or
amendment thereto. An amendment granting a Stock Appreciation Right
shall not be deemed to be a grant of a new option for purposes of the
Plan.
(b) A Stock Appreciation Right may be exercised by:
(1) filing with the Secretary of the Company a written election,
which election shall be delivered by the Secretary to the
Committee specifying:
(i) the option or portion thereof to be surrendered; and
(ii) the percentage of the Appreciation which the Optionee
desires to receive in cash, if any; and
<PAGE>
(2) surrendering such option for cancellation or partial
cancellation, as the case may be, provided, however, that any
election to receive any portion of the Appreciation in cash shall
be of no force or effect unless and until the Committee shall
have consented to such election.
(c) No election to receive any portion of the Appreciation in cash shall
be filed with the Secretary and no Stock Appreciation Right shall be
exercised to receive any cash unless such election and exercise shall
occur during the period (hereinafter referred to as the "Cash Window
Period") beginning on the third business day following the date of
release for publication by the Company of a regular quarterly or
annual statement of sales and earnings and ending on the twelfth
business day following such date. The Committee may consent to the
election of a holder to receive any portion of the Appreciation in
cash at any time after such election has been made. If such election
is consented to, the Stock Appreciation Right shall be deemed to have
been exercised during the Cash Window Period in which, or next
occurring after which, the Optionee completed all acts required of
such Optionee under the preceding paragraphs to exercise the Stock
Appreciation Right. Any Stock Appreciation Right exercised during said
Cash Window Period shall be valued and deemed exercised as of the date
during such Cash Window Period when the average of the high and low
prices for the shares of Stock as reported by the NYSE is the highest.
2.4 Exercise of Option or Stock Appreciation Right in the Event of Termination
of Employment or Death
(a) Options and associated Stock Appreciation Rights shall terminate
immediately upon the termination of the Optionee's employment with the
Company or a Subsidiary unless the written option instrument of such
Optionee provides otherwise. The conditions established by the
Committee in the instrument for exercising options and Stock
Appreciation Rights following termination of employment are limited by
the following restrictions.
(1) If termination of employment is by reason of the death of the
Optionee, no exercise by the
<PAGE>
Optionee's Beneficiary may occur more than two years after the
Optionee's death.
(2) If termination of employment is the result of Disability or
Retirement, no exercise by the Optionee or his Beneficiary may
occur more than two years following such termination of
employment.
(3) If termination of employment is for a reason other than death,
Disability, Retirement or "involuntary termination for cause", no
exercise by the Optionee may occur more than three months
following such termination of employment. As used herein
"involuntary termination for cause" shall mean termination of
employment by reason of the Optionee's commission of a felony,
fraud or willful misconduct which has resulted, or is likely to
result, in substantial and material damage to the Company or its
Subsidiaries. Whether an involuntary termination is for "cause"
will be determined in the sole discretion of the Committee.
(b) If the Optionee should die after termination of employment, such
termination being for a reason other than Disability, Retirement or
involuntary termination for cause, but while the option is still
exercisable, the option or associated Stock Appreciation Right, if
any, may be exercised by the Beneficiary of the Optionee no later than
one year from the date of termination of employment of the Optionee.
(c) Under no circumstances may an option or Stock Appreciation Right be
exercised by an Optionee or Beneficiary after the expiration of the
term specified for the option.
2.5 Awarding of Restricted Stock
(a) The Committee shall from time to time in its absolute discretion
select from among the eligible employees the Participants to whom
awards of Restricted Stock shall be granted and the number of shares
subject to such awards. Each award of Restricted Stock under the Plan
shall be evidenced by an instrument delivered to the Participant in
such form as the Committee shall
<PAGE>
prescribe from time to time in accordance with the Plan. The
Restricted Stock subject to such award shall be registered in the name
of the Participant and held in escrow by the Committee during the
Restricted Period (as defined herein).
(b) Upon the award to a Participant of shares of Restricted Stock pursuant
to Section 2.5(a), the Participant shall, subject to Subsection (c) of
this Section 2.5, possess all incidents of ownership of such shares,
including the right to receive dividends with respect to such shares
and to vote such shares.
(c) Shares of Restricted Stock awarded to a Participant may not be sold,
assigned, transferred, pledged, hypothecated or otherwise disposed of,
except by will or the laws of descent and distribution, for a period
of five years, or such shorter period as the Committee shall
determine, from the date on which the award is granted (the
"Restricted Period"). The Committee may also impose such other
restrictions and conditions on the shares as it deems appropriate and
any attempt to dispose of any such shares of Restricted Stock in
contravention of such restrictions shall be null and void and without
effect. In determining the Restricted Period of an award, the
Committee may provide that the foregoing restrictions shall lapse with
respect to specified percentages of the awarded shares on successive
anniversaries of the date of such award. In no event shall the
Restricted Period end with respect to awarded shares prior to the
satisfaction by the Participant of any liability arising under Section
2.2(f).
(d) The restrictions described in Section 2.5(c) shall lapse upon the
completion of the Restricted Period with respect to specific shares of
Restricted Stock and the Participant's right to such shares shall vest
on such date or, if earlier, on the date that the Participant's
employment terminates on account of the death, Disability or
Retirement of the Participant. The Company shall deliver to the
Participant, or the Beneficiary of such Participant, if applicable,
within 30 days of the termination of the Restricted Period, the number
of shares of Stock that were awarded to the Participant as Restricted
Stock and with respect to which the restrictions imposed under Section
2.5(c)
<PAGE>
have lapsed, less any stock returned by the Company to satisfy tax
withholding pursuant to Section 2.2(f), if applicable.
(e) Except as provided in Sections 2.5(d) and (f), if the Participant's
continuous employment with the Company or a Subsidiary shall terminate
for any reason prior to the expiration of the Restricted Period of an
award, any shares remaining subject to restrictions shall thereupon be
forfeited by the Participant and transferred to, and reacquired by,
the Company or a Subsidiary at no cost to the Company or Subsidiary.
(f) The Committee shall have the authority (and the instrument evidencing
an award of Restricted Stock may so provide) to cancel all or any
portion of any outstanding restrictions prior to the expiration of the
Restricted Period with respect to any or all of the shares of
Restricted Stock awarded to an employee hereunder on such terms and
conditions as the Committee may deem appropriate.
(g) In the event of a Change in Control, all restrictions on any
outstanding shares of Restricted Stock shall lapse as of the date of
such Change in Control.
ARTICLE III - GENERAL PROVISIONS
3.1 Authority
Appropriate officers of the Company designated by the Committee are
authorized to execute and deliver written instruments evidencing awards
hereunder, and amendments thereto, in the name of the Company, as directed
from time to time by the Committee.
3.2 Adjustments in the Event of Change in Common Stock of the Company
In the event of any change in the Stock 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 Stock at a price substantially below Fair Market
Value, or of any similar change affecting the Stock, the number and kind of
shares which thereafter may be obtained and sold under the Plan and the
number and kind of shares subject to options in
<PAGE>
outstanding option instruments and the purchase price per share thereof and
the number of shares of Restricted Stock awarded pursuant to Section 2.5(a)
with respect to which all restrictions have not lapsed, 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 rights granted to, or available for, Participants in
the Plan. Any fractional shares resulting from such adjustments shall be
eliminated. However, without the consent of the Optionee, no adjustment
shall be made in the terms of an ISO which would disqualify it from
treatment under Section 421(a) of the Code or would be considered a
modification, extension or renewal of an option under Section 425(h) of the
Code.
3.3 Rights of Employees
The Plan and any option or award granted under the Plan shall not confer
upon any Optionee or Participant any right with respect to continuance of
employment by the Company or any Subsidiary nor shall they interfere in any
way with the right of the Company or Subsidiary by which an Optionee or
Participant is employed to terminate his employment at any time. The
Company shall not be obligated to issue Stock pursuant to an option or an
award of Restricted Stock for which the restrictions hereunder have lapsed
if such issuance would constitute a violation of any applicable law. No
Optionee shall have any rights as a shareholder with respect to any shares
subject to option prior to the date of issuance to such Optionee of a
certificate or certificates for such shares. Except as provided herein, no
Participant shall have any rights as a shareholder with respect to any
shares of Restricted Stock awarded to such Participant.
3.4 Amendment, Suspension and Discontinuance of the Plan
The Board may from time to time amend, suspend or discontinue the Plan,
provided that the Board may not, without shareholder approval, take any of
the following actions unless such actions fall within the provisions of
Section 3.2 herein:
(a) increase the number of shares reserved for options pursuant to Section
1.5;
(b) alter in any way the class of persons eligible to participate in the
Plan;
<PAGE>
(c) permit the granting of any option at an option price less than that
provided under Section 2.2(b) hereof; or
(d) extend the term of the Plan or the term during which any option may be
granted or exercised.
No amendment, suspension or discontinuance of the Plan shall impair an
Optionee's rights under an option previously granted to an Optionee without
the Optionee's consent.
3.5 Governing Law
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Connecticut.
3.6 Effective Date of the Plan
The Plan shall be effective on April 18, 1995, subject to the requisite
approval of shareholders. No option shall be granted pursuant to this Plan
later than April 17, 2005, but options granted before such date may extend
beyond it in accordance with their terms and the terms of the Plan.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
PER SHARE INFORMATION CONTAINED IN THIS SCHEDULE HAS BEEN RESTATED TO CONFORM TO
THE PROVISIONS OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS
PER SHARE". SUCH PER SHARE INFORMATION ALSO REFLECTS THE COMPANY'S MAY 1, 1998
THREE FOR TWO STOCK SPLIT.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 545
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 409
<MORTGAGE> 11
<REAL-ESTATE> 0
<TOTAL-INVEST> 965
<CASH> 104 <F1>
<RECOVER-REINSURE> 596
<DEFERRED-ACQUISITION> 39
<TOTAL-ASSETS> 2109
<POLICY-LOSSES> 522
<UNEARNED-PREMIUMS> 474
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 29
409 <F2>
0
<COMMON> 10
<OTHER-SE> 413
<TOTAL-LIABILITY-AND-EQUITY> 2109
289
<INVESTMENT-INCOME> 47
<INVESTMENT-GAINS> 18
<OTHER-INCOME> 107 <F3>
<BENEFITS> 129
<UNDERWRITING-AMORTIZATION> 45
<UNDERWRITING-OTHER> 146 <F4>
<INCOME-PRETAX> 127
<INCOME-TAX> 41
<INCOME-CONTINUING> 86
<DISCONTINUED> 30 <F5>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116
<EPS-PRIMARY> 3.95 <F6><F7>
<EPS-DILUTED> 3.57 <F6><F8>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Cash includes short-term investments.
<F2>Company obligated mandatorily redeemable capital securities and
convertible
capital securities classified at mezzanine level on Consolidated
Statements of
Financial Position.
<F3>Includes gain on sale of IRI.
<F4>Includes Engineering Services expense and interest.
<F5>Net gain on discontinued operations of Radian, after
tax.
<F6>Reflects the impact of three-for-two stock split approved by the
Board
of Directors on April 21, 1998 for net income.
<F7>Per SFAS No. 128 "Earnings per Share", this item represents
EPS-Basic.
<F8>Per SFAS No. 128 "Earnings per Share", this item represents
EPS-Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
PER SHARE INFORMATION CONTAINED IN THIS SCHEDULE HAS BEEN RESTATED TO CONFORM TO
THE PROVISIONS OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS
PER SHARE". SUCH PER SHARE INFORMATION ALSO REFLECTS THE COMPANY'S MAY 1, 1998
THREE FOR TWO STOCK SPLIT.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 237
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 326
<MORTGAGE> 11
<REAL-ESTATE> 0
<TOTAL-INVEST> 574
<CASH> 140 <F1>
<RECOVER-REINSURE> 146
<DEFERRED-ACQUISITION> 43
<TOTAL-ASSETS> 1254
<POLICY-LOSSES> 279
<UNEARNED-PREMIUMS> 293
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 43
229 <F2>
0
<COMMON> 10
<OTHER-SE> 320
<TOTAL-LIABILITY-AND-EQUITY> 1254
361
<INVESTMENT-INCOME> 26
<INVESTMENT-GAINS> 6
<OTHER-INCOME> 45
<BENEFITS> 157
<UNDERWRITING-AMORTIZATION> 68
<UNDERWRITING-OTHER> 106 <F3>
<INCOME-PRETAX> 64
<INCOME-TAX> 17
<INCOME-CONTINUING> 47
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47
<EPS-PRIMARY> 1.57 <F4><F5>
<EPS-DILUTED> 1.56 <F4><F6>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Cash includes short-term investments.
<F2>Company obligated mandatorily redeemable capital securities and
convertible
capital securities classified at mezzanine level on Consolidated
Statements of
Financial Position.
<F3>Includes Engineering Services expense and interest.
<F4>Reflects the impact of three-for-two stock split approved by the
Board of Directors on April 21, 1998 for net income.
<F5>Per SFAS No. 128 "Earnings per Share", this item represents
EPS-Basic.
<F6>Per SFAS No. 128 "Earnings per Share", this item represents
EPS-Basic.
</FN>
</TABLE>
