SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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)
Registrant's telephone number, including area code: (860) 722-1866
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
Common stock, without par value New York Stock Exchange, Inc.
Rights to Purchase Depositary Receipts New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports 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........
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K............
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 15, 2000 was $699,824,639.
Number of shares of common stock outstanding as of February 15, 2000:
29,247,002.
Documents Incorporated by Reference:
Portions of the Proxy Statement dated March 16, 2000 for the Annual Meeting of
Shareholders to be held April 18, 2000 are incorporated by reference in Parts
III and IV herein.
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PART I
Item 1. Business.
A. GENERAL DEVELOPMENT OF BUSINESS
HSB Group, Inc. (together with its subsidiaries referred to as the
"Company" or "HSB" hereinafter) was formed under the laws of the State of
Connecticut in 1997 to serve as the holding company for The Hartford Steam
Boiler Inspection and Insurance Company (HSBIIC) and its subsidiaries. The
Hartford Steam Boiler Inspection and Insurance Company was chartered as an
insurance company by the Connecticut legislature in 1866.
The Company's operations are divided into four reportable operating segments
- - Commercial insurance, Global Special Risk insurance, Engineering Services and
Investments. The most significant business of the Company is providing insurance
against losses from accidents to boilers, pressure vessels, and a wide variety
of mechanical and electrical machinery and equipment along with a high level of
inspection and engineering services aimed at loss prevention. Net earned
premiums for the Company's insurance segments in the aggregate were $381.9
million for 1999, which accounted for approximately 63 percent of the Company's
revenues. See Note 10 to the Consolidated Financial Statements located in Item 8
of Part II herein for information on the Company's net written and net earned
premiums over the last three years.
The Company conducts its business in Canada through its subsidiary, The
Boiler Inspection and Insurance Company of Canada. Insurance for risks located
in countries other than the United States and Canada is written by HSB
Engineering Insurance Limited (HSB EIL).
The following is a summary of recent developments in the business of the
Company.
The reinsurance agreements as discussed below effective January 1, 1998
between HSBIIC, Employers Reinsurance Corporation (ERC) and Industrial Risk
Insurers (IRI) were terminated with respect to loss or liabilities arising out
of occurrences taking place on or after January 1, 2000. As a result, HSBIIC
will no longer retain 85 percent of the equipment breakdown insurance and 15
percent of the property insurance of the combined insurance portfolio for risks
arising on or after January 1, 2000. The joint underwriting association that was
known as HSB Industrial Risk Insurers will, from January 1, 2000, be known as
Industrial Risk Insurers.
Concurrent with the termination of the reinsurance agreements, HSBIIC, ERC
and IRI replaced the operating agreement for IRI dated January 1, 1998. The new
agreement, effective January 1, 2000, calls for HSBIIC to retain 0.5 percent
membership share in IRI with the ability to increase its total share up to a
maximum of 10 percent, at no cost, at HSBIIC's option. In addition, the
agreement also establishes an arrangement for HSB to perform equipment breakdown
engineering and inspection services for clients of IRI and provides for a fixed
fronting fee in the event that IRI continues to use HSBIIC's licenses. See
"Participation in Industrial Risk Insurers" on page 13 for additional
information.
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On January 6, 1998, HSBIIC sold its 23.5 percent share in IRI to 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. 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 that 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. Under the 1998 agreements, HSBIIC wrote the business
for the reconstituted IRI (which was renamed HSB Industrial Risk Insurers) using
its insurance licenses and provided certain other management and technical
services. In addition, through various reinsurance agreements with ERC and IRI,
HSBIIC transferred its manufacturing book of business to IRI and retained 85% of
the equipment breakdown insurance and 15% of the property insurance of the
HSBIIC/IRI combined portfolio.
On December 31, 1997, to support the Company's role with HSB IRI, a
business trust formed by HSB sold $300 million of 20-year, 7 percent Convertible
Capital Securities in a private placement to ERC, of which $250 million was
contributed by the Company to HSBIIC. The capital securities are convertible
into HSB common stock, at any time, subject to regulatory approval. See Note 13
to the Consolidated Financial Statements located in Item 8 of Part II herein for
more information on this transaction.
Effective July 1, 1998, HSBIIC completed an acquisition of the monoline
boiler and machinery business and the ASME inspection services, which certify
boiler and pressure vessel compliance with the codes and standards of the
American Society of Mechanical Engineers, of the Kemper Insurance Companies.
Kemper and HSBIIC also completed an agreement for HSBIIC to reinsure boiler and
machinery coverage included as part of Kemper's commercial package policies.
The Company also offers professional scientific and technical consulting
services for industry and government on a world-wide basis through HSBIIC's
Engineering Department and its engineering subsidiaries. In 1999, net
engineering services revenues were $119.6 million, which accounted for
approximately 19.7 percent of the Company's revenues.
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 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, at which time an estimated after-tax gain of
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$30.3 million, net of deferred losses, was realized. In 1996 and prior to July
1997, the Company's share of the joint venture's results were recorded as equity
in Radian.
Recently the Company has been focusing on identifying acquisition
candidates in the niche engineering management consulting service business,
primarily in process or energy related industries, in order to expand or
complement its engineering service capabilities. The Company does not currently
anticipate that any single acquisition within the next twelve months will be
material to the operations or financial position of the Company, however, this
does not rule out the possibility.
In July 1999, HSBIIC acquired Structural Integrity Associates, Inc.
(Structural) based in San Jose, California. Structural is an engineering
consulting and inspection services firm specializing in the analysis, control
and prevention of structural and equipment failures. Its services include
inspection and condition assessment and monitoring and remaining life analysis,
repair, remediation and total risk management of critical equipment and
structures. In April 1998, HSB acquired Solomon Associates, Inc. (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. During 1997, the Company completed the
acquisition of Haughton Engineering Services Limited of England. Haughton offers
a wide range of inspection services in the United Kingdom to help ensure
compliance with regulatory codes. During 1997, the Company also acquired a 51
percent interest in Integrated Process Technologies LLC (IPT). IPT measures and
manages facility costs and service performance on an outsource basis for large
businesses with geographically distributed locations.
The Company is a multi-national company operating primarily in North
American, European, and Asian markets. Currently, the Company's principal market
for its insurance and engineering services is the United States. However, the
Company does desire to become a stronger competitor in the international
machinery breakdown insurance and related engineering services markets as it
believes that there is significant opportunity for profitable growth overseas.
In 1999, the revenues and pre-tax income associated with operations outside of
the United States were approximately 13.2 percent and 9.5 percent, respectively.
Identifiable assets associated with operations outside of the United States are
approximately 19.5 percent of the consolidated amount. See Note 1 and Note 5 to
the Consolidated Financial Statements located in Item 8 of Part II herein for
more financial data based on geographic location and business segments.
B. PRODUCTS AND SERVICES
Insurance
Equipment breakdown insurance provides for the indemnification of the
policyholder for financial loss resulting from destruction or damage to an
insured boiler, pressure vessel, or other item of machinery or equipment caused
by an accident. This financial loss can include the cost
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to repair or replace the damaged equipment (property damage), and product
spoilage, lost profits and expenses to avert lost profits (business
interruption) stemming from an accident.
The Company distinguishes itself from other insurance suppliers by
providing a high level of loss prevention, failure analysis and other
engineering services with the insurance product. This heavy emphasis on loss
prevention historically has had the dual effect of increasing underwriting and
inspection expenses, while reducing loss and loss adjustment expenses.
An important ancillary benefit for the policyholder is that the inspection
performed by the Company's inspector on a boiler, pressure vessel, or other
piece of equipment, as part of the insurance process, is normally accepted by
state and other regulatory jurisdictions for their certification purposes.
Without a certificate of inspection by the insurance carrier or another
inspection agency, policyholders cannot legally operate many types of equipment.
The Company also writes all risk property insurance for risks with
significant machinery and equipment exposures, in addition to its more
traditional boiler and machinery products. The all risk line is marketed to
customers with equipment and machinery exposures, such as electric utilities,
where sophisticated engineering services are important to loss prevention and
control. These customers are offered technical services such as computerized
evaluations of fire protection systems in addition to fire inspections and
boiler and machinery inspections. The Company also writes all risk coverage
specifically tailored for data processing systems.
Engineering Services
HSBIIC's Engineering Services division provides quality assurance services,
inspections to code standards of the American Society of Mechanical Engineers
(ASME) and other organizations, ISO certification and registration services and,
using its proprietary technologies and databases, provides other specialized
consulting, condition monitoring, benchmarking and inspection services related
to the design and applications of boilers, pressure vessels, and many other
types of equipment for domestic and foreign equipment manufacturers and
operators. HSBIIC is the largest Authorized Inspection Agency for ASME codes in
the world. The Engineering Services division also offers training and
educational services related to these areas. In addition the Company has been
developing and expanding its services to respond to the growing trend to
outsource the management and maintenance of property, plant and equipment.
Aside from HSBIIC, the Company's engineering affiliates include HSB
Reliability Technologies Corp. (HSB RT), HSB Professional Loss Control, Inc.
(HSB PLC), Integrated Process Technologies LLC (IPT), Solomon Associates, Inc.
(SAI), Structural Integrity Associates, Inc. (Structural) and HSB Haughton
Engineering Services Limited (Haughton). HSB RT maintains an extensive database
on equipment maintenance and reliability and provides preventive maintenance
consulting services and programs to a wide range of businesses and industries.
Such services and programs are designed to increase production,
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reduce maintenance, energy and spare parts inventory costs, and extend equipment
life. HSB PLC is a fire protection consulting and engineering firm. Its services
include inspections, hazards analysis and risk assessment, engineering design,
code consulting, research and testing, and training. Structural, SAI, Haughton,
and Integrated Process Technologies, in which the Company holds a majority
interest, are described on page 4.
C. COMPETITION
Insurance
The Company is the largest writer of equipment breakdown insurance in North
America and is establishing a significant presence in the engineering insurance
market outside of North America. Based on net premiums written reported in the
1999 edition of Best's Aggregates and Averages, the Company has approximately a
39 percent market share and no other single company has more than a 10 percent
market share of the domestic equipment breakdown market. The Factory Mutual
Insurance Company has a market share of approximately 18 percent.
In general, the insurance market is influenced by the total insurance
capacity available based on policyholder surplus. Over the last few years,
global capacity to accept risk has grown as new insurers enter the property
casualty market and new financial products have been designed to securitize
catastrophe risks. In addition to available capacity, competition in the
equipment breakdown insurance market is based on price and service to the
insured. Service includes maintaining customer relationships, engineering and
loss prevention activities, and claims settlement. The Company prices its
product competitively in the marketplace, but primarily competes by offering a
high level of service, not by offering the lowest-priced product.
Competition in the equipment breakdown insurance market, as well as the
property/casualty market in general, has intensified in recent years as a result
of continuing restructuring and consolidation in the insurance industry.
However, because the Company primarily underwrites risks which require unique
engineering expertise and jurisdictionally mandated inspections, the Company
believes that its products and services will continue to be competitive.
Engineering Services
The Company provides a wide range of engineering, consulting and inspection
services as described on page 5. For most of these services it has numerous
competitors, some of whom are much larger and have greater financial resources
than the Company.
Competition in these areas is based on price and on the qualifications,
experience and availability of the individuals who perform the work. The
Company's force of inspectors, engineers, and technicians is spread throughout
the world. Ongoing training programs
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ensure that the Company's inspectors, engineers, and technicians are kept
up-to-date on the latest engineering and technical developments.
D. MARKETING
Insurance
The Company's various functional operations are aligned to focus on its two
principal customer groups, commercial risks and global special risks. The
Company believes that this organizational structure allows it to service its
customers more effectively and efficiently and at the same time to be a more
aggressive and flexible competitor.
Currently, the Company's principal market for its insurance business is the
United States. In 1999, 90 percent of its net written premiums related to risks
located in the United States. Of the direct premiums written in the United
States in 1999 (gross premiums less return premiums and cancellations, excluding
reinsurance assumed and before deducting reinsurance ceded), less than 10
percent was written in any one state. With the exception of California, Florida,
New York, Pennsylvania and Texas, no state accounted for more than 5 percent of
such premiums.
The Company has contracts with independent insurance agencies in all fifty
states, the District of Columbia, Puerto Rico and Canada. These agencies market
the Company's direct insurance to its small and medium commercial accounts.
Personal contact with these independent insurance agents is accomplished through
the Company's field sales force which operates out of various branch offices
across the country and in Canada. It is the Company's policy in appointing
agents to be selective, seeking to maintain and strengthen its existing
relationships and to develop relationships with new agents whom the Company
believes will become a continuing source of profitable business. The Company
periodically reviews its agency contracts and selectively reduces them in order
to retain only those agents who consistently produce certain minimum levels of
business for the Company.
Large, engineering-intensive U.S. and international accounts, most of which
comprise the Global Special Risk segment, are primarily marketed and serviced by
account teams comprised of underwriting, marketing, engineering and claims staff
who have specialized knowledge of particular customer industries. U.S. customers
are serviced primarily by HSBIIC. Canadian customers are serviced by The Boiler
Inspection and Insurance Company of Canada. Overseas customers are serviced by
HSB Engineering Insurance Limited, based in London, with additional offices in
Hong Kong, China, Malaysia, Australia, Miami, Spain, Korea and South Africa.
Additionally, the Company markets its insurance products through the
distribution channels of the companies which it reinsures. See discussion of
reinsurance assumed on page 11.
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Large account business is brokered through a small number of brokers as a
result of the significant consolidation of the international brokerage business
in the late 1990s. For 1999, approximately 26 percent of the Company's gross
written premium, which included HSB Industrial Risk Insurers, was produced by
J&H Marsh & McLennan and Sedgwick Group.
No other insured or broker accounts for more than 10 percent of the
consolidated total revenues of the Company.
Engineering Services
The Company's engineering services are marketed in a variety of ways.
Customized services related to loss prevention, failure analysis, and equipment
testing are generally sold in conjunction with the insurance contract but are
also available separately. Most other engineering services are marketed on a bid
or proposal basis. While such business is usually price sensitive, the exacting
standards and requirements set by industry and government for most of the
services offered by the Company tend to diminish that effect.
Engineering services are marketed and serviced primarily by personnel
located in the Company's various domestic and international offices.
While the primary market for engineering services continues to be the U.S.,
the Company has been focusing on expanding its international business, primarily
in Europe, the Pacific Rim and certain countries in South America as demand for
engineering services is expected to grow at a faster rate in these developing
regions than in the U.S.
No engineering services customer accounts for more than 10 percent of the
Company's consolidated total revenues.
E. REGULATION
Insurance
The Company's domestic insurance subsidiaries' operations are subject to
regulation throughout the United States. Various aspects of the insurance
operations are regulated, including the type and amount of business that can be
written, the price that can be charged for particular forms of coverage, policy
forms, trade and claim settlement practices, reserve requirements and agency
appointments. Regulations also extend to the form and content of financial
statements filed with such regulatory authorities, the type and concentration of
permitted investments for insurers, and the extent and nature of transactions
between members of a holding company system, including dividends involving
insurers. In general, such transactions must be on fair and reasonable terms,
and in some cases, prior regulatory approval is required. In addition, many
states require advance notification, and in the case of domiciliary insurers,
require prior approval of any acquisition of control (generally presumed to
exist in the case of a 10% or more ownership of voting securities) of an
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insurance company. Such laws, while intended to protect policyholder interests,
may delay or prevent certain transactions effecting a change in control of an
insurer.
The nature and extent of regulations pertaining to the business the Company
writes outside of the U.S. varies considerably. Regulations cover various
financial and operational areas, including such matters as amount and type of
reserves, currency, policy language, repatriation of assets and compulsory
cessions of reinsurance.
In the United States, the National Association of Insurance Commissioners
(NAIC) has adopted risk-based capital (RBC) requirements applicable to property
and casualty insurers. The RBC formula establishes a required statutory surplus
level for an insurer based on the risks inherent in its overall operations which
are identified as underwriting risk, invested asset risk, credit risk and
off-balance sheet risk. The law provides for regulatory responses ranging from
requiring a plan of corrective action to placing the insurer under regulatory
control for insurers whose surplus is below the prescribed RBC target. HSBIIC's
adjusted capital significantly exceeded the authorized control level RBC for
1999.
NAIC Insurance Regulatory Information System (IRIS) ratios are part of the
solvency impairment early warning system of the NAIC. They consist of twelve
categories of financial data with defined acceptable ranges for each. Companies
with ratios outside of the acceptable ranges are selected for closer review by
regulators. HSBIIC's IRIS ratios were within acceptable ranges for 1999 with the
exception of the change in surplus ratio. This ratio exceeded the normal range
for surplus increases or decreases due to $152.7 million of dividends paid by
HSBIIC to HSB Group, Inc., net unrealized losses of $92.9 million primarily due
to a decrease in the carrying value of its insurance subsidiaries and a decline
in the value of the fixed income portfolio, and other statutory surplus
adjustments of $18.0 million, offset by $80.0 million of net income.
The Company's insurance subsidiaries' operations are subject to examination
by insurance regulators at regular intervals. The most recently concluded
insurance examination for HSBIIC was conducted for the years 1995 - 1998 by the
Connecticut Insurance Department, the HSBIIC's domestic regulator. No material
findings or adjustments were included in the final report of the examination.
Similar regulatory procedures govern the Company's other U.S. and foreign
insurance subsidiaries.
Insurance guaranty fund laws exist in all states which subject insurers to
assessments up to prescribed limits for certain obligations of insolvent
insurers to their policyholders and claimants. The Company is permitted to
recover a portion of these assessments through premium tax offsets and policy
surcharges.
See Note 6 to the Consolidated Financial Statements located in Item 8 of
Part II herein for additional information on statutory reporting.
As discussed earlier, the Company's insureds receive, in addition to the
insurance product, inspections which meet state, county or municipally mandated
requirements. In
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order for the Company's inspectors to perform these mandated inspections, they
must be commissioned. Commissioning is conducted by the National Board of Boiler
and Pressure Vessel Inspectors and the various state jurisdictional authorities.
The majority of the Company's inspectors are commissioned, and the Company
believes that it has an adequate number of commissioned inspectors to conduct
its business affairs.
Engineering Services
A portion of the Company's engineering services revenue comes from
certifying that boilers and pressure vessels are being constructed according to
standards adopted by the American Society of Mechanical Engineers (ASME). The
commission that authorizes inspectors to conduct insurance inspections also
authorizes them to perform ASME Code inspections. The Company performs other
certification and inspection services which are governed by established
standards, such as ISO 9000.
Other
The Company and members of its professional and technical staff are subject
to a variety of other state, local and foreign licensing and permit requirements
and other laws generally applicable to corporations and businesses.
F. INSURANCE OPERATIONS
Policies
Pricing for the Company's insurance policies is based upon the rates the
Company has developed for use with its various products. In many jurisdictions
in which the Company does business, such rates, as well as the policy forms
themselves, must be approved by the jurisdiction's insurance regulator. Rates
for the Company's products are developed based upon estimated claim costs,
expenses related to the acquisition and servicing of the business, engineering
expenses and a profit component.
Coverages for unique risks are judgment-rated, taking into account
deductibles, the condition of the insured's equipment, loss prevention and
maintenance programs of the insured, and other factors.
Policies are normally written for a term of one year. Most of the Company's
policies provide coverage for property damage and business interruption to
insured property (including buildings and structures under the Company's all
risk policy) resulting from covered perils. Property insured under the Company's
equipment breakdown policies includes such equipment as steam boilers, hot water
boilers, pressure vessels, refrigerating and air conditioning systems, motors,
generators, compressors, pumps, engines, fans, blowers, gear sets, turbines,
transformers, electrical switch gear, data processing and business equipment and
a wide variety of production and processing equipment.
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The Company's policy with respect to the business it underwrites is to
generally manage its risks to probable maximum losses (PMLs) not in excess of
$50 million and maximum foreseeable losses (MFLs) not in excess of $100 million.
The Company's current reinsurance program generally limits the Company's
retention on any one loss to $1 million, with potentially higher per risk
retentions dependent on aggregate losses experienced by the Company during the
reinsurance period.
Reinsurance Assumed
The predominant practice in the insurance industry is to combine several
types of insurance coverages into one policy referred to as a package policy.
The Company has reinsurance agreements with approximately 200 multi-line
insurance companies to reach the small to mid-sized customers that purchase such
package policies. This business primarily focuses on small and mid-sized
commercial customers and it offers a significant opportunity for growth by the
Company because, based on Company estimates, equipment breakdown coverage is
only provided currently to less than 15 percent of the over 10 million insured
companies and institutions in the United States.
Under the reinsurance agreements, the Company's reinsured companies may
include equipment breakdown exposures in their multi-peril policies, and such
risks will be assumed by the Company under the terms of the agreements. These
plans generally provide that the Company will assume 100 percent of each boiler
and machinery risk, subject to the capacity specified in the agreement, and will
receive the entire equipment breakdown premium except for a ceding commission
which will be retained by the reinsured company for commissions to agents and
brokers, premium taxes and handling expenses.
Although the Company assumes the role of reinsurer, it continues to have
selling and underwriting responsibilities as well as involvement in inspecting
and claims adjusting. In effect, the Company becomes the equipment breakdown
insurance department of the reinsured company and provides equipment breakdown
underwriting (that is, the examination and evaluation of the risk based on its
engineering judgments), claims and engineering services as if it were part of
that organization. Traditionally, as part of the underwriting process, the
Company retains the right to decline or restrict coverage in the same manner as
it does for its own business. The Company also writes a simplified program
(referred to as ReSource) under which a reinsured company agrees to include
equipment breakdown insurance on a portfolio of accounts meeting specific
underwriting guidelines and occupancy parameters, which the Company agrees to
reinsure for equipment breakdown losses.
The insurance industry, in general, continues to undergo significant
restructuring and consolidation. A considerable amount of merger and acquisition
activity has occurred over the last several years and, with the advent of
financial services reform, more contraction is possible in the future. Depending
on the specific companies involved in these activities and other market factors,
the level of reinsured business the Company assumes in the future under the
arrangements described above could be impacted.
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The Company also assumes reinsurance, primarily on a facultative basis, for
certain large risks and several insurance pools.
The written premium generated through reinsurance assumed totaled $363.3
million in 1999, representing approximately 46.6 percent of the Company's gross
written premium.
Reinsurance Ceded
As a property carrier, the Company is subject to losses that may arise from
catastrophic events. The Company participates in various facultative, quota
share and excess of loss reinsurance agreements to limit its exposure,
particularly to catastrophic losses and high risk lines, and to provide
additional capacity to write business. The Company evaluates its exposures and
reinsurance needs annually to implement a program that corresponds with the
level of exposure it is willing to retain. Under the Company's current treaty
reinsurance program, its maximum retention on any one risk is generally limited
to $1 million, with potentially higher per risk retentions depending on
aggregate losses experienced by the Company during the reinsurance program
period. In addition, the Company uses facultative reinsurance on certain high
exposure risks and has catastrophe reinsurance for aggregate net losses greater
than $15 million.
The Company utilizes well-capitalized domestic and international
reinsurance companies and syndicates for its reinsurance program and monitors
their financial condition on an ongoing basis. For reinsurers that are not
accredited in their state of domicile, the Company typically requires collateral
for reinsurance recoverable from such carriers. In the unlikely event that the
Company's reinsurers are unable to meet their obligations, the Company would
continue to have primary liability to policyholders for losses incurred.
Uncollectible reinsurance recoverables have not had, and are not expected by
management to have in the future, a material adverse effect on the consolidated
results of operations or financial position of the Company. The Company is not
party to any contracts that do not comply with the risk transfer provisions of
SFAS 113 "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts".
For additional information on reinsurance, see Notes 10 and 11 to the
Consolidated Financial Statements located in Item 8 of Part II herein.
Pools and Joint Underwriting Associations
With the exception of HSB Industrial Risk Insurers as described on page 2
and discussed below, the Company does not participate to any significant degree
in voluntary reinsurance pools of other insurance companies because the Company
generally chooses to insure only those risks which it has inspected or has the
right to inspect. From time to time, the Company is required to participate in
certain joint underwriting associations which provide insurance for particular
classes of insureds when insurance in the voluntary market is unavailable.
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Participation in Industrial Risk Insurers
Industrial Risk Insurers (IRI) is an unincorporated, voluntary joint
underwriting association that provides property insurance for the class of
business known as "highly protected risks" for larger manufacturing, processing
and industrial businesses which have invested in protection against loss through
the use of sprinklers and other means. As part of the arrangement with Employers
Reinsurance Corporation (ERC) effective January 1, 1998 (see "A. GENERAL
DEVELOPMENT OF BUSINESS") HSBIIC wrote the insurance in 1999 and 1998 for IRI
(which did business under the name HSB Industrial Risk Insurers) using its
insurance licenses and provided certain other services. In addition, through
various quota share reinsurance agreements with Employers Reinsurance
Corporation and HSB IRI, HSBIIC transferred its manufacturing book of business
to HSB IRI and retained 85 percent of the equipment breakdown insurance and 15
percent of the property insurance of the combined insurance portfolio.
In 1998 and 1999, HSBIIC's membership interest in HSB IRI was .5 percent.
In 1997 and 1996, HSBIIC's membership interest was 23.5 percent and 14 percent
respectively. In 1996 and prior the shares were .5 percent. As discussed above
(see "A. GENERAL DEVELOPMENT OF BUSINESS") the reinsurance agreements effective
January 1, 1998 between HSBIIC, ERC and IRI were terminated with respect to loss
or liabilities arising out of occurrences taking place on or after January 1,
2000. Net earned premium attributable to the agreements with ERC and HSB IRI,
prior to the placement of reinsurance by the Company for its own account, was 11
percent of the Company's total consolidated revenues for 1999 and 15 percent for
1998. Ceding commissions, which are netted out of expenses, were 16 percent of
consolidated revenues for 1999 and 11 percent for 1998.
Claims and Claim Adjustment
Essentially all claims under the Company's policies of insurance are
handled by the Company's own claims handlers. Management believes that the
Company's handlers are better able to make the connection between loss
prevention and loss control. The Company employs claims handlers in its various
offices throughout the country, Canada and the U.K. Claims handlers, in many
cases, are assigned to particular customer groups in order to apply specialized
industry knowledge to the adjustment of claims.
Claims and adjustment expense reserves comprise one of the largest
liabilities of the Company. Reserves are established to reflect estimates of
total losses and loss adjustment expenses that will ultimately be paid under
direct and assumed insurance contracts. Loss reserves include claims and
adjustment expenses on claims that have been reported but not settled and those
that have been incurred but not yet reported. Loss reserve estimates reflect
such variables as past loss experience and inflation. In addition, due to the
nature of much of the coverages, complex engineering judgments are involved.
Subjective judgments are an integral component of the loss reserving process,
due to the nature of the variables involved. Previously established loss
reserves are regularly adjusted as loss experience develops and new information
becomes available. Adjustments to previously established
13
<PAGE>
reserves are reflected in the financial statements in the period in which the
estimates are changed.
The normal turnaround time in paying small claims is less than six months.
The vast majority of claims are settled within one year and very few remain
unsettled two years after the loss occurs. This pattern is somewhat skewed in
terms of claim dollars (as noted in the schedule on pages 17 - 18) as it is the
larger claims that often take longer to adjust. Compared to the
property/casualty industry as a whole, the Company has a very "short-tail"
settlement period. The Company's claims expenses are based on estimates of the
current costs of replacing productive capacity. The Company does not employ
discounting techniques in establishing liabilities for claims and claim
adjustment expenses.
For those relatively few claims involving litigation, the Company uses both
its in-house law department and outside counsel, depending on the issues, costs,
and staffing requirements.
The following table provides a reconciliation of the beginning and ending
reserves for net claims and claim adjustment expenses for the years ended
December 31, 1999, 1998 and 1997.
RECONCILIATION OF NET LIABILITY FOR
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1999 1998 1997
-------------------------------
(in millions)
Net liability for claims and
Adjustment expenses at January 1, $169.7 $190.8 $177.8
Plus:
Provision for claims and adjustment
expenses occurring in the current year 165.4 164.0 209.5
Increase (decrease) in estimated claims and
adjustment expenses arising in prior years 0.4 10.9 8.4
-------------------------------
Total incurred claims and adjustment expenses $165.8 $174.9 $217.9
-------------------------------
Less:
Payment for claims arising in:
Current year 80.0 84.2 82.3
Prior years 99.4 111.8 122.6
-------------------------------
Total payments $179.4 $196.0 $204.9
-------------------------------
Net liability for claims and adjustment
expenses at December 31, $156.1 $169.7 $190.8
===============================
The loss ratio improved 0.8 percentage points in 1999 from 1998. This
improvement was primarily attributable to increased use of reinsurance. The 1999
results were impacted by $10 million of domestic weather-related events and the
Taiwan earthquake as well as $10 million in losses related to medical equipment
insurance contracts. These insurance contracts represented less than 1 percent
of the Company's revenues. The loss ratio decreased 0.2 percentage points in
1998 as compared to 1997. Loss results in 1998 were
14
<PAGE>
impacted by severe ice storms in Canada, as well as a few significant losses in
our other international businesses. Prior year loss development in 1999, 1998
and 1997 added 0.1, 2.8 and 1.7 percentage points to the respective loss ratio.
The components of claims and adjustment expenses, net of reinsurance are
displayed above.
The following table shows a reconciliation of the net liability to the
gross liability for claims and claim adjustment expenses based on reinsurance
recoverable on unpaid losses.
RECONCILIATION OF NET LIABILITY TO GROSS LIABILITY
FOR CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1999 1998 1997
-----------------------------
(in millions)
Net liability for claims and
Adjustment expenses at December 31, $156.1 $169.7 $190.8
Reinsurance recoverable on unpaid claims
and adjustment expenses 626.2 388.5 85.9
-----------------------------
Gross liability for claims and
adjustment expenses at December 31, $782.3 $558.2 $276.7
=============================
15
<PAGE>
RECONCILIATION OF GROSS LIABILITY FOR CLAIMS AND
CLAIM ADJUSTMENT EXPENSES
1999 1998 1997
------------------------------
(in millions)
Gross liability for claims and claim adjustment
expenses at January 1, $558.2 $276.7 $302.9
Plus:
Provision for claims and claim adjustment
expenses occurring in the current year 653.0 572.7 263.3
Increase (decrease) in estimated claims and
claim adjustment expenses arising in prior
years 31.7 46.9 (0.2)
------------------------------
Total incurred claims and claim adjustment
expenses $684.7 $619.6 $263.1
------------------------------
Less:
Payment for claims arising in:
Current year 164.9 141.0 90.6
Prior years 295.7 197.1 198.7
------------------------------
Total payments $460.6 $338.1 $289.3
------------------------------
Gross liability for claims and claim adjustment
expenses at December 31, $782.3 $558.2 $276.7
==============================
The claim and claim expense reserve runoff table on the following pages
shows the amounts of the net liability for 1989 through 1999 and the amounts of
the gross liability for 1993 through 1999. The ten-year development table for
gross liabilities is being constructed progressively, with 1993 as the base
year. Within the tables for net and gross liabilities, each column shows the
reserve established at each calendar year-end as well as cumulative totals for
claims payments and re-estimated liabilities for both that accident year and all
previous years that combined make up that year-end reserve. The redundancy
(deficiency) shown on a gross and net basis is a cumulative number for that year
and all previous years.
16
<PAGE>
RECONCILIATION OF BEGINNING AND ENDING CLAIMS RESERVES
AND EXHIBIT OF REDUNDANCIES (DEFICIENCIES)
(in millions)
Net Reserves
<TABLE>
<CAPTION>
YEAR ENDED 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ---------- ---- ---- ---- ---- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for
Unpaid Claims and
Claim Adjustment
Expenses $139.6 $115.7 $111.4 $132.8 $171.3 $161.3 $145.5 $177.8 $190.8 $169.7 $156.1
Cumulative Amount
Paid as of:
End of Year - - - - - - - - - - -
One Year Later 85.6 86.7 91.2 99.7 108.8 111.7 80.6 122.6 111.8 99.4 -
Two Years Later 104.2 109.7 115.5 134.0 152.1 126.9 99.8 146.3 144.8 - -
Three Years Later 110.3 120.6 127.0 154.4 153.4 134.5 112.1 160.4 - - -
Four Years Later 112.5 127.6 137.7 151.1 157.8 144.1 119.2 - - - -
Five Years Later 118.9 132.7 135.7 151.6 166.1 149.6 - - - - -
Six Years Later 123.0 131.4 135.7 160.0 166.5 - - - - - -
Seven Years Later 121.4 130.9 136.7 160.4 - - - - - - -
Eight Years Later 120.8 131.6 136.9 - - - - - - - -
Nine Years Later 121.5 131.8 - - - - - - - - -
Ten Years Later 121.7 - - - - - - - - - -
Net Liability
Reestimated as of:
End of Year 139.6 115.7 111.4 132.8 171.3 161.3 145.5 177.8 190.8 169.7 156.1
One Year Later 129.4 135.4 137.5 159.7 172.7 163.9 135.7 186.2 201.7 170.1 -
Two Years Later 127.4 138.0 139.7 166.6 173.9 157.3 128.8 187.5 188.8 - -
Three Years Later 127.8 136.9 141.1 165.2 170.6 154.2 131.2 179.6 - - -
Four Years Later 125.0 137.9 142.0 163.0 169.2 155.3 128.0 - - - -
Five Years Later 125.8 135.7 141.4 161.5 168.0 155.6 - - - - -
Six Years Later 125.5 136.0 141.3 163.4 168.5 - - - - - -
Seven Years Later 125.8 135.8 139.6 163.8 - - - - - - -
Eight Years Later 125.5 134.5 140.2 - - - - - - - -
Nine Years Later 124.2 134.8 - - - - - - - - -
Ten Years Later 124.5 - - - - - - - - - -
Cumulative Redundancy
(Deficiency) 15.1 (19.1) (28.8) (31.0) 2.8 5.7 17.5 (1.8) 2.0 (0.4) -
</TABLE>
The net deficiencies in 1990, 1991 and 1992 were attributable to the
settlement of certain large losses for which the Company initially determined it
would not have liability, the settlement of some outstanding claims for more
than was originally anticipated, unusually late notice of loss provided by the
insured for several large losses, and reserves established for losses on which
the coverage was being contested. The 1995 net redundancy was attributable to
favorable claim development in the Company's foreign operations.
17
<PAGE>
Gross Reserves
<TABLE>
<CAPTION>
YEAR ENDED 1993 1994 1995 1996 1997 1998 1999
- ---------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Liability for
Unpaid Claims and Claim
Adjustment Expenses $214.4 $199.4 $190.9 $302.9 $276.7 $558.2 782.3
Cumulative Amount Paid as of:
End of Year - - - - - -
One Year Later 144.2 135.2 108.9 198.8 197.1 295.7
Two Years Later 189.9 164.1 158.0 284.2 242.3 -
Three Years Later 200.2 201.1 212.4 301.2 - -
Four Years Later 229.8 251.7 218.5 - - -
Five Years Later 277.0 256.2 - - - -
Six Years Later 277.6
Gross Liability Reestimated as of:
End of year 214.4 199.4 190.9 302.9 276.7 558.2 782.3
One Year Later 224.3 212.0 205.5 302.7 323.5 589.9
Two Years Later 227.0 228.3 194.6 339.8 309.4 -
Three Years Later 243.4 226.8 234.6 329.9 - -
Four Years Later 245.0 264.8 228.8 - - -
Five Years Later 281.4 263.1 - - - -
Six Years Later 281.8
Cumulative Redundancy
(Deficiency) (67.4) (63.6) (37.8) (26.9) (32.6) (31.7)
</TABLE>
The adverse development primarily resulted from the decision rendered under
an arbitration proceeding for a claim occurring in 1992, adverse claims
experience in international operations primarily occurring in accident years
1997 and 1998, and the settlement of some large outstanding claims for more than
originally anticipated.
The growth in the gross liability for unpaid claims and claims adjustment
expenses from 1995 forward reflects the Company's changing participation in IRI
which was .5 percent through December 1, 1995, 14 percent effective December 1,
1995, 23.5 percent effective December 1, 1996 as well as the HSB IRI arrangement
effective January 1, 1998. See page 2 for details.
G. INVESTMENTS
Income from the Company's investment portfolio contributes significantly to
earnings. Each year there is a significant net inflow of cash from insurance,
engineering services and investment operations into the Company's investment
portfolio. In addition, cash flow is affected by the normal maturity of fixed
income investments, financing activities and the purchase and sale of equity
securities.
(in millions)
1999 1998 1997 1996 1995
-----------------------------------------------
Net Investment Income $ 64.1 $ 64.2 $ 36.8 $ 32.3 $ 28.9
Realized Investment Gains 40.6 25.4 14.1 12.1 2.8
-----------------------------------------------
Income from
Investment Operations $104.7 $ 89.6 $ 50.9 $ 44.4 $ 31.7
Net Unrealized Gains $ 4.7 $113.1 $ 95.3 $ 81.4 $ 65.4
Statutory Surplus (HSBIIC) $428.8 $612.6 $550.8 $292.4 $280.6
18
<PAGE>
The Company's 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 stockholders and market conditions. The
fluctuations in income from investment operations from 1995 through 1997 were
largely driven by the amount of realized gains generated in each of such years.
In 1995 the Company curtailed its realized gains in order to take advantage of a
strongly performing market and to build statutory surplus. In 1996 the Company
continued to build statutory surplus, however, high valuations towards the end
of the year caused the Company to realize gains. Realized investment gains
increased in 1997 over 1996 as the Company managed its portfolio to respond to
changing market conditions and tax planning opportunities, and as a result of
calls of fixed income and convertible securities. Realized investment gains in
1998 were significantly impacted by call premiums on fixed income instruments
and sales of certain convertible securities and common stocks in response to
market conditions. Realized investment gains increased $15.2 million in 1999 as
a result of repositioning the investment portfolio due to market fluctuations
and to keep the absolute amount of common equities from exceeding a certain
targeted percentage of the Company's GAAP capital. During 1999 bond yields
continued to move up, the impact of which has caused a reduction in the
Company's unrealized gains with respect to fixed income securities by
approximately $64.5 million.
Net investment income increased 11.8 percent in 1996 due to an increased
level of investable assets and to a lesser extent by dividend increases on the
Company's common stock investments. Net investment income for 1997 increased
13.9 percent compared to 1996. The increase is attributable to calls of high
yielding preferred stocks early in the year the proceeds of which were invested
in fully taxable securities, and more investable funds as the Company invested
the proceeds from its capital securities issued in the second half of 1997. In
1998 net investment income increased significantly due to the investment of the
capital securities proceeds and from the January 1998 sales of the Company's
interests in IRI and Radian International LLC. Net investment income for 1999
remained flat compared to 1998.
The significant increase in statutory surplus of HSBIIC for 1997 resulted
from a contribution to capital of $250 million of the $300 million in proceeds
received by the Company from the sale of its convertible capital securities to
Employers Reinsurance Corporation on December 31, 1997. The increase in surplus
for 1998 resulted from the January 1998 sales of HSBIIC's interests in IRI and
Radian International LLC. The decrease in surplus for 1999 primarily resulted
from $152.7 million of dividends paid by HSBIIC to HSB Group, Inc., net
unrealized losses of $92.9 million primarily due to a decrease in the carrying
value of its insurance subsidiaries and a decline in the value of the fixed
income portfolio, and other statutory surplus adjustments of $18.0 million,
offset by $80.0 million of net income.
In December 1996, HSBIIC entered into three "zero cost collar" contracts to
mitigate the effects of market risk on its U.S. common stock portfolio (which
for management
19
<PAGE>
purposes included certain convertible preferreds). In the fourth quarter of
1997, HSBIIC settled all of its outstanding contracts resulting in realized
losses of $30.7 million for the year, all of which were offset by and
represented portfolio appreciation and returns that were realized. In 1997, the
Company's U.S. common stock portfolio experienced a total return of $57 million
(which included price appreciation of approximately $54 million) since December
31, 1996, and had a price movement correlation with the S&P 500 Index well in
excess of 80 percent.
The Company's investment portfolio consists of high-grade domestic and
foreign investments. Excluding short-term investments, HSB's investments are
primarily comprised of publicly traded, highly liquid securities. At December
31, 1999, the Company had approximately 52.9 percent of its invested assets in
fixed maturities as compared to 53.6 percent at year-end 1998. In the period
1991-1996 the Company gradually reduced its investments in common stocks as part
of its overall capital management strategy. At year-end 1999, the carrying value
of the equity securities portfolio represented 41.3 percent of invested assets
compared to 40.6 percent at year-end 1998.
The Company does not engage in cash-flow underwriting; it seeks to have
underwriting profit each year. None of the Company's claim reserves are
discounted as most claims settle, on average, within one year. Therefore, the
Company does not use duration measurements in managing its interest rate
exposure. Instead, the Company manages its portfolio on a segmented basis.
Approximately $300 million (cost basis) of the Company's invested assets
(comprised of perpetual and redeemable preferred stocks and corporate bonds) are
utilized to provide interest coverage and potential principal repayment over the
life of the convertible capital securities issued on December 31, 1997. The
remainder of the Company's invested assets, exclusive of cash and cash
equivalents, short-term securities and common stocks are invested to provide
income for the future. There are three portfolio areas with quite different
maturity/call characteristics. The portfolio of traditional bonds of
approximately $245 million has an average life of 22 years, with over 50 percent
of that portfolio callable in less than ten years. The sinking fund preferred
portfolio of $43 million, based on expected calls, has an estimated life of
three years. The $52 million adjustable rate preferred stock portfolio, based on
expected calls, has an estimated life of five years.
The Company believes the expected cash flows from the Company's operations,
maturities and calls are adequate to enable the Company to respond to the
previously discussed parameters that impact its investment strategy. See
"Investment Operations" in the Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations located in Item 7 and
Note 7 to Consolidated Financial Statements in Item 8 of Part II herein for
additional information.
20
<PAGE>
The following table summarizes the investment results of the Company's
investment portfolio:
<TABLE>
<CAPTION>
Annualized Rate Investment
Net Invest- of Return (2) Gains (Losses) (3)
Cash and ment Income ------------------------------------------------
Invested Less Before After
Assets, Less Interest Income Income Change in
Borrowed Money Expense (1) Taxes Taxes Realized Unrealized
- ---------------------------------------------------------------------------------------------
(in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
1999 $ 931.5 $61.8 6.4% 5.0% $40.6 $(108.4)
1998 1,048.7 63.4 6.6** 5.1** 25.4 17.8
1997 629.2* 35.5 6.1 5.1 14.1 13.9
</TABLE>
* Does not include $300 million in proceeds from the sale of convertible capital
securities on December 31, 1997.
** For the calculation of Annualized Rate of Return "Cash and Invested Assets
Less Borrowed Money" includes the $300 million in proceeds in the beginning of
the year.
(1) Net investment income excludes realized investment gains and is reduced by
investment expenses, but is before the deduction for income taxes.
(2) The rates of return on investments shown above have been determined in
accordance with rules prescribed by the National Association of Insurance
Commissioners. These rates have been determined by the following formula:
2I
--
A + B - I
I is equal to net investment income, before taxes, earned on investment assets.
A+B is equal to the sum of the beginning and end of the year amounts shown under
"Cash and Invested Assets, Less Borrowed Money". The after tax rates of return
are computed in the same manner, but net investment income is reduced by income
taxes.
(3) Realized and unrealized investment gains (losses) are before income taxes.
H. EMPLOYEES
At year-end 1999, the Company, including its wholly-owned subsidiaries, had
2,471 full and part-time employees. Management believes that its relations with
its employees are satisfactory.
21
<PAGE>
I. FORWARD-LOOKING STATEMENTS
For a summary of factors that may materially affect the Company's future
business, see "Forward-Looking Statements" in Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations in Item
7.
Item 2. Properties.
The Hartford Steam Boiler Inspection and Insurance Company leases
approximately 221,516 square feet for its home office at One State Street,
Hartford, Connecticut under a long-term capital lease with One State Street
Limited Partnership. In addition to its home office facility, the Company leases
facilities for its branch offices and subsidiaries throughout the United States
and Canada, and in a small number of other foreign locations. The Company
considers the office facilities and other operating resources to be suitable and
adequate for its current and anticipated level of operations.
See Notes 8 and 9 to Consolidated Financial Statements located in Item 8 of
Part II herein for additional information.
Item 3. Legal Proceedings.
The Company is involved in various 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4(a). Executive Officers of the Registrant.
All executive officers are elected by the Board of Directors to hold office
until the next Annual Meeting of Shareholders. An officer may be removed at any
time by the Board of Directors. Gordon W. Kreh retired from his position as
President and Chief Executive Officer effective December 31, 1999.
Richard H. Booth, 52, Chairman since 3/00; President, Chief Executive Officer
and Director since 1/00; Director since 7/96; Executive Vice President of
Phoenix Home Life Mutual Insurance Company 10/94 - 12/99; director of Phoenix
Home Life Mutual Insurance Company 6/98 - 12/99.
22
<PAGE>
Saul L. Basch, 53, Senior Vice President, Treasurer and Chief Financial Officer
since 10/95; Partner, Coopers & Lybrand L.L.P. 9/73 - 10/95, most recently as
Partner-in-Charge of Coopers & Lybrand's New York Insurance Industry Practice.
Michael L. Downs, 50, Senior Vice President since 2/94; Managing Director -
Engineering Insurance Co., Ltd. 1/91 - 2/94; Second Vice President 7/87 - 1/91;
Assistant Vice President 2/85 - 7/87; Assistant Secretary 4/80 - 2/85.
John J. Kelley, 54, Senior Vice President since 2/94; Corporate Secretary and
Special Assistant to the President 5/87 - 2/94; Assistant Vice President and
Special Assistant to the President 9/83 - 5/87; Assistant Vice President 9/79 -
9/83; Assistant Secretary 4/77 - 9/79.
William A. Kerr, 62, Senior Vice President - Engineering since 9/95; Vice
President and General Manager, Pratt & Whitney Turbo Power and Marine Division,
United Technologies Corporation 8/95 - 9/95; Vice President of Aftermarket
Operations, Pratt & Whitney 4/92 - 8/95.
Normand Mercier, 54, Senior Vice President - Commercial Risks - Operations since
9/98; Senior Vice President, HSBIIC since 4/98; President, The Boiler Inspection
and Insurance Company 1/90-4/98.
R. Kevin Price, 53, Senior Vice President and Corporate Secretary since 2/94;
Second Vice President 4/89 - 2/94; Assistant Vice President 1/84 - 4/89.
William Stockdale, 54, Senior Vice President since 9/95; Managing Director and
Chief Executive Officer of HSB Engineering Insurance Ltd., London, since 9/94.
Robert C. Walker, 56, Senior Vice President-Claims and General Counsel since
1/95; Senior Vice President - Claims 3/94 - 1/95.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's common stock is traded on the New York Stock Exchange under
the symbol HSB. As of February 15, 2000, the Company had 4,826 holders of
record.
Dividends paid by The Hartford Steam Boiler Inspection and Insurance
Company, HSB Group's principal subsidiary, are limited by state insurance
regulations. Approval from the Connecticut Insurance Commissioner is required
for dividend distributions within a twelve-month period which would exceed the
greater of (i) 10 percent of an insurer's statutory surplus or (ii) net income
calculated as of the December 31st last preceding. Regulatory approval was not
required for the payment of 1999 dividends. Approximately $80 million of
HSBIIC's statutory surplus is available for distribution to HSB Group, Inc. in
2000 without prior regulatory approval.
23
<PAGE>
Quarterly dividends declared for the 1999 and 1998 fiscal years were as
follows:
First Second Third Fourth Year
------ ------ ----- ------ ----
1999 $.42 $.42 $.44 $.44 $1.72
1998 $.40 $.40 $.42 $.42 $1.64
Quarterly market prices for the Company's common stock were as follows for
the two most recent years:
First Second Third Fourth Year
------ ------ ----- ------ ----
1999 High $41.31 $41.88 $41.94 $38.38 $41.94
1999 Low $35.50 $35.50 $34.19 $31.88 $31.88
1998 High $44.92 $53.50 $57.63 $42.00 $57.63
1998 Low $36.45 $43.17 $40.38 $36.00 $36.00
24
<PAGE>
Item 6. Selected Financial Data.
(in millions, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Consolidated Statements
of Operations
Revenues:
Gross earned premiums $ 823.8 $ 770.5 $ 609.3 $ 556.5 $455.0
Ceded premiums 441.9 374.4 118.1 107.9 65.9
------------------------------------------------------------------------------
Insurance premiums 381.9 396.1 491.2 448.6 389.1
Engineering services 119.6 93.5 61.3 55.8 49.9
Income from investment operations 104.7 89.6 50.9 44.4 31.7
------------------------------------------------------------------------------
Total revenues (1) $ 606.2 $ 579.2 $ 603.4 $ 548.8 $470.7
------------------------------------------------------------------------------
Income from continuing operations $ 72.8 $ 104.1 $ 66.3 $ 54.6 $ 52.7
Income from continuing operations
per common share - basic $ 2.51 $ 3.55 $ 2.21 $ 1.81 $ 1.72
Income from continuing operations
per common share - assuming dilution 2.50 3.35 2.20 1.81 1.72
Dividends declared per common share 1.72 1.64 1.56 1.52 1.49
- --------------------------------------------------------------------------------------------------------------------------------
Summary of Consolidated Statements
of Financial Position
Total assets $2,263.2 $2,138.6 $ 1,537.2 $1,112.3 $951.9
Long-term borrowings and
capital lease obligations 52.9 53.0 53.0 53.0 53.4
Convertible redeemable preferred stock -- -- -- 20.0 --
Company obligated mandatorily
Redeemable capital securities 409.0 408.9 408.9 -- --
Shareholders' equity:
Common 376.5 419.3 345.3 345.6 341.1
Per common share 12.95 14.53 11.75 11.50 11.21
Return on average equity 18.3% 35.2%(2) 19.1% 15.6% 19.5%
Stock price per share:
High $ 41.94 $ 57.63 $ 37.67 $ 34.83 $ 33.50
Low 31.88 36.00 29.58 28.58 26.50
Close 33.81 41.06 36.80 30.92 33.33
Common shares outstanding
at end of year (3) 29.1 28.9 29.4 30.0 30.5
- ---------------------------------------------------------------------------------------------------------------------------------
Insurance
Underwriting gain $ 21.3 $ 41.2 $ 39.8 $ 21.8 $ 34.2
Loss ratio 43.4% 44.2% 44.4% 45.6% 39.8%
Expense ratio 51.0% 45.4% 47.3% 49.1% 50.9%
-------------------------------------------------------------------------------
Combined ratio 94.4% 89.6% 91.7% 94.7% 90.7%
- ---------------------------------------------------------------------------------------------------------------------------------
Engineering Services
Operating gain $ 3.0 $ 7.3 $ 4.3 $ 7.3 $ 6.7
Engineering services margin 2.5% 7.8% 7.1% 13.2% 13.3%
Investments
Net investment income $ 64.1 $ 64.2 $ 36.8 $ 32.3 $ 28.9
Realized investment gains 40.6 25.4 14.1 12.1 2.8
-------------------------------------------------------------------------------
Income from investment operations $ 104.7 $ 89.6 $ 50.9 $ 44.4 $ 31.7
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes revenues from investments accounted for under the equity method.
(2) Includes gain on sale of IRI and Radian LLC.
(3) Reflects the repurchase of approximately 0.1, 1.2, 1.5, 0.4 and 0.2 million
shares in 1999, 1998, 1997, 1996 and 1995, respectively.
25
<PAGE>
Item 7. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations
(dollar amounts in millions, except per share amounts)
Summary of Results of Operations
Consolidated Overview
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------
Revenues:
Gross earned premiums $ 823.8 $ 770.5 $ 609.3
Ceded premiums 441.9 374.4 118.1
-------------------------------
Insurance premiums 381.9 396.1 491.2
Engineering services 119.6 93.5 61.3
Net investment income 64.1 64.2 36.8
Realized investment gains 40.6 25.4 14.1
-------------------------------
Total revenues $ 606.2 $ 579.2 $ 603.4
Income from continuing
operations (excluding the
gain on sale of IRI) $ 72.8 $ 80.3 $ 66.3
Gain on sale of IRI (after-tax) -- 23.8 --
-------------------------------
Income from continuing
operations 72.8 104.1 66.3
Discontinued operations -- 30.3 --
-------------------------------
Net income $ 72.8 $ 134.4 $ 66.3
-------------------------------
Earnings per share:
Income from continuing
operations (excluding
the gain on sale of IRI)
Assuming dilution $ 2.50 $ 2.67 $ 2.20
Income from continuing
operations:
Basic $ 2.51 $ 3.55 $ 2.21
Assuming dilution 2.50 3.35 2.20
Net income:
Basic $ 2.51 $ 4.59 $ 2.21
Assuming dilution 2.50 4.21 2.20
- ------------------------------------------------------------------------
The table above presents consolidated results of HSB Group, Inc. (HSB or the
Company).
Overview of Results of Operations
Income from continuing operations for 1999, excluding the 1998 gain on sale of
Industrial Risk Insurers (IRI) discussed below, decreased $7.5 million or 9.3
percent from 1998. The decline in after-tax earnings was primarily due to
reduced underwriting profits as well as a decline in the engineering services
operating gain. The impact of these items was partially offset by higher income
from investment operations, virtually all of which resulted from increased net
realized gains in 1999. Excluding the gain on sale of IRI, income from
continuing operations per common share on a diluted basis decreased 6.4 percent
in 1999 as compared to 1998.
26
<PAGE>
In comparison to 1998, the major contributors to the reduction in pre-tax
earnings (exclusive of realized gains) were: increased information systems costs
(including Year 2000 remediation costs) of $8 million; reduced profits from HSB
Industrial Risk Insurers of $7 million; change in management and other expenses
related to consolidation and relocation of certain businesses of $5 million; and
$3 million of reduced margins in certain engineering businesses.
Net income for 1998 included after-tax gains on the sale of HSB's interest in
IRI of $23.8 million and Radian International LLC (Radian LLC) of $30.3 million.
The Radian 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 put
the Company's interest to The Dow Chemical Company (Dow). As a result, HSB's
interest in Radian LLC was classified as a discontinued operation in 1997. The
Company's after-tax earnings, excluding the after-tax gains on sales of IRI and
Radian LLC, increased 21.1 percent in 1998 compared with 1997 due to increased
underwriting profits, improved engineering results and higher net realized
gains. Income from continuing operations, excluding the gain on sale of IRI, per
common share on a diluted basis increased 21.4 percent in 1998 from 1997.
Total revenues grew 4.7 percent in 1999 as compared to a decline of 4.0 percent
in 1998. The increase in 1999 was attributable to growth in engineering services
as well as strong realized investment gains offset by a reduction in net earned
premiums. Gross earned premiums grew 6.9 percent in 1999 and 26.5 percent in
1998. In 1999, much of this increase was attributable to the continued growth in
our commercial book of business as well as a full year's earnings related to the
1998 acquisition of the Kemper book noted in the Other Developments section of
this Management's Discussion and Analysis (MD&A).
Ceded premiums increased 18.0 and 217.0 percent in 1999 and 1998, respectively,
resulting from the HSB Industrial Risk Insurers arrangement and related
reinsurance with Employers Reinsurance Corporation (ERC), as well as the
increasing effect of the Company's reinsurance programs which utilized
significantly more quota share reinsurance on certain of our books of business.
The Company anticipates that quota share reinsurance will not have as
significant a role as 2000 progresses.
The combined ratio for the Company increased to 94.4 percent in 1999 from 89.6
percent in 1998. In 1997, the combined ratio was 91.7 percent. The 1999 ratio
was adversely impacted by the increase in the expense ratio from 45.4 percent in
1998 to 51.0 percent in 1999.
Engineering services revenue increased 27.9 percent in 1999 and 52.5 percent in
1998. The growth in both 1999 and 1998 was led by additional revenues from our
recent acquisitions. Operating margins decreased to 2.5 percent from 7.8 percent
in 1998. The investment of operating funds to develop new products and establish
start-up operations, and the consolidation of certain businesses coupled with
reduced volume and profits in certain of our traditional engineering businesses
caused margins to contract from 1998.
Income from investment operations increased 16.9 percent in 1999 primarily as a
result of increased realized investment gains from repositioning the investment
portfolio due to market fluctuations and to keep the absolute amount of common
equities from exceeding a certain targeted percentage of the Company's Generally
Accepted Accounting Principles (GAAP) capital. Net investment income grew 74.5
percent in 1998 from the investment of proceeds from the sales of IRI and Radian
LLC and the issuance of capital securities in the second half of 1997.
The effective tax rate on income from continuing operations before distributions
on capital securities for 1999 was 28.2 percent compared to 29.6 percent and
26.8 percent for 1998 and 1997, respectively. Tax rate fluctuations occur as the
levels of underwriting and engineering services results and realized gains
change the mix of pre-tax income between fully taxable earnings and tax
preferred earnings. Various tax credits (primarily foreign tax credits) also
impact the effective rate. The Company continues to manage its use of tax
advantageous investments in an attempt to maximize after-tax earnings.
27
<PAGE>
HSB Industrial Risk Insurers
The reinsurance agreements effective January 1, 1998 between The Hartford Steam
Boiler Inspection and Insurance Company (HSBIIC), ERC and IRI, as discussed
below, were terminated with respect to loss or liabilities arising out of
occurrences taking place on or after January 1, 2000. As a result, HSBIIC will
no longer retain 85 percent of the equipment breakdown insurance and 15 percent
of the property insurance of the combined insurance portfolio for risks arising
on or after January 1, 2000. The joint underwriting association that was known
as HSB Industrial Risk Insurers will, from January 1, 2000, be known as
Industrial Risk Insurers (IRI).
Concurrent with the termination of the reinsurance agreements, HSBIIC, ERC and
IRI replaced the operating agreement dated January 1, 1998. The new agreement,
effective January 1, 2000, calls for HSBIIC to retain 0.5 percent membership
share in IRI with the ability to increase its total share up to a maximum of 10
percent, at no cost, at HSBIIC's option. In addition, the agreement also
establishes an arrangement for HSB to perform equipment breakdown engineering
and inspection services for clients of IRI and provides for a fixed fronting fee
in the event that IRI continues to use HSBIIC's licenses. HSBIIC received
payments of $27 million in December 1999 related to the partial settlement of
unearned reinsurance premiums and ceding commissions due to HSBIIC under the
prior agreement. Final settlement is expected to occur in the second half of
2000.
On January 6, 1998, HSBIIC sold its interest in IRI to ERC in accordance with a
previously announced purchase and sale agreement between ERC and IRI's
twenty-three member insurers. HSBIIC received gross proceeds of $49.1 million,
prior to transaction costs, for its 23.5 percent share in IRI. The gain on the
sale of IRI was $36.6 million pre-tax and $23.8 million after-tax. Because the
sale was structured in part as a reinsurance transaction, a portion of HSBIIC's
gross proceeds was utilized to reinsure in-force policies with ERC.
IRI is an unincorporated, voluntary joint underwriting association which
provides property insurance for the class of business known as Highly Protected
Risks (HPR) for larger manufacturing, processing and industrial businesses,
which have invested in protection against loss through the use of sprinklers and
other means. IRI primarily writes policies on a syndicate basis that specifies
to the insured the percentage share of risk accepted by each member of the
association. Each member company, therefore, operates as a direct insurer or
reinsurer on such policies and participates in the premiums and losses generated
thereunder in proportion to its membership interest. In 1997 and 1996, HSBIIC's
membership shares were 23.5 and 14 percent respectively; in 1995 and prior the
shares were 0.5 percent.
In essence, IRI facilitates the proportional sharing of risk under one policy
where each member is essentially considered to be the direct writer for
reporting, premium tax and other regulatory purposes. Liability on such policies
is several and not joint, and therefore, members are not responsible for policy
liabilities of the other members. An increased participation does not expose
HSBIIC to the effect of adverse loss development on claims incurred prior to the
effective date of the increase; conversely a decrease in participation does not
release HSBIIC from the effect of adverse development.
Contemporaneous with the close of the 1998 sale, IRI was reconstituted with ERC
(with a 99.5 percent share) and HSBIIC (with a 0.5 percent share) as the sole
members. The new association was renamed HSB Industrial Risk Insurers. In 1999
and 1998, HSBIIC wrote the business for HSB Industrial Risk Insurers using its
insurance licenses and provided certain other 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 in 1998 and retained 85 percent of the equipment
breakdown insurance and 15 percent of the property insurance of the combined
insurance portfolio. This agreement was the largest contributing factor in the
growth of both gross earned premium and ceded premium. As a result, in both 1999
and 1998 transactions arising from this agreement comprise a significant
28
<PAGE>
portion of the reinsurance asset, unearned insurance premiums and ceded
reinsurance payables reflected in the Consolidated Statements of Financial
Position.
In contemplation of HSB's expanded role in HSB Industrial Risk Insurers, on
December 31, 1997 a business trust formed by HSB sold $300 million of 20 year, 7
percent Convertible Capital Securities in a private placement to ERC (see note
13). The Convertible Capital Securities are convertible into shares of HSB
common stock, at any time, subject to regulatory approval, at a conversion price
of $56.67 per share. $250 million of the proceeds were contributed to HSBIIC and
$50 million were retained by HSB.
Discontinued Operations
On January 2, 1998, HSBIIC exercised its option to put its 40 percent share in
Radian LLC to 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 worldwide. In connection with
the formation of the new company, HSBIIC contributed substantially all of the
assets and liabilities 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 HSB's Board of Directors of management's
decision to exercise its put. The after-tax gain of $30.3 million recognized in
1998 is net of deferred losses previously noted. Prior to July 1997, HSBIIC's
share of the joint venture's results was recorded as equity in Radian.
Recent Accounting Developments
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants (AcSEC) issued three Statements of Position (SOPs)
that became effective for fiscal years beginning after December 15, 1998: SOP
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" and SOP 98-5, "Reporting on the Costs of Start-Up
Activities." Because the Company's accounting policies were already in
compliance with these SOPs, the implementation of these statements had no impact
upon the results of operations, financial condition or cash flows.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" subsequently amended by SFAS No. 137. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that such instruments be measured at fair value. In addition, all
hedging relationships must be designated, reassessed and documented pursuant to
the provisions of SFAS No. 133. This statement is effective for the Company for
the first quarter of 2001. Based on the Company's current investment policies
and practices, the Company anticipates that the adoption of the provisions of
SFAS No. 133 will not have a significant effect on results of operations,
financial condition or cash flows.
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." The
SOP identifies several methods of deposit accounting and provides guidance on
the application of each method. This SOP became effective for financial
statements for fiscal years beginning after June 15, 1999. Currently the Company
is not party to any contracts that do not comply with the risk transfer
provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," and, therefore, does not anticipate
the adoption of SOP 98-7 will have a material impact on results of operations,
financial condition or cash flows.
29
<PAGE>
Other Developments
In July 1999, HSBIIC acquired Structural Integrity Associates, Inc. (Structural)
based in San Jose, California. Structural is an engineering consulting and
inspection services firm specializing in the analysis, control and prevention of
structural and equipment failures. It offers a full array of services, from
inspection and condition assessment, to monitoring and remaining life analysis,
repair, remediation and total risk management of critical equipment and
structures.
HSBIIC completed an acquisition of the monoline boiler and machinery business of
Kemper Insurance Companies (Kemper) and 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, effective July 1,
1998. The two companies also completed an agreement for HSBIIC to reinsure
boiler and machinery coverage written as part of Kemper's commercial package
policies.
On April 21, 1998, the Board of Directors approved a three-for-two stock split
for shares of record on May 1, 1998. The additional shares were distributed on
May 22, 1998. In accordance with SFAS No. 128, "Earnings per Share," all
earnings per share presentations have been adjusted to reflect the impact of the
stock split, including retroactive restatement of prior periods.
In April 1998, HSB acquired Solomon Associates, Inc. (SAI) based in Dallas,
Texas. SAI is an engineering management consulting firm that provides
comparative performance benchmarking consulting to the refining, petrochemical
and power generation industries. 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.
Insurance Operations
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------
Gross earned premiums $ 823.8 $ 770.5 $609.3
Ceded premiums 441.9 374.4 118.1
------------------------------------
Insurance premiums $ 381.9 $ 396.1 $491.2
Claims and adjustment
expenses 165.8 174.9 217.9
Underwriting, acquisition
and other expenses 194.8 180.0 233.5
------------------------------------
Underwriting gain $ 21.3 $ 41.2 $ 39.8
Loss ratio 43.4% 44.2% 44.4%
Expense ratio 51.0% 45.4% 47.3%
Combined ratio 94.4% 89.6% 91.7%
- ------------------------------------------------------------------------
Insurance operations include the underwriting results of HSBIIC, HSB Engineering
Insurance Limited (EIL), The Boiler Inspection and Insurance Company of Canada
(BI&I), The Allen Insurance Company, Ltd., The Hartford Steam Boiler Inspection
and Insurance Company of Connecticut, The Hartford Steam Boiler Inspection and
Insurance Company of Texas and HSBIIC's participation in HSB Industrial Risk
Insurers and various other pools.
Gross earned premiums in 1999 increased 6.9 percent over 1998. Much of this
growth was attributable to the integration of certain commercial books of
business acquired in mid-1998; growth in our client company business and a full
year of writing HSB Industrial Risk Insurers policies utilizing the Company's
licenses. In 1998, a portion of HSB Industrial Risk Insurers policies in-force
were written/renewed utilizing the licenses of other insurers. The increases in
gross premiums were offset by premium declines in certain operations within
Global Special Risks. In some areas of the Company's direct businesses, the
market continued to experience price erosion in 1999 as the number of insurers
offering capacity expanded. HSB
30
<PAGE>
will not write business at rates that do not provide sufficient opportunity to
earn a profit. As a result, the Company anticipates that premiums in the Global
Special Risks areas may continue to experience revenue declines. In addition,
the new January 1, 2000 agreement with IRI, previously discussed, will also
result in a decrease in gross earned premiums. In 1998, gross earned premiums
increased 26.5 percent primarily as a result of HSB Industrial Risk Insurers
($155.4 million) as well as the addition of the Kemper portfolio to our
commercial business.
Domestically, exclusive of HSB Industrial Risk Insurers, gross earned premiums
increased $34.8 million or 9.3 percent in 1999 due to the integration of the
Kemper portfolio and growth in our client company business. Gross earned
premiums representing coverage outside the U.S., exclusive of HSB Industrial
Risk Insurers, decreased 12.5 percent to $116.8 from $133.5 million in 1998 due
to price erosion and maintenance of strict underwriting standards.
In 1998, domestic gross earned premiums, excluding the impact of HSB Industrial
Risk Insurers, remained flat as a result of the combination of growth in written
premiums from our client companies offset by reductions in our domestic special
risk premiums. Gross earned premiums representing coverage outside the U.S.,
exclusive of HSB Industrial Risk Insurers, increased 5.4 percent to $133.5
million.
The insurance industry, in general, continues to undergo significant
restructuring and consolidation. Considerable merger and acquisition activity
has occurred over the last several years and, with the advent of financial
services reform, more contraction is possible in the future. Depending on the
specific companies involved in these activities and other market factors, the
level of reinsured business the Company assumes in the future could be impacted.
HSB is positioned to benefit from these changes over the long term due to its
strong market position and reinsurance relationships with approximately 200
multi-line carriers; while over the shorter term, there is both opportunity and
challenge.
The increase in ceded premiums of 18.0 and 217.0 percent in 1999 and 1998,
respectively, was primarily due to the HSB Industrial Risk Insurers arrangement
and related reinsurance with ERC, as well as the increasing effect of the
Company's reinsurance programs which over the past three years have utilized
significantly more quota share reinsurance on certain of our books of business.
Due to changing reinsurance market conditions and the impact of the new IRI
agreement effective January 1, 2000, the Company is in the process of evaluating
and redesigning its current reinsurance programs that will place less reliance
on quota share reinsurance. The Company anticipates this will lead to a reduced
level of ceded premiums.
Due to the new agreement with IRI, coupled with a decline in our Global Special
Risks segment, gross earned premiums are expected to decline in 2000. However,
anticipated changes in the utilization of reinsurance may cause ceded premiums
to decline at a higher rate than gross earned premiums for 2000.
The Company participates in various facultative, quota share and excess of loss
reinsurance agreements to limit its exposure, particularly to catastrophic
losses and high-risk lines and to provide additional capacity to write business.
The Company evaluates its exposures and reinsurance needs annually to implement
a program that corresponds with the level of exposure it is willing to retain.
Because the Company has primary responsibility to its insureds, a careful
evaluation of the financial strength of those reinsurers it cedes business to is
performed. HSB's reinsurance costs continue to be impacted by its prior loss
experience and business growth, as well as the design of its program.
31
<PAGE>
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------
Provision for claims and
adjustment expenses
occurring in the
current year $ 165.4 $ 164.0 $ 209.5
Increase in estimated
claims and adjustment
expenses arising in
prior years 0.4 10.9 8.4
-------------------------------------
Total incurred claims and
adjustment expenses* $ 165.8 $ 174.9 $ 217.9
Loss ratio 43.4% 44.2% 44.4%
- ------------------------------------------------------------------------
* Includes approximately $2.0, $5.0 and $3.3 million of subrogation recoveries,
respectively.
Claims and adjustment expense reserves comprise one of the largest liabilities
on the Company's Consolidated Statements of Financial Position. Reserves are
established to record the Company's estimates of total losses and loss
adjustment expenses that will ultimately be paid under direct and assumed
insurance contracts. Loss reserves include claims and adjustment expenses on
claims that have been reported but not yet settled and those that have been
incurred but not yet reported to the Company. The length of time that reserves
are carried on the Consolidated Statements of Financial Position is a function
of the pay-out patterns associated with the types of coverage involved. The
majority of claims the Company incurs are short-tailed in nature, relative to
the property-casualty industry as a whole, meaning they generally settle shortly
after claims are reported. The Company's loss reserve estimates reflect such
variables as past loss experience and inflation. In addition, due to the nature
of much of the Company's types of coverage, complex engineering judgments are
involved. Previously established loss reserves are regularly adjusted as loss
experience develops and new information becomes available. Adjustments to
previously established reserves are reflected in the financial statements in the
period in which the estimates are changed. The Company does not discount its
loss reserves.
The loss ratio improved 0.8 percentage points in 1999 from 1998. This
improvement was primarily attributable to increased use of reinsurance. The 1999
results were impacted by $10 million of domestic weather-related events and the
Taiwan earthquake as well as $10 million in losses related to medical equipment
insurance contracts. These insurance contracts represented less than 1 percent
of the Company's revenues. The loss ratio decreased 0.2 percentage points in
1998 as compared to 1997. Loss results in 1998 were impacted by severe ice
storms in Canada, as well as a few significant losses in our other international
businesses. Prior year loss development in 1999, 1998 and 1997 added 0.1, 2.8
and 1.7 percentage points to the respective loss ratio. The components of claims
and adjustment expenses, net of reinsurance, are displayed above.
Gross claims and adjustment expenses were $684.7 million in 1999 as compared to
$619.6 million in 1998 and $263.1 million in 1997. This increase was the result
of weather-related events domestically, the Taiwan earthquake and large losses
in our Global Special Risks business, all of which were largely reinsured. The
significant increases in claim reserves and reinsurance assets since December
31, 1998 largely relate to these events. In 1998, the increase in gross claims
was largely due to the Company's role as direct writer of HSB Industrial Risk
Insurers' policies and included approximately $154 million from Hurricane
Georges on exposures written by HSB Industrial Risk Insurers. On a net basis the
impact on HSB from such hurricane losses after cessions to HSB Industrial Risk
Insurers and reinsurance recoveries was $1.9 million.
Although reported claim activity has been negligible at this time,
quantification of the Company's exposure to Year 2000 losses and loss adjustment
expenses are not reasonably estimable as applicable policy and reinsurance
contract wordings have not been legally tested in the context of such losses.
32
<PAGE>
The expense ratio increased to 51.0 percent in 1999 from 45.4 percent in 1998
and 47.3 percent in 1997. A portion of the 1999 increase in the expense ratio
was attributable to increases in policy acquisition costs. Increases in
commission rates that reflect changes in the mix of business, primarily in the
commercial segment, increased the expense ratio approximately 1.9 percentage
points. In 1999, the Company's results were negatively impacted by increased
information systems costs of $8 million (including Year 2000 remediation costs)
and $5 million of charges related to a change in management at HSB and
consolidation and relocation of certain businesses. Approximately $11 million of
these amounts were allocated to the insurance operations, thereby increasing the
expense ratio by 2.9 percentage points.
The 1998 expense ratio improvement of 1.9 percentage points over 1997 was
primarily related to the new quota share reinsurance agreements and the HSB
Industrial Risk Insurers arrangement with ERC, both of which resulted in ceding
commissions to HSBIIC that positively impacted our expense ratio by 3.9
percentage points. A portion of such ceding commission was intended to reimburse
HSBIIC for the additional costs of managing HSB Industrial Risk Insurers and to
offset the reduction in net earned premiums.
The following information summarizes key financial results by reportable
insurance segment:
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------
Commercial:
Net earned premiums $ 335.2 $ 306.3 $ 269.0
Net income 12.8 14.8 13.4
Income taxes 7.2 4.6 6.1
Global Special Risks:
Net earned premiums $ 45.6 $ 83.6 $ 217.1
Net income 6.7 9.8 10.7
Income taxes 2.3 7.7 6.2
- ------------------------------------------------------------------------
The Commercial business has shown strong revenue growth year over year despite
significant price competition as HSB continues to focus on its client company
strategy. Net earned premiums in the Commercial segment rose $28.9 and $37.3
million in 1999 and 1998, respectively, due primarily to the integration of the
Kemper portfolio and growth in our client company business, offset by declines
in direct writings. In 1999, domestic operations posted an underwriting gain at
a lower margin than 1998 due to the increased expense ratio. International
operations posted an improved underwriting gain as 1998 was more severely
impacted by weather-related claims. In 1998, domestic operations posted an
underwriting gain that was partially offset by a difficult claims year
internationally, particularly due to severe ice storms that affected over 30
percent of Canada. The high tax benefit recognized on Canadian losses caused the
effective tax rate to decline from 1997.
Global Special Risks net earned premiums declined $38.0 million in 1999. This
decrease relates primarily to increased ceded premiums related to the HSB
Industrial Risk Insurers business. In addition, price erosion and maintenance of
strict underwriting standards, coupled with changes in reinsurance programs,
contributed to the decline in 1999. In 1998, net earned premiums decreased
$133.5 million primarily due to the increased use of reinsurance and the
arrangement with HSB Industrial Risk Insurers. Global Special Risks net income
decreased in 1999 primarily as a result of the declining book. In 1998, the
international businesses were impacted by adverse claims experience as compared
to 1997. In 1998, income taxes as a percentage of net income increased as a
result of a decreased use of foreign tax credits.
As part of the arrangement with HSB Industrial Risk Insurers, HSBIIC wrote all
direct policies for HSB Industrial Risk Insurers and then ceded back these risks
100 percent to HSB Industrial Risk Insurers. HSBIIC then reinsured ERC's 99.5
percent share of the business resulting in the assumption of 85 percent of the
equipment breakdown business and 15 percent of the property business. As a
result of the termination of the ERC reinsurance agreement and the replacement
of the IRI agreement effective January 1, 2000, as
33
<PAGE>
previously discussed, the Company anticipates that Global Special Risks' gross
earned and ceded premiums, as well as the fees/expense reimbursement generated
from managing the IRI business will continue to decline.
Engineering Services Operations
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------
Engineering services
Revenues $119.6 $ 93.5 $ 61.3
Engineering services
Expenses 116.6 86.2 57.0
-----------------------------------
Operating gain $ 3.0 $ 7.3 $ 4.3
Operating margin 2.5% 7.8% 7.0%
- ------------------------------------------------------------------------
Engineering services operations include the results of HSBIIC's, EIL's and
BI&I's engineering services, HSB Reliability Technologies (HSBRT), HSB
Professional Loss Control, HSB International, SAI, Structural and the Company's
interest in Integrated Process Technologies, LLC (IPT).
Engineering services revenues increased 27.9 percent in comparison to 1998. The
growth in revenues is primarily due to significant increases related to IPT, a
full year's integration of the SAI acquisition which occurred in April 1998, the
Structural acquisition in July 1999 and EIL's engineering services revenues
generated through other acquisitions. In 1998, revenue increases of 52.5 percent
were generated by HSBRT; EIL's acquisition of Haughton's engineering in the last
quarter of 1997; and the addition of SAI in April 1998.
Operating margins decreased to 2.5 percent from 7.8 percent in 1998. The decline
in operating margin from the previous year reflects the investment of operating
funds to develop new products and establish start-up operations coupled with
reduced volume and profits in certain of our traditional engineering businesses,
particularly HSBRT. In addition, the Company recorded a charge of $0.7 million
related to costs associated with the consolidation of certain engineering
activities. Margins increased 0.8 percentage points in 1998 as a result of
improved field service staff utilization and cost efficiencies, which were
offset somewhat by the start-up costs of integrating certain acquisitions.
In July 1999, HSBIIC acquired Structural based in San Jose, California.
Structural is an engineering consulting firm that specializes in prevention,
control and repair of structural and mechanical failures. The Company continues
to focus on identifying and evaluating acquisition candidates in the niche
engineering management consulting service business, primarily in process
industries, in order to expand or complement its engineering service
capabilities.
Investment Operations
For the years ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------
Net investment income $ 64.1 $ 64.2 $ 36.8
Realized investment gains 40.6 25.4 14.1
----------------------------------
Income from investment
operations $ 104.7 $ 89.6 $ 50.9
Total cash and invested
assets, at fair value $ 998.1 $1,094.8 $ 996.7
Unrealized gains, pre-tax $ 4.7 $ 113.1 $ 95.3
- ---------------------------------------------------------------------------
The Company's investment strategy is 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 stockholders, servicing requirements of capital securities and
market conditions. The
34
<PAGE>
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 in an attempt to maximize after-tax
investment earnings. The Company does not engage in cash flow underwriting; it
seeks to have underwriting profit each year.
None of the Company's claim reserves are discounted as most claims settle, on
average, within one year. Therefore, the Company does not use duration
measurements in managing its interest rate exposure. Instead, HSB manages its
portfolio on a segmented basis. Approximately $300 million (cost basis) of the
Company's invested assets (comprised of perpetual and redeemable preferred
stocks and corporate bonds) are utilized to provide interest coverage and
potential principal repayment over the life of the convertible capital
securities issued on December 31, 1997. The remainder of the Company's invested
assets, exclusive of cash and cash equivalents, short-term securities and common
stocks are invested to provide income for the future. There are three portfolio
areas with quite different maturity/call characteristics. The portfolio of
traditional bonds of approximately $245 million has an average life of 22 years,
with over 50 percent of that portfolio callable in less than ten years. The
sinking fund preferred portfolio of $43 million, based on expected calls, has an
estimated life of three years. The $52 million adjustable rate preferred stock
portfolio, based on expected calls, has an estimated life of five years.
The Company believes the expected cash flows from the Company's operations,
maturities and calls are adequate to enable the Company to respond to the
previously discussed parameters that impact its investment strategy.
Net investment income for 1999 remained flat compared to 1998 and increased
$27.4 million in 1998 as compared to 1997 due to the investment of proceeds from
capital securities issued during the second half of 1997. In addition, proceeds
from the January 1998 sale of HSB's interests in IRI and Radian LLC
significantly increased investable funds. Declining yields available on new
fixed maturities relative to higher yields on maturing investments over the past
few years have also moderated investment income growth. Net investment income
has also been impacted by calls of high yielding preferred stocks.
Realized investment gains increased $15.2 million in 1999 as a result of
repositioning the investment portfolio due to market fluctuations and to keep
the absolute amount of common equities from exceeding a certain targeted
percentage of the Company's GAAP capital. In 1998, realized gains increased
$11.3 million as a result of call premiums on fixed income investments and sales
of certain convertible securities and common stocks in response to market
conditions.
In 1997, realized gains were reduced by $30.7 million (all of which were offset
by and represented portfolio appreciation and returns that were realized) to
reflect the estimated fair value of three "zero cost collar contracts" entered
into at the end of 1996 to mitigate the effects of market risk on the Company's
U.S. common stock portfolio (which, for management purposes, included certain
convertible preferreds). Each contract had a notional value of $50 million and
maturity dates ranging from November 1997 to January 1998. The contracts were
European style, which means they only settled upon maturity. The contracts,
which were entered into when the Standard & Poor's 500 Index (S&P 500 Index) was
744.3, allowed HSBIIC to recover from the counterparty if the index was below
695.2 at the time of maturity, and required HSBIIC to reimburse the counterparty
if the index was above a range of 811.3 to 818.7 at the time of maturity.
Through its U.K. subsidiary, EIL, the Company writes business in Malaysia and is
required to maintain ringgit denominated investments based on the level of
premiums written in Malaysia. At December 31, 1999, 1998 and 1997, the Company's
deposits were 20, 29 and 50 million ringgits, respectively. This equated to
$5.1, $7.1 and $12.8 million at December 31, 1999, 1998 and 1997, respectively.
In 1997, due to currency fluctuation in Southeast Asia, realized investment
gains were negatively impacted by $7.4 million.
HSB's investment portfolio continues to consist of high-grade domestic and
foreign investments. Excluding short-term investments, HSB's investments are
primarily comprised of publicly traded, highly liquid
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securities. At the end of 1999, HSB's fixed maturities portfolio comprised 52.9
percent of the value of the invested assets. The credit quality of HSB's bond
investments at December 31, 1999, averaged an A rating. HSB's portfolio does not
include any bonds in default as to either principal or interest. Bonds held at
December 31, 1999 had a fair value of $299.8 million. Redeemable preferred
stocks averaged a BBB rating. During 1999 bond yields continued to move up, the
impact of which has caused a reduction in the Company's unrealized gains with
respect to fixed income securities by approximately $64.5 million pre-tax.
The carrying value of the equity securities portfolio represented 41.3 percent
of the investments at December 31, 1999. This included $65.3 million of pre-tax
unrealized investment gains of which $92.6 million related to common equities,
offset by $27.3 million of preferred unrealized investment losses. The Company's
common equities, which are comprised of primarily Standard & Poor's 500 (S&P
500) "large cap" stocks, essentially modeled the performance of the S&P 500
Index in 1999. HSB also recorded $22.1 million of dividends and $43.5 million of
net pre-tax realized gains from this portfolio in 1999. The Company's largest
single holding accounted for less than 1 percent of total consolidated assets.
Realized investment gains increased in 1999 over 1998 (and in 1998 over 1997
taking into account the $30.7 million loss on the "zero cost collar contracts")
as HSB managed its portfolio to respond to changing market conditions and tax
planning opportunities.
Market Risk
Market risk generally encompasses systemic risks or risks associated with macro
factors relating to economic losses due to adverse changes in the fair value of
a financial instrument. Market risk relates to the variability of market prices
and/or cash flows associated with changes in interest rates, securities prices,
market indices, yield curves or currency exchange rates and is inherent to all
financial instruments. The Company's investment strategy is to maximize total
return on the investment portfolio through investment income and capital
appreciation and is based on such factors as operational results, tax
implications, regulatory requirements, interest rates, dividends to
stockholders, servicing requirements of capital securities and market
conditions.
The focus of this disclosure is on one element of market risk - price risk. For
the Company, price risk relates to changes in the level of prices of financial
instruments due to changes in interest rates, equity prices or foreign exchange
rates. The primary price risk exposures of the Company relate to interest rate
and equity price risk.
For purposes of this disclosure market risk sensitive instruments are
categorized as instruments entered into for trading purposes and instruments
entered into for purposes other than trading. The Company does not hold any
financial instruments entered into for trading purposes and, therefore, market
risk sensitive instruments are classified as held for purposes other than
trading.
Interest Rate Risk
Interest rate risk is the major price risk facing the Company's fixed income
portfolio. Such exposure can subject the Company to economic losses due to
changes in the level or volatility of interest rates. Bond prices change
inversely with the direction of interest rates. Generally, as interest rates
rise, prices for fixed income instruments will fall. As rates decline the
inverse is true. The Company attempts to mitigate this risk by investing in high
quality issues using a buy and hold approach.
Equity Market Risk
Equity market risk is defined as the chance that market influences will affect
the expected returns of all equities. Returns are influenced not only by the
fundamental attributes of investment securities, but by the price movements of
the general marketplace. Much of this depends on the sensitivity of the
individual issue
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to the overall market. The Company attempts to reduce this risk through
diversification and a focus on high quality, blue chip investments.
Foreign Exchange Risk
Foreign exchange risk arises from the possibility that changes in foreign
currency exchange rates will adversely impact the value of financial
instruments. The Company has foreign exchange exposure when it buys or sells
foreign currencies or financial instruments denominated in a foreign currency.
The Company's foreign transactions are primarily denominated in Canadian
dollars.
Sensitivity Analysis
The following analysis illustrates the sensitivity of the market value of the
Company's financial instruments to selected changes in market rates and prices.
The range of changes selected reflects the Company's view of reasonably possible
market movements over a one-year period. The range of values selected should not
be interpreted as the Company's prediction of future market events, but rather
an illustration of the impact of such events.
The analysis assumes that the composition of the Company's interest rate
sensitive assets and liabilities existing at the beginning of the period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the time to maturity. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Accordingly, the analysis may not be indicative of, is not intended to
provide and does not provide a precise forecast of the effect of changes of
market interest rates on the Company's income or stockholders' equity. Further,
the computations do not contemplate any actions the Company would undertake in
response to changes in interest rates.
The sensitivity analysis assumes an instantaneous shift in market interest
rates, with scenarios of interest rates increasing and decreasing 100 and 150
basis points from their levels at December 31, 1999 and 1998 with all other
variables held constant. The analysis assumes the yield to worst methodology. A
100 and 150 basis point increase in the market interest rates would result in a
pre-tax decrease in the net financial instrument position of $50.1 and $38.1
million for 1999 and 1998 and $67.4 and $55.1 million for 1999 and 1998,
respectively. Similarly, a 100 and 150 basis point decrease in market interest
rates would result in a pre-tax increase in the net financial instrument
position of $50.1 and $38.1 million for 1999 and 1998 and $67.4 and $55.1
million for 1999 and 1998, respectively.
Portfolio sensitivity to these variables tends to change over time due to
changes in portfolio composition and changes in market environment. For the
fixed maturity portfolio, sensitivity, as measured by duration, increased from
5.48 at December 31, 1998 to 8.37 at December 31, 1999. This increase in
duration is due primarily to changes that occurred in the interest rate
environment during the period. The Company uses a yield to worst methodology to
calculate duration. This assumes that an issuer, given the current rate
environment, will call higher coupon debt if appropriate. As interest rates
increased during the year, the call feature on many issues became
non-applicable. This change in the environment caused portfolio duration to
increase and a corresponding increase in sensitivity to interest rates.
The Company's long-term debt and convertible capital securities have been issued
at fixed rates, and as such, interest expense would not be impacted by interest
rate shifts. The impact of 100 and 150 basis point increases in interest rates
on the fixed rate debt would result in a decrease in the market value of the
debt by $0.3 million in 1999 and 1998 and $0.5 million in 1999 and 1998. The
effect of 100 and 150 basis point increases in interest rates on the $300
million convertible capital securities would result in an estimated market value
of $247.6 and $296.4 million in 1999 and 1998, and $237.0 and $289.4 million in
1999 and 1998, respectively, and is calculated without giving any effect to the
relationship of the conversion price to the current market price of HSB Group,
Inc. common stock. The impact of 100 and 150 basis point
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increases in interest rates on the variable rate capital securities would result
in an additional charge to pre-tax income of $1.1 million in 1999 and 1998 and
$1.6 million in 1999 and 1998, respectively, per year. A 100 and 150 basis point
decrease in interest rates would increase pre-tax income by $1.1 million in 1999
and 1998 and $1.6 million in 1999 and 1998, respectively, per year.
Equity price risk was measured assuming an instantaneous 10 percent and 25
percent change in the S&P 500 Index from its level at December 31, 1999 and 1998
with all other variables held constant. The Company's equity holdings (comprised
of common stocks and non-redeemable preferreds) were assumed to be 100 percent
correlated to this index. A 10 percent and 25 percent increase or decrease in
the S&P 500 Index would result in a $21.4 and $24.9 million increase or decrease
in 1999 and 1998 and $53.4 and $62.4 million increase or decrease in 1999 and
1998, respectively, in the net financial instrument position. The Company's
equity instruments' sensitivity to equity market risk, as measured by portfolio
beta, decreased from 1.02 at December 31, 1998 to 0.98 at December 31, 1999.
This change is generally attributed to portfolio repositioning during the
period.
The sensitivity analysis also assumes an instantaneous 10 percent and 20 percent
change in the foreign currency exchange rates versus the U.S. dollar from their
levels at December 31, 1999 and 1998 with all other variables held constant. A
10 percent and 20 percent strengthening of the U.S. dollar would result in
decreases of $6.1 and $6.4 million in 1999 and 1998 and $12.2 and $12.4 million
in 1999 and 1998, respectively, in the net financial instrument position.
Weakening of the U.S. dollar versus all other currencies would result in like
increases in the net financial instrument position.
The following table reflects the estimated effects on the market value of the
Company's financial instruments due to an increase in interest rates of 100
basis points, a 10 percent decline in the S&P 500 Index and a decline of 10
percent in foreign currency exchange rates.
Held For Other Than Trading Purposes
Market Interest Currency Equity
At December 31, 1999 Value Rate Risk Risk Risk
- --------------------------------------------------------------------------
Fixed maturity
securities $ 489.8 $ (37.3) $ (2.6) $ --
Equity securities 381.8 (12.1) (2.0) (21.4)
Short-term investments 53.5 (0.7) (1.5) --
----------------------------------------------
Total all securities $ 925.1 $ (50.1) $ (6.1) $ (21.4)
- --------------------------------------------------------------------------
Held For Other Than Trading Purposes
Market Interest Currency Equity
At December 31, 1998 Value Rate Risk Risk Risk
- -------------------------------------------------------------------------
Fixed maturity
securities $ 577.1 $ (27.1) $ (2.1) $ --
Equity securities 437.1 (10.1) (1.9) (24.9)
Short-term investments 62.3 (0.9) (2.4) --
--------------------------------------------
Total all securities $1,076.5 $ (38.1) $ (6.4) $ (24.9)
- --------------------------------------------------------------------------
The following table reflects the estimated effects on the market value of the
Company's financial instruments due to an increase in interest rates of 150
basis points, a 25 percent decline in the S&P 500 Index and a decline of 20
percent in foreign currency exchange rates.
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Held For Other Than Trading Purposes
Market Interest Currency Equity
At December 31, 1999 Value Rate Risk Risk Risk
- -------------------------------------------------------------------------
Fixed maturity
securities $ 489.8 $ (49.1) $ (5.2) $ --
Equity securities 381.8 (17.2) (4.1) (53.4)
Short-term investments 53.5 (1.1) (2.9) --
---------------------------------------------
Total all securities $ 925.1 $ (67.4) $ (12.2) $ (53.4)
- --------------------------------------------------------------------------
Held For Other Than Trading Purposes
Market Interest Currency Equity
At December 31, 1998 Value Rate Risk Risk Risk
- -------------------------------------------------------------------------
Fixed maturity
securities $ 577.1 $ (39.4) $ (4.2) $ --
Equity securities 437.1 (14.4) (3.7) (62.4)
Short-term investments 62.3 (1.3) (4.5) --
--------------------------------------------
Total all securities $1,076.5 $ (55.1) $ (12.4) $ (62.4)
- --------------------------------------------------------------------------
Statement of Comprehensive Income
In addition to the impact of HSB's results of operations, the Consolidated
Statements of Comprehensive Income display the effects of price movements on
HSB's invested assets. In 1999, the impact of rising interest rates on the
carrying values of the Company's fixed income investments more than offset the
strong performance of its common equities such that 1999 cumulative holding
gains, net of taxes, decreased $45.2 million as compared to the increase of
$28.1 million in 1998 and $21.3 million in 1997.
Liquidity and Capital Resources
At December 31, 1999 1998
- ------------------------------------------------------------------------
Total assets $2,263.2 $2,138.6
Short-term investments 53.5 62.3
Cash and cash equivalents 73.0 18.3
Short-term borrowings 41.5 21.0
Long-term borrowings 25.1 25.1
Capital securities of subsidiary Trust I 109.0 108.9
Capital securities of subsidiary Trust II 300.0 300.0
Common shareholders' equity $ 376.5 $ 419.3
- ------------------------------------------------------------------------
Liquidity refers to the Company's ability to generate sufficient funds to meet
the cash requirements of its business operations and financing obligations. HSB
is a holding company whose principal subsidiary is HSBIIC. HSB relies on
investment income, primarily in the form of dividends from HSBIIC, in order to
meet its short and long-term liquidity requirements including the service
requirements for its capital securities. The Company receives a regular inflow
of cash from maturing investments, engineering services and insurance
operations. The mix of the investment portfolio is managed to respond to
expected claim pay-out patterns and the service requirements of the Company's
capital securities. HSB also maintains cash equivalents and a highly liquid
short-term portfolio to provide for immediate cash needs and to offset a portion
of interest rate risk relating to $110 million of Global Floating Rate Capital
Securities. During 1999, HSB received $152.7 million in dividends from HSBIIC
and at December 31, 1999 the holding company had $143.2 million of cash and
invested assets as compared to $92.8 million at December 31, 1998. Current
estimates are that HSBIIC has the capacity to dividend to HSB approximately $80
million in 2000 without regulatory approval.
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On July 15, 1997, a trust sponsored and wholly owned by the Company issued $110
million aggregate liquidation amount of capital securities in a private
placement and 3,403 shares of common securities to the Company, the proceeds of
which were invested by the trust in $113.4 million aggregate principal amount of
the Company's debt securities. On November 5, 1997, an exchange offer was
commenced, pursuant to which the capital securities originally issued in the
private placement were exchanged for capital securities that were registered
with the Securities and Exchange Commission (the Capital Securities) and the
debt securities were exchanged for debt securities that were registered with the
Securities and Exchange Commission (the Debt Securities).
The Debt Securities represent all of the assets of the trust. The proceeds from
the issuance of the Debt Securities were used by the Company for general
corporate purposes. The Debt Securities and related income statement effects are
eliminated in the Company's consolidated financial statements. The $113.4
million principal amount of Debt Securities accrue and pay cash distributions
quarterly in arrears at a variable rate equal to the 90 day LIBOR plus 0.91
percent of the stated liquidation amount of $1,000 per Debt Security and are
scheduled to mature on July 15, 2027.
The Capital Securities accrue and pay cash distributions quarterly in arrears at
a variable rate equal to the 90 day LIBOR plus 0.91 percent of the stated
liquidation amount of $1,000 per Capital Security. The current coupon is 7.1
percent. HSB has the right to defer payment of distributions on the securities
at any time or from time to time for a period not exceeding 20 consecutive
quarterly periods with respect to each deferral period. During an extension
period, interest will continue to accrue and the amount of distributions to
which holders of the Capital Securities are entitled will accumulate, and the
Company will be prohibited from paying any cash dividends on its common stock.
The Capital Securities are generally non-callable for ten years, but may be
called earlier by HSB upon the occurrence of certain tax events including loss
of deductibility of interest on the securities. The Capital Securities are
mandatorily redeemable upon the maturity of the Debt Securities on July 15,
2027, or earlier to the extent of any redemption by the Company of any Debt
Securities. The redemption price in either such case will be $1,000 per share
plus accrued and unpaid distributions to the date fixed for redemption.
The terms of the Debt Securities, the guarantee of the Company with respect to
the Capital Securities, the Indenture and the Trust Agreement together provide a
full guarantee of amounts due on the Capital Securities. The Capital Securities
are currently rated BBB- by Standard & Poor's and BBB+ by Duff & Phelps credit
rating agencies.
On December 31, 1997, HSB Group, Inc. sold $300 million of 20 year Convertible
Capital Securities in a private placement to ERC. The Convertible Capital
Securities are callable by the Company at its option (i) at any time after seven
years; (ii) upon the occurrence of certain tax events including loss of
deductibility of the interest on the securities; (iii) in the event that HSB
vetoes a prospective purchaser of the Convertible Capital Securities; or (iv) in
the event of a change in control of ERC. The Convertible Capital Securities are
mandatorily redeemable on December 31, 2017 and are redeemable at par plus a
redemption premium, at the option of ERC, in the event of a change in control of
HSB within five years following issuance of the securities.
The Convertible Capital Securities are convertible, in whole or in part, at
ERC's option at any time, subject to regulatory approval, into shares of HSB
common stock at a conversion price of $56.67 per share, subject to adjustment.
HSB has provided certain registration rights to ERC in connection with the
common stock into which the Convertible Capital Securities are convertible
pursuant to a Registration Rights Agreement dated December 31, 1997. If ERC were
to exercise its conversion rights in total, it would hold at December 31, 1999,
on a fully diluted basis, approximately 15.4 percent of HSB's common stock.
Pursuant to certain provisions contained in the Purchase Agreement dated
December 31, 1997, ERC has agreed to certain "standstill" arrangements which for
a period of five years will preclude ERC from purchasing any common
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stock of HSB, other than by exercise of its conversion rights, and will limit
its ability to take certain other actions with respect to HSB during that
period.
The securities were issued through HSB Capital II (Trust II), a Delaware
business trust created by HSB, at a 7 percent coupon, payable semi-annually. The
Convertible Capital Securities rank pari passu with the Global Floating Rate
Capital Securities issued in July 1997. Holders of the Convertible Capital
Securities will be entitled to receive preferential cumulative cash
distributions accumulating from the date of original issuance and payable
semi-annually in arrears. HSB has the right to defer payment of interest at any
time or from time to time for a period not exceeding 10 consecutive semi-annual
periods with respect to each deferral period. During an extension period,
interest will continue to accrue and the amount of distributions to which
holders of the Convertible Capital Securities are entitled will accumulate, and
HSB will be prohibited from paying any cash dividends on its common stock. HSB
has irrevocably and unconditionally guaranteed all of Trust II's obligations
under the Convertible Capital Securities.
Cash provided from operations decreased to $43.2 million in 1999 as compared to
$55.6 million in 1998. The decrease was primarily attributable to a $22 million
decline in net cash flows from HSBIIC's participation in HSB Industrial Risk
Insurers, offset by an increase in insurance operating cash flows. Net cash
flows from HSB Industrial Risk Insurers were favorably impacted by a $27 million
accelerated collection of receivables pursuant to the termination of certain
reinsurance agreements between HSBIIC, ERC and IRI, as previously discussed.
Operating cash flows from insurance, excluding HSB Industrial Risk Insurers,
were positively impacted by a decline in net claims paid of 10.3 percent, as
well as, a decrease in payments to reinsurers for ceded premiums of 9.1 percent
offset by a decrease in premiums collected of 5.5 percent.
Cash provided from operations increased $29.5 million in 1998 as compared to
1997. Insurance operations cash flows, excluding HSB Industrial Risk Insurers,
were impacted by a decline in net claims paid of 2.9 percent while premiums
collected increased 6.5 percent. Payments to reinsurers for ceded premiums
increased 70.5 percent from 1997. HSBIIC's participation in HSB Industrial Risk
Insurers positively impacted cash flow from operations $35.3 million.
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. Common shareholders' equity of $376.5 million at
December 31, 1999 decreased $42.8 million since December 31, 1998. The decrease
primarily reflects net income of $72.8 million and net stock issuance of $7.7
million, offset by a decrease in unrealized investment gains, net of tax, of
$69.8 million and dividends of $49.9 million. The decrease in unrealized
investment gains of $69.8 million results principally from realized gains of
$26.4 million and unrealized depreciation of fixed maturities and non-redeemable
preferreds of $63.2 million, the sum of which is offset by net unrealized
appreciation of common stocks and convertible preferreds of $18.0 million.
On January 24, 2000, the Board renewed the authorization to repurchase up to 3
million shares of common stock. HSB repurchased approximately 0.1, 1.2 and 1.5
million shares at a cost of $4.4, $47.7 and $54.0 million during 1999, 1998 and
1997, respectively.
At December 31, 1999, HSBIIC had significant short-term borrowing capacity.
HSBIIC is currently authorized to issue up to $75 million of commercial paper.
Commercial paper outstanding at December 31, 1999 and 1998 was $38.6 and $20.0
million, respectively. The weighted-average interest rate was 6.0 percent and
5.2 percent at December 31, 1999 and 1998, respectively. In 1999, Standard &
Poor's and Duff & Phelps credit rating services reaffirmed their highest ratings
for the commercial paper.
The Company writes business in European markets primarily through its U.K.
subsidiary, EIL. The adoption of a common currency (the euro) by eleven of the
fifteen member countries of the European Union on January 1, 1999 did not result
in a substantial change in the business or a significant increase in costs. In
part, this is due to the fact that much of EIL's business is U.S. dollar
denominated. Also, the U.K. is not a
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first wave euro country. The Company will continue to monitor developments and
assess impacts on markets, pricing and reporting.
Year 2000
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.
Year 2000 problems could result in system failures, product failures or
miscalculations causing disruptions of operations. If the computer systems,
software products and devices do not correctly process dates after December 31,
1999, business could be adversely affected.
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 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 has evaluated and
continues to evaluate its potential insurance coverage exposures arising out of
the Year 2000 and its impact on insured equipment.
The Company has completed all stages of its Year 2000 Program: (i) assessment
and analysis; (ii) development, renovation and replacement; (iii)
implementation; (iv) testing and validation; (v) contingency planning; and (vi)
audit and review.
The Company continues to monitor information systems and transaction processing
with the objective of identifying and correcting any undetected errors of
omission or commission which may have occurred in the execution of its Year 2000
Program.
Subsequent to January 1, 2000, HSB has not encountered any disruptions or
anomalies that affected any critical internal system nor experienced any
material disruption in its business due to the inability of any of its key
business partners and suppliers to deliver information and services due to Year
2000 problems.
Costs
The Company's aggregate spending in connection with the Year 2000 Program was
approximately $28 million. Certain of these costs were expensed as incurred and
funded through operating cash flow. The Company has expensed $6.9, $5.1 and $1.5
million in 1999, 1998 and 1997, respectively. The remainder of the $28 million
related 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 of
information systems and infrastructure that would have occurred in the normal
course of business without the advent of the Year 2000 event are excluded from
these expensed amounts.
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 had
filed with the various jurisdictions an endorsement to its equipment breakdown
forms which reiterated that coverage was 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 was included in policies in all
states that approved the endorsement. In the four jurisdictions that did not
approve the endorsement, a notice reiterating the Company's coverage intent with
respect to Year 2000 exposures was sent to policyholders. The Company filed a
similar endorsement for use with its all-risk policy. Many of the insurers that
the Company reinsures for equipment breakdown coverage issued similar
endorsements to their policies.
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Although reported claim activity has been negligible at this time,
quantification of the Company's exposure to Year 2000 losses and loss adjustment
expenses are not reasonably estimable 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, in particular the passage of financial services reform legislation;
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; the adequacy of loss reserves;
changes in asset valuations; consolidation and restructuring in the insurance
industry; changes in the Company's participation in joint underwriting
associations, and in particular its new agreement with IRI; changes in the
demand and customer base for engineering and inspection services offered by the
Company, whether resulting from changes in the law or otherwise and other
general market conditions.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
See "Market Risk" in Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations in Item 7.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page No.
Report of Independent Accountants 45
Financial Statements 46
Consolidated Statements of Operations
for the years ended December 31, 1999,
1998 and 1997. 46
Consolidated Statements of Comprehensive Income
for the years ended December 31, 1999,
1998 and 1997. 47
Consolidated Statements of Financial Position -
December 31, 1999 and 1998. 48
Consolidated Statements of Cash Flows
for the years ended December 31, 1999,
1998 and 1997. 49
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Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997. 51
Notes to Consolidated Financial Statements 52
Schedule I - Summary of investments-
other than investments in related parties 77
Schedule II - Condensed Financial Information of
HSB Group, Inc. 78
Schedule III - Supplementary Insurance Information 81
Schedule IV - Reinsurance 82
Schedule V - Valuation and Qualifying Accounts 83
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations 84
Schedules other than the ones listed above are omitted for the reason that they
are not required or are not applicable or the required information is shown in
the financial statements or notes thereto.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of HSB Group, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of HSB
Group, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
listed in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Hartford, Connecticut
January 24, 2000
45
<PAGE>
Financial Statements
Consolidated Statements of Operations
For the years ended December 31, (in millions, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Gross earned premiums $ 823.8 $ 770.5 $ 609.3
Ceded premiums 441.9 374.4 118.1
-------------------------------------
Insurance premiums 381.9 396.1 491.2
Engineering services 119.6 93.5 61.3
Net investment income 64.1 64.2 36.8
Realized investment gains 40.6 25.4 14.1
-------------------------------------
Total revenues 606.2 579.2 603.4
-------------------------------------
Expenses:
Claims and adjustment 165.8 174.9 217.9
Policy acquisition 89.2 66.3 90.7
Underwriting and inspection 105.6 113.7 142.8
Engineering services 116.6 86.2 57.0
Interest 2.3 0.8 1.3
-------------------------------------
Total expenses 479.5 441.9 509.7
-------------------------------------
Gain on sale of IRI -- 36.6 --
Income from continuing operations before income taxes
and distributions on capital securities 126.7 173.9 93.7
Income taxes:
Current 35.1 45.0 23.8
Deferred 0.6 6.4 1.3
-------------------------------------
Total income taxes 35.7 51.4 25.1
-------------------------------------
Distributions on capital securities of subsidiary trusts,
net of income tax benefits of $9.8; $9.9; and $1.2 18.2 18.4 2.3
-------------------------------------
Income from continuing operations 72.8 104.1 66.3
-------------------------------------
Discontinued operations:
Loss from operations, net of income tax
benefits of $-; $3.2; and $0.1 -- (6.6) --
Gain on disposal, net of income taxes
of $-; $23.7; and $- -- 36.9 --
-------------------------------------
Total discontinued operations -- 30.3 --
-------------------------------------
Net income $ 72.8 $ 134.4 $ 66.3
-------------------------------------
Earnings per common share - basic:
Income from continuing operations $ 2.51 $ 3.55 $ 2.21
Discontinued operations -- 1.04 --
-------------------------------------
Net income $ 2.51 $ 4.59 $ 2.21
-------------------------------------
Weighted-average common shares outstanding 29.0 29.3 29.5
Earnings per common share - assuming dilution:
Income from continuing operations $ 2.50 $ 3.35 $ 2.20
Discontinued operations -- 0.86 --
-------------------------------------
Net income $ 2.50 $ 4.21 $ 2.20
-------------------------------------
Diluted weighted-average common shares outstanding 34.6 35.2 30.2
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
46
<PAGE>
Consolidated Statements of Comprehensive Income
For the years ended December 31, (in millions)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income: $ 72.8 $ 134.4 $ 66.3
Other comprehensive income, net of tax:
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising
during the period,net of income (benefit)
taxes of $(24.5); $16.6; and $15.7 (45.2) 28.1 21.3
Add: reclassification adjustments for gains
included in net income (26.4) (16.0) (13.5)
-------------------------------------
Total unrealized (losses) gains on securities (71.6) 12.1 7.8
Minimum pension liability adjustments, net of income taxes 1.1 (0.1) (0.3)
Foreign currency translation adjustments, net of income taxes 1.8 (1.1) (0.8)
-------------------------------------
Other comprehensive (loss) income (68.7) 10.9 6.7
-------------------------------------
Comprehensive income $ 4.1 $ 145.3 $ 73.0
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
47
<PAGE>
Consolidated Statements of Financial Position
At December 31, (in millions, except per share amounts)
1999 1998
- --------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 73.0 $ 18.3
Short-term investments, at cost 53.5 62.3
Fixed maturities, at fair value
(cost - $545.7; $568.5) 489.8 577.1
Equity securities, at fair value
(cost - $316.5; $326.3) 381.8 437.1
--------------------------
Total cash and invested assets 998.1 1,094.8
Reinsurance assets 850.3 625.0
Insurance premiums receivable 104.4 146.7
Engineering services receivable 39.1 26.1
Fixed assets 58.2 54.9
Prepaid acquisition costs 52.9 46.6
Capital lease 13.8 14.6
Other assets 146.4 129.9
--------------------------
Total assets $ 2,263.2 $ 2,138.6
--------------------------
Liabilities:
Unearned insurance premiums $ 420.1 $ 464.6
Claims and adjustment expenses 782.3 558.2
Short-term borrowings 41.5 21.0
Long-term borrowings 25.1 25.1
Capital lease 27.8 27.9
Deferred income taxes 2.8 42.7
Dividends and distributions
on capital securities 24.0 23.2
Ceded reinsurance payable 66.3 64.1
Other liabilities 87.8 83.6
--------------------------
Total liabilities 1,477.7 1,310.4
--------------------------
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 $1.0; $1.1 109.0 108.9
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 and
outstanding 29.1; 28.9) 10.0 10.0
Additional paid-in capital 36.2 33.5
Accumulated other comprehensive income (1.9) 66.8
Retained earnings 339.1 311.2
Benefit plans (6.9) (2.2)
--------------------------
Total shareholders' equity 376.5 419.3
--------------------------
Total $ 2,263.2 $ 2,138.6
--------------------------
Common shareholders' equity per common share $ 12.95 $ 14.53
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
48
<PAGE>
Consolidated Statements of Cash Flows
For the years ended December 31, (in millions)
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 72.8 $ 134.4 $ 66.3
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 20.9 15.9 9.5
Deferred income taxes 0.6 6.4 1.3
Realized investment gains, including
market adjustments for collar contracts (40.6) (25.4) (14.1)
Distributions on capital securities 28.0 28.3 3.5
Gain from disposition of Radian,
net of income taxes -- (30.3) --
Gain from disposition of IRI,
net of income taxes -- (23.8) --
Change in balances, net of effects
from purchases and sales of subsidiaries:
Insurance premiums receivable 42.3 (8.7) (31.6)
Engineering services receivable (9.6) (11.2) (0.5)
Prepaid acquisition costs (6.3) (4.1) (4.9)
Reinsurance assets (225.3) (500.5) 38.4
Unearned insurance premiums (44.5) 177.3 19.7
Ceded reinsurance payable 2.2 60.2 (1.5)
Claims and adjustment expenses 224.1 281.5 (26.2)
Investment in Radian -- -- (3.7)
Other (21.4) (44.4) (30.1)
-----------------------------------------
Cash provided by operating activities 43.2 55.6 26.1
-----------------------------------------
Investing activities:
Fixed asset additions, net (13.3) (20.8) (10.4)
Investments:
Sale (purchase) of short-term investments, net 8.8 69.0 (78.7)
Purchase of fixed maturities (186.7) (423.5) (60.6)
Proceeds from sale of fixed maturities 192.5 66.5 27.9
Redemption of fixed maturities 19.2 30.8 14.4
Purchase of equity securities (304.9) (326.7) (252.9)
Proceeds from sale of equity securities 359.5 251.8 254.1
Proceeds from disposition of Radian -- 128.9 --
Proceeds from disposition of IRI -- 49.1 --
Purchase of Solomon Associates Inc.,
net of cash acquired -- (2.1) --
Purchase of Kemper books of business -- (27.5) --
Purchase of Structural Integrity Associates,
Inc., net of cash acquired (5.3) -- --
Settlement of collar contracts -- -- (30.7)
-----------------------------------------
Cash provided by (used in) investment activities 69.8 (204.5) (136.9)
-----------------------------------------
Financing activities:
Proceeds from Company obligated mandatorily redeemable
capital securities of subsidiary Trust I -- -- 108.9
Proceeds from Company obligated mandatorily redeemable
convertible capital securities of subsidiary Trust II -- -- 300.0
Increase (decrease) in short-term borrowings 19.2 (21.4) 39.1
Dividends and distribution on capital securities (77.1) (66.2) (46.7)
Reacquisition of stock (4.4) (47.7) (54.0)
Exercise of stock options 4.0 9.3 7.0
-----------------------------------------
Cash (used in) provided by financing activities (58.3) (126.0) 354.3
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 54.7 (274.9) 243.5
Cash and cash equivalents at beginning of period 18.3 293.2 49.7
-----------------------------------------
Cash and cash equivalents at end of period $ 73.0 $ 18.3 $ 293.2
-----------------------------------------
Interest paid $ 4.1 $ 2.5 $ 3.2
-----------------------------------------
Federal income tax paid $ 28.3 $ 52.4 $ 33.8
-----------------------------------------
</TABLE>
49
<PAGE>
Non-cash investing and financing activities:
Conversion of HSB convertible preferred stock into HSB common stock in 1997 and
issuance of HSB common stock in connection with the acquisition of Solomon
Associates, Inc. in 1998 (see note 3).
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
50
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, (in millions)
<TABLE>
<CAPTION>
Total Accumulated
Share- Additional Other
holders' Common Paid-in Comprehensive Retained Benefit
Equity Stock Capital Income Earnings Plans
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $ 345.6 $ 10.0 $ 32.0 $ 49.2 $ 255.1 $ (0.7)
- ----------------------------------------------------------------------------------------------------------------------------
Net income 66.3 -- -- -- 66.3 --
Dividends declared (47.0) -- -- -- (47.0) --
Change in accumulated other
comprehensive income, net of tax 6.7 -- -- 6.7 -- --
Benefit plans (0.3) -- -- -- -- (0.3)
Reacquisition of stock (54.0) -- (1.8) -- (52.2) --
Conversion of redeemable preferred stock 20.0 -- 0.7 -- 19.3 --
Exercise of stock options 7.0 -- 0.5 -- 6.5 --
Issuance of reacquired stock,
net of forfeitures 1.0 -- 0.2 -- 0.8 --
- -----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $ 345.3 $ 10.0 $ 31.6 $ 55.9 $ 248.8 $ (1.0)
- -----------------------------------------------------------------------------------------------------------------------------
Net income 134.4 -- -- -- 134.4 --
Dividends declared (47.9) -- -- -- (47.9) --
Change in accumulated other
comprehensive income, net of tax 10.9 -- -- 10.9 -- --
Benefit plans (1.2) -- -- -- -- (1.2)
Reacquisition of stock (47.7) -- (5.0) -- (42.7) --
Exercise of stock options 9.3 -- 1.8 -- 7.5 --
Issuance of reacquired stock,
net of forfeitures 16.2 -- 5.1 -- 11.1 --
- -----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $ 419.3 $ 10.0 $ 33.5 $ 66.8 $ 311.2 $ (2.2)
- -----------------------------------------------------------------------------------------------------------------------------
Net income 72.8 -- -- -- 72.8 --
Dividends declared (49.9) -- -- -- (49.9) --
Change in accumulated other
comprehensive income, net of tax (68.7) -- -- (68.7) -- --
Benefit plans (4.7) -- -- -- -- (4.7)
Reacquisition of stock (4.4) -- (1.2) -- (3.2) --
Exercise of stock options 4.0 -- 1.5 -- 2.5 --
Issuance of reacquired stock,
net of forfeitures 8.1 -- 2.4 -- 5.7 --
- -----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $ 376.5 $ 10.0 $ 36.2 $ (1.9) $ 339.1 $ (6.9)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
51
<PAGE>
Notes to Consolidated Financial Statements
(in millions, except per share amounts)
1. Accounting Policies
Consolidation
The accompanying financial statements present the consolidated accounts of HSB
Group, Inc. and its subsidiaries (collectively, HSB or the Company) and are
prepared in accordance with Generally Accepted Accounting Principles (GAAP)
within the U.S. Significant intercompany transactions and balances have been
eliminated in consolidation. The preparation of financial statements in
accordance with GAAP requires the use of estimates in reporting certain assets
and liabilities. Actual results could differ from those estimates. Certain
amounts for 1998 and 1997 have been reclassified to conform with the 1999
presentation.
Insurance
Insurance premium revenues are net of reinsurance ceded and are generally earned
on a pro rata basis over the contract period. The portion of gross insurance
premiums not earned at the end of the period is recorded as unearned insurance
premiums on the Consolidated Statements of Financial Position.
Prepaid acquisition costs, consisting principally of commissions, premium taxes
and certain underwriting expenses are amortized as the related insurance
premiums are earned. Unearned ceded commissions arising from certain reinsurance
transactions are netted in prepaid acquisition costs. All other acquisition
costs are charged to operations as incurred.
Liabilities for claims and adjustment expenses for boiler and machinery,
property and other coverages represent estimated reserves on claims and
adjustment expenses reported but not yet settled and the cost of claims and
adjustment expenses incurred but not yet reported. Reserves for claims and
adjustment expenses are undiscounted and are gross of amounts recoverable from
reinsurers. Reserves are reduced for estimated amounts of salvage and
subrogation and deductibles from customers. HSB records subrogation when
recoverability is probable, such as when a judgment is returned, liability is
admitted or settlement is reached. The length of time that reserves for claims
and adjustment expenses are carried on the Consolidated Statements of Financial
Position is a function of the pay-out patterns associated with the types of
coverages involved. Estimates for these reserves reflect such variables as past
loss experience, changes in judicial interpretation of legal liability, policy
coverage and inflation. The establishment of such reserves frequently requires
complex engineering judgements. Due to the nature of the variables involved in
the reserving process, subjective judgments are an integral component.
Previously estimated reserves are regularly adjusted as loss experience develops
and new information becomes available. Since reserves are based on estimates,
the ultimate liability may be more or less than such reserves. The effects of
changes in estimated reserves are included in the results of operations in the
period in which the estimates change (see note 11).
Reinsurance assets represent amounts due from reinsurers for paid and unpaid
claims, paid and unpaid loss adjustment expenses and the unearned portion of
premiums ceded through reinsurance agreements.
Engineering Services
HSB recognizes the majority of its engineering services revenues as the service
is provided. Costs on such contracts are included in operations as incurred.
Provisions are made for losses on contracts at the time such losses become
known.
52
<PAGE>
Investments
Cash and cash equivalents include cash on hand and short-term highly liquid
investments with maturities of three months or less. Short-term investments have
a maturity of one year or less and are carried at cost which, together with
accrued interest thereon, approximates fair value. Fixed maturities include
bonds, notes and redeemable preferred stocks. Equity securities include common
and non-redeemable preferred stocks. All fixed maturities and equity securities
are classified as available for sale. Accordingly, these investments are carried
at estimated fair value. Estimated fair values of securities classified as
available for sale are based principally upon quoted market prices. Unrealized
gains and losses on investments classified as available for sale and foreign
exchange gains and losses on certain investments in foreign operations where the
U.S. dollar is not the functional currency are included net of income tax in
shareholders' equity.
Investment income is net of investment expenses. Realized investment gains and
losses are determined on the basis of costs related to those investments sold
and are recorded on the trade date. Also, included in realized investment gains
and losses are losses arising from declines in the realizable value of
investments considered to be other than temporary.
The carrying values of short-term investments, investment income accrued and
securities transactions in the course of settlement approximate their fair value
because of the relatively short period of time between origination of the
instruments and their expected realization.
Financial instruments which qualify for hedge accounting are recorded at market
with gains and losses reflected in shareholders' equity. To the extent such
instruments do not qualify for hedge accounting, related gains and losses are
reflected in results of operations.
Income Taxes
Deferred tax assets and liabilities are generally determined based on the
difference between financial statement and tax basis for certain assets and
liabilities using tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets are allowed if future realization is
more likely than not. Deferred income taxes are provided for unrealized
appreciation/depreciation on fixed maturities and equity securities available
for sale, prepaid acquisition costs, loss reserve discounting, unearned
premiums, certain employee benefit costs and other items which are the result of
temporary differences in the treatment of such items for tax and financial
statement purposes (see note 12).
Fixed Assets
Fixed assets include real and personal property and certain eligible capitalized
system development costs. Fixed assets are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization is calculated on
the basis of estimated useful lives using straight-line and accelerated methods.
Upon retirement or replacement, any gain or loss is included in results of
operations.
Goodwill and Other Intangible Assets
Goodwill represents the cost of acquiring a business which is in excess of the
fair value of its net assets. Goodwill is generally amortized over 3 to 20 years
and other intangible assets over their estimated useful lives. These assets are
included in other assets on the Consolidated Statements of Financial Position
and amounted to $56.7 and $57.7 million (net of accumulated amortization of
$12.5 and $5.5 million) at December 31, 1999 and 1998, respectively. HSB
evaluates the realizability of goodwill based upon projections of undiscounted
cash flows.
53
<PAGE>
2. Changes in Accounting Principles
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants (AcSEC) issued three Statements of Position (SOPs)
that became effective for fiscal years beginning after December 15, 1998: SOP
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" and SOP 98-5, "Reporting on the Costs of Start-Up
Activities." Because the Company's accounting policies were already in
compliance with these SOPs, the implementation of these statements had no impact
upon the results of operations, financial condition or cash flows.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" subsequently amended by SFAS No. 137. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that such instruments be measured at fair value. In addition, all
hedging relationships must be designated, reassessed and documented pursuant to
the provisions of SFAS No. 133. This statement is effective for the Company for
the first quarter of 2001. Based on the Company's current investment policies
and practices, the Company anticipates that the adoption of the provisions of
SFAS No. 133 will not have a significant effect on results of operations,
financial condition or cash flows.
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." The
SOP identifies several methods of deposit accounting and provides guidance on
the application of each method. This SOP became effective for financial
statements for fiscal years beginning after June 15, 1999. Currently the Company
is not party to any contracts that do not comply with the risk transfer
provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," and, therefore, does not anticipate
the adoption of SOP 98-7 will have a material impact on results of operations,
financial condition or cash flows.
3. Corporate Activity
Acquisitions / Divestitures
Structural Integrity Associates
In July 1999, The Hartford Steam Boiler Inspection and Insurance Company
(HSBIIC) acquired Structural Integrity Associates, Inc. (Structural) based in
San Jose, California. Structural is an engineering consulting and inspection
services firm specializing in the analysis, control and prevention of structural
and equipment failures. It offers a full array of services, from inspection and
condition assessment, to monitoring and remaining life analysis, repair,
remediation and total risk management of critical equipment and structures.
HSB Industrial Risk Insurers
The reinsurance agreements effective January 1, 1998 between HSBIIC, Employers
Reinsurance Corporation (ERC) and Industrial Risk Insurers (IRI), as discussed
below, were terminated with respect to loss or liabilities arising out of
occurrences taking place on or after January 1, 2000. As a result, HSBIIC will
no longer retain 85 percent of the equipment breakdown insurance and 15 percent
of the property insurance of the combined insurance portfolio for risks arising
on or after January 1, 2000. The joint underwriting association that was known
as HSB Industrial Risk Insurers will, from January 1, 2000, be known as
Industrial Risk Insurers (IRI).
54
<PAGE>
Concurrent with the termination of the reinsurance agreements, HSBIIC, ERC and
IRI replaced the operating agreement dated January 1, 1998. The new agreement,
effective January 1, 2000, calls for HSBIIC to retain 0.5 percent membership
share in IRI with the ability to increase its total share up to a maximum of 10
percent, at no cost, at HSBIIC's option. In addition, the agreement also
establishes an arrangement for HSB to perform engineering and inspection
services for clients of IRI and provides for a fixed fronting fee in the event
that IRI continues to use HSBIIC's licenses. HSBIIC received payments of $27
million in December 1999 related to the partial settlement of unearned
reinsurance premiums and ceding commissions due to HSBIIC under the agreement.
Final settlement is expected to occur in the second half of 2000.
On January 6, 1998, HSBIIC sold its interest in IRI to ERC in accordance with a
previously announced purchase and sale agreement between ERC and IRI's
twenty-three member insurers. HSBIIC received gross proceeds of $49.1 million,
prior to transaction costs, for its 23.5 percent share in IRI. The gain on the
sale of IRI was $36.6 million pre-tax and $23.8 million after-tax. Because the
sale was structured in part as a reinsurance transaction, a portion of HSBIIC's
gross proceeds was utilized to reinsure in-force policies with ERC.
IRI is an unincorporated, voluntary joint underwriting association which
provides property insurance for the class of business known as Highly Protected
Risks (HPR) for larger manufacturing, processing and industrial businesses,
which have invested in protection against loss through the use of sprinklers and
other means. IRI primarily writes policies on a syndicate basis that specifies
to the insured the percentage share of risk accepted by each member of the
association. Each member company, therefore, operates as a direct insurer or
reinsurer on such policies and participates in the premiums and losses generated
thereunder in proportion to its membership interest. In 1997 and 1996, HSBIIC's
membership shares were 23.5 and 14 percent respectively; in 1995 and prior the
shares were 0.5 percent.
Contemporaneous with the close of the sale, IRI was reconstituted with ERC (with
a 99.5 percent share) and HSBIIC (with a 0.5 percent share) as the sole members.
The new association had been renamed HSB Industrial Risk Insurers. In 1999 and
1998, HSBIIC wrote the business for HSB Industrial Risk Insurers using its
insurance licenses and provided 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 retained 85 percent of the equipment
breakdown insurance and 15 percent of the property insurance of the combined
insurance portfolio.
To support HSB's expanded role, on December 31, 1997, a business trust formed by
HSB sold $300 million of 20 year, 7 percent Convertible Capital Securities in a
private placement to ERC (see note 13). These capital securities are convertible
into HSB common stock, at any time, subject to regulatory approval, at a
conversion price of $56.67 per share. $250 million of the proceeds were
contributed to HSBIIC and $50 million were retained by HSB.
Radian LLC
On January 2, 1998, HSBIIC 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 worldwide. In connection with the formation of the
new company, HSBIIC contributed substantially all of the assets and liabilities
of its wholly owned subsidiary, Radian Corporation to Radian LLC. The results of
Radian LLC were classified as discontinued operations following ratification on
July 28, 1997 by HSB's Board of Directors of management's decision to exercise
its put. HSBIIC's share of Radian LLC's losses incurred subsequent to such
decision of approximately $6.6 million after-tax was deferred and recognized at
the time the gain was recognized in 1998. This transaction resulted in an
after-tax gain of approximately $36.9 million, which was recorded in the
55
<PAGE>
first quarter of 1998. Prior to July 1997, HSBIIC's share of the joint venture's
results were recorded as equity in Radian LLC.
As of December 31, 1997, Radian LLC had assets of $159.7 million, liabilities of
$88.4 million, revenues of $288.0 million and expenses of $314.0 million. As of
December 31, 1997, HSBIIC's interest in Radian LLC was 40 percent.
Kemper
HSBIIC completed an acquisition of the monoline boiler and machinery business of
Kemper Insurance Companies (Kemper) and 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, effective July 1,
1998. The two companies also completed an agreement for HSBIIC to reinsure
boiler and machinery coverage written as part of Kemper's commercial package
policies.
Solomon Associates, Inc.
In April 1998, HSB acquired Solomon Associates, Inc. (SAI) based in Dallas,
Texas. SAI is an engineering management consulting firm that provides
comparative performance benchmarking consulting to the refining, petrochemical
and power generation industries.
Stock Split
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 of HSB's stock
resulting from the split were distributed on May 22, 1998. In accordance with
SFAS No. 128 "Earnings per Share" (EPS), all earnings per share presentations
have been adjusted to reflect the impact of the stock split, including
retroactive restatement of prior periods. Shares have also been restated for
comparative purposes.
Capital Securities
On July 15, 1997, HSB sold $110 million of 30 year Global Floating Rate Capital
Securities in a private placement. On December 31, 1997, HSB issued $300 million
of 20 year fixed rate Convertible Capital Securities to ERC (see note 13).
56
<PAGE>
4. Earnings per Share
The following table presents a reconciliation of the numerator and denominator
of the calculation of basic and diluted EPS for income from continuing
operations:
1999 1998 1997
- ------------------------------------------------------------------------
Income from continuing
Operations $ 72.8 $ 104.1 $ 66.3
Dividends on preferred shares -- -- (1.1)
-----------------------------
Income applicable to
common stock 72.8 104.1 65.2
Convertible preferred stock -- -- 1.1
After-tax distributions on
convertible capital securities (1) 13.7 13.7 --
-----------------------------
Adjusted for diluted
Computation $ 86.5 $ 117.8 $ 66.3
- ------------------------------------------------------------------------
Weighted-average common
shares outstanding (2) 29.0 29.3 29.5
Convertible capital securities 5.3 5.3 --
Convertible preferred stock -- -- 0.5
Stock options (3) 0.3 0.6 0.2
-----------------------------
Adjusted for diluted
Computation 34.6 35.2 30.2
- ------------------------------------------------------------------------
From continuing operations:
Earnings per share - basic (4) $ 2.51 $ 3.55 $ 2.21
Earnings per share - assuming
Dilution $ 2.50 $ 3.35 $ 2.20
- ------------------------------------------------------------------------
(1) See note 13.
(2) Weighted-average shares reflect the repurchase of approximately 0.1, 1.2
and 1.5 million shares in 1999, 1998 and 1997, respectively.
(3) Includes the dilutive effect of stock options computed using the treasury
stock method and shares issuable under deferred stock awards (see note 15).
(4) Represents income applicable to common stock divided by weighted-average
common shares outstanding.
5. Segment Information
HSB has four reportable segments - Commercial insurance, Global Special Risks
insurance, Engineering services and Investments. HSB is a multi-national company
operating primarily in North American, European and Asian markets. Through its
Commercial segment operations, HSB provides risk modification services,
equipment breakdown insurance and loss recovery services to commercial
businesses. The Global Special Risks operating segment focuses on the needs of
equipment-intensive industries by offering all-risk coverage with customized
engineering consulting and risk management. HSB's Engineering services
operations offer professional scientific and technical consulting for industry
and government on a worldwide basis. The Company's investment assets are managed
by its Investment operating segment.
The accounting policies of the segments are the same as those described in
"Accounting Policies" (see note 1), except for certain benefit charges which
comprise the Corporate Account. HSB evaluates the performance of its
57
<PAGE>
segments and allocates resources to them based on net income (loss). Segment
assets are not included in this evaluation process. Interest income and expense
are included in the results of Investment operations.
HSB's foreign operations (primarily insurance) are widely dispersed such that no
country or logical aggregation of countries in a geographic area comprises a
significant concentration with respect to either revenues or identifiable
assets. Export sales from HSB's domestic operations are minimal due to the
existence of the Company's foreign subsidiaries which are responsible for
virtually all of the Company's foreign sales.
The following presents financial data of the Company based on geographic
location:
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------
Revenues from continuing operations:
U.S. $ 526.1 $ 491.0 $ 483.1
Non-U.S. 80.1 88.2 120.3
-----------------------------------
Total $ 606.2 $ 579.2 $ 603.4
-----------------------------------
Income from continuing operations
before taxes and distributions
on capital securities:
U.S. $ 114.7 $ 168.2 $ 78.4
Non-U.S. 12.0 5.7 15.3
----------------------------------
Total $ 126.7 $ 173.9 $ 93.7
- --------------------------------------------------------------------------
At December 31, 1999 1998 1997
- --------------------------------------------------------------------------
Identifiable assets:
U.S. $ 1,822.8 $ 1,755.9 $ 1,244.7
Non-U.S. 440.4 382.7 292.5
----------------------------------------
Total $ 2,263.2 $ 2,138.6 $ 1,537.2
- --------------------------------------------------------------------------
The following table presents revenue and net income from the Company's
reportable segments and reconciles these amounts to the corresponding
consolidated totals.
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Revenues from continuing operations:
Insurance premiums:
Commercial $ 335.2 $ 306.3 $ 269.0
Global Special Risks 45.6 83.6 217.1
Engineering services 119.6 93.5 61.3
Net investment income and realized
investment gains 104.7 89.6 50.9
-------------------------------
Total revenues from reportable segments 605.1 573.0 598.3
Other segments 1.1 6.2 5.1
-------------------------------
Total revenues $ 606.2 $ 579.2 $ 603.4
-------------------------------
Net income (loss):
Commercial $ 12.8 $ 14.8 $ 13.4
Global Special Risks 6.7 9.8 10.7
Engineering services 0.7 4.6 3.0
Investments 73.8 65.1 37.7
-------------------------------
Total net income from reportable segments 94.0 94.3 64.8
Other segments (1) (9.4) (0.3) (1.3)
Corporate account 6.4 4.7 5.1
Distributions on capital securities (18.2) (18.4) (2.3)
Discontinued operations -- 30.3 --
Gain on sale of IRI, net of income taxes -- 23.8 --
-------------------------------
Net income $ 72.8 $ 134.4 $ 66.3
- --------------------------------------------------------------------------------
58
<PAGE>
(1) In 1999, other segments includes an after-tax charge of $6.5 million for
losses related to medical equipment insurance contracts.
Specified items included in the measure of net income for reportable segments
are as follows:
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------
Depreciation and amortization expense:
Commercial $ 9.9 $ 7.3 $ 3.4
Global Special Risks 2.1 2.2 3.2
Engineering services 8.1 5.9 2.7
Investments 0.4 0.3 --
Income tax expense:
Commercial 7.2 4.6 6.1
Global Special Risks 2.3 7.7 6.2
Engineering services 0.4 1.6 0.1
Investments 27.6 22.5 10.3
- ------------------------------------------------------------------------------
6. Statutory Financial Information
HSBIIC is a Connecticut domiciled insurance company which is licensed to conduct
business in all 50 states, the District of Columbia, Puerto Rico and the U.S.
Virgin Islands. The annual statements for state insurance regulatory authorities
are currently prepared using accounting methods prescribed or permitted by such
authorities (statutory basis) and are not consolidated. Statutory accounting
practices (SAP) also differ in certain other respects from GAAP. With respect to
HSBIIC, these differences are primarily comprised of the accounting for prepaid
acquisition costs, deferred income taxes, fixed maturity investments, valuation
of certain non-insurance affiliates and employee benefit plans. At December 31,
1999 and 1998, policyholders' surplus on a statutory basis was $428.8 and $612.6
million, respectively. Statutory net income, adjusted to include the earnings of
all HSBIIC domestic insurance subsidiaries for 1999, 1998 and 1997 was $81.1,
$202.5 and $42.9 million, respectively.
HSBIIC and its insurance subsidiaries are currently subject to various
regulations that limit the maximum amount of dividends available to HSBIIC's
parent company without prior approval of insurance regulatory authorities. Under
SAP, approximately $80 million of statutory surplus is available for
distribution to HSB Group, Inc. in 2000 without prior regulatory approval.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance, which will replace the
current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The NAIC is now considering amendments to the
Codification guidance that would be effective upon implementation. The NAIC has
recommended an effective date of January 1, 2001. The Company has not estimated
the potential effect of the Codification guidance adopted by the Connecticut
Insurance Department.
59
<PAGE>
7. Investments
For the years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
Income from Investment Operations:
Net investment income:
Short-term interest $ 5.0 $ 8.7 $ 6.7
Fixed maturities:
Taxable interest 24.7 31.9 9.6
Tax exempt interest 2.0 2.5 2.1
Redeemable preferred dividends 17.3 5.9 7.2
Equity securities:
Common dividends 6.5 6.4 4.7
Non-redeemable preferred dividends 15.6 14.0 8.3
Other 2.0 0.2 2.1
------------------------------
Total investment income 73.1 69.6 40.7
Investment expenses (9.0) (5.4) (3.9)
------------------------------
Net investment income $ 64.1 $ 64.2 $ 36.8
Realized investment gains (losses):
Fixed maturities:
Bonds:
Gains $ 0.3 $ 2.1 $ 0.5
Losses (1.3) (0.2) (0.3)
------------------------------
Net (losses) gains (1.0) 1.9 0.2
Redeemable preferred stocks:
Gains 0.7 2.3 0.4
Losses (2.6) (0.1) (0.3)
------------------------------
Net (losses) gains (1.9) 2.2 0.1
Equity securities:
Common stocks:
Gains 50.7 20.5 48.1
Losses (12.2) (7.0) (5.1)
------------------------------
Net gains 38.5 13.5 43.0
Non-redeemable preferred stocks:
Gains 7.8 10.3 7.7
Losses (2.8) (3.1) (0.2)
------------------------------
Net gains 5.0 7.2 7.5
Foreign exchange (losses) gains (0.1) 0.3 (7.4)
Collar contracts losses -- -- (30.7)
Other gains 0.1 0.3 1.4
------------------------------
Realized investment gains $ 40.6 $ 25.4 $ 14.1
- ---------------------------------------------------------------------------
There were no material declines in the realizable value of investments
considered to be other than temporary for 1999, 1998 and 1997.
60
<PAGE>
At December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Unrealized Investment Gains, Net of Tax
Fixed maturities:
Gains $ 2.7 $ 13.0 $ 7.9
Losses (58.6) (4.4) (0.6)
-------------------------------
Net (losses) gains (55.9) 8.6 7.3
Equity securities:
Gains 103.7 122.9 94.3
Losses (38.4) (12.1) (1.8)
-------------------------------
Net gains 65.3 110.8 92.5
Foreign exchange losses (4.7) (6.3) (4.5)
-------------------------------
Total unrealized investment gains 4.7 113.1 95.3
Income taxes (3.7) (42.3) (35.5)
-------------------------------
Unrealized investment gains,
net of tax $ 1.0 $ 70.8 $ 59.8
- -------------------------------------------------------------------------------
Fixed Maturities
The amortized cost, estimated fair values (based principally upon quoted market
prices) and gross unrealized gains and losses of fixed maturities at December
31, were as follows:
1999
- ------------------------------------------------------------------------------
Category Amortized Estimated Gross Gross
Cost Fair Unrealized Unrealized
Value Gains Losses
- ------------------------------------------------------------------------------
Redeemable preferred stocks $214.8 $190.0 $1.6 $26.4
States and municipalities 37.7 36.6 0.6 1.7
Foreign governments 16.5 16.6 0.3 0.2
Corporate and other 276.7 246.6 0.2 30.3
---------------------------------------------
Total fixed maturities $545.7 $489.8 $2.7 $58.6
- ------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
Category Amortized Estimated Gross Gross
Cost Fair Unrealized Unrealized
Value Gains Losses
- -------------------------------------------------------------------------------
Redeemable preferred stocks $215.5 $219.2 $ 5.0 $1.3
States and municipalities 47.4 49.3 2.1 0.2
Foreign governments 21.0 21.3 0.4 0.1
Corporate and other 284.6 287.3 5.5 2.8
-----------------------------------------------
Total fixed maturities $568.5 $577.1 $13.0 $4.4
- -------------------------------------------------------------------------------
61
<PAGE>
The amortized cost and estimated fair value of fixed maturities at December 31,
by contractual years-to-maturity is as follows (actual maturities may differ
from contractual maturities because borrowers may have the right to prepay
obligations):
1999
- ---------------------------------------------------------------------
Maturity Amortized Estimated
Cost Fair
Value
- ----------------------------------------------------------------------
One year or less $ 39.2 $ 38.1
Over one year through five years 51.0 50.5
Over five years through ten years 53.8 52.0
Over ten years 401.7 349.2
--------------------------
Total fixed maturities $ 545.7 $ 489.8
- ---------------------------------------------------------------------
Equity Securities
The cost, estimated fair values (based principally upon quoted market prices)
and gross unrealized gains and losses of equity securities at December 31, were
as follows:
1999
- --------------------------------------------------------------------------------
Gross Gross
Estimated Unrealized Unrealized
Cost Fair Value Gains Losses
- --------------------------------------------------------------------------------
Common stocks $128.6 $221.2 $100.5 $ 7.9
Non-redeemable preferred stocks 187.9 160.6 3.2 30.5
-----------------------------------------------
Total equity securities $316.5 $381.8 $103.7 $38.4
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
Gross Gross
Estimated Unrealized Unrealized
Cost Fair Value Gains Losses
- --------------------------------------------------------------------------------
Common stocks $141.3 $249.3 $112.3 $ 4.3
Non-redeemable preferred stocks 185.0 187.8 10.6 7.8
------------------------------------------------
Total equity securities $326.3 $437.1 $122.9 $12.1
- --------------------------------------------------------------------------------
On December 19, 1996, HSBIIC entered into three "zero cost collar contracts" to
mitigate the effects of market risk on its U.S. common stock portfolio (which,
for management purposes, included certain convertible preferreds). In the fourth
quarter of 1997, HSBIIC settled all of its outstanding contracts resulting in
realized losses of $30.7 million for the year, all of which were offset by and
represented portfolio appreciation and returns that were realized. During the
year ended December 31, 1997, the Company's U.S. common stock portfolio had
experienced a total return of $57 million (which included price appreciation of
approximately $54 million) and had a price movement correlation with the S&P 500
Index well in excess of 80 percent.
The collar subjected the Company to market and counterparty credit risk. The
Company managed this exposure by frequently modeling the effects of potential
future price movements on the value of the collar and HSB's portfolio and by
entering into contracts with internationally recognized financial institutions,
which were expected to perform under the terms of the contract, and by
evaluating the credit worthiness of such institutions by taking into account
credit ratings and other factors.
62
<PAGE>
8. Fixed Assets
Fixed assets are summarized as follows:
At December 31, 1999 1998
- ------------------------------------------------------------------------------
Land and buildings $ 4.9 $ 5.1
Furniture, equipment, leasehold improvements and other 72.8 68.0
Systems development costs 32.5 23.9
---------------------
110.2 97.0
Less accumulated depreciation and amortization (52.0) (42.1)
---------------------
Total fixed assets $ 58.2 $ 54.9
- ------------------------------------------------------------------------------
Property and equipment are stated at cost. Depreciation expense is computed
using straight-line and accelerated methods over the estimated useful lives of
31.5 years for buildings and 3 to 10 years for equipment and furniture.
Leasehold improvements are amortized over the shorter of the assets' useful
lives or their remaining contractual lease terms.
The Company has a policy of capitalizing certain systems development costs.
Systems development costs are amortized over estimated useful lives of 3 to 10
years. In 1998, approximately $6.5 million of systems development costs related
to the allocation of purchase price for SAI.
In 1996, the Company began a comprehensive effort to assess and address issues
relating to the ability of its policy processing and other operational systems
to properly recognize calendar dates beginning in the year 2000. As part of this
effort, the Company established a Year 2000 Program to address the areas of
applications software, infrastructures, embedded technology and key business
partners and suppliers. The Company's aggregate spending in connection with the
Year 2000 Program was approximately $28 million. Certain of these costs were
expensed as incurred and funded through operating cash flow. The Company has
expensed $6.9, $5.1 and $1.5 million in 1999, 1998 and 1997, respectively. The
remainder of the $28 million related 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 of information systems and infrastructure that would have
occurred in the normal course of business without the advent of the Year 2000
event are excluded from these amounts, and are being capitalized in accordance
with the Company's existing capitalization policy.
9. Leases
The Company leases its home office facility at One State Street under a
long-term capital lease with the One State Street Limited Partnership
(Partnership). The lease obligation of $26.1 million was recorded at July 1,
1983 at an interest rate of 15 percent. An asset of $26.1 million was also
recorded in 1983. Accumulated amortization on the asset was $12.3 and $11.5
million at December 31, 1999 and 1998, respectively. Terms of the lease require
annual minimum lease payments of approximately $4.2 million a year through June
30, 2018. In addition, the Company is required to pay over the lease term a
proportional share of the facility's variable operating expenses. This amounted
to approximately $2.7, $2.9 and $2.6 million for the years ended 1999, 1998 and
1997, respectively.
The Company owns the One State Street land and leases it to the Partnership. The
Company receives a base rent for the land and a participation in the net cash
flow of the Partnership. If the facility is sold, the Company will receive 50
percent or more of the sales proceeds in excess of the mortgages, all operating
expenses and costs of sale and the rental obligations pursuant to the land
lease. Under certain circumstances, the Company has the right to purchase the
facility.
63
<PAGE>
In addition to its home office facility, the Company leases facilities and
certain equipment which are accounted for as operating leases. Lease expenses
amounted to $12.0, $10.2 and $8.4 million in 1999, 1998 and 1997, respectively.
At December 31, 1999, future minimum rental commitments under noncancelable
leases accounted for as operating leases with initial or remaining terms of more
than one year were as follows:
2000 $ 6.9
2001 6.3
2002 5.7
2003 5.1
2004 3.7
2005 and thereafter 2.1
--------
Total $29.8
--------
10. Reinsurance
The components of net written and net earned insurance premiums were as follows:
For the years ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------
Written premiums:
Direct $ 416.6 $ 478.2 $ 361.4
Assumed 363.3 318.5 257.1
Ceded (413.2) (444.1) (120.0)
-----------------------------------
Net written premiums $ 366.7 $ 352.6 $ 498.5
Earned premiums:
Direct $ 452.8 $ 408.8 $ 370.1
Assumed 371.0 361.7 239.2
Ceded (441.9) (374.4) (118.1)
-----------------------------------
Insurance premiums $ 381.9 $ 396.1 $ 491.2
- -------------------------------------------------------------------------
In 1999 and 1998, HSBIIC was the direct writer of business written on behalf of
HSB Industrial Risk Insurers. This business was ceded to that entity and
HSBIIC's share of the equipment breakdown and property business was assumed back
in accordance with the reinsurance agreements in place with ERC (see note 3).
This has resulted in growth in gross and ceded premiums and claims and
adjustment expenses.
The Company writes direct business, which in 1999 and 1998 included HSB
Industrial Risk Insurers business, through agencies and brokerage firms. In
addition, the Company assumes boiler and machinery exposures from approximately
200 insurance companies and several insurance pools. Under the reinsurance
agreements, the Company's reinsured companies may include equipment breakdown
exposures in their multi-peril policies, and such risks will be assumed by the
Company under the terms of the agreement. These agreements generally provide
that the Company will assume 100 percent of each boiler and machinery risk,
subject to the capacity specified in the agreement, and will receive the entire
equipment breakdown premium except for a ceding commission, which will be
retained by the reinsured company for commissions to agents and brokers, premium
taxes and handling expenses.
Although the Company assumes the role of reinsurer, it continues to have selling
and underwriting responsibilities as well as involvement in inspecting and
claims adjusting. In effect, the Company becomes the equipment breakdown
insurance department of the reinsured company and provides all equipment
breakdown underwriting (that is, the examination and evaluation of the risk
based on its engineering judgments), claims and engineering services as if it
were part of that organization. Traditionally, as part of the underwriting
process, the Company retains the right to decline or restrict coverage in the
same manner as it does for its own business. In 1996, the Company began to write
a simplified program (referred to as ReSource) under which a reinsured company
agrees
64
<PAGE>
to include equipment breakdown insurance on an entire portfolio of accounts
meeting specific underwriting guidelines and occupancy parameters, which the
Company agrees to reinsure for equipment breakdown losses.
The insurance industry, in general, continues to undergo significant
restructuring and consolidation. Considerable merger and acquisition activity
has occurred over the last several years and, with the advent of financial
services reform, more contraction is possible in the future. Depending on the
specific companies involved in these activities and other market factors, the
level of reinsured business the Company assumes in the future could be impacted.
For 1999 approximately 26 percent of the Company's gross written premium, which
includes HSB Industrial Risk Insurers, was produced by J&H Marsh & McLennan and
Sedgwick Group.
As a property insurer, the Company is subject to losses that may arise from
catastrophic events. The Company participates in various facultative, quota
share and excess of loss reinsurance agreements to limit its exposure,
particularly to catastrophic losses, and to provide additional capacity to write
business. In the unlikely event that ceded reinsurers are unable to meet their
obligations, the Company would continue to have primary liability to
policyholders for losses incurred. Reinsurance recoverable on unpaid claims and
the unearned portion of ceded reinsurance premiums are reported as assets,
rather than netted against the related liability accounts. The Company is not
party to any contracts which do not comply with the risk transfer provisions of
SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts." The Company recorded $503.4, $444.7 and $45.2 million
of reinsurance recoveries as a reduction of its claims and adjustment expenses
for the years ended December 31, 1999, 1998 and 1997, respectively. Reinsurance
recoverable on paid claims and adjustment expenses was $22.9 and $14.6 million
at December 31, 1999 and 1998, respectively.
11. Reconciliation of Liability for Claims and Adjustment Expenses
The following tables provide reconciliations of the beginning and ending
reserves for claims and adjustment expenses on both a gross liability and net
(of reinsurance) liability basis:
Reconciliation of Gross Liability for Claims and Adjustment Expenses
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross liability for claims and adjustment
expenses at January 1, $ 558.2 $ 276.7 $ 302.9
Plus:
Provision for claims and adjustment
expenses occurring in the current year 653.0 572.7 263.3
Increase (decrease) in estimated claims and
adjustment expenses arising in prior years (1) 31.7 46.9 (0.2)
--------------------------------
Total incurred claims and adjustment expenses $ 684.7 $ 619.6 $ 263.1
--------------------------------
Less:
Payment for claims arising in:
Current year 164.9 141.0 90.6
Prior years 295.7 197.1 198.7
--------------------------------
Total payments $ 460.6 $ 338.1 $ 289.3
--------------------------------
Gross liability for claims and adjustment
expenses at December 31, $ 782.3 $ 558.2 $ 276.7
- ------------------------------------------------------------------------------------------
</TABLE>
(1) The 1998 increase primarily resulted from the decision rendered under an
arbitration proceeding and adverse claims experience in international
operations.
65
<PAGE>
Reconciliation of Net Liability for Claims and Adjustment Expenses
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net liability for claims and adjustment
expenses at January 1, $ 169.7 $ 190.8 $ 177.8
Plus:
Provision for claims and adjustment expenses
occurring in the current year 165.4 164.0 209.5
Increase (decrease) in estimated claims and
adjustment expenses arising in prior years 0.4 10.9 8.4
--------------------------------
Total incurred claims and adjustment expenses $ 165.8 $ 174.9 $ 217.9
--------------------------------
Less:
Payment for claims arising in:
Current year 80.0 84.2 82.3
Prior years 99.4 111.8 122.6
--------------------------------
Total payments $ 179.4 $ 196.0 $ 204.9
--------------------------------
Net liability for claims and adjustment
expenses at December 31, $ 156.1 $ 169.7 $ 190.8
- ----------------------------------------------------------------------------------------
</TABLE>
1999, 1998 and 1997 net claims and adjustment expenses incurred have been
reduced by subrogation recoveries of approximately $2.0, $5.0 and $3.3 million,
respectively.
A reconciliation of the net liability to the gross liability for claims and
adjustment expenses is as follows:
At December 31, 1999 1998 1997
- --------------------------------------------------------------------------
Net liability for claims and
adjustment expenses $ 156.1 $ 169.7 $ 190.8
Reinsurance recoverable on unpaid
claims and adjustment expenses 626.2 388.5 85.9
-------------------------------
Gross liability for claims and
adjustment expenses $ 782.3 $ 558.2 $ 276.7
- --------------------------------------------------------------------------
The Company utilizes well-capitalized domestic and international reinsurance
companies and syndicates for its reinsurance program and monitors their
financial condition on an on-going basis. For reinsurers that are not accredited
in their state of domicile, the Company requires collateral for reinsurance
recoverable from such carriers. Uncollectible reinsurance recoverables have not
had, and are not expected by management to have in the future, a material
adverse effect on the consolidated results of operations or financial position
of the Company.
The following table displays information concerning the primary participants in
the Company's current reinsurance program as of December 31, 1999:
Reinsurer Ceded
Written Reinsurance 1999 A.M. Best's
Premium Asset Rating
- --------------------------------------------------------------------------------
Employers Reinsurance Corporation* $ 141.5 $ 292.6 A++ (Superior)
General Reinsurance Corporation 39.7 83.5 A++ (Superior)
Scottsdale Insurance Company 5.3 29.1 A+ (Superior)
Gerling-Konzern Globale 10.9 22.4 n/a
Hartford Fire Insurance Company 10.6 21.8 A+ (Superior)
Terra Nova Insurance Company LTD 7.7 18.4 n/a
Mid Ocean Reinsurance Company 7.8 17.3 n/a
NAC Reinsurance Corporation 7.0 16.5 A+ (Superior)
Frankona Ruckversicherungs AG 6.4 15.7 n/a
Lloyds 376 JHV 9.9 15.6 n/a
- -----------------------------------------------------------------------------
* Net of business assumed by HSB from ERC
As of December 31, 1999, no other reinsurance asset of the Company from any
single reinsurer exceeded 3.0 percent of shareholders' equity. Certain Lloyd's
syndicates participate in the excess of loss reinsurance program, primarily in
the excess layers. The highest aggregate percentage participation of such
syndicates, at 32.4 percent,
66
<PAGE>
is in the $50 million excess of $100 million layer. No individual syndicate has
more than 7.2 percent participation in any of the excess layers. In addition,
certain syndicates participate in three of our quota share treaties, aggregating
10.6, 12.7 and 82.9 percent in each of the three treaties. Lloyd's participation
in our catastrophe cover is 71.4 percent with no individual syndicate retaining
more than 6.7 percent. The Company's reinsurance asset in the aggregate from
over 100 Lloyd's syndicates, excluding the syndicate disclosed above, is 12
percent of shareholders' equity at December 31, 1999. Lloyd's has historically
participated more heavily in the higher treaty layers.
The Company is involved in various 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.
12. Income Taxes
Tax Provision
A reconciliation of income taxes at U.S. statutory rates to the income taxes as
reported is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes and distributions
on capital securities $ 126.7 100% $ 173.9 100% $ 93.7 100%
-----------------------------------------------------------------
Tax at statutory rates $ 44.3 35% $ 60.9 35% $ 32.8 35%
Income (loss) taxed at foreign rates 0.4 -- (0.6) -- 1.0 1
Dividends received deduction (4.0) (3) (4.3) (2) (4.9) (5)
Tax exempt interest (0.7) (1) (0.9) (1) (0.8) (1)
Tax credits and other (4.3) (3) (3.7) (2) (3.0) (3)
-----------------------------------------------------------------
Total income taxes and effective tax rate $ 35.7 28% $ 51.4 30% $ 25.1 27%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Income taxes consisted of the following:
1999 1998 1997
- ------------------------------------------------------------------------
Current provision (benefit):
U.S. $ 31.1 $ 45.3 $ 16.8
Foreign 4.0 (0.3) 7.0
-----------------------------
Total current provision 35.1 45.0 23.8
Deferred provision (benefit):
U.S. (0.4) 6.2 1.1
Foreign 1.0 0.2 0.2
-----------------------------
Total deferred provision 0.6 6.4 1.3
-----------------------------
Total income taxes $ 35.7 $ 51.4 $ 25.1
- ------------------------------------------------------------------------
67
<PAGE>
Deferred Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's deferred tax liabilities and assets as of December 31, 1999 and 1998
are as follows:
1999 1998
- -------------------------------------------------------------------------
Deferred tax liabilities:
Prepaid acquisition costs $ 19.4 $ 17.1
Depreciation and amortization 9.6 6.2
Pension asset 16.0 14.4
Unrealized investment gains 3.7 42.3
Other 5.1 8.3
------------------
Total deferred tax liabilities 53.8 88.3
------------------
Deferred tax assets:
Benefit plans 9.0 9.2
Capital lease 4.9 4.7
Unearned insurance premiums 11.8 12.1
Loss reserve discounting and subrogation 7.7 7.0
Other 17.6 12.6
------------------
Total deferred tax assets 51.0 45.6
------------------
Net deferred tax liabilities $ 2.8 $ 42.7
- -------------------------------------------------------------------------
Other Information
U.S. federal tax return examinations have been completed for years through 1995.
The Company believes adequate provisions for income tax have been recorded for
all years.
13. Capital Structure
HSB's capital structure is as follows at December 31:
1999 1998
- ------------------------------------------------------------------------
Short-term borrowings $ 41.5 $ 21.0
Long-term borrowings * $ 25.1 $ 25.1
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 $1.0; $1.1 $ 109.0 $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
Common shareholders' equity $ 376.5 $419.3
- ------------------------------------------------------------------------
* Excludes capital lease (see note 9).
Short-term and Long-term Borrowings
HSBIIC has a commercial paper program with a limit of $75 million. Commercial
paper outstanding at December 31, 1999 and 1998 was $38.6 and $20.0 million,
respectively. The weighted-average interest rate was 6.0 percent and 5.2 percent
at December 31, 1999 and 1998, respectively. Commercial paper outstanding at
year end 1999
68
<PAGE>
matures on or before March 14, 2000. Long-term debt includes $25.1 million of
senior notes due May 15, 2000 at an interest rate of 6.83 percent. Current
market value is estimated to be $25.3 million.
Capital Securities
On July 15, 1997, a trust sponsored and wholly owned by the Company issued $110
million aggregate liquidation amount of capital securities in a private
placement and 3,403 shares of common securities to the Company, the proceeds of
which were invested by the trust in $113.4 million aggregate principal amount of
the Company's debt securities. On November 5, 1997, an exchange offer was
commenced, pursuant to which the capital securities originally issued in the
private placement were exchanged for capital securities that were registered
with the Securities and Exchange Commission (the Capital Securities) and the
debt securities were exchanged for debt securities that were registered with the
Securities and Exchange Commission (the Debt Securities).
The Debt Securities represent all of the assets of the trust. The proceeds from
the issuance of the Debt Securities were used by the Company for general
corporate purposes. The Debt Securities and related income statement effects are
eliminated in the Company's consolidated financial statements. The $113.4
million principal amount of Debt Securities accrue and pay cash distributions
quarterly in arrears at a variable rate equal to the 90 day LIBOR plus 0.91
percent of the stated liquidation amount of $1,000 per Debt Security and are
scheduled to mature on July 15, 2027.
The Capital Securities accrue and pay cash distributions quarterly in arrears at
a variable rate equal to the 90 day LIBOR plus 0.91 percent of the stated
liquidation amount of $1,000 per Capital Security. The current coupon is 7.1
percent. HSB has the right to defer payment of distributions on the securities
at any time or from time to time for a period not exceeding 20 consecutive
quarterly periods with respect to each deferral period. During an extension
period, interest will continue to accrue and the amount of distributions to
which holders of the Capital Securities are entitled will accumulate, and the
Company will be prohibited from paying any cash dividends on its common stock.
The Capital Securities are generally non-callable for ten years, but may be
called earlier by HSB upon the occurrence of certain tax events including loss
of deductibility of interest on the securities. The Capital Securities are
mandatorily redeemable upon the maturity of the Debt Securities on July 15,
2027, or earlier to the extent of any redemption by the Company of any Debt
Securities. The redemption price in either such case will be $1,000 per share
plus accrued and unpaid distributions to the date fixed for redemption.
The terms of the Debt Securities, the guarantee of the Company with respect to
the Capital Securities, the Indenture and the Trust Agreement together provide a
full guarantee of amounts due on the Capital Securities. The Capital Securities
are currently rated BBB- by Standard & Poor's and BBB+ by Duff & Phelps credit
rating agencies.
On December 31, 1997, HSB Group, Inc. sold $300 million of 20 year Convertible
Capital Securities in a private placement to ERC. The Convertible Capital
Securities are callable by the Company at its option (i) at any time after seven
years; (ii) upon the occurrence of certain tax events including loss of
deductibility of the interest on the securities; (iii) in the event that HSB
vetoes a prospective purchaser of the Convertible Capital Securities; or (iv) in
the event of a change in control of ERC. The Convertible Capital Securities are
mandatorily redeemable on December 31, 2017 and are redeemable at par plus a
redemption premium, at the option of ERC, in the event of a change in control of
HSB within five years following issuance of the securities.
The Convertible Capital Securities are convertible, in whole or in part, at
ERC's option at any time, subject to regulatory approval, into shares of HSB
common stock at a conversion price of $56.67 per share, subject to adjustment.
HSB has provided certain registration rights to ERC in connection with the
common stock into which the Convertible Capital Securities are convertible
pursuant to a Registration Rights Agreement dated December 31,
69
<PAGE>
1997. If ERC were to exercise its conversion rights in total, it would hold at
December 31, 1999, on a fully diluted basis, approximately 15.4 percent of HSB's
common stock. Pursuant to certain provisions contained in the Purchase Agreement
dated December 31, 1997, ERC has agreed to certain "standstill" arrangements
which for a period of five years will preclude ERC from purchasing any common
stock of HSB, other than by exercise of its conversion rights, and will limit
its ability to take certain other actions with respect to HSB during that
period.
The securities were issued through HSB Capital II (Trust II), a Delaware
business trust created by HSB, at a 7 percent coupon, payable semi-annually. The
Convertible Capital Securities rank pari passu with the Global Floating Rate
Capital Securities issued July 1997. Holders of the Convertible Capital
Securities will be entitled to receive preferential cumulative cash
distributions accumulating from the date of original issuance and payable
semi-annually in arrears. HSB has the right to defer payment of interest at any
time or from time to time for a period not exceeding 10 consecutive semi-annual
periods with respect to each deferral period. During an extension period,
interest will continue to accrue and the amount of distributions to which
holders of the Convertible Capital Securities are entitled will accumulate, and
HSB will be prohibited from paying any cash dividends on its common stock. HSB
has irrevocably and unconditionally guaranteed all of Trust II's obligations
under the Convertible Capital Securities.
The estimated fair value of the Capital Securities issued by Trust I is equal to
their carrying value. The estimated fair value of the Convertible Capital
Securities issued by Trust II is $272.2 million and is calculated without giving
any effect to the relationship of the conversion price to the current market
price of HSB Group, Inc. common stock.
Other Comprehensive Income
The components of accumulated other comprehensive income (net of income taxes)
are as follows:
Total
Accumulated Unrealized Minimum
Other Gains Pension Foreign
Comprehensive on Liability Exchange
Income Securities Adjustment Losses
- --------------------------------------------------------------------------------
Balances at December 31, 1997 $ 55.9 $ 62.4 $ (3.9) $(2.6)
Current period change 10.9 12.1 (0.1) (1.1)
- -------------------------------------------------------------------------------
Balances at December 31, 1998 $ 66.8 $ 74.5 $ (4.0) $(3.7)
Current period change (68.7) (71.6) 1.1 1.8
- -------------------------------------------------------------------------------
Balances at December 31, 1999 $ (1.9) $ 2.9 $ (2.9) $(1.9)
- -------------------------------------------------------------------------------
14. Pension and Other Benefit Programs
HSB maintains various types of pension and postretirement medical plans covering
employees of the Company and certain subsidiaries. The pension plans are
non-contributory and benefits are based upon an employee's years of service and
final average pay based upon the highest three out of five years. Vesting occurs
after five years of service in compliance with the provisions of the Tax Reform
Act of 1986.
Under the terms of the HSB Group, Inc. Thrift Incentive Plan, a defined
contribution plan, covered employees are allowed to contribute up to 15 percent
of their pay, on a pre-tax basis, limited by the maximum allowed under Internal
Revenue Service regulations. The Company makes a matching contribution of 50
percent of employee contributions up to 6 percent of compensation. Total expense
for the plan was $2.4, $2.1 and $1.7 million for 1999, 1998 and 1997,
respectively.
The Company makes available health care and life insurance benefits for retired
employees of the Company and certain subsidiaries. The Company makes
contributions to the plans as claims are incurred. Retirees'
70
<PAGE>
contributions to these plans vary, based upon retiree's age, years of service
and coverage elected. The Company periodically amends the plan changing the
contribution rate of retirees and amounts of coverage.
The following chart summarizes the balance sheet impact, as well as the benefit
obligations, assets, funded status and rate assumptions associated with the U.S.
pension and postretirement medical benefit plans:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
- -------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 180.2 $ 156.0 $ 28.7 $ 29.9
Service cost 6.9 5.3 0.4 0.3
Interest cost 12.7 11.9 1.8 1.9
Net benefit payments (10.8) (10.3) (2.1) (1.9)
Liability loss (gain) 5.3 0.7 (1.9) (2.7)
Assumption changes (16.8) 9.6 (1.4) 1.2
Acquisitions -- 4.2 -- --
Amendments -- 2.8 -- --
-------------------------------------------------
Benefit obligation at end of year $ 177.5 $ 180.2 $ 25.5 $ 28.7
Change in plan assets:
Fair value of plan assets at beginning of year $ 249.1 $ 213.0 $ -- $ --
Actual return on plan assets 29.2 40.8 -- --
Acquisitions -- 3.5 -- --
Employer contributions 0.4 0.4 1.8 1.5
Participants' contributions -- -- 0.4 0.4
Benefits paid (8.9) (8.6) (2.2) (1.9)
-------------------------------------------------
Fair value of plan assets at end of year $ 269.8 $ 249.1 $ -- $ --
Funded status:
Funded status at end of year $ 92.3 $ 68.9 $ (25.5) $ (28.7)
Unrecognized actuarial (gain) loss (44.4) (25.6) 0.8 4.0
Unrecognized transition amount (3.1) (4.7) -- --
Unrecognized prior service cost 3.6 4.2 -- --
-------------------------------------------------
Net amount recognized $ 48.4 $ 42.8 $ (24.7) $ (24.7)
Amounts recognized in the consolidated statements
of financial position consist of:
Prepaid benefit cost $ 42.6 $ 34.6 $ -- $ --
Accrued benefit liability -- -- (24.7) (24.7)
Intangible asset 1.3 2.0 -- --
Accumulated other comprehensive income 4.5 6.2 -- --
-------------------------------------------------
Net amount recognized $ 48.4 $ 42.8 $ (24.7) $ (24.7)
Weighted-average assumptions as of December 31:
Discount rate 7.75% 6.75% 7.75% 6.75%
Long-term rate of return on assets 11.00% 11.00% n/a n/a
Rate of increase in future compensation levels 5.25% 4.25% n/a n/a
Current year health care cost trend rate n/a n/a 5.00% 6.00%
Ultimate health care cost trend rate n/a n/a 4.25% 4.25%
- -------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, the annual rate of increase in the per capita cost of
covered health care benefits ranges from 5.0 percent in 1999 decreasing
gradually to 4.25 percent by the year 2001 and remaining level thereafter.
Assets available for pension plan benefits include approximately $25.2 and $24.2
million of Company stock at December 31, 1999 and 1998, respectively.
71
<PAGE>
The following chart summarizes the cost components associated with the pension
and postretirement medical benefit plans:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
- ------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit (credit) cost
Service cost $ 6.9 $ 5.3 $ 4.1 $ 0.4 $ 0.3 $ 0.3
Interest cost 12.7 11.9 10.7 1.8 1.9 2.1
Expected return on plan assets (23.0) (18.5) (16.8) -- -- --
Amortization of transition amount (1.8) (1.9) (1.8) -- -- --
Amortization of prior service cost 0.7 0.8 0.5 -- -- --
Recognized actuarial loss 1.0 1.0 0.5 -- -- 0.1
-----------------------------------------------------------------------
Net periodic benefit (credit) cost $ (3.5) $ (1.4) $ (2.8) $ 2.2 $ 2.2 $ 2.5
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $37.7, $30.1 and $2.8 million, respectively, as of
December 31, 1999 and $36.6, $29.7 and $3.2 million, respectively, as of
December 31, 1998.
The Company's acquisition of SAI in April 1998, resulted in the increase of the
pension benefit obligation by $4.2 million and pension plan assets by $3.5
million.
Assumed health care cost trend rates have an effect on the amounts reported for
the health care plan. A one percentage point change in the assumed health care
cost trend rates would have the following effects:
1% 1%
Point Point
Increase Decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 0.1 $ (0.1)
Effect on postretirement benefit obligation 1.2 (1.1)
- --------------------------------------------------------------------------------
15. Stock Compensation Plans
HSB has a Stock Option Plan under which key employees may be granted restricted
stock and stock options.
HSB's Long-Term Incentive Plan grants senior management awards contingent upon
achievement of specified performance objectives over a three year period, which
may be paid out in cash or shares of common stock (which may be restricted
shares). The number of shares subject to issuance under this plan cannot exceed
375,000.
HSB's restricted stock is an award of common shares that may not be sold or
transferred during the restriction period, usually three years under the Stock
Option Plan and five years under the Long-Term Incentive Plan, from the date on
which the award is granted. During the restriction period, the employee is the
registered owner, receives dividends and may vote the restricted shares.
Compensation expense is based on the market value of the Company's common stock
at the date of grant and is recognized over the period of the restriction.
Compensation expense for this benefit was $3.7, $1.0 and $0.6 million in 1999,
1998 and 1997, respectively. The unamortized compensation expense related to
this plan is included in benefit plans as a component of shareholders' equity.
These amounts were $6.9 and $2.2 million in 1999 and 1998, respectively.
A summary of grants follows:
1999 1998 1997
- ---------------------------------------------------------------------------
Restricted shares awarded 222,227 54,434 30,594
Weighted-average fair value
of shares on grant date $ 36.08 $ 39.86 $ 31.93
- ---------------------------------------------------------------------------
A stock option award under the HSB's Stock Option Plan allows for the purchase
of HSB common stock at no less than the market price on the date of grant.
Options granted to date are exercisable no earlier than one year after the
72
<PAGE>
grant date and expire no more than ten years from the date of grant. The number
of shares available for delivery under this plan cannot exceed 4.2 million.
A summary of the status of HSB's stock options as of December 31, 1999, 1998 and
1997 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,730,225 $ 33.92 2,227,125 $ 32.03 1,979,475 $ 32.44
Granted 1,046,000 36.52 814,500 39.34 558,750 32.55
Exercised (139,400) 33.99 (279,450) 34.21 (235,500) 31.12
Forfeited (14,450) 36.84 (31,950) 37.81 (75,600) 33.49
-------------------------------------------------------------------------------
Outstanding at end of year 3,622,375 $ 34.66 2,730,225 $ 33.92 2,227,125 $ 32.03
-------------------------------------------------------------------------------
Options exercisable at end of year 2,588,875 $ 33.92 1,923,225 $ 31.65 1,681,875 $ 32.51
Weighted-average fair value of options
granted during the year $ 6.05 $ 4.68 $ 4.24
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding as of
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------
Range of Weighted- Weighted Weighted-
Exercise Number Average Average Number Average
Prices Outstanding Remaining Exercise Price Exercisable Exercise Price
Contractual Life
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$27-$30.99 1,077,750 5.09 $29.98 1,077,750 $29.98
$31-$34.99 789,000 6.48 $33.43 619,000 $33.16
$35-$38.99 1,605,625 8.16 $37.72 742,125 $38.63
$39-$42.99 150,000 8.11 $42.02 150,000 $42.02
--------- ---------
3,622,375 2,588,875
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SFAS No. 123, "Accounting for Stock Based Compensation" allows the use of a fair
value based method of accounting for an employee stock option or similar equity
instruments or the intrinsic value based method prescribed by Accounting
Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees" with
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The Company has elected to continue
using the intrinsic value based method. Had the Company elected to recognize
compensation cost using the fair value based method, compensation would have
been measured at date of grant and recognized over the service period. Pro forma
net income and earnings per share would have been imputed as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Net income As Reported $ 72.8 $ 134.4 $ 66.3
Pro Forma 68.0 131.4 64.5
Earnings per common share -
basic As Reported $ 2.51 $ 4.59 $ 2.21
Pro Forma 2.35 4.49 2.15
Earnings per common share -
assuming dilution As Reported $ 2.50 $ 4.21 $ 2.20
Pro Forma 2.32 4.12 2.13
- -------------------------------------------------------------------------------
73
<PAGE>
These pro forma disclosure amounts derived by the use of SFAS No. 123 are not
indicative of future amounts. SFAS No. 123 is not applicable to options granted
prior to 1995, and additional options may be granted in future years.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997
- -------------------------------------------------------------
Risk-free interest rate 5.0% 4.9% 6.3%
Expected life 6 years 6 years 6 years
Expected volatility 22.2% 15.7% 15.8%
Expected dividend yield 4.7% 4.7% 5.0%
- -------------------------------------------------------------
16. Stock Purchase Rights
On September 21, 1998, the Board of Directors approved the adoption of a new
shareholder rights plan to replace the plan that was set to expire on November
28, 1998. Pursuant to the new plan, which is substantially similar to the old
plan, the Board declared a dividend of one right for each outstanding share of
common stock to shareholders of record on November 28, 1998.
The rights will separate from the common stock and become exercisable if a
person or group acquires ownership of 15 percent or more of the outstanding
common stock of the Company or commences a tender or exchange offer to acquire
15 percent or more of the outstanding shares.
Each right entitles a holder to purchase one two-hundredth of a share of Series
A Junior Participating Preferred Stock, without par value at an exercise price
of $162.00 per share, subject to adjustment. If an acquirer obtains 15 percent
or more of the Company's common stock and the Board of Directors determines that
such acquisition is not in the best interest of the shareholders, the rights of
shareholders other than the acquirer will entitle the holder to purchase common
shares of the Company (or, under certain circumstances, of the acquirer) at a 50
percent discount. Under the plan ERC will not be deemed an acquirer in the event
of the conversion of the Convertible Capital Securities it holds into common
stock of the Company unless it acquires one percent or more additional shares.
The rights expire on November 28, 2008 and may be redeemed by the Company for
$.01 per right any time until the tenth business day following public
announcement that a 15 percent position has been acquired.
74
<PAGE>
17. Consolidated Quarterly Data (unaudited)
<TABLE>
<CAPTION>
1999 First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross earned premiums $ 208.9 $ 206.8 $ 200.6 $ 207.5 $823.8
Ceded premiums 112.4 113.1 107.9 108.5 441.9
-------------------------------------------------
Insurance premiums 96.5 93.7 92.7 99.0 381.9
Engineering services 27.6 27.8 30.6 33.6 119.6
Net investment income 15.7 16.6 16.5 15.3 64.1
Realized investment gains 7.1 10.2 13.5 9.8 40.6
-------------------------------------------------
Total revenues $ 146.9 $ 148.3 $ 153.3 $ 157.7 $606.2
-------------------------------------------------
Income from continuing operations
before income taxes and distributions
on capital securities (1) $ 36.4 $ 38.7 $ 32.7 $ 18.9 $126.7
Income taxes 10.9 11.4 9.3 4.1 35.7
Distributions on capital securities
of subsidiary trusts, net of income tax 4.5 4.5 4.6 4.6 18.2
-------------------------------------------------
Net income $ 21.0 $ 22.8 $ 18.8 $ 10.2 $ 72.8
-------------------------------------------------
Earnings per common share - basic $ 0.72 $ 0.79 $ 0.65 $ 0.35 $ 2.51
-------------------------------------------------
Earnings per common share -
assuming dilution(2) $ 0.71 $ 0.76 $ 0.64 $ 0.35 $ 2.50
-------------------------------------------------
Dividends declared per common share $ 0.42 $ 0.42 $ 0.44 $ 0.44 $ 1.72
-------------------------------------------------
Common stock price ranges:
High $ 41.31 $ 41.88 $ 41.94 $ 38.38 $ 41.94
Low $ 35.50 $ 35.50 $ 34.19 $ 31.88 $ 31.88
Close $ 37.13 $ 41.19 $ 35.19 $ 33.81 $ 33.81
Shareholders at December 31, 4,864
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Fourth quarter results reflect pre-tax charges of $5 million related to
change in management costs and consolidation and relocation of certain
businesses as well as $7 million in losses related to medical equipment
insurance contracts.
(2) In the fourth quarter, the assumed conversion of the Company's convertible
capital securities is not used in the computation of earnings per share since
such inclusion would be antidilutive. Therefore, the quarterly earnings per
share will not equal the full year earnings per share.
<TABLE>
<CAPTION>
75
<PAGE>
1998 First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross earned premiums $ 179.7 $ 175.7 $ 212.5 $ 202.6 $770.5
Ceded premiums 80.3 85.3 113.0 95.8 374.4
-------------------------------------------------
Insurance premiums 99.4 90.4 99.5 106.8 396.1
Engineering services 19.7 22.7 25.3 25.8 93.5
Net investment income 15.2 15.9 15.5 17.6 64.2
Realized investment gains 3.2 7.3 7.9 7.0 25.4
-------------------------------------------------
Total revenues $ 137.5 $ 136.3 $ 148.2 $ 157.2 $579.2
-------------------------------------------------
Income from continuing operations
before income taxes and
distributions on capital securities $ 69.6 $ 34.8 $ 36.1 $ 33.4 $173.9
Income taxes 22.5 9.3 9.3 10.3 51.4
Distributions on capital securities
of subsidiary trusts, net of income tax 4.5 4.7 4.6 4.6 18.4
-------------------------------------------------
Income from continuing operations $ 42.6 $ 20.8 $ 22.2 $ 18.5 $104.1
Discontinued operations:
Loss from operations,
net of income tax benefits $ (6.6) $ -- $ -- $ -- $ (6.6)
Gain on disposal, net of income taxes 36.9 -- -- -- 36.9
-------------------------------------------------
Total discontinued operations $ 30.3 $ -- $ -- $ -- $ 30.3
-------------------------------------------------
Net income $ 72.9 $ 20.8 $ 22.2 $ 18.5 $134.4
-------------------------------------------------
Earnings per common share - basic:
Income from continuing operations $ 1.45 $ 0.71 $ 0.75 $ 0.64 $ 3.55
Discontinued operations 1.04 -- -- -- 1.04
-------------------------------------------------
Net income $ 2.49 $ 0.71 $ 0.75 $ 0.64 $ 4.59
-------------------------------------------------
Earnings per common share - assuming dilution:
Income from continuing operations $ 1.31 $ 0.68 $ 0.72 $ 0.63 $ 3.35
Discontinued operations 0.86 -- -- -- 0.86
-------------------------------------------------
Net income $ 2.17 $ 0.68 $ 0.72 $ 0.63 $ 4.21
-------------------------------------------------
Dividends declared per common share $ 0.40 $ 0.40 $ 0.42 $ 0.42 $ 1.64
-------------------------------------------------
Common stock price ranges:
High $ 44.92 $ 53.50 $ 57.63 $ 42.00 $ 57.63
Low $ 36.45 $ 43.17 $ 40.38 $ 36.00 $ 36.00
Close $ 44.92 $ 53.50 $ 40.38 $ 41.06 $ 41.06
Shareholders at December 31, 5,045
- ---------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
Schedule I
HSB Group, Inc.
Summary of investments - other than investments in related parties
At December 31, (in millions)
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------- ------------------------------------------
Column A Column B Column C Column D Column E Column F Column G
- -------------------------------- ----------------- -------------- -------------- -------------- ------------- ------------
Amount Amount
Shown Shown
In The In The
Market Balance Market Balance
Type of Investment Cost Value Sheet Cost Value Sheet
- --------------------------------------------------- -------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Bonds:
U.S. government and government
agencies and authorities $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
States, municipalities and
political subdivisions 37.7 36.6 36.6 47.4 49.3 49.3
Foreign governments 16.5 16.6 16.6 21.0 21.3 21.3
Public utilities 0.0 0.0 0.0 0.0 0.0 0.0
Convertibles and bonds with
warrants attached 0.0 0.0 0.0 0.0 0.0 0.0
All other corporate bonds 265.9 235.8 235.8 273.5 276.2 276.2
Certificates of deposit 0.0 0.0 0.0 0.0 0.0 0.0
Mortgage receivable 10.8 10.8 10.8 11.1 11.1 11.1
Redeemable preferred stocks 214.8 190.0 190.0 215.5 219.2 219.2
---------------------------------------------- -----------------------------------------
Total fixed maturities $545.7 $489.8 $489.8 $568.5 $577.1 $577.1
Equity securities:
Common stocks:
Public utilities 24.2 23.5 23.5 16.6 19.1 19.1
Banks and insurance 13.3 19.1 19.1 39.9 48.7 48.7
Industrial and other 91.1 178.6 178.6 84.8 181.5 181.5
Non-Redeemable preferred stocks 187.9 160.6 160.6 185.0 187.8 187.8
---------------------------------------------- -----------------------------------------
Total equity securities $316.5 $381.8 $381.8 $326.3 $437.1 $437.1
Short-term investments and cash: $126.5 $126.5 $126.5 $80.6 $80.6 $80.6
---------------------------------------------- -----------------------------------------
Total investments $988.7 $998.1 $998.1 $975.4 $1,094.8 $1,094.8
============================================== =========================================
</TABLE>
77
<PAGE>
Schedule II
HSB Group, Inc. (Registrant)
Condensed Financial Information of HSB Group, Inc.
Balance Sheet Information
At December 31, (in millions)
<TABLE>
<CAPTION>
1999 1998
------------------------------
<S> <C> <C>
Assets
Cash $ 0.1 $ 0.1
Short-term investments, at cost 7.4 2.1
Investment in subsidiaries 664.3 780.2
Fixed maturities, at fair value (cost-$90.1; $47.9) 79.4 47.2
Equity securities, at fair value (cost-$70.1; $45.2) 56.4 43.4
Other assets 15.1 2.9
-------------------------------
Total assets $822.7 $875.9
==============================
Liabilities
Dividends and distributions on capital securities $ 24.0 $ 23.2
Other liabilities 13.2 24.5
------------------------------
Total liabilities 37.2 47.7
------------------------------
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 $1.0 and $1.1 109.0 108.9
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 10.0 10.0
Additional paid-in capital 36.2 33.5
Accumulated other comprehensive income (1.9) 66.8
Retained earnings 339.1 311.2
Benefit plans (6.9) (2.2)
------------------------------
Total shareholders' equity 376.5 419.3
------------------------------
Total liabilities and shareholders' equity $ 822.7 $875.9
==============================
</TABLE>
These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of HSB Group, Inc.
(see pages 46 through 76).
78
<PAGE>
Schedule II (continued)
HSB Group, Inc. (Registrant)
Condensed Financial Information of HSB Group, Inc.
Condensed Statement of Income Information
For the years ended December 31, (in millions)
1999 1998
------------------------
Revenues:
Net investment income $ 9.6 $ 6.4
Realized investment (losses) gains (0.4) 1.0
------------------------
Income before income taxes and
distributions on capital securities 9.2 7.4
Income taxes 3.2 2.5
Distributions on capital securities
of subsidiary trusts, net of
income taxes of $9.8 and $9.9 18.2 18.4
------------------------
Net Loss - Parent only (12.2) (13.5)
Equity in net income of subsidiaries 85.0 147.9
------------------------
Net income $ 72.8 $ 134.4
========================
These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of HSB Group, Inc.
(see pages 46 through 76).
79
<PAGE>
Schedule II (continued)
HSB Group, Inc. (Registrant)
Condensed Financial Information of HSB Group, Inc.
Condensed Statement of Cash Flows Information
For the years ended December 31, (in millions)
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
Operating Activities:
Net income $ 72.8 $ 134.4
Adjustments to reconcile Net Income
to cash provided by operating activities:
Amortization 0.1 -
Deferred income taxes 0.2 -
Undistributed earnings loss (earnings)
of subsidiaries * 67.7 (91.8)
Distributions on capital securities 28.0 28.3
Realized investment losses (gains) 0.4 (1.0)
Change in balances, net of effects from
purchases of subsidiary:
Decrease in other assets (0.1) 9.2
(Decrease) increase in other liabilities (18.8) 22.2
-------------------------
Cash provided by operating activities 150.3 101.3
-------------------------
Investing Activities:
(Purchase) sale of short-term investments, net (5.3) 58.4
Purchase of fixed maturities (80.2) (48.0)
Proceeds from sale of fixed maturities 37.3 12.3
Purchase of equity securities (28.2) (26.6)
Proceeds from sale of equity securities 3.6 8.7
Purchase of Solomon Associates, Inc.,
net of cash acquired - (2.1)
-------------------------
Cash (used in) provided by investing activities (72.8) 2.7
-------------------------
Financing Activities:
Dividends and distributions on capital securities (77.1) (66.2)
Exercise of stock options 4.0 9.3
Reacquisition of stock (4.4) (47.7)
-------------------------
Cash used in financing activities (77.5) (104.6)
-------------------------
Change in cash
- (0.6)
Cash at beginning of period
0.1 0.7
Cash at end of period $ 0.1 $ 0.1
=========================
</TABLE>
* Dividends received from The Hartford Steam Boiler Inspection and Insurance
Company were $152.7 million and $56.1 million in 1999 and 1998,
respectively.
These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of HSB Group, Inc.
(see pages 46 through 76).
80
<PAGE>
<TABLE>
<CAPTION>
Schedule III
HSB Group, Inc.
Supplementary Insurance Information
At December 31 and for the years then ended (in millions)
Column A Column B* Column C* Column D* Column E* Column F Column G** Column H Column I Column J Column K
- ------------ ------------ ---------- ----------- ----------- ----------- ---------- ----------- -------------- ----------- --------
Segment Deferred Future Unearned Other Premium Net Benefits, Amortization Other Premiums
acquisition policy premiums policy revenue investment claims, of prepaid operating written
costs Benefits Claims and income losses and policy expense
and Benefits settlement acquisition
Losses, Payable expenses claims
And loss
Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999:
Commercial $ - $ - $ - $ - $ 335.2 $ - $130.0 $ 78.1 $ 107.1 $351.7
Global
Special
Risk - - - - 45.6 - 24.0 12.8 (0.5) 11.8
Other
Segments - - - - 1.1 - 11.8 (1.7) (1.0) 3.2
---------- ------------ --------- ------------ ---------- ----------- ---------- ------------- ------------ ----------
Total $ - $ - $ - $ - $ 381.9 $ - $165.8 $ 89.2 $105.6 $366.7
========== ============ ========= ============ ========== =========== ========== ============= ============ ==========
1998:
Commercial $ - $ - $ - $ - $ 306.3 $ - $124.6 $ 67.6 $ 95.6 $327.5
Global
Special
Risk - - - - 83.6 - 46.6 0.9 18.1 20.3
Other
Segments - - - - 6.2 - 3.7 (2.2) - 4.8
---------- ------------- --------- ------------ ---------- ----------- ---------- ------------- ------------ ----------
Total $ - $ - $ - $ - $ 396.1 $ - $174.9 $ 66.3 $113.7 $352.6
========== ============= ========= ============ ========== =========== ========== ============= =========== ==========
1997:
Commercial $ - $ - $ - $ - $ 269.0 $ - $103.9 $ 59.5 $ 83.2 $277.4
Global
Special
Risk - - - - 217.1 - 111.4 31.0 58.3 217.3
Other
Segments - - - - 5.1 - 2.6 0.2 1.3 3.8
---------- ------------- --------- ------------ ---------- ---------- ---------- ------------- ------------ ----------
Total $ - $ - $ - $ - $ 491.2 $ - $217.9 $ 90.7 $142.8 $498.5
========== ============= ========== ============ ========== ========== =========== ============= =========== ==========
</TABLE>
* Segment assets are not included in management's evaluation and allocation of
resources to segments.
** Investment assets are managed by and investment income is allocated to the
Company's Investment segment.
81
<PAGE>
<TABLE>
<CAPTION>
Schedule IV
HSB Group, Inc.
Reinsurance
For the years ended December 31, (in millions)
Column A Column B Column C Column D Column E Column F
Insurance Gross Ceded to Assumed Net Percentage of
Premiums Amount Other From Other Amount Amount
Companies Companies Assumed to Net
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Property and
Liability
Insurance $452.8 $441.9 $371.0 $381.9 97.1%
1998
Property and
Liability
Insurance $408.8 $374.4 $361.7 $396.1 91.3%
1997
Property and
Liability
Insurance $370.1 $118.1 $239.2 $491.2 48.7%
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Schedule V
HSB Group, Inc.
Valuation and Qualifying Accounts
At December 31, (in millions)
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance
Beginning of Costs and Other Deductions At End of
Description Period Expenses Accounts Describe (a) Period
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Reserve for Accounts Receivable $3.9 $2.0 $0.0 $1.0 $4.9
1998
Reserve for Accounts Receivable $3.6 $0.5 $0.0 $0.2 $3.9
1997
Reserve for Accounts Receivable $3.0 $0.9 $0.0 $0.3 $3.6
</TABLE>
(a) Engineering Services and Insurance Premium Receivables written off as
uncollectible.
83
<PAGE>
<TABLE>
<CAPTION>
Schedule VI
HSB Group, Inc.
Supplemental Information Concerning Property-Casualty Insurance Operations
At December 31 and for the years then ended (in millions)
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
- ------------ ----------- ------------ ------------ ---------- -------- --------- ----------------- -------------- --------- --------
Reserves for Claims and Claims Amortization
Unpaid Claims Discount Net Adjustment Expenses of Prepaid Paid Claims
Affiliation Prepaid And Claim if any, Invest- Incurred Related to Policy and Claim
with Acquisition Adjustment deducted Unearned Earned ment Current Prior Acquisition Adjustment Premiums
Registrant(a) Costs Expenses in Column C Premiums Premiums Income Year Year Costs Expenses Written
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 52.9 782.3 - 420.1 381.9 64.1 165.4 0.4 89.2 179.4 366.7
1998 46.6 558.2 - 464.6 396.1 64.2 164.0 10.9 66.3 196.0 352.6
1997 42.5 276.7 - 287.3 491.2 36.8 209.5 8.4 90.7 204.9 498.5
</TABLE>
(a) Consolidated property-casualty entities
84
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
"Nominees for Election to the Board of Directors for Three-Year Term
Expiring in 2003" and "Members of the Board of Directors Continuing in Office"
on pages 2-4 of the Company's Proxy Statement dated March 16, 2000 are
incorporated herein by reference. Also see pages 22 -- 23 herein.
Item 11. Executive Compensation.
"Meetings and Remuneration of the Directors" on pages 5-6, "Human Resources
Committee Report on Executive Compensation" on pages 8-11, "Summary Compensation
Table" on page 12, "Stock Option and Long-Term Incentive Plan Tables" on pages
13-14, "Retirement Plans" on pages 14-15, "Employment Arrangements" on pages
15-17, "Compensation Committee Interlocks and Insider Participation" on page 17,
and "Performance Graph" on page 17 of the Company's Proxy Statement dated March
16, 2000 are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
"Security Ownership of Certain Beneficial Owners and Management" on pages
6-8 of the Company's Proxy Statement dated March 16, 2000 is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions.
"Compensation Committee Interlocks and Insider Participation" on page 17 of
the Company's Proxy Statement dated March 16, 2000 is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a) The financial statements and schedules listed in the Index to
Financial Statements and Financial Statement Schedules on page 43
herein are filed as part of this report.
(b) Reports on Form 8-K -
(i) Form 8-K dated October 25, 1999 to report third quarter 1999
results of Registrant;
(ii) Form 8-K dated November 29, 1999 to report election of Richard
Booth as President and Chief Executive Officer and retirement of
Gordon W. Kreh;
(iii)Form 8-K dated November 30, 1999 to report declaration of
dividend by Registrant;
(iv) Form 8-K dated January 18, 2000 to announce Registrant's
anticipated 1999 net income;
85
<PAGE>
(v) Form 8-K dated January 24, 2000 to report fourth quarter 1999
results of Registrant and declaration of dividend by Registrant;
(vi) Form 8-K dated March 6, 2000 to announce election of Richard
Booth as Chairman.
(c) The exhibits listed in the accompanying Index to Exhibits are filed as
part of this report.
86
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
(Registrant)
By: /s/ Richard H. Booth
Richard H. Booth
Chairman, President and Chief
Executive Officer
March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
(Signature) (Title)
By:/s/ Richard H. Booth
Richard H. Booth Chairman, President,
March 29, 2000 Chief Executive Officer
and Director
/s/ Saul L. Basch Senior Vice President, Treasurer
Saul L. Basch and Chief Financial Officer
March 29, 2000 (Principal Financial Officer and
Principal Accounting Officer)
/s/ Robert C. Walker
Robert C. Walker Senior Vice President and General
March 29, 2000 Counsel
(Joel B Alvord)* Director
(Colin G. Campbell)* Director
(Richard G. Dooley)* Director
(William B. Ellis)* Director
(Henrietta Holsman Fore)* Director
87
<PAGE>
(E. James Ferland)* Director
(Simon W. Leathes)* Director
*By: /s/ Robert C. Walker
Robert C. Walker
(Attorney-in-Fact)
March 29, 2000
88
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
**(3)(i) Certificate of Incorporation of HSB Group, Inc., incorporated by
reference to Exhibit 3(i) to the Registrant's Form 10-K for the
year ended December 31, 1997, File Number 001-13135.
(3)(ii) By-laws of HSB Group, Inc.
**(4)(i) Rights Agreement dated as of November 28, 1998 between HSB Group,
Inc. and BankBoston, N.A., as Rights Agent, incorporated by
reference to the Registrant's Report on Form 8-K dated September
21, 1998, File Number 001-13135.
**(4)(ii) Documents related to HSB Capital I:
(a) Indenture of Registrant relating to the Junior
Subordinated Debentures, incorporated by reference to
Exhibit 4 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, File No. 001-13135.
(b) First Supplemental Indenture of Registrant, incorporated
by reference to Exhibit 4 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, File No.
001-13135.
(c) Form of Certificate of Exchange Junior Subordinated
Debentures, incorporated by reference to Exhibit 4.3 to
Registrant's and HSB Capital I's Registration Statement on
Form S-4 filed with the Commission on October 10, 1997,
Registration No. 333-37581.
(d) Certificate of Trust of HSB Capital I, incorporated by
reference to Exhibit 4.4 to Registrant's and HSB Capital
I's Registration Statement on Form S-4 filed with the
Commission on October 10, 1997, Registration No.
333-37581.
(e) Amended and Restated Trust Agreement of HSB Capital I,
incorporated by reference to Exhibit 4 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, File No. 001-13135.
(f) Form of Exchange Capital Security Certificate for HSB
Capital I, incorporated by reference to Exhibit 4.6 to
Registrant's and HSB Capital I's Registration Statement on
Form S-4 filed with the Commission on October 10, 1997,
Registration No. 333-37581.
(g) Form of Exchange Guarantee of Registrant relating to the
Exchange Capital Securities, incorporated by reference to
Exhibit 4.7 to Registrant's and HSB Capital I's
Registration Statement on Form S-4 filed with the
Commission on October 10, 1997, Registration No.
333-37581.
89
<PAGE>
Documents related to HSB Capital II:
(a) Purchase Agreement as of December 31, 1997 among Employers
Reinsurance Corporation, ERC Life Reinsurance Corporation
and Registrant, incorporated by reference to Registrant's
Current Report on Form 8-K. File No. 001-13135, filed
January 12, 1998 (the "January 12, 1998 8-K).
(b) Indenture of Registrant relating to the 7.0% Convertible
Subordinated Deferrable Interest Debentures Due December 31,
2017, incorporated by reference to the January 12, 1998 8-K.
(c) Form of Certificate of 7.0% Convertible Subordinated
Deferrable Interest Debentures due December 31, 2017,
incorporated by reference to the January 12, 1998 8-K.
(d) Certificate of Trust of HSB Capital II, incorporated by
reference to the January 12, 1998 8-K.
(e) Trust Agreement dated as of December 31, 1997 among
Registrant, The First National Bank of Chicago, First
Chicago Delaware Inc. and The Administrative Trustees named
therein, incorporated by reference to the January 12, 1998
8-K.
(f) Form of Capital Securities Certificate of HSB Capital II,
incorporated by reference to the January 12, 1998 8-K.
(g) Guarantee Agreement between Registrant and The First
National Bank of Chicago dated as of December 31, 1997
relating to HSB Capital II, incorporated by reference to the
January 12, 1998 8-K.
(h) Registration Rights Agreement dated as of December 31, 1997
among Employers Reinsurance Corporation, ERC Life
Reinsurance Corporation and Registrant, incorporated by
reference to the January 12, 1998 8-K.
**(10)(i) (a) Lease Agreement between HSBIIC and One State Street
Limited Partnership; incorporated by reference to Exhibit
(10)(i) to HSBIIC's Form 10. File No. 0-13300, filed March
18, 1985.
(10)(iii) **(a) Employment Agreement dated February 3, 1997
between HSBIIC and various executive officers, assumed by
Registrant; incorporated by reference to HSBIIC's Form 10-K
for the year ended December 31, 1996, filed with the
Commission on March 31, 1997, File No. 001-10527 (the "1996
10-K").*
(b) Employment Agreement dated November 29, 1999 between
Registrant and Richard H. Booth.*
**(c) HSB Group, Inc. Long-Term Incentive Plan, as amended and
restated effective September 21, 1998, incorporated by
reference to Exhibit 10(iii)(c) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, File Number 001-13135.*
**(d) HSB Group, Inc. Short-Term Incentive Plan, as amended and
restated effective January 1, 1998, incorporated by
reference to Exhibit (iii)(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998,
File Number 001-13135.*
90
<PAGE>
**(e) HSB Group, Inc. 1985 Stock Option Plan, as amended and
restated as of September 21, 1998, incorporated by reference
to Exhibit 10(iii)(a) to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998, File
Number 001-13135.*
(f) HSB Group, Inc. 1995 Stock Option Plan, as amended and
restated effective April 20, 1999. *
** (g) Pre-Retirement Death Benefit and Supplemental Pension
Agreement between HSBIIC and various executive officers, as
amended and restated effective March 14, 1997, assumed by
Registrant, incorporated by reference to the 1996 10-K. *
**(h) Pre-Retirement Death Benefit and Supplemental Pension
Agreement between HSBIIC and William A. Kerr, dated March
14, 1997, assumed by Registrant, incorporated by reference
to the 1996 10-K. *
**(i) Pre-Retirement Death Benefit and Supplemental Pension
Agreement between HSBIIC and Robert C. Walker, dated March
14, 1997, assumed by Registrant, incorporated by reference
to the 1996 10-K.*
(j) Pre-Retirement Death Benefit and Supplemental Pension
Agreement between Registrant and Richard H. Booth, dated
November 29, 1999.*
(k) Continuing Services and Retirement Agreement between
Registrant and Gordon W. Kreh dated March 3, 2000.*
**(l) HSB Group, Inc. Directors Stock and Deferred Compensation
Plan, as amended and restated effective September 21, 1998,
incorporated by reference to Exhibit 10(iii)(b) to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, File Number 001-13135.*
**(m) Description of certain arrangements not set forth in any
formal documents, as described on pages 5 - 6 , with respect
to directors' compensation, and on pages 8 -16, with respect
to executive officer's compensation, which pages are
incorporated by reference to Registrant's Proxy Statement
dated and filed March 16, 2000. *
(21) Subsidiaries of the Registrant.
(23) Consent of experts and counsel - consent of PricewaterhouseCoopers LLP.
(24) Power of attorney.
(27) Financial Data Schedule.
* Management contract, compensatory plan or arrangement required to be filed as
an exhibit pursuant to Item 14(c) of this report.
** Previously filed.
91
Exhibit 3(ii)
Amended and Restated
as of January 24, 2000
BYLAWS
of
HSB GROUP, INC.
ARTICLE I
SHAREHOLDERS' MEETINGS
All meetings of the Shareholders shall be held in the City of Hartford
or such other place within Connecticut as the Board of Directors may appoint.
The Annual Meeting shall be held on the 3rd Tuesday of April in each year or on
some other day within two (2) months thereafter as fixed by the Board of
Directors. Special meetings of the Shareholders may be held at such time as
fixed by the Board of Directors. Notice of every meeting of the Shareholders and
of the time and place thereof shall be given as required by law. At each meeting
of the Shareholders the President or Chairman of the Board shall preside and act
as Chairman. The Chairman may appoint a Committee on Proxies to receive, count
and report the votes cast in person at such meeting and the votes represented by
proxies. The holders of a majority of the shares of the issued and outstanding
stock entitled to vote at a meeting, present either in person or by proxy, shall
constitute a quorum for the transaction of business at such meeting of the
Shareholders. If a quorum is not present at such meeting, the Shareholders
present in person or by proxy may adjourn to such future time as shall be agreed
upon by them, and notice of such adjournment shall be given to Shareholders not
present or represented at the meeting.
Regulations for the conduct of a meeting of Shareholders may be
prescribed by the Chairman or at the Chairman's option be adopted by the
Shareholders present by voice vote or by ballot.
At any meeting of the Shareholders, only such business may be conducted
as shall have been properly brought before the meeting and as shall have been
determined to be lawful and appropriate for consideration by Shareholders at the
meeting. To be properly brought before a meeting business must be (a) specified
in the notice of meeting, (b) otherwise properly brought before the meeting by
or at the direction of the Board of Directors or the Chairman of the meeting, or
(c) otherwise properly brought before the meeting by a Shareholder. For business
to be properly brought before a meeting by a Shareholder pursuant to clause (c)
above, the Shareholder must have given timely notice thereof in proper written
form to the Corporate Secretary. To be timely, a Shareholder's notice to the
Corporate Secretary must be delivered to or mailed and received by the Corporate
Secretary of the Company not less than sixty nor more than ninety days prior to
the anniversary of the date on which the immediately preceding Annual Meeting of
the Shareholders was convened; provided, however, that in the event that the
Annual Meeting is called for a date that is not within thirty days before or
after such anniversary date, notice by the Shareholder in order to be timely
must be received not later than the close of business on the tenth day following
the day on which such notice of the date of the Annual Meeting was mailed or
such public disclosure of the date of the Annual Meeting was made, whichever
first occurs. Such Shareholder's notice shall set forth as to each matter the
Shareholder proposes to bring before the meeting (a) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (b) the name and record address of such
Shareholder, (c) the class and number of shares of capital stock of the Company
which are beneficially held by such Shareholder and (d) any material interest of
such Shareholder in such business. Notwithstanding anything in these Bylaws to
the contrary, no business shall be conducted at a meeting except in accordance
with the procedures set forth herein. The Chairman of the meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the procedures set forth
herein, or that business was not lawful or appropriate for consideration by
Shareholders at the meeting, and if the Chairman of the meeting should so
determine, the Chairman of the meeting shall so declare to the meeting and any
such business not properly brought before the meeting shall not be transacted at
that meeting.
Nominations of persons for election to the Board of Directors of the
Company may be made by the Board of Directors or by any Shareholder entitled to
vote for the election of Directors in compliance with the notice procedures set
forth herein. Any Shareholder entitled to vote for the election of Directors at
a meeting may nominate persons for the election of Directors only if timely
written notice of such Shareholder's intent is given to the Corporate Secretary.
To be timely, a Shareholder's notice to the Corporate Secretary must be
delivered to or mailed and received by the Corporate Secretary of the Company
not less than sixty days nor more than ninety days prior to the anniversary of
the date on which the immediately preceding Annual Meeting of the Shareholders
was convened; provided, however, that in the event that the Annual Meeting is
called for a date that is not within thirty days before or after such
anniversary date, notice by the Shareholder in order to be timely must be
received not later than the close of business on the tenth day following the day
on which such notice of the date of the Annual Meeting was mailed or such public
disclosure of the date of the Annual Meeting was made, whichever first occurs.
Such Shareholder's notice shall set forth (a) as to each person whom the
Shareholder proposes to nominate for election or re-election as a Director, (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of capital stock of the Company which are beneficially owned by such
person and (iv) any other information relating to such person that is required
to be disclosed in solicitations of proxies for election of Directors, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (including, without limitation such person's
written consent to being named in the proxy statement as a nominee and to
serving as a Director if elected) and (b) as to the Shareholder giving the
notice, (i) the name and address, as they appear on the Company's books, of such
Shareholder and, (ii) the class and number of shares of capital stock of the
Company which are beneficially owned by such Shareholder. If the Chairman of the
meeting determines that a nomination was not in accordance with the foregoing
procedures, such nomination shall be void.
ARTICLE II
DIRECTORS
The Board of Directors shall consist of the number of directors fixed
from time to time by resolution adopted by the affirmative vote of a majority of
the entire Board of Directors. No person shall serve as Director beyond the date
of the first Annual Meeting of Shareholders held subsequent to the Director's
seventieth birthday, unless such Director's service is extended by a resolution
adopted by a majority of the Board of Directors. Such resolution shall specify
the date to which service is extended which in no event may be later than the
last day of the Director's then current term.
Regular and special meetings of the Board of Directors shall be held as
determined by the Directors.
At any meetings of the Board of Directors, a majority of the Directors
then in office, but not less than one-third of the directorships fixed in
accordance with this Article, shall constitute a quorum for the transaction of
business. Unless otherwise prescribed herein or in the Articles of Incorporation
of the Company, action of the Board of Directors shall be by majority vote of
the Directors present. The compensation of Directors shall be determined by the
Board of Directors.
ARTICLE III
COMMITTEES
The Board of Directors may by resolution designate two or more
Directors to constitute an executive committee or other committees, which
committees shall have and may exercise all such authority of the Board of
Directors as shall be provided in such resolution, subject to such limitations
as are provided under Section 33-753 of the Connecticut General Statutes, as it
may be amended from time to time.
The Board of Directors may by resolution designate one or more
Directors as alternate members of such committees who may replace any absent
member at any meeting of such committees upon such notice and in such manner as
may be provided in the resolution designating such alternate members.
ARTICLE IV
OFFICERS
There shall be a President and there may be a Chairman of the Board,
each elected by the Board of Directors from their own number. The President
shall be the chief executive officer and responsible under the direction of the
Board of Directors for the supervision, management and active control of the
affairs and properties of the Company.
The Board of Directors may also elect a Corporate Secretary, a
Treasurer, one or more Executive Vice Presidents and Senior Vice Presidents.
The President shall appoint such other Officers as may be required for
the prompt and orderly transaction of the business of the Company.
Any elected Officer may be removed at the pleasure of the Directors
and any appointed Officer may also be removed by the President.
The Officers shall be subject to the direction of and shall have such
authority and perform such duties as may be assigned from time to time by the
Board of Directors or the President.
ARTICLE V
AMENDMENTS
These bylaws may be altered, amended, added to or repealed by a
majority of the entire Board of Directors at any meeting of said Board, provided
that notice thereof shall have been given in the notice of such meeting.
STATE OF CONNECTICUT,
ss. Hartford, CT..............19
COUNTY OF HARTFORD.
The foregoing is a true copy of the bylaws of HSB Group, Inc.
Attest:____________________________
Corporate Secretary
Exhibit 10(iii)(b)
SEVERANCE AGREEMENT
THIS AGREEMENT, dated November 29, 1999, is made by and
between HSB Group, Inc., a Connecticut corporation (the "Company"), and Richard
H. Booth (the "Executive").
WHEREAS, the Company considers it essential to the best
interests of its shareholders to attract and retain key executives; and
WHEREAS, the Board recognizes that, as is the case with many
publicly held corporations, the possibility of a Change in Control exists and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of management
personnel to the detriment of the Company and its shareholders; and
WHEREAS, the Board has determined that appropriate steps
should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's management, including the Executive, to
their assigned duties without distraction in the face of potentially disturbing
circumstances arising from the possibility of a Change in Control; and
WHEREAS, the Board desires to provide for a specific severance
benefit for certain terminations of employment unrelated to a Change in Control;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, the Company and the Executive hereby agree as
follows:
1. Defined Terms. The definitions of capitalized terms
used in this Agreement are provided in the last Section hereof.
2. Term of Agreement. The Term of this Agreement shall
commence on the date hereof and shall continue in effect through December 31,
2002; provided, however, that commencing on January 1, 2001 and each January 1
thereafter, the Term shall automatically be extended for one additional year
unless, not later than September 30 of the preceding year, the Company or the
Executive shall have given notice not to extend the Term; and further provided,
however, that if a Change in Control shall have occurred during the Term, the
Term shall expire no earlier than thirty-six (36) months beyond the month in
which such Change in Control occurred.
3. Company's Covenants Summarized. In order to induce the
Executive to remain in the employ of the Company and in consideration of the
Executive's covenants set forth in Section 4 hereof, the Company agrees, under
the conditions described herein, to pay the Executive the Severance Payments and
the other payments and benefits described herein. This Agreement shall not be
construed as creating an express or implied contract of employment and, except
as otherwise agreed in writing between the Executive and the Company, the
Executive shall not have any right to be retained in the employ of the Company.
4. The Executive's Covenants. The Executive agrees that,
subject to the terms and conditions of this Agreement, in the event of a
Potential Change in Control during the Term, the Executive will remain in the
employ of the Company until the earliest of (i) a date which is six (6) months
following the date of such Potential Change in Control, (ii) the date of a
Change in Control, (iii) the date of termination by the Executive of the
Executive's employment for Good Reason or by reason of death, Disability or
Retirement, or (iv) the termination by the Company of the Executive's employment
for any reason.
5. Compensation Other Than Change in Control Severance
Payments.
5.1 Following a Change in Control and during the Term, during
any period that the Executive fails to perform the Executive's full-time duties
with the Company as a result of incapacity due to physical or mental illness,
the Company shall pay the Executive's full salary to the Executive at the rate
in effect at the commencement of any such period, together with all compensation
and benefits payable to the Executive under the terms of any compensation or
benefit plan, program or arrangement maintained by the Company during such
period, until the Executive's employment is terminated by the Company for
Disability.
5.2 If the Executive's employment shall be terminated for any
reason during the Term, the Company shall pay the Executive's full salary to the
Executive through the Date of Termination at the rate in effect immediately
prior to the Notice of Termination or, in the event of a termination following a
Change in Control, such higher rate as may be in effect (i) immediately prior to
the Change in Control, or (ii) immediately prior to the first occurrence of an
event or circumstance constituting Good Reason in the event of a termination for
Good Reason, together with all compensation and benefits payable to the
Executive through the Date of Termination under the terms of the Company's
compensation and benefit plans, programs or arrangements as in effect
immediately prior to the Notice of Termination or, in the event of a termination
following a Change in Control and if more favorable to the Executive, as in
effect (i) immediately prior to the Change in Control, or (ii) immediately prior
to the first occurrence of an event or circumstance constituting Good Reason in
the event of a termination for Good Reason.
5.3 If the Executive's employment shall be terminated for any
reason during the Term, the Company shall pay to the Executive the Executive's
normal post-termination compensation and benefits, if any, as such payments
become due. Such post-termination compensation and benefits shall be determined
under, and paid in accordance with, the Company's retirement, insurance and
other compensation or benefit plans, programs and arrangements as in effect
immediately prior to the Notice of Termination or, in the event of a termination
following a Change in Control and if more favorable to the Executive, as in
effect (i) immediately prior to the Change in Control, or (ii) immediately prior
to the occurrence of the first event or circumstance constituting Good Reason in
the event of a termination for Good Reason; provided that, for purposes of any
retiree medical benefits insurance program then in effect, Executive shall be
deemed to have satisfied any years of service and retirement status requirements
as of the Date of Termination in order to be eligible to receive benefits under
such program.
5.4 If the Executive's employment shall be terminated by the
Company for any reason (other than for death, Disability or Cause) during the
Term and the Executive is not entitled to any Severance Payments as provided in
Section 6.1 hereof, the Company shall pay to the Executive a severance payment,
in cash, equal to two times the Executive's base salary as in effect immediately
prior to issuance of the Notice of Termination in connection with such
termination, payable in substantially equal bi-weekly installments over the two
year period following such termination. The Company shall also provide the
Executive with outplacement services suitable to the Executive's position for a
period expiring three years after the Date of Termination, or, if earlier, until
the first acceptance by the Executive of an offer of employment. The severance
benefits payable under this Section 5.4 shall be in lieu of any severance
benefits otherwise payable to the Executive. The Company shall also pay to the
Executive all legal fees and expenses incurred by the Executive in seeking in
good faith to obtain or enforce any benefit or right provided by this Section
5.4; provided, that such reimbursement shall only be payable if the Executive is
successful in obtaining or enforcing such benefit or right.
5.5 If the Executive's employment shall be terminated for any
reason other than death during the Term, in addition to any retirement benefits
to which the Executive is entitled under each Pension Plan or any successor plan
thereto, the Company shall pay the Executive a benefit equal to the excess of
(i) the retirement pension to which the Executive would have been entitled under
the Retirement Plan determined as if the Executive were fully vested, had
accumulated ten (10) additional years of Credited Service (as defined in the
Retirement Plan), and had "Earnings" under such plan determined in accordance
with Exhibit A, over (ii) any vested retirement pension under the Retirement
Plan which the Executive had accrued pursuant to the provisions of such plan as
of the Date of Termination. The benefit payable under this Section 5.5., shall
commence and be paid at the same time and in the same form as the benefit, if
any, payable under the Retirement Plan; provided however, if the Executive has
not vested in a benefit under the Retirement Plan, Executive shall have the
right to select the commencement and form of payment to the same extent he would
were such benefit to be payable under the Retirement Plan.
5.6 If the Executive's employment shall be terminated on
account of death during the Term and the Executive is married at the time of his
death, in addition to any death benefits to which the Executive's spouse is
entitled under each Pension Plan or any successor plan thereto, the Company
shall pay the Executive's spouse a benefit equal to the excess of (i) the
aggregate death benefit to which the Executive's spouse would have been entitled
under the Retirement Plan determined as if the Executive were fully vested, had
accumulated ten (10) additional years of Credited Service (as defined in the
Retirement Plan) and had "Earnings" under such plan determined in accordance
with Exhibit A, prior to his death over (ii) any aggregate death benefit under
the Retirement Plan which the Executive had accrued pursuant to the provisions
of such plan as of the date of his death. The benefit payable under this Section
5.6. shall commence and be paid at the same time and in the same form as the
death benefit, if any, is payable, or would have been payable had Executive been
vested in a death benefit, under the Retirement Plan.
6. Change in Control Severance Payments.
6.1 If (i) the Executive's employment is terminated following
a Change in Control and during the Term, other than (A) by the Company for
Cause, (B) by reason of death or Disability, or (C) by the Executive without
Good Reason, or (ii) the Executive voluntarily terminates his/her employment for
any reason during the one-month period commencing on the first anniversary of
the Change in Control, then, in either such case, the Company shall pay the
Executive the amounts, and provide the Executive the benefits, described in this
Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments
and benefits to which the Executive is entitled under Section 5 hereof. For
purposes of this Agreement, the Executive's employment shall be deemed to have
been terminated following a Change in Control by the Company without Cause or by
the Executive with Good Reason, if (i) the Executive's employment is terminated
by the Company without Cause prior to a Change in Control (whether or not a
Change in Control thereafter occurs) and such termination was at the request or
direction of a Person who has entered into an agreement with the Company the
consummation of which would constitute a Change in Control, (ii) the Executive
terminates his/her employment for Good Reason prior to a Change in Control
(whether or not a Change in Control thereafter occurs) and the circumstance or
event which constitutes Good Reason occurs at the request or direction of such
Person, or (iii) the Executive's employment is terminated, after the occurrence
of a Potential Change in Control and prior to a Change in Control, by the
Company without Cause or by the Executive for Good Reason and such termination
or the circumstance or event which constitutes Good Reason is otherwise in
connection with or in anticipation of a Change in Control which occurs within
six months after the issuance of the Notice of Termination in connection with
such termination.
(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Executive, the Company
shall pay to the Executive a lump sum severance payment, in cash,
equal to three times the sum of (i) the Executive's base salary as in
effect immediately prior to the issuance of the Notice of Termination
in connection with such termination or, if higher, in effect
(1)immediately prior to the Change in Control or (2) immediately prior
to the first occurrence of an event or circumstance constituting Good
Reason in the event of a termination for Good Reason, and (ii) the
average bonus earned by the Executive pursuant to any annual bonus
plan and any short term or long term incentive plan maintained by the
Company in respect of the three fiscal years or performance periods(or
such shorter number of full fiscal years during which the Executive
was employed by the Company) ending immediately prior to the fiscal
year in which occurs the following, whichever average is highest: (1)
the issuance of the Notice of Termination in connection with such
termination; (2) the date of the Change in Control; or (3) the date of
the first event or circumstance constituting Good Reason.
(B) For the thirty-six (36) month period immediately following
the Date of Termination, the Company shall arrange to provide the
Executive and his/her dependents life, disability, accident, dental,
prescription drug and health insurance benefits substantially similar
to those provided to the Executive and his/her dependents immediately
prior to the issuance of the Notice of Termination in connection with
such termination or, if more favorable to the Executive, those
provided to the Executive and his/her dependents (i)immediately prior
to the Change in Control or (ii) immediately prior to the first
occurrence of an event or circumstance constituting Good Reason in the
event of termination for Good Reason, at no greater cost to the
Executive than the cost to the Executive immediately prior to such
date or occurrence. Benefits otherwise receivable by the Executive
pursuant to this Section 6.1 (B) shall be reduced to the extent
benefits of the same type are received by or made available to the
Executive at no greater cost during the thirty-six (36) month period
following the Executive's termination of employment (and any such
benefits received by or made available to the Executive shall be
reported to the Company by the Executive).
(C) In addition to any retirement benefits to which the Executive
is entitled under each Pension Plan (including the supplemental
pension benefits provided under Sections 5.5 and 5.6 hereof) or any
successor plan thereto, the Company shall pay the Executive a lump sum
amount, in cash, equal to the excess of (i) the actuarial equivalent
of the aggregate retirement pension (taking into account any early
retirement subsidies associated therewith and determined as a straight
life annuity commencing at the date (but in no event earlier than the
third anniversary of the Date of Termination) as of which the
actuarial equivalent of such annuity is greatest) which the Executive
would have accrued under the terms of all Pension Plans (without
regard to any amendment to any Pension Plan made subsequent to a
Change in Control or, if earlier, the Notice of Termination, which
amendment adversely affects in any manner the computation of
retirement benefits thereunder), determined as if the Executive were
fully vested thereunder, were thirty six (36) months older and had
accumulated (after the Date of Termination) thirty-six (36) additional
months of service credit thereunder at an annual rate of compensation
equal to the annual salary and average bonus taken into account under
Section 6.1(A) hereof, over (ii) the actuarial equivalent of any
aggregate vested retirement pension (taking into account any early
retirement subsidies associated therewith and determined as a straight
life annuity commencing at the date (but in no event earlier than the
Date of Termination) as of which the actuarial equivalent of such
annuity is greatest) which the Executive had accrued pursuant to the
provisions of the Pension Plans as of the Date of Termination. For
purposes of this Section 6.1(C), "actuarial equivalent" shall be
determined using the same assumptions utilized under the Company's
tax-qualified Pension Plan immediately prior to the issuance of the
Notice of Termination in connection with such termination, or, if more
favorable to the Executive, (i)immediately prior to the Change in
Control or (ii) immediately prior to the first occurrence of an event
or circumstance constituting Good Reason in the event of a termination
for Good Reason.
(D) Notwithstanding any provision of any annual or long-term
bonus or incentive plan to the contrary, the Company shall pay to the
Executive a lump sum amount, in cash, equal to the fair market value
of the sum of (i) any unpaid incentive compensation which has been
allocated or awarded to the Executive for a completed fiscal year or
other measuring period preceding the Date of Termination under any
such plan and (ii) a pro rata portion to the Date of Termination of
the aggregate value of all contingent incentive compensation awards to
the Executive for all then uncompleted periods under any such plan,
calculated as to each such award by multiplying the award that the
Executive would have earned on the last day of the performance award
period, assuming the achievement, at the target level, of the
individual and corporate performance goals established with respect to
such award, by the fraction obtained by dividing the number of full
months and any fractional portion of a month during such performance
award period through the Date of Termination by the total number of
months contained in such performance award period; provided, that, for
purposes of any annual bonus or incentive plan, the award shall be
calculated as if the annual performance period had been fully
completed; and further, provided, that, such incentive awards payable
under this Section 6.1(D) shall be reduced by the amount, if any, of
incentive awards paid to the Executive under any such plan or plans
for the same performance award periods or any portion thereof.
(E) The Company shall provide the Executive with outplacement
services suitable to the Executive's position for a period expiring
three years after the Date of Termination, or, if earlier, until the
first acceptance by the Executive of an offer of employment.
6.2 (A) Whether or not the Executive becomes entitled to the
Severance Payments, if any of the payments or benefits received or to be
received by the Executive in connection with a Change in Control or the
Executive's termination of employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
Person whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (such payments or benefits, excluding the Gross-Up
Payment, being hereinafter referred to as the "Total Payments") will be subject
to the Excise Tax, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Total Payments and any federal, state
and local income and employment taxes and Excise Tax upon the Gross-Up Payment,
shall be equal to the Total Payments.
(B) For purposes of determining whether any of the Total Payments
will be subject to the Excise Tax and the amount of such Excise Tax,
(i) all of the Total Payments shall be treated as "parachute payments"
(within the meaning of section 280G(b)(2) of the Code) unless, in the
opinion of tax counsel ("Tax Counsel") reasonably acceptable to the
Executive and selected by the accounting firm which was, immediately
prior to the Change in Control or, if different, immediately prior to
a Potential Change in Control, the Company's independent auditor (the
"Auditor"), such payments or benefits (in whole or in part) do not
constitute parachute payments, including by reason of section
280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within
the meaning of section 280G(b)(l) of the Code shall be treated as
subject to the Excise Tax unless, in the opinion of Tax Counsel, such
excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered (within the meaning of
section 280G(b)(4)(B) of the Code) in excess of the Base Amount
allocable to such reasonable compensation, or are otherwise not
subject to the Excise Tax, and (iii) the value of any noncash benefits
or any deferred payment or benefit shall be determined by the Auditor
in accordance with the principles of sections 280G(d)(3) and (4) of
the Code. For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay federal income tax at
the highest marginal rate of federal income taxation in the calendar
year in which the Gross-Up Payment is to be made and state and local
income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the Date of Termination (or
if there is no Date of Termination, then the date on which the
Gross-Up Payment is calculated for purposes of this Section 6.2), net
of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes.
(C) In the event that the Excise Tax is finally determined (as
hereinafter defined) to be less than the amount taken into account
hereunder in calculating the Gross-Up Payment, the Executive shall
repay to the Company, within five (5) business days following the time
that the amount of such reduction in the Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to such
reduction (plus that portion of the Gross-Up Payment attributable to
the Excise Tax and federal, state and local income and employment
taxes imposed on the Gross-Up Payment being repaid by the Executive,
to the extent that such repayment results in a reduction in the Excise
Tax and a dollar-for-dollar reduction in the Executive's taxable
income and wages for purposes of federal, state and local income and
employment taxes), plus interest on the amount of such repayment at
120% of the rate provided in section 1274(b)(2)(B) of the Code. In the
event that the Excise Tax is finally determined to exceed the amount
taken into account hereunder in calculating the Gross-Up Payment
(including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess
(plus any interest, penalties or additions payable by the Executive
with respect to such excess) within five (5) business days following
the time that the amount of such excess is finally determined. The
Executive and the Company shall each reasonably cooperate with the
other in connection with any administrative or judicial proceedings
concerning the existence or amount of liability for Excise Tax with
respect to the Total Payments. For purposes of this Agreement,
"finally determined" shall mean the earliest to occur of (i) a written
agreement between the parties or (ii) a final judgment, order or
decree by an arbitrator or by a court having proper jurisdiction which
is not subject to appeal or for which the time to appeal has lapsed.
6.3 The payments provided in subsections (A), (C) and (D) of
Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the
fifth day following the Date of Termination; provided, however, that if the
amounts of such payments cannot be finally determined on or before such day, the
Company shall pay to the Executive on such day an estimate, as determined in
good faith by the Executive or, in the case of payments under Section 6.2
hereof, in accordance with Section 6.2 hereof, of the minimum amount of such
payments to which the Executive is clearly entitled and shall pay the remainder
of such payments (together with interest on the unpaid remainder (or on all such
payments to the extent the Company fails to make such payments when due) at 120%
of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined but in no event later than the thirtieth (30th) day
after the Date of Termination. In the event that the amount of the estimated
payments exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by the Company to the Executive, payable on the
fifth (5th) business day after demand by the Company (together with interest at
120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time
that payments are made under this Agreement, the Company shall provide the
Executive with a written statement setting forth the manner in which such
payments were calculated and the basis for such calculations including, without
limitation, any opinions or other advice the Company has received from Tax
Counsel, the Auditor or other advisors or consultants (and any such opinions or
advice which are in writing shall be attached to the statement).
6.4 The Company also shall pay to the Executive all legal fees
and expenses incurred by the Executive in disputing in good faith any issue
under this Section 6 relating to the termination of the Executive's employment,
in seeking in good faith to obtain or enforce any benefit or right provided by
this Section 6 or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five (5) business
days after delivery of the Executive's written requests for payment accompanied
with such evidence of fees and expenses incurred as the Company reasonably may
require.
7. Termination Procedures and Compensation During Dispute.
7.1 Notice of Termination. During the Term, any purported
termination of the Executive's employment (other than by reason of death) shall
be communicated by written Notice of Termination from one party hereto to the
other party hereto in accordance with Section 10 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated. Further, a Notice of Termination for Cause is required to include a
copy of a resolution duly adopted by the affirmative vote of not less than
three-quarters (3/4) of the entire membership of the Board at a meeting of the
Board which was called and held for the purpose of considering such termination
(after reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, the Executive was guilty of
conduct set forth in clause (i) or (ii) of the definition of Cause herein, and
specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of Termination," with respect
to any purported termination of the Executive's employment during the Term,
shall mean (i) if the Executive's employment is terminated for Disability,
thirty (30) days after Notice of Termination is given (provided that the
Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination by the Company,
shall not be less than thirty (30) days (except in the case of a termination for
Cause) nor more than sixty (60) days and, in the case of a termination by the
Executive, shall not be less than fifteen (15) days nor more than sixty (60)
days, respectively, from the date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If within fifteen (15)
days after any Notice of Termination is given, or, if later, prior to the Date
of Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the payment of amounts set forth in Section 6 of this
Agreement, the Date of Termination shall be extended until the earlier of (i)
the date on which the Term ends or (ii) the date on which the dispute is finally
resolved, either by mutual written agreement of the parties or by a final
judgment, order or decree of an arbitrator; provided, however, that the Date of
Termination shall be extended by a notice of dispute given by the Executive only
if such notice is given in good faith and the Executive pursues the resolution
of such dispute with reasonable diligence.
7.4 Compensation During Dispute. If a purported termination
occurs during the Term and the Date of Termination is extended in accordance
with Section 7.3 hereof, the Company shall continue to pay the Executive the
full compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to, salary) and continue the Executive as a
participant in all compensation, benefit and insurance plans in which the
Executive was participating when the notice giving rise to the dispute was
given, until the Date of Termination, as determined in accordance with Section
7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other
amounts due under this Agreement (other than those due under Section 5.2 hereof)
and shall not be offset against or reduce any other amounts due under this
Agreement.
8. No Mitigation. The Company agrees that, if the Executive's
employment with the Company terminates during the Term, the Executive is not
required to seek other employment or to attempt in any way to reduce any amounts
payable to the Executive by the Company pursuant to Sections 5.4, 6 or 7.4
hereof. Further, if the Date of Termination occurs following a Change in
Control, the amount of any payment or benefit provided for in this Agreement
(other than Section 6.1(B) hereof) shall not be reduced by any compensation
earned by the Executive as the result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owed by the
Executive to the Company, or otherwise.
9. Successors; Binding Agreement.
9.1 In addition to any obligations imposed by law upon any
successor to the Company, the Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession which is in connection with a
Change in Control shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the same
terms as the Executive would be entitled to hereunder if the Executive were to
terminate the Executive's employment for Good Reason after a Change in Control,
except that, for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the Date of Termination.
9.2 This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive shall die while any amount would still be payable to the Executive
hereunder (other than amounts which, by their terms, terminate upon the death of
the Executive) if the Executive had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators of the
Executive's estate.
10. Notices. For the purpose of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed, if
to the Executive, to the address inserted below the Executive's signature on the
final page hereof and, if to the Company, to the address set forth below, or to
such other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon actual receipt:
To the Company:
HSB Group, Inc.
One State Street
P.O. Box 5024
Hartford, CT 06102-5024
Attention: Corporate Secretary
11. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer as may be
specifically designated by the Board. No waiver by either party hereto at any
time of any breach by the other party hereto of, or of any lack of compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. This Agreement supersedes any
other agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof which have been made by either party. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the laws of the State of Connecticut. All references to sections
of the Exchange Act or the Code shall be deemed also to refer to any successor
provisions to such sections. Any payments provided for hereunder shall be paid
net of any applicable withholding required under federal, state or local law and
any additional withholding to which the Executive has agreed. The obligations of
the Company and the Executive under this Agreement which by their nature may
require either partial or total performance after the expiration of the Term
(including, without limitation, those under Sections 5.4, 5.5, 5.6, 6 and 7
hereof) shall survive such expiration.
12. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
13. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Settlement of Disputes; Arbitration.
14.1 All claims by the Executive for compensation or benefits
under this Agreement (other than claims for compensation or benefits payable in
connection with a Change in Control) shall be directed to and determined by the
Board and shall be in writing. Any denial by the Board of such a claim for
compensation or benefits shall be delivered to the Executive in writing and
shall set forth the specific reasons for the denial and the specific provisions
of this Agreement relied upon. The Board shall afford a reasonable opportunity
to the Executive for a review of the decision denying such a claim and shall
further allow the Executive to appeal to the Board a decision of the Board
within sixty (60) days after notification by the Board that the Executive's
claim has been denied.
14.2 Any dispute or controversy arising under this Agreement
in connection with any termination-related compensation or benefit and any such
dispute or controversy in connection with a claim for compensation or benefits
to which Section 14.1 applies (after application of the provisions of said
Section 14.1) shall be settled exclusively by arbitration in Hartford,
Connecticut in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction. Notwithstanding any provision of this Agreement to the
contrary, the Executive shall be entitled to seek specific performance in any
court having proper jurisdiction of the Executive's right to be paid until the
Date of Termination during the pendency of any dispute or controversy arising
under or in connection with this Agreement.
15. Definitions. For purposes of this Agreement, the following
terms shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated
under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.
(C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of
the Code.
(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under
the Exchange Act.
(E) "Board" shall mean the Board of Directors of the Company.
(F) "Cause" for termination by the Company of the Executive's employment
shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board, which demand specifically (a)identifies the manner in which the
Board believes that the Executive has not substantially performed the
Executive's duties and (b) states a period of time within which the Executive
must correct such failure (which is reasonable based on the specific
circumstances of such failure), and the period of time specified in the demand
has expired; or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or its subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, no act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that the Executive's act, or failure to act, was
in the best interest of the Company.
(G) A "Change in Control" shall be deemed to have occurred if the event 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 the date hereof, 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 the date hereof 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
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.
(H) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(I) "Company" shall mean HSB Group, Inc. and, except in determining under
Section 15(G) 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 and agrees to perform this Agreement by operation of law, or otherwise.
(J) "Date of Termination" shall have the meaning set forth in Section 7.2
hereof.
(K) "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of six (6) consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability, and, within thirty (30) days
after such Notice of Termination is given, the Executive shall not have returned
to the full-time performance of the Executive's duties.
(L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(M) "Excise Tax" shall mean any excise tax imposed under section 4999 of
the Code.
(N) "Executive" shall mean the individual named in the first paragraph of
this Agreement.
(O) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express written
consent) after any Change in Control, or prior to a Change in Control under the
circumstances described in clauses (i), (ii) and (iii) of the second sentence of
Section 6.1 hereof (treating all references in paragraphs (I) through (VII)
below to a "Change in Control" as references to a "Potential Change in
Control"), of any one of the following acts by the Company, or failures by the
Company to act, unless, in the case of any act or failure to act described in
paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected
prior to the Date of Termination specified in the Notice of Termination given in
respect thereof:
(I) the assignment to the Executive of any
duties inconsistent with the Executive's status as a senior
executive officer of the Company or a substantial adverse
alteration in the nature or status of the Executive's
responsibilities from those in effect immediately prior to the
Change in Control;
(II) a reduction by the Company in the
Executive's annual base salary as in effect on the date hereof
or as the same may be increased from time to time, except for
across-the-board salary reductions similarly affecting all
senior executives of the Company and all senior executives of
any Person in control of the Company;
(III) the Company's requiring the Executive
to be based more than 50 miles from the Executive's principal
place of employment immediately prior to the Change in
Control, except for required travel on the Company's business
to an extent substantially consistent with the Executive's
present business travel obligations;
(IV) the failure by the Company to pay to
the Executive any portion of the Executive's current
compensation except pursuant to an across-the-board
compensation deferral similarly affecting all senior
executives of the Company and all senior executives of any
Person in control of the Company, or to pay to the Executive
any portion of an installment of deferred compensation under
any deferred compensation program of the Company, within seven
(7) days of the date such compensation is due;
(V) the failure by the Company to continue
in effect any compensation plan in which the Executive
participates immediately prior to the Change in Control which
is material to the Executive's total compensation, unless an
equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or
the failure by the Company to continue the Executive's
participation therein (or in such substitute or alternative
plan) on a basis not materially less favorable, both in terms
of the amount or timing of payment of benefits provided and
the level of the Executive's participation relative to other
participants, as existed immediately prior to the Change in
Control;
(VI) the failure by the Company to continue
to provide the Executive with benefits substantially similar
to those enjoyed by the Executive under any of the Company's
pension, savings, life insurance, medical, health and
accident, or disability plans in which the Executive was
participating immediately prior to the Change in Control
(except for across the board changes similarly affecting all
senior executives of the Company and all senior executives of
any Person in control of the Company), the taking of any other
action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive the
Executive of any material fringe benefit enjoyed by the
Executive at the time of the Change in Control, or the failure
by the Company to provide the Executive with the number of
paid vacation days to which the Executive is entitled on the
basis of years of service with the Company in accordance with
the Company's normal vacation policy in effect at the time of
the Change in Control; or
(VII) any purported termination of the
Executive's employment which is not effected pursuant to a
Notice of Termination satisfying the requirements of Section
7.1 hereof; for purposes of this Agreement, no such purported
termination shall be effective.
The Executive's right to terminate the Executive's employment
for Good Reason shall not be affected by the Executive's incapacity due to
physical or mental illness. The Executive's continued employment shall not
constitute consent to, or a waiver of rights with respect to, any act or failure
to act constituting Good Reason hereunder.
(P) "Gross-Up Payment" shall have the meaning set forth in Section 6.2
hereof.
(Q) "Notice of Termination" shall have the meaning set forth in Section 7.1
hereof.
(R) "Pension Plan" shall mean any tax-qualified defined benefit pension
plan, or supplemental or excess benefit plan relating thereto maintained by the
Company and any other plan or agreement entered into between the Executive and
the Company which is designed to provide the Executive with defined benefit type
retirement benefits, other than the Pre-Retirement Death Benefit and
Supplemental Pension Agreement between Executive and the Company.
(S) "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.
(T) "Potential Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have occurred:
(I) the Company enters into an agreement,
the consummation of which would result in the occurrence of a
Change in Control;
(II) the Company or any Person publicly
announces an intention to take or to consider taking actions
which, if consummated, would constitute a Change in Control;
(III) any Person becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
representing 10% or more of either the then outstanding shares
of common stock of the Company or the combined voting power of
the Company's then outstanding securities (not including in
the securities beneficially owned by such Person any
securities acquired directly from the Company or its
affiliates); or
(IV) the Board adopts a resolution to the
effect that, for purposes of this Agreement, a Potential
Change in Control has occurred.
(U) "Retirement" shall be deemed the reason for the termination by the
Executive of the Executive's employment if such employment is terminated in
accordance with the Company's retirement policy, including early retirement,
generally applicable to its salaried employees.
(V)"Retirement Plan" shall mean The HSB Group, Inc. Employees Retirement
Plan and, to the extent applicable, The HSB Group, Inc. Excess Retirement
Benefit Plan, each as amended, and any successor plans thereto.
(W) "Severance Payments" shall have the meaning set forth in Section 6.1
hereof.
(X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof.
(Y) "Term" shall mean the period of time described in Section 2 hereof
(including any extension, continuation or termination described therein).
(Z) "Total Payments" shall mean those payments so described in Section 6.2
hereof.
HSB GROUP, INC.
By: /s/ R. Kevin Price
Name: R. Kevin Price
Title: Corporate
Secretary
EXECUTIVE
/s/ Richard H. Booth
Exhibit 10(iii)(f)
As amended and restated
effective 4/20/99
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
eligible to participate in the Plan and to motivate such individuals 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 Participants 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.
(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 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. 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 meets the definition of
Long-Term Disability under the Company's Long-Term Disability Plan.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" shall mean the average of the high and low prices
per share of the Company's 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 individual to whom an option is granted under
the Plan.
(p) "Participant" shall mean an individual to whom an option is granted or
to whom Restricted Stock is awarded under the Plan.
(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 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) "Related Company" shall mean any corporation, partnership, joint
venture or other entity during any period in which at least a fifty
percent voting or profits interest is owned, directly or indirectly,
by the Company.
(t) "Restricted Stock" shall mean one or more shares of Stock awarded to
an eligible Participant under Section 2.5 of the Plan and subject to
the terms and conditions set forth in Section 2.5.
(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.
(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 to such option or the portion thereof which is surrendered.
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 award 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 individuals 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 individual. 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
All employees of the Company or a Related Employer and any consultant or
other person providing key services to the Company or a Related Employer
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 of Stock that may be delivered to
Participants and their beneficiaries under the Plan shall be equal to
the sum of (i) 4,200,000 shares of Stock; and (ii) any shares of Stock
that are represented by awards granted under the Company's 1985 Stock
Option Plan which are forfeited, expire or are canceled without
delivery of shares of Stock or which result in the forfeiture of
shares of Stock back to the Company. 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 Options, Nonstatutory Stock
Options, Stock Appreciation Rights or Restricted Stock in any single
calendar year for more than 250,000 shares of Stock. The limitation on
the number of shares which may be delivered under the Plan or granted
to an individual Participant shall be subject to adjustment under
Section 3.2 of this Plan.
(b) Any shares of Stock granted under the Plan that are forfeited back to
the Company because of the failure to meet an award contingency or
condition shall again be available for delivery pursuant to new awards
granted under the Plan. To the extent any shares of Stock covered by
an award are not delivered to a Participant because the award is
forfeited, canceled or expired, or the shares are not delivered
because the award is settled in cash or used to satisfy the applicable
tax withholding obligation, such shares shall not be deemed to have
been delivered for purposes of determining the maximum number of
shares of Stock available for delivery under the Plan.
(c) If the exercise price of any stock option granted under the Plan or
the Company's 1985 Stock Option Plan is satisfied by tendering shares
of Stock to the Company (by either actual delivery or by attestation),
only the number of shares of Stock issued net of the shares of Stock
tendered shall be deemed delivered for purposes of determining the
maximum number of shares of Stock available for delivery under the
Plan.
(d) 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
individual during any calendar year (under this Plan and any other option
plan of the Company) 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 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 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 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 Related Company the amount of any taxes which the Company
or Related Company is required to withhold with respect to such Stock
or cash. The Company or Related Company 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 Related Company 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 Related Company 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
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
(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 (or
cessation of the provision of services) with the Company or a Related
Company 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 (or cessation of the provision of
services) are limited by the following restrictions.
(1) If termination of employment (or cessation of the provision of
services) 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.
(2) If termination of employment (or cessation of the provision of
services) 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 (or cessation of the
provision of services).
(3) If termination of employment (or cessation of the provision of
services) 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 (or cessation of the provision of
services). As used herein "involuntary termination for cause"
shall mean termination of employment (or cessation of the
provision of services) 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 a Related Company. 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 (or
cessation of provision of services), such termination (or cessation of
provision of services) 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 (or
cessation of provision of services) 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 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).
(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 of the Participant's
termination of employment (or cessation of the provision of services)
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) 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 (or other provision of services) with the
Company or a Related Employer 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 at no
cost to the Company.
(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 a Participant 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 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 Participants
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 (or other provision of services) by the Company or any Related
Employer nor shall they interfere in any way with the right of the Company
or Related Employer by which an Optionee or Participant is employed to
terminate his employment (or other provision of services) 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;
(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.
Exhibit 10(iii)(j)
PRE-RETIREMENT DEATH BENEFIT AND
SUPPLEMENTAL PENSION AGREEMENT
THIS AGREEMENT, made and entered into this 29th day of November, 1999
between HSB Group, Inc. (hereinafter referred to as the "Company"), a
corporation organized and existing under the laws of the State of Connecticut
and Richard H. Booth (hereinafter referred to as the "Executive").
WHEREAS, the Company considers it essential to the best interests of its
shareholders to attract and retain key executives; and
WHEREAS, the Executive is willing to join the Company as a key executive if
the Company will agree to pay him or his designees certain benefits in
accordance with the provisions and conditions hereinafter set forth;
NOW, THEREFORE, for value received and in consideration of the mutual
covenants contained herein, the parties covenant and agree as follows:
ARTICLE I - DEFINITIONS
For purposes of this Agreement, the following terms have the meanings set forth
below:
1.1 "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated
under Section 12 of the Exchange Act.
1.2 "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the
Exchange Act.
1.3 "Beneficiary" shall mean the person or persons designated under Section 7.1
hereof to receive benefits payable under this Agreement upon the
Executive's death.
1.4 "Board" shall mean the Board of Directors of the Company.
1.5 "Cause" for termination by the Company of the Executive's employment shall
mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than
any such failure resulting from the Executive's incapacity due to physical
or mental illness or any such actual or anticipated failure after the
issuance of a Notice of Termination for Good Reason by the Executive
pursuant to Section 6.1 hereof) after a written demand for substantial
performance is delivered to the Executive by the Board, which demand
specifically (a) identifies the manner in which the Board believes that the
Executive has not substantially performed the Executive's duties and (b)
states a period of time within which the Executive must correct such
failure (which is reasonable based on the specific circumstances of such
failure), and the period of time specified in the demand has expired; or
(ii) the willful engaging by the Executive in conduct which is demonstrably
and materially injurious to the Company or its subsidiaries, monetarily or
otherwise. For purposes of clauses (i) and (ii) of this definition, no act,
or failure to act, on the Executive's part shall be deemed "willful" unless
done, or omitted to be done, by the Executive not in good faith and without
reasonable belief that the Executive's act, or failure to act, was in the
best interest of the Company.
1.6 A "Change in Control" shall be deemed to have occurred if the event set
forth in any one of the following paragraphs shall have occurred:
(a) 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 (c) below; or
(b) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on the
date hereof, 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 the date hereof or whose appointment, election or nomination
for election was previously so approved or recommended; or
(c) 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 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
(d) 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.
1.7 "Company" shall mean HSB Group, Inc. and, except in determining whether or
not any Change in Control of the Company has occurred, shall include any
successor to its business and/or assets which assumes and agrees to perform
this Agreement by operation of law, or otherwise.
1.8 "Disability" shall be deemed the reason for the Termination of Employment
of the Executive by the Company if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the
Company for a period of six (6) consecutive months, the Company shall have
given the Executive a notice of termination for Disability, and, within
thirty (30) days after such notice of termination is given, the Executive
shall not have returned to the full-time performance of the Executive's
duties.
1.9 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
1.10 "Executive" shall mean the individual named in the first paragraph of this
Agreement.
1.11 "Executive's Base Annual Salary" shall mean annual salary, exclusive of
bonuses, in effect at the date of Termination of Employment of the
Executive or, if higher, in effect (i) immediately prior to the Change in
Control or (ii) immediately prior to the first occurrence of an event or
circumstance constituting Good Reason in the event of a termination for
Good Reason.
1.12 "Good Reason" for Termination of Employment by the Executive shall mean the
occurrence (without the Executive's express written consent) after any
Change in Control, or prior to a Change in Control under the circumstances
described in clauses (i), (ii) and (iii) of the first sentence of Section
4.2 hereof (treating all references in paragraphs (a) through (g) below to
a "Change in Control" as references to a "Potential Change in Control"), of
any one of the following acts by the Company, or failures by the Company to
act, unless, in the case of any act or failure to act described in
paragraph (a), (e), (f) or (g) below, such act or failure to act is
corrected prior to the date of termination specified in the Notice of
Termination given in respect thereof:
(a) the assignment to the Executive of any duties inconsistent with
the Executive's status as a senior executive officer of the Company or a
substantial adverse alteration in the nature or status of the Executive's
responsibilities from those in effect immediately prior to the Change in
Control;
(b) a reduction by the Company in the Executive's annual base salary
as in effect on the date hereof or as the same may be increased from time
to time, except for across-the-board salary reductions similarly affecting
all senior executives of the Company and all senior executives of any
Person in control of the Company;
(c) the Company's requiring the Executive to be based more than 50
miles from the Executive's principal place of employment immediately prior
to the Change in Control, except for required travel on the Company's
business to an extent substantially consistent with the Executive's present
business travel obligations;
(d) the failure by the Company to pay to the Executive any portion of
the Executive's current compensation except pursuant to an across-the-board
compensation deferral similarly affecting all senior executives of the
Company and all senior executives of any Person in control of the Company,
or to pay to the Executive any portion of an installment of deferred
compensation under any deferred compensation program of the Company, within
seven (7) days of the date such compensation is due;
(e) the failure by the Company to continue in effect any compensation
plan in which the Executive participates immediately prior to the Change in
Control which is material to the Executive's total compensation, unless an
equitable arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan, or the failure by the
Company to continue the Executive's participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable,
both in terms of the amount or timing of payment of benefits provided and
the level of the Executive's participation relative to other participants,
as existed immediately prior to the Change in Control;
(f) the failure by the Company to continue to provide the Executive
with benefits substantially similar to those enjoyed by the Executive under
any of the Company's pension, savings, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control (except for across the board
changes similarly affecting all senior executives of the Company and all
senior executives of any Person in control of the Company), the taking of
any other action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive the Executive of any
material fringe benefit enjoyed by the Executive at the time of the Change
in Control, or the failure by the Company to provide the Executive with the
number of paid vacation days to which the Executive is entitled on the
basis of years of service with the Company in accordance with the Company's
normal vacation policy in effect at the time of the Change in Control; or
(g) any purported termination of the Executive's employment which is
not effected pursuant to a Notice of Termination satisfying the
requirements of Section 6.1 hereof; for purposes of this Agreement, no such
purported termination shall be effective.
The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical
or mental illness. The Executive's continued employment shall not
constitute consent to, or a waiver of rights with respect to, any act or
failure to act constituting Good Reason hereunder.
1.13 "Notice of Termination" shall have the meaning set forth in Section 6.1
hereof.
1.14 "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.
1.15 "Potential Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have
occurred:
(a) the Company enters into an agreement, the consummation of which
would result in the occurrence of a Change in Control;
(b) the Company or any Person publicly announces an intention to take
or to consider taking actions which, if consummated, would constitute a
Change in Control;
(c) any Person becomes the Beneficial Owner, directly or indirectly,
of securities of the Company representing 10% or more of either the then
outstanding shares of common stock of the Company or the combined voting
power of the Company's then outstanding securities (not including in the
securities beneficially owned by such Person any securities acquired
directly from the Company or its affiliates); or
(d) the Board adopts a resolution to the effect that, for purposes of
this Agreement, a Potential Change in Control has occurred.
1.16 "Termination of Employment" means the cessation of the Executive's
full-time employment.
ARTICLE II - PRE-RETIREMENT DEATH BENEFIT
2.1 If the Termination of Employment of the Executive is on account of the
Executive's death, a death benefit equal to fifty percent (50%) of the
Executive's Base Annual Salary at the time of his death will be paid
subject to the limitations under Article VII. This death benefit will be
paid by the Company to the Beneficiary of the Executive each year for
fifteen years (15) years. The amount to be paid each year will be paid in
equal monthly installments beginning on the first day of the month
following the date of the Executive's death and on the first day of each
month thereafter. If Termination of Employment of the Executive is on
account of any event other than death, no benefit will be paid by the
Company under this Article II.
ARTICLE III - SUPPLEMENTAL PENSION BENEFIT
3.1 Eligibility for Supplemental Pension Benefit on Termination of Employment
on or after Age 65
If Termination of Employment occurs on or after the Executive has attained
age 65, the Executive will be entitled to receive an annual supplemental
pension benefit under this Agreement in an amount equal to thirty-five
percent (35%) of the Executive's Base Annual Salary. This supplemental
pension benefit will be paid by the Company to the Executive each year for
fifteen (15) years. The amount to be paid each year will be paid in equal
monthly installments, beginning on the first day of the month following the
date of Termination of Employment of the Executive, and on the first day of
each month thereafter.
3.2 Eligibility for Supplemental Pension Benefit on Termination of Employment
after Age 55 but prior to age 65
If Termination of Employment occurs after the Executive has attained age 55
but prior to attaining age 65, the Executive will be entitled to receive
the annual supplemental pension benefit calculated under Section 3.1 under
this Agreement multiplied by the applicable percentage set forth in
Appendix A. This supplemental pension benefit will be paid by the Company
to the Executive each year for fifteen (15) years. The amount to be paid
each year will be paid in equal monthly installments beginning on the first
day of the month following the date of the Termination of Employment of the
Executive and on the first day of each month thereafter.
3.3 Eligibility for Supplemental Pension Benefit on Termination of Employment
by the Company Prior to Age 55
(a) If Termination of Employment of the Executive by the Company
occurs prior to the Executive attaining age 55, the Executive will be
entitled to receive the annual supplemental pension benefit calculated
under Section 3.1 under this Agreement multiplied by seventy percent (70%).
This supplemental pension benefit will be paid by the Company to the
Executive each year for fifteen (15) years. The amount to be paid each year
will be paid in equal monthly installments beginning on the first day of
the month following the month within which the Executive attains age 55 and
on the first day of each month thereafter. In the event the Executive dies
prior to the commencement date of the benefit, such benefits will be paid
to the Executive's Beneficiary in accordance with Section 7.1 hereof,
beginning on the first day of the month following the month within which
the Executive would have attained age 55.
(b) If Termination of Employment is by reason of the voluntary
resignation of the Executive prior to attainment of age 55 (other than for
death, Disability or Good Reason following a Change in Control of the
Executive pursuant to the provisions of Article IV) hereof, the Executive
shall not be entitled to any benefit under this Agreement.
3.4 Eligibility for Supplemental Pension Benefit on Disability
(a) If Termination of Employment of the Executive occurs on account of
Disability the Executive will be entitled to receive a supplemental pension
benefit under this Agreement in an amount equal to thirty-five percent
(35%) of the Executive's Base Annual Salary reduced by any benefit to which
the Executive may be entitled under Social Security, the Company's
Long-Term Disability Plan, Worker's Compensation awards, or any combination
thereof, on account of Disability. This supplemental pension benefit, if
any, will be paid by the Company to the Executive each year for fifteen
(15) years. The amount to be paid each year will be paid in equal monthly
installments, beginning on the first day of the month following the date of
Termination of the Executive's Employment, and on the first day of each
month thereafter.
(b) If, at any time during a period in which the Executive is entitled
to receive payments on account of Disability, the condition of Disability
no longer exists, the Company's obligation to make any further payments on
account of such Disability will terminate on the date on which such
Disability no longer exists.
ARTICLE IV - TERMINATION OF EXECUTIVE'S EMPLOYMENT FOLLOWING CHANGE IN CONTROL
4.1 In lieu of the benefit, if any, to which the Executive would be entitled
under the provisions of Article III hereof, if (i) Termination of
Employment of the Executive occurs within three years following a Change in
Control, other than (A) by the Company for Cause, (B) by reason of death or
Disability, or (C) by the Executive without Good Reason, or (ii) the
Executive voluntarily terminates his/her employment for any reason during
the one-month period commencing on the first anniversary of the Change in
Control, then, in either such case, the Company shall pay the Executive the
amounts determined in accordance with Section 3.1 hereof as though the
Executive had attained age 65 prior to such termination. This supplemental
pension benefit will be paid by the Company to the Executive each year for
fifteen (15) years. The amount to be paid each year will be paid in equal
monthly installments beginning on the first day of the month following the
date of the termination of the Executive and on the first day of each month
thereafter.
4.2 For purposes of this Agreement, the Executive's employment shall be deemed
to have been terminated following a Change in Control by the Company
without Cause or by the Executive with Good Reason, if (i) the Executive's
employment is terminated by the Company without Cause prior to a Change in
Control (whether or not a Change in Control thereafter occurs) and such
termination was at the request or direction of a Person who has entered
into an agreement with the Company the consummation of which would
constitute a Change in Control, (ii) the Executive terminates his/her
employment for Good Reason prior to a Change in Control (whether or not a
Change in Control thereafter occurs) and the circumstance or event which
constitutes Good Reason occurs at the request or direction of such Person,
or (iii) the Executive's employment is terminated, after the occurrence of
a Potential Change in Control and prior to a Change in Control, by the
Company without Cause or by the Executive for Good Reason and such
termination or the circumstance or event which constitutes Good Reason is
otherwise in connection with or in anticipation of a Change in Control
which occurs within six months after the issuance of the Notice of
Termination in connection with such termination.
ARTICLE V -TERMINATION OF EMPLOYMENT
OF THE EXECUTIVE FOR CAUSE
5.1 If Termination of Employment of the Executive is for Cause, notwithstanding
any other provision of this Agreement, the Executive will not be entitled
to receive any benefits hereunder.
ARTICLE VI - NOTICE OF TERMINATION
6.1 Any purported termination of the Executive's employment (i) by the Company
or (ii) following a Change in Control, by the Executive for Good Reason or
in accordance with clause (ii) of Section 4.1 shall be communicated by
written Notice of Termination from one party hereto to the other party
hereto in accordance with Section 9.12 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment
under the provision so indicated. Further, a Notice of Termination for
Cause is required to include a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board which was called and held
for the purpose of considering such termination (after reasonable notice to
the Executive and an opportunity for the Executive, together with the
Executive's counsel, to be heard before the Board) finding that, in the
good faith opinion of the Board, the Executive was guilty of conduct set
forth in clause (i) or (ii) of the definition of Cause herein, and
specifying the particulars thereof in detail.
6.2 The effective date of Termination of Employment of Executive for
termination of employment requiring notice pursuant to Section 6.1 hereof
shall be (i) if the Executive's employment is terminated for Disability,
thirty (30) days after Notice of Termination is given (provided that the
Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date
specified in the Notice of Termination (which, in the case of a termination
by the Company, shall not be less than thirty (30) days (except in the case
of a termination for Cause) nor more than sixty (60) days and, in the case
of a termination by the Executive, shall not be less than fifteen (15) days
nor more than sixty (60) days, respectively, from the date such Notice of
Termination is given).
ARTICLE VII- BENEFICIARY OF DEATH BENEFIT
OR SUPPLEMENTAL PENSION
7.1 In the event that the termination of the Executive's employment with the
Company is on account of the Executive's death or that the Executive should
die prior to receipt of any amounts(s) due or remaining to be paid under
Articles III or IV of this Agreement, the death benefit payable under
Article II or any amounts remaining payable under Articles III or IV, shall
be paid at the times and in the manner specified under the terms of Article
II or Articles III or IV, as applicable, to such Beneficiary or
Beneficiaries as the Executive may have designated by filing with the
Company a notice in writing in a form acceptable to the Company. In the
absence of any such designation, such unpaid amounts shall be paid to the
Executive's surviving spouse, or if the Executive should die without a
spouse surviving, to the Executive's estate.
ARTICLE VIII - CLAIMS PROCEDURE
8.1 Filing Claims
Any insured, Beneficiary or other individual (hereinafter, "Claimant")
entitled to benefits under the Agreement shall file a claim request with
the Administrator.
8.2 Notification of Claimant
If a claim request is wholly or partially denied, the Administrator will
furnish to the Claimant a notice of the decision within 90 days in writing
and in a manner calculated to be understood by the Claimant, which notice
will contain the following information:
(a) The specific reason or reasons for the denial;
(b) Specific reference to pertinent provisions of the Agreement upon
which the denial is based;
(c) A description of any additional material or information necessary
for the Claimant to perfect the Claim and an explanation of why such
material or information is necessary; and
(d) An explanation of the claims review procedure under the Agreement
describing the steps to be taken by a Claimant who wishes to submit his
claim for review.
8.3 Review Procedure
Claimant or his authorized representative may with respect to any
denied claims:
(a) Request a review upon written application filed within sixty (60)
days after receipt by the Claimant of written notice of the denial of his
claim;
(b) Review pertinent documents; and
(c) Submit issues and comments in writing.
Any request or submission must be in writing and directed to the
Fiduciary, as defined under Section 9.9, (or its designee). The
Fiduciary (or its designee) will have the sole responsibility for the
review of any denied claim and will take all steps appropriate in the
light of its findings.
8.4 Decision on Review
(a) The Fiduciary (or its designee) will render a decision following
its review. If special circumstances (such as the need to hold a hearing on
any matter pertaining to the denied claim) warrant additional time, the
decision will be rendered as soon as possible, but not later than 120 days
after receipt of the request for review. Written notice of any such
extension will be furnished to the Claimant prior to the commencement of
the extension.
(b) The decision on review will be in writing and will include
specific reasons for the decision, written in a manner calculated to be
understood by the Claimant, as well as specific references to the pertinent
provisions of the Agreement on which the decision is based.
(c) If the decision on the review is not furnished to the Claimant
within the time limits prescribed above, the claim will be deemed denied on
review.
ARTICLE IX - MISCELLANEOUS PROVISIONS
9.1 Misrepresentation.
(a) The Company may deem it appropriate to insure its obligation to
provide all or any part of the benefits described in this Agreement. If the
Company does deem it appropriate to insure all or any part of any such
benefits, the Company will so notify the Executive. The Executive agrees to
take whatever actions may be necessary to enable the Company to timely
apply for, acquire and maintain such insurance and to fulfill the
requirements of the insurance company relative to the issuance thereof.
(b) If the Executive is required by the Company to submit information
to one or more insurers in order to secure insurance as described herein,
and if the Executive has made a material misrepresentation in any
application for such insurance, the Executive's right to a benefit under
this Agreement will be reduced by the amount of the benefit that is not
paid by the insurer(s) because of such material misrepresentation.
9.2 Satisfaction of Claims
The Executive agrees that his rights and interests, and rights and
interests of any persons taking under or through him, will be completely
satisfied upon compliance by the Company with the provisions of this
Agreement.
9.3 Amendment; Waiver; Superseding Agreement.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of
any breach by the other party hereto of, or of any lack of compliance with,
any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. This Agreement
supersedes any other agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof which have
been made by either party.
(b) The Agreement may be altered, amended, or modified only by a
written instrument signed by the Company and the Executive. This Agreement
sets forth the entire understanding of the parties with respect to the
subject matter thereof.
9.4 Governing Law
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Connecticut. All
references to sections of the Exchange Act shall be deemed also to refer to
any successor provisions to such sections. Any payments provided for
hereunder shall be paid net of any applicable withholding required under
federal, state or local law and any additional withholding to which the
Executive has agreed.
9.5 Non-Assignable Rights
Neither the Executive nor his spouse, nor other Beneficiary, will have any
right to commute, sell, assign, transfer or otherwise convey the right to
receive any payments hereunder without the written consent of the Company.
Such payments and the right thereto are expressly declared to be
non-assignable and nontransferable.
9.6 Independence of Agreement
The benefits under this Agreement will be independent of, and in addition
to, any other agreement that may exist from time to time between the
parties hereto, or any other compensation payable by the Company to the
Executive, whether as salary, bonus or otherwise. This Agreement will not
be deemed to constitute a contract of employment between the parties
hereto, nor will any provision hereof restrict the right of the Company to
discharge the Executive, or restrict the right of the Executive to
terminate his employment.
9.7 Non-Secured Promise
The rights of the Executive under this Agreement and of any Beneficiary of
the Executive will be solely those of an unsecured creditor of the Company.
Any insurance policy or any other asset acquired or held by the Company in
connection with the liabilities assumed by it hereunder, will not be deemed
to be held under any trust for the benefit of the Executive or his
beneficiaries or to be security for the performance of the obligations of
the Company, but will be, and remain, a general, unpledged, unrestricted
asset of the Company and the Company will retain all ownership rights in
any such policy.
9.8 Successors; Binding Agreement
In addition to any obligations imposed by law upon any successor to the
Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession
which is in connection with a Change in Control shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company
in the same amount and on the same terms as the Executive would be entitled
to hereunder if the Executive were to terminate the Executive's employment
for Good Reason after a Change in Control, except that, for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the date of Termination of Employment of the
Executive.
9.9 Fiduciary and Administrator
(a) The Human Resources Committee of the Board will be Fiduciary and
the Company will be Administrator of this Agreement. The Company's Board of
Directors may authorize a person or group of persons to fulfill the
responsibilities of the Company as Administrator.
(b) The Fiduciary or the Administrator may employ others to render
advice with regard to its responsibilities under this Agreement. The
Fiduciary may also allocate fiduciary responsibilities to others and may
exercise any other powers necessary for the discharge of its duties to the
extent not in conflict with any provisions of the Employee Retirement
Income Security Act of 1974 that may be applicable.
9.10 Waiver by Human Resources Committee
The Human Resources Committee of the Board is authorized to waive any
provisions of this Agreement which would otherwise operate to deny, reduce
or delay any benefit payments under any provisions of this Agreement.
9.11 Arbitration
Any dispute or controversy arising under this Agreement in connection with
any termination-related compensation or benefit and any such dispute or
controversy in connection with a claim for compensation or benefits to
which Article VIII applies (after application of the provisions of said
Article VIII) shall be settled exclusively by arbitration in Hartford,
Connecticut in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's
award in any court having jurisdiction.
9.12 Notices
For the purpose of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to
have been duly given when delivered or mailed by United States registered
mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address inserted below the Executive's signature on the
final page hereof and, if to the Company, to the address set forth below,
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address
shall be effective only upon actual receipt:
To the Company:
HSB Group, Inc.
One State Street
P.O. Box 5024
Hartford, CT 06102-5024
Attention: Corporate Secretary
9.13 Validity
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
9.14 Counterparts
This Agreement may be executed in several counterparts, each of which shall
be deemed to be an original but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties have hereunto set their hands, the Company
by its duly authorized officer, on the day and year first written above.
/s/ Richard H. Booth
Executive
HSB GROUP, INC.
/s/ R. Kevin Price
Its: Corporate Secretary
<PAGE>
APPENDIX A
ATTAINED AGE PERCENTAGE OF
AT TERMINATION OF BENEFIT
EMPLOYMENT
65 100
64 97
63 94
62 91
61 88
60 85
59 82
58 79
57 76
56 73
55 70
Exhibit 10(iii)(k)
CONTINUING SERVICES AND RETIREMENT AGREEMENT
This CONTINUING SERVICES AND RETIREMENT AGREEMENT ("Agreement") is made as
of March 3, 2000 by and between HSB Group, Inc., a Connecticut corporation
("Company"), and Gordon W. Kreh ("Executive").
WHEREAS, Executive has been employed by the Company and certain of its
Affiliates (as defined in Section 3.1 below) for nearly twenty-nine years and
served in various senior management positions prior to being appointed Chief
Executive Officer in 1994 and Chairman of the Board in 1998; and
WHEREAS Executive has provided valuable service to the Company over the
term of his employment; and
WHEREAS, in order to facilitate an orderly management transition, Executive
has agreed to retire as President and Chief Executive Officer of the Company
effective as of December 31, 1999, and to retire as Chairman of the Board
effective as of a date on or after the Signing Date (as defined in Section 1.3
below) specified by the Governance Committee of the Board of Directors; and
WHEREAS, the Company desires to have access to Executive's knowledge,
experience and business relationships in effecting a smooth management
transition by retaining Executive to provide certain services to the Company
with respect to the business of the Company and its principal Affiliates to the
extent mutually agreeable to the Chief Executive Officer of the Company and
Executive;
NOW, THEREFORE, in consideration of the foregoing and the mutual provisions
contained herein, Executive and the Company, intending to be legally bound,
hereby agree as follows:
ARTICLE I
SERVICES TO BE PROVIDED
1.1 Continuing Services. During the Service Period (as defined in Section
1.3 below), Executive shall be available on a full-time basis to provide such
services to the Company as the Chief Executive Officer may reasonably request.
By way of illustration and not limitation, such services may include advice and
assistance with respect to (i) general corporate and organizational matters,
(ii) development and marketing of products, (iii) customer and marketing
relationships; and (iv) development of strategic and business plans.
Notwithstanding the foregoing, Executive shall not be required to perform any
specific services (except as described under Section 1.2 below), to provide
services at any specific location, or to be present at the Company's offices
during any specific periods, rather Executive shall perform only such services,
and only on such terms, as shall be mutually agreeable to Executive and the
Company's Chief Executive Officer. Executive agrees that by affixing his
signature to this Agreement, he confirms his voluntary and irrevocable
resignation as President and Chief Executive Officer of the Company, effective
as of December 31, 1999, and from all of the other officer and director
positions (other than Chairman of the Board) he holds with the Company and its
Affiliates, including but not limited to those identified on Exhibit A,
effective as of the Signing Date, and that he will resign as Chairman of the
Board on the date specified by the Governance Committee of the Board of
Directors.
1.2. Assistance with Claims. Executive agrees that, during the Service
Period, he will be available, on a reasonable basis, to assist the Company and
its Affiliates in the prosecution or defense of any claims, suits, litigation,
arbitrations, investigations, or other proceedings, whether pending or
threatened ("Claims") that may be made or threatened by or against the Company
or any of Affiliates. Executive agrees, unless precluded by law, to promptly
inform the Company if he is requested (i) to testify or otherwise become
involved in connection with any Claim against the Company or any Affiliate or
(ii) to assist or participate in any investigation (whether governmental or
private) of the Company or Affiliate or any of their actions, whether or not a
lawsuit has been filed against the Company or any of its Affiliates relating
thereto.
1.3. Service Period. The "Service Period" shall be the period beginning on
the date that this Agreement is executed by the Executive (the "Signing Date")
and ending on the date which is the earlier of (i) two years from the Signing
Date, i.e. March 3, 2002, or (ii) the date Executive's employment is terminated
by reason of death or Disability (as defined under Section 4.3 below) of the
Executive, by the Company in accordance with Section 4.1, or by the Executive in
accordance with Section 4.2 (the "Termination Date").
ARTICLE II
COMPENSATION AND BENEFITS
2.1. Pre-Service Period Compensation. For the period January 1, 2000
through the Signing Date, Executive shall continue to be paid a Base Salary at
the annual rate of $725,000. On the eighth day (or, if such day is not a
business day, the next succeeding business day) after the Signing Date, provided
that Executive has not revoked his consent to the release referenced in Section
5.1 below during such time, Executive shall be paid (i) a lump sum cash amount
of $1,350,000 (which for purposes of determining "Annual Compensation" under the
Company's Retirement Plan and Excess Retirement Plan shall be deemed to be an
amount paid under the Company's Severance Plan); (ii) a $145,000 award, payable
in cash, under the Company's Short-Term Incentive Plan for the 1999 Plan Year;
and (iii) 25,413 shares of Company common stock, subject to the restrictions
provided in the Restricted Stock Instrument attached as Exhibit B to this
Agreement, under the Company's Long-Term Incentive Plan for the Performance
Period ending December 31, 1999. Executive agrees that the awards described
under (ii) and (iii) of the preceding sentence are payment in full and final
settlement and satisfaction of all rights he has to receive awards under the
Company's Short-term Incentive Plan for the 1999 Plan Year and under the
Company's Long-Term Incentive Plan for the Performance Period ending December
31, 1999. Executive shall not be entitled to receive any awards under the
Short-Term Incentive Plan for the 2000 Plan Year.
2.2 Service Period Compensation.
2.2.1 Base Salary and Benefits. For the period beginning on the Signing
Date and continuing thereafter during the Service Period, Executive shall be
paid at a base annual salary rate of $50,000. During the Service Period,
Executive shall be considered to be an employee of the Company for purposes of
(i) any outstanding option awards under the Company's 1985 and 1995 Stock Option
Plans; and (ii) determining his eligibility to receive benefits and accrue
service under the Company's benefit plans and programs, except as may be
specifically modified or limited by this Agreement.
2.2.2 Severance Plan. Executive acknowledges that the $1,350,000 lump sum
payment referenced in Section 2.1 above is in lieu of any payment under the
Company's Severance Plan or any other Company plan, program, arrangement or
agreement providing for severance benefits, and Executive further acknowledges
that he shall not be eligible to receive any additional benefits under the
Company's Severance Plan or any other Company plan, program, arrangement or
agreement which provides severance pay, regardless of whether Executive's
employment terminates at the conclusion of the Service Period or during the
Service Period in accordance with Section 4.1, 4.2 or 4.3 below.
2.2.3 Pre-Retirement Death Benefit and Supplemental Pension Agreement. The
Pre-Retirement Death Benefit and Supplemental Pension Agreement dated March 14,
1997 between Executive and the Company ("SERP") shall remain in effect during
the Service Period with the following modifications:
(i) "Executive's Base Annual Salary" shall be $725,000.
(ii) Any termination of Executive's employment during the Service
Period for any reason, including, but not limited to termination of
Executive's employment following a Change in Control, other than by reason
of death or Disability (as defined in the SERP), will be deemed to be a
termination of employment by the Company prior to Executive's reaching age
55, and Executive's benefit will calculated in accordance with Section
3.3(a) of the SERP.
2.2.4 Retiree Life Insurance and Medical Plans. Provided Executive is
employed by the Company on the last day of the Service Period, for purposes of
the Company's Retiree Life Insurance Plan and Company's Retiree Medical Plan
Executive shall be deemed to have retired under the Company's Retirement Plan
and for purposes of computing the Annual Dollar Limits of Company contributions
under the Retiree Medical Plan, shall be deemed to be age 55 until the day he
actually reaches age 55 following which Executive's actual age will be used.
2.2.5 Prorated Awards Under the Long-Term Incentive Plan. Executive will be
entitled to receive the following prorated awards under the Long-Term Incentive
Plan for the Performance Periods ending in 2000 and 2001:
(i) 2/3 of the award, if any, he would otherwise have been entitled to
receive as Chief Executive Officer of the Company based upon the attainment
of the Performance Measures established for the 1998-2000 Performance
Period; and
(ii) 1/3 of the award, if any, he would otherwise have been entitled
to receive as Chief Executive Officer of the Company based upon the
attainment of the Performance Measures established for the 1999-2001
Performance Period; provided, however, Executive will forfeit any right to
any award under this Section 2.2.5 if at the time an award is payable
Executive is in breach of any of the provisions contained in Sections 3.1,
3.2, 3.3 or 3.4 of this Agreement. Payment of the awards will be in the
form of cash or common stock of the Company (which may include restricted
stock) or a combination thereof, at the discretion of the Human Resources
Committee of the Board of Directors of the Company. Payment will be made at
the same time as payment is made to other participants under the Plan.
2.2.6 Restricted Shares under the Company's Long-Term Incentive Plan. With
respect to the restricted shares previously granted under the Company's
Long-Term Incentive Plan (and the special grant awarded outside the plan on
January 26, 1998) listed on Exhibit C to this Agreement, the Restricted Stock
Instruments governing such awards shall be amended as follows:
(i) the Restricted Period will end on March 3, 2002;
(ii) the restrictions on the shares described in the instruments will
lapse on the earlier of (x) March 3, 2002, provided Executive is still
employed by the Company on such date, or (y) the date of the Executive's
death or Disability, and
(iii) violation of Sections 3.1, 3.2, 3.3, or 3.4 of this Agreement or
termination of this Agreement by the Executive in accordance with Section
4.2 will result in forfeiture of all of such shares.
2.3 Coverage under the Rabbi Trust. The Company agrees that it will
continue to include any benefits payable to Executive under the SERP Agreement,
the Top Hat Plan and the Excess Retirement Plan under the Trust Agreement dated
May 30, 1997 between the Company and Fleet National Bank until such time as all
benefits payable under such plans have been paid to Executive or his beneficiary
or the trust is terminated by the Company in accordance with the terms of the
Trust Agreement.
2.4 Acknowledgement by Executive. Executive acknowledges and agrees that in
the event that he revokes his consent to the release referenced in Section 5.1
below, he shall have no right to receive any of the payments in this Article II.
Executive further acknowledges that following his receipt of the payments set
forth in this Article II and/or Article IV below, as applicable, the Company
shall have no further obligations to him, and he shall have no right to further
compensation, with respect to his employment with the Company or the separation
therefrom.
ARTICLE III
COVENANTS OF EXECUTIVE
3.1. Confidentiality. Executive agrees that, during the Service Period, and
at all times thereafter, he shall continue to hold in a fiduciary capacity for
the benefit of the Company, all secret or confidential information, knowledge or
data relating to the Company and any other business or entity in which, at any
relevant time, the Company holds an equity (voting or non-voting) interest equal
to or greater than 10% (an "Affiliate") that shall have been obtained by
Executive during his employment by or affiliation with the Company or its
Affiliates, and that shall not be public knowledge other than by acts of
Executive or his representative ("Confidential Material"). Executive shall not,
without the prior written consent of the Chief Executive Officer of the Company,
communicate or divulge any Confidential Material to anyone other than the
Company and those designated by it.
3.2. Covenant Not to Compete. Executive hereby agrees that for a period of
two years from the Signing Date, he will not, directly or indirectly, enter into
any business relationship (either as principal, agent, board member, officer,
consultant, stockholder, employee or in any other capacity) with any business or
other entity that at any relevant time competes in any respect with any of the
businesses of the Company or any of its Affiliates in any county in the State of
Connecticut, the names of all of which are deemed hereby to be specifically
included herein by reference, throughout the United States and North America,
and anywhere else in the world where the Company or any of its Affiliates, has
operations or conducts business (a "Competitor"); provided, however, that such
prohibited activity shall not include the ownership of less than 1% of the
voting securities of any publicly traded corporation regardless of the business
of such corporation. Notwithstanding the foregoing, Executive may participate in
private equity or venture capital activities from time to time, provided that in
connection with such activities Executive may not directly or indirectly enter
into a business relationship with any entity which engages in the underwriting
of equipment breakdown insurance and/or engineering services of the type offered
by the Company or any of its Affiliates.
3.3. Solicitation. Executive agrees that for a period of three years from
the Signing Date, he will not employ, offer to employ, engage as a consultant,
or form a business association with any person who is then, or who during the
preceding one year was, an employee of the Company or any Affiliate, nor will he
assist any other person in soliciting for employment or consultation any person
who is then, or who during the preceding one year was, an employee of the
Company or any Affiliate. Notwithstanding the foregoing, Executive will not be
precluded from employing a former employee of the Company or any of its
Affiliates, provided that Executive did not directly or indirectly solicit such
employee, and provided further that such former employee's date of termination
of employment from the Company or its Affiliate was more than six months prior
to the date such person is employed by Executive.
3.4. Non-Interference. Executive agrees that for a period of three years
from the Signing Date, he will not disturb or attempt to disturb any business
relationship or agreement between either the Company or an Affiliate and any
other person or entity.
3.5. Injunctive Relief. Executive acknowledges that his violation of the
foregoing covenants of this Article III could cause the Company irreparable harm
and he agrees that the Company shall be entitled to injunctive relief
restraining Executive from actual or threatened breach of the covenants, and
that if a bond is required to be posted in order for the Company to secure such
relief, said bond need only be in a nominal amount. Subject to Section 3.6
below, the right of the Company to seek injunctive relief shall be in addition
to any other remedies available to the Company with respect to an alleged or
threatened breach.
3.6. Effect of Covenants. Nothing in Sections 3.1, 3.2, 3.3, or 3.4 hereof
shall be construed to adversely affect the rights that the Company would possess
in the absence of the provisions of such sections.
ARTICLE IV
TERMINATION OF EMPLOYMENT
4.1. Termination of Employment by Company. In the event that Executive
violates any of the provisions of Sections 3.1, 3.2, 3.3 or 3.4, the Company may
terminate Executive's employment by sending a notice of termination to Executive
which shall set forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive's employment under this
Section 4.1. The date the notice is sent in accordance with this Agreement shall
be the effective date of Executive's termination. In the event that the Company
terminates Executive's employment pursuant to the preceding sentence, (i) the
Base Salary payments will cease effective as of the termination date; (ii) any
shares of restricted stock currently outstanding under the Company's Long-term
Incentive Plan, the special grant of 2,539 shares awarded outside of the plan on
January 26, 1998, and the restricted shares granted under Section 2.1 will be
forfeited; and (iii) Executive will not be eligible for the Retiree Medical Plan
and Retiree Life Insurance benefit as provided under Section 2.2.4. The Company
shall not be entitled to suspend or terminate any other payments or benefits
otherwise due to Executive by reason of Executive's violation of Sections 3.1,
3.2, 3.3, or 3.4 (whether before or after a judgment is obtained by the Company
against Executive). Nothing in this Section 3.6 shall limit the Company's
remedies in the case of Executive's violation of this Agreement, except as
otherwise specifically provided in this Section 4.1.
4.2 Resignation by Executive. Executive shall have the right to terminate
his employment at any time by sending a written notice to the Company in
accordance with this Agreement specifying the effective date of his termination.
In the event that Executive provides services to, or assumes a position with, a
for-profit business without the written consent of the Chief Executive Officer
of the Company (regardless of whether such business is a Competitor), Executive
shall be deemed to have resigned from employment with the Company effective as
of the date such services commenced. For purposes of determining the respective
rights and obligations of the parties under this Agreement arising out of
termination pursuant to this Section 4.2, such termination shall be deemed to be
a termination by the Company in accordance with Section 4.1. Termination by
Executive under this Section 4.2 shall not act to release him from the
restrictions set forth in Sections 3.1, 3.2, 3.3. or 3.4., without the written
consent of the Chief Executive Officer.
4.3 Death or Disability. In the event that Executive's employment is
terminated on account of death or Disability, (i) the Base Salary payments will
cease effective as of the employment termination date; and (ii) any shares of
restricted stock currently outstanding under the Company's Long-term Incentive
Plan, the special grant of 2,539 shares awarded outside of the plan on January
26, 1998, and the restricted shares granted under Section 2.1 will become
non-forfeitable and freely transferable subject to the requirements contained in
the restricted stock instruments governing such restricted stock awards. For
purposes of this Agreement "Disability" shall mean a total and permanent
Long-Term Disability as it is defined in the Company's Employees' Disability
Plan, effective January 1, 1976, as from time to time amended.
4.4 Other Benefits upon Termination of Employment. Any other benefits
payable to Executive or his beneficiary shall be determined in accordance with
the terms of the Company's policies, programs and plans in effect on the date of
Executive's termination of employment under this Article IV taking into account
the event giving rise to the termination and Executive's age and years of
service as of such termination date.
ARTICLE V
MISCELLANEOUS PROVISIONS
5.1 Release of Claims. The provision by the Company of the compensation and
benefits described under Article II and/or Article IV, as applicable, hereunder
are conditioned upon Executive's compliance with the terms described under this
Agreement and the execution, non-revocation and honoring of a release of claims
and covenant not to sue in favor of the Company in the form attached hereto as
Exhibit D.
5.2. Other Agreements. This Agreement shall be effective on the Signing
Date. Except as otherwise expressly provided herein, this Agreement constitutes
the entire agreement between Executive and the Company and supersedes all prior
agreements and understandings, written or oral, including, but not by way of
limitation, the Severance Agreement dated February 3, 1997, as amended effective
as of May 24, 1999.
5.3. Successors. This Agreement is personal to Executive and may not be
assigned by Executive without the consent of the Company. However, to the extent
that rights or benefits under this Agreement otherwise survive Executive's
death, Executive's heirs and estate shall succeed to such rights and benefits
pursuant to Executive's will or the laws of descent and distribution; provided
that Executive shall have the right at any time and from time to time, by notice
delivered to the Company, to designate or to change the beneficiary or
beneficiaries with respect to such benefits. This Agreement may be assigned to a
successor to all or substantially all of the business or assets of the Company.
5.4. Arbitration of All Disputes. Any controversy or claim arising out of
or relating to this Agreement (or the breach thereof) shall be settled by final,
binding and non-appealable arbitration in Hartford, Connecticut by three
arbitrators. Except as otherwise expressly provided in this Section 5.4, the
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association (the "Association") then in effect. One of the
arbitrators shall be appointed by the Company, one shall be appointed by
Executive, and the third shall be appointed by the first two arbitrators. If the
first two arbitrators cannot agree on the third arbitrator within 30 days of the
appointment of the second arbitrator, then the third arbitrator shall be
appointed by the Association. This Section 5.4 shall not be construed to limit
the Company's right to obtain relief under Section 3.5 hereof with respect to
any matter or controversy subject to Section 3.5 hereof, and, pending a final
determination by the arbitrator with respect to any such matter or controversy,
the Company shall be entitled to obtain any such relief by direct application to
state, federal or other applicable court, without being required to first
arbitrate such matter or controversy.
5.5. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut, without reference to the
principles of conflict laws.
5.6. Amendment. This Agreement may only be amended by written agreement
executed by the parties hereto or their respective successors or legal
representatives.
5.7. Notices. Notices and all other communications provided for in this
Agreement shall be in writing and shall be delivered personally or sent by
registered or certified mail, return receipt requested, postage prepaid
(provided that international mail shall be sent via overnight or two-day
delivery), or sent by facsimile or prepaid overnight courier to the parties at
the addresses set forth below (or such other addresses as shall be specified by
the parties by like notice). Such notices, demands, claims and other
communications shall be deemed given: (i) in the case of delivery by overnight
service with guaranteed next day delivery, the next day or the day designated
for delivery; (ii) in the case of certified or registered U.S. mail, five days
after deposit in the U.S. mail; or (iii) in the case of facsimile, the date upon
which the transmitting party received confirmation of receipt by facsimile,
telephone or otherwise; provided, however, that in no event shall any such
communications be deemed to be given later than the date they are actually
received. Communications that are to be delivered by the U.S. mail or by
overnight service or two-day delivery service are to be delivered to the
addresses set forth below:
If to Executive:
Gordon W. Kreh
133 Westerly Terrace
Hartford, CT 06105
If to the Company:
HSB Group, Inc.
P.O. Box 5024
One State Street
Hartford, CT 06102-5024
Attn: Corporate Secretary
or to such other address as either party shall furnished to the other party in
writing in accordance with the provisions of this Section 5.7.
5.8 Severability. It is the desire and intent of the parties that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. In the event that any one or more of the provisions of
this Agreement shall be held to be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remainder of this Agreement shall
not in any way be affected or impaired thereby. Moreover, if any one or more of
the provisions contained in this Agreement is held to be excessively broad as to
duration, scope, activity or subject, such provisions shall be construed by
limiting and reducing them so as to be enforceable to the maximum extent
compatible with applicable law. The invalidity or unenforceability of any
provision of this Agreement will not affect the validity or enforceability of
any other provision of this Agreement, and this Agreement shall be construed as
if such invalid or unenforceable provision were omitted (but only to the extent
such provision can not be appropriately reformed or modified).
5.9 No Waiver. The failure of either party to this Agreement to enforce any
of its terms, provisions or covenants shall not be construed as a waiver of the
same or of the right of such party to enforce the same. Waiver by either party
hereto of any breach or default by the other party of any term or provision of
this Agreement shall not operate as a waiver of any other breach or default.
This Agreement and the provisions contained in it shall not be construed or
interpreted for or against any party to this Agreement because that party
drafted or caused that party's legal representative to draft any of its
provisions.
IN WITNESS WHEREOF, Executive has hereunto set his hand and the Company has
caused this Agreement to be executed on its behalf, all as of the Signing Date.
HSB GROUP, INC.
By: /s/ R. Kevin Price
Its: Corporate Secretary
EXECUTIVE
By: /s/ Gordon W. Kreh
<PAGE>
EXHIBIT A
LIST OF DIRECTORSHIPS AND OFFICES HELD BY
EXECUTIVE IN AFFILIATES
Name of Entity Title(s)
The Allen Insurance Company Director
The Boiler Inspection and Insurance Director
Company of Canada
The Hartford Steam Boiler Inspection Chairman of the Board, President
and Insurance Company and Chief Executive Officer
The Hartford Steam Boiler Inspection Chairman of the Board, President
and Insurance Company of and Chief Executive Officer
Connecticut
The Hartford Steam Boiler Inspection President and Chief Executive
and Insurance Company of Texas Officer
HSB Associates, Inc. Director
HSB Engineering Finance Corporation Director and President
HSB Investment Corporation Director
One State Street Intermediaries, Inc. Director
HSB Engineering Insurance, Limited Director
<PAGE>
EXHIBIT B
RESTRICTED STOCK INSTRUMENT
To: Gordon W. Kreh
HSB GROUP, INC.
RESTRICTED STOCK INSTRUMENT
Pursuant to the provisions of the Long-Term Incentive Plan (the "Plan") HSB
Group, Inc. (the "Company") hereby awards to you (the "Participant"), subject to
the terms and conditions of the Plan and subject further to the terms and
conditions herein set forth, 25,413 shares of Common Stock of the Company
("Restricted Stock").
1. Terms and Conditions - It is understood that the award of Restricted
Stock is subject to the following terms and conditions:
(a) Restricted Period - The Restricted Stock awarded to the
Participant may not be sold, assigned, transferred, pledged,
hypothecated or otherwise disposed of, except by will or the
laws of descent and distribution, for the period of time
ending on March 3, 2002 (the "Restricted Period"). Any attempt
by Participant to dispose of any such shares prior to the
expiration of the Restricted Period shall be null and void and
without effect.
(b) Dividends and Voting Rights - The Restricted Stock will be
registered in the name of the Participant and held in escrow
by the Human Resources Committee of the Board of Directors
(the "Committee"). The Participant will, subject to the
restrictions contained in this Instrument, possess all
incidents of ownership of the Restricted Stock, including the
rights to receive dividends with respect to such stock and to
vote such stock.
(c) Lapse of Restrictions - The restrictions on the Restricted
Stock described in Paragraph (a) above shall lapse upon the
completion of the Restricted Period 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 death or Disability (as such term is defined in the
Plan).
(d) Forfeiture - In the event the Participant's employment with
the Company terminates for any reason other than death or
Disability, or in the event the Participant violates any of
Sections 3.1, 3.2, 3.3 or 3.4 of the Continuing Services and
Retirement Agreement to which this instrument is attached,
prior to the expiration of the Restricted Period, the
Restricted Stock shall thereupon be forfeited by the
Participant and transferred to, or reacquired by the Company
at no cost to the Company.
(e) Delivery of Shares - The Company shall deliver the Restricted
Stock to the Participant, or the Beneficiary (as defined in
the Plan) of the Participant, if applicable, within 30 days
after the termination of the Restricted Period or, the earlier
lapse of restrictions in accordance with Paragraph (c).
2. Modification - The Committee shall have the authority to cancel all or any
portion of any outstanding restrictions on the Restricted Stock prior to
the expiration of the Restricted Period with respect to the shares of
Restricted Stock awarded hereunder on such terms and conditions as the
Committee may deem appropriate.
3. No Right to Continued Employment - This award shall not confer upon
Participant any right with respect to continuance of employment by the
Company, nor shall it interfere in any way with the right of the Company to
terminate his employment at any time.
4. No Rights as Shareholder - Except as provided herein, the Participant shall
not have any rights as a shareholder with respect to any shares of the
Restricted Stock awarded hereby.
5. Compliance with Laws and Regulations - The Company shall not be obligated
to deliver stock pursuant to an award of Restricted Stock for which the
restrictions hereunder have lapsed if such delivery would constitute a
violation of any applicable law. The Committee may postpone the delivery of
stock following the lapse of certain restrictions with respect to the
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 deliverable upon
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 the Plan
are exempt from such registration.
6. Restrictions and Withholding - The Committee shall have the right to
condition any delivery of shares pursuant to the lapse of certain
restrictions with respect to the Restricted Stock on the 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. Upon the
delivery of shares of Restricted Stock pursuant hereto the Participant or
other person receiving the stock shall be required to pay to the Company,
the amount of any taxes which the Company is required to withhold with
respect to such stock. The Participant will have the ability to elect to
have shares otherwise issuable pursuant to the lapse of restrictions
withheld, or may deliver previously owned shares to the Company, to satisfy
such withholding taxes.
7. Adjustment - 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 (as defined in the Plan), or of any similar change
affecting the common stock of the Company, the number of shares of
Restricted Stock awarded herein with respect to which 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, all participants in the Plan. Any fractional shares resulting from
such adjustments shall be eliminated. Any adjustment so made shall be final
and binding upon the Participant.
8. Participant Bound by Plan - Participant acknowledges receipt of a copy of
the Plan and shall be bound by all the terms and provisions thereof.
9. Notices - Any notice hereunder to the Committee shall be addressed as
follows:
The Human Resources Committee
c/o The Corporate Secretary, 12th Floor
HSB Group, Inc.
One State Street
P. O. Box 5024
Hartford, CT 06102-5024
Any notice hereunder to Participant shall be sent to the last known home
address reflected in the records of the Participant's Employer.
10. Governing Law - The terms and conditions of this Instrument shall be
governed by the laws of the State of Connecticut.
11. The Company has caused this Instrument to be prepared by its duly
authorized officer.
HSB GROUP, INC.
By /s/ R. Kevin Price
Its: Corporate Secretary
<PAGE>
EXHIBIT C
RESTRICTED STOCK
Grant Date Number of Shares
1/24/97 3,999
1/26/98 4,824
1/26/98 2,539 (granted outside of the Long-
Term Incentive Plan)
2/22/99 31,458
<PAGE>
EXHIBIT D
RELEASE OF CLAIMS AND COVENANT NOT TO SUE
This RELEASE OF CLAIMS AND COVENANT NOT TO SUE (the "Release") is executed and
delivered by GORDON W. KREH (the "Executive") to HSB GROUP, INC. (the
"Company"). In consideration of the agreement by the Company to provide the
Executive with the rights, payments and benefits under the Continuing Services
and Retirement Agreement between the Executive and the Company dated March 3,
2000 (the "Agreement") to which the Executive would not otherwise be entitled,
the Executive hereby agrees as follows:
Section 1. Release and Covenant. The Executive, of his own free will,
voluntarily releases and forever discharges the HSB Group, Inc., its
subsidiaries, affiliates, directors, officers, employees, agents, stockholders,
successors and assigns, both individually and in their official capacities,
(collectively referred to as "Releases") from, and covenants not to sue or
proceed against any of the foregoing on the basis of, any and all past or
present causes of action, suits, agreements or other claims which the Executive,
his dependents, relatives, heirs, executors, administrators, successors and
assigns has or have against any of them upon or by reason of any matter, cause
or thing whatsoever, including, but not limited to, any matters arising out of
his employment by the Company and the termination of his position as Chairman,
President and Chief Executive Officer of the Company (and as an officer and/or
director of various subsidiaries and affiliates of the Company), and including,
but not limited to, any alleged violation of the Civil Rights Acts of 1964 and
1991, the Equal Pay Act of 1963, the Age Discrimination in Employment Act of
1967, the Rehabilitation Act of 1973, the Older Workers Benefit Protection Act
of 1990, the Americans with Disabilities Act of 1990, the Family and Medical
Leave Act of 1993, the Employee Retirement Income Security Act of 1974, the
Connecticut Human Rights and Opportunities Law, each as amended, and any other
federal or state law, regulation or ordinance, or public policy, contract or
tort law having any bearing whatsoever on the terms and conditions of employment
or termination of employment. This Release shall not, however, constitute a
waiver of any vested pension rights of Executive, or be construed to prohibit
Executive from bringing appropriate proceedings to enforce this Agreement.
Executive further agrees that he will not seek or be entitled to any personal
recovery in any claim, charge, action or proceeding whatsoever against the
Company or any of the Releases for any of the matters set forth in this Release.
Section 2. Due Care. The Executive acknowledges that he has received a copy of
this Release prior to its execution and has been advised hereby of his
opportunity to review and consider this Release for 21 days prior to its
execution. The Executive further acknowledges that he has been advised hereby to
consult with an attorney prior to executing this Release. The Executive enters
into this Release having freely and knowingly elected, after due consideration,
to execute this Release and to fulfill the promises set forth herein. This
Release shall be revocable by the Executive during the 7-day period following
its execution by delivering (by hand or overnight courier) written notice of
revocation to R. Kevin Price, Corporate Secretary at HSB Group, Inc., One State
Street, Hartford, Connecticut 06102-5024 and shall not become effective or
enforceable until the expiration of such 7-day period. In the event of such a
revocation, the Executive shall not be entitled to the consideration for this
Release set forth above.
Section 3. Reliance by Executive. The Executive acknowledges that, in his
decision to enter into this Release, he has not relied on any representations,
promises or agreements of any kind, including oral statements by representatives
of the Company, except as set forth in this Release.
This RELEASE OF CLAIMS AND COVENANT NOT TO SUE is executed by the Executive and
delivered to the Company on March 3, 2000.
EXECUTIVE:
/s/ Gordon W. Kreh
Exhibit (21)
LIST OF SUBSIDIARIES OF HSB GROUP, INC.
NAME OF COMPANY STATE/JURISDICTION OF
INCORPORATION/
FORMATION
The Allen Insurance Company Bermuda
The Boiler Inspection and Insurance
Company of Canada (wholly-owned
by HSB Engineering Insurance Ltd.) Canada
Cordova/HSB Ventures, LLC
(50% owned by HSB Ventures, Inc.) Georgia
EIG, Co. (wholly owned by
The Hartford Steam Boiler Inspection and
Insurance Company) Delaware
Hartford Steam Boiler Colombia Ldta.
(90% owned by The Hartford
Steam Boiler Inspection and
Insurance Company and 10% by HSB
Group, Inc.) Colombia
The Hartford Steam Boiler Inspection
and Insurance Company Connecticut
The Hartford Steam Boiler Inspection
and Insurance Company of Connecticut Connecticut
The Hartford Steam Boiler Inspection
and Insurance Company of Texas Texas
Hartford Steam Boiler International GmbH
(wholly-owned by The
Hartford Steam Boiler Inspection and
Insurance Company) Germany
Hartford Steam Boiler (M) Sdn. Bhd.
(wholly-owned by The Hartford
Steam Boiler Inspection and Insurance Company) Malaysia
Hartford Steam Boiler (Singapore) PTE Ltd.
(wholly-owned by The
Hartford Steam Boiler Inspection
and Insurance Company) Singapore
HSB Africa (wholly-owned by HSB Engineering
Insurance Limited) South Africa
HSB Associates, Inc. New York
HSB Capital I Delaware
HSB Capital II Delaware
HSB Capital Corp. I, Inc. (wholly-owned by HSB
Engineering Finance Corporation) Delaware
HSB Engineering Finance Corporation Delaware
HSB Engineering Insurance Limited
(wholly-owned by EIG Co.) England
<PAGE>
HSB Haughton Engineering Insurance
Services, Ltd. (wholly-owned by
HSB Engineering Insurance Limited) England
HSB Haughton (Ireland) Limited
(wholly-owned by HSB Haughton
Engineering Services, Ltd.) Ireland
HSB Inspection Quality Limited
(wholly-owned by HSB Haughton
Engineering Insurance Services, Ltd.) England
HSB Investment Corporation (wholly-owned
by The Hartford Steam
Boiler Inspection and Insurance Company) Connecticut
HSB Professional Loss Control, Inc.
(wholly-owned by The Hartford
Steam Boiler Inspection and Insurance Company) Tennessee
HSB Reliability Technologies Corp.
(wholly-owned by The Hartford
Steam Boiler Inspection and Insurance Company) Florida
HSB-RS Korea (wholly-owned by
The Hartford Steam Boiler Inspection
and Insurance Company) Korea
HSB Servicetouch, LLC (52% owned by
The Hartford Steam Boiler
Inspection and Insurance Company) Connecticut
HSB Ventures, Inc. (wholly-owned by
HSB Engineering Finance
Corporation) Delaware
Integrated Process Technologies, LLC
(51% owned by The Hartford
Steam Boiler Inspection and Insurance Company) Delaware
One State Street Intermediaries Connecticut
Ra-Hart Investment Company (wholly-owned
by The Hartford Steam
Boiler Inspection and Insurance Company) Texas
Solomon Associates, Inc. Texas
Solomon Associates International, Inc.
(wholly-owned by Solomon
Associates, Inc.) Texas
Solomon Associates Limited (wholly-owned
by Solomon Associates
International, Inc.) United Kingdom
Structural Integrity Associates, Inc.
(wholly-owned by The Hartford
Steam Boiler Inspection and Insurance Company) California
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
HSB Group, Inc. on Form S-3 (File No. 333-53059) and Forms S-8 (File Nos.
33-4397, 33-36519 and 333-29605) of our report dated January 24, 2000, on our
audits of the consolidated financial statements and financial statement
schedules of HSB Group, Inc. and its subsidiaries as of December 31, 1999 and
1998, and for the three years in the period ended December 31, 1999, which
report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
March 29, 2000
POWER OF ATTORNEY Exhibit (24)
We, the undersigned directors of HSB Group, Inc., hereby individually appoint
Robert C. Walker and Roberta A. O'Brien, and each of them singly, with full
power of substitution to each, our true and lawful attorneys with full power to
them and each of them singly, to sign for us in our names in the capacities
stated below the Form 10-K Annual Report, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, for the fiscal year ended December 31, 1999 for
HSB Group, Inc., and any and all amendments to said Form 10-K, and generally to
do all such things in our name and on our behalf in our capacities as directors
that will enable the Company to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all requirements of the Securities and
Exchange Commission, which relate to said Form 10-K and the filing thereof,
hereby ratifying and confirming our signatures as they may be signed by our said
attorneys or any one of them to said Form 10-K and any and all amendments
thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Power
of Attorney has been signed by the following persons in the capacities and on
the date indicated.
(Signature) (Title) (Date)
/s/ Richard H. Booth President, Chief March 28, 2000
Richard H. Booth Executive Officer
and Director
/s/ Joel B. Alvord
Joel B. Alvord Director March 27, 2000
/s/ Colin G. Campbell
Colin G. Campbell Director March 26, 2000
/s/ Richard G. Dooley
Richard G. Dooley Director March 27, 2000
<PAGE>
(Signature) (Title) (Date)
/s/ William B. Ellis
William B. Ellis Director March 25, 2000
/s/ E. James Ferland
E. James Ferland Director March 27, 2000
/s/ Henrietta Holsman Fore
Henrietta Holsman Fore Director March 27, 2000
/s/ Simon W. Leathes
Simon W. Leathes Director March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FILED HEREWITH AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 478
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 382
<MORTGAGE> 11
<REAL-ESTATE> 0
<TOTAL-INVEST> 871
<CASH> 127 <F1>
<RECOVER-REINSURE> 850
<DEFERRED-ACQUISITION> 53
<TOTAL-ASSETS> 2263
<POLICY-LOSSES> 782
<UNEARNED-PREMIUMS> 420
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 67
409 <F2>
0
<COMMON> 10
<OTHER-SE> 367
<TOTAL-LIABILITY-AND-EQUITY> 2263
382
<INVESTMENT-INCOME> 64
<INVESTMENT-GAINS> 41
<OTHER-INCOME> 120
<BENEFITS> 166
<UNDERWRITING-AMORTIZATION> 89
<UNDERWRITING-OTHER> 225 <F3>
<INCOME-PRETAX> 109
<INCOME-TAX> 36
<INCOME-CONTINUING> 73
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73
<EPS-BASIC> 2.51<F4>
<EPS-DILUTED> 2.50<F5>
<RESERVE-OPEN> 558
<PROVISION-CURRENT> 653
<PROVISION-PRIOR> 32
<PAYMENTS-CURRENT> 165
<PAYMENTS-PRIOR> 296
<RESERVE-CLOSE> 782
<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, underwriting and inspection and interest
expense.
<F4>Per SFAS No. 128 "Earnings per Share", this item represents EPS-Basic.
<F5>Per SFAS No. 128 "Earnings per Share", this item represents EPS-Assuming
Dilution.
</FN>
</TABLE>
