Filed by HSB Group, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: HSB Group, Inc.
Commission File No. 333-45828
HSB GROUP, INC.
TRANSCRIPT OF MEDIA TELECONFERENCE WITH Q & A
October 24, 2000, 9:00 a.m. EDT
Moderator: Jim Rowan
I. Operator
Good morning, ladies and gentlemen, and welcome to
the third quarter results conference call. At this
time all participants are in a listen only mode.
Later we will conduct a question and answer session
and instructions will follow at that time. If anyone
should require assistance during the call, please
press the star followed by the zero on your
touchtone phone. As a reminder ladies and gentlemen,
this call is being recorded.
I would now like to introduce your host for today's
conference, Mr. Jim Rowan, Chief Investment Officer.
Please go ahead, sir.
II. Disclaimer - J. Rowan
Good morning and thank you for calling in and
listening to our call. I'd like to start off by
mentioning that this news release does contain
forward looking statements within the meaning of the
Private Securities Litigation Reform Act, etc., and
you need to consider anything that is said here in
light of filings that we have made with the
Securities and Exchange Commission and the standard
disclosures that are made therein.
III. Discussion of Press Release - J. Rowan
With that in mind, I would like to mention one other
important paragraph that is in our press release and
this has to do with the agreement that we entered
into and announced on the 18th of August with AIG.
We do state here in the press release that the
proposed transaction with AIG is progressing as
expected and that the special meeting of HSB
shareholders is scheduled for Monday, November 6th
and at the request of AIG a public hearing on the
matter is scheduled with the Insurance Commissioner
of the State of Connecticut for November 8th.
IV. Review of Third Quarter Financial Results - J. Rowan
And now I'd like to go into the quarter's results.
I'm discussing this a little bit differently than
our normal pattern which has been to go through the
income statement. As you can see, we have a number
of unusual items in this quarter, we have broken
them out for you. Start off with a 34 cent charge
which actually is $15 million and this was for the
early redemption of the convertible capital
securities that had been issued to ERC. Those were
extinguished in September and they were replaced by
a loan from AIG in the amount of $315 million and
that transaction, if you will, is reflected on our
balance sheet.
In addition, the quarter also includes a charge for
$20.7 million pre-tax which is 58 cents. And that
has to do with our Special Risks business basically
generated by our London based affiliate. We refer to
it oftentimes as EIG or EIL. This charge includes
provisions for future claims as well as other
expenses and a non-tax deductible write down of the
goodwill impairment of that business. We should note
that this is not a closing of the business but
rather a scaling down of the business.
Over the course of the year we have talked about the
challenges in our Special Risks business,
particularly in our Global Special Risks business
and you will find that this action is consistent
with what we had talked about most recently.
Also contributing to the results in the quarter was
a 53 cent loss from adverse experience in our Global
Special Risks business primarily for losses outside
the United States and losses which have accident
dates of after July 1st, this past summer. And that
results in a combined ratio for our insurance
business of 121%, and primarily as we've stated here
coming from the results of the Special Risks
business.
Our commercial business continues to operate
profitably and operate consistently and growing. Our
premiums are up over 12% year over year. And our
combined ratio was fairly decent for the quarter.
In Engineering Services our revenues were up 26.5%,
our expense were up a bit but we were able to
improve our operating margin substantially, getting
up to 6.5%. Also, as we had discussed earlier, we
were looking for a, call it a solution, to the IPT
problem and that solution was achieved. We did sell
the operation and that's noted in the press release.
That resulted in a capital gain of almost $10
million during the quarter.
In terms of investment income we were down a little
bit from the prior year but up from prior quarter
and realized investment gains were substantial but
we believe consistent with what happened to the
market during the quarter. Our performance vis a vis
the S&P 500 and equity portfolio during the quarter
was quite good so we think we did make the right
moves by reducing some of our equity exposure at
that time. With that, I'd like to turn the session
over to questions.
V. Q & A
Operator Thank you, Mr. Rowan. Ladies and gentlemen at this
time if you have a question, you will need to press
the one on your touchtone phone and you will hear a
tone acknowledging your request. Your questions will
be taken in the order that they are received. If
your question has already been answered you may
remove yourself from queue by pressing the pound
key. Also, if you are using a speakerphone, please
pick up your handset before pressing the buttons.
One moment for the first question.
Melissa Kuan, please state your question.
L. Warner Oh, hi. It's Liz Warner at Goldman Sachs. I just
have a quick question about the global business. And
I'm wondering what your outlook for that marketplace
is in light of the fact that there were some charges
in the quarter from that and also given that AIG
seems pretty focused on SHB's global network?
J. Rowan Liz, at this point we're not making forward looking
statements or projections. However, if you would
look backward in the third quarter we have indicated
for quite some time that the Special Risks business
is quite challenged from a pricing standpoint and
that significant price improvement is needed in that
business.
L. Warner Is it across the board in terms of marketplace and
product or is it isolated in any way to any particular
market?
J. Rowan It doesn't appear to be a geographical issue, Liz.
L. Warner Okay. Thanks.
Operator Jeff Thompson, please state your question.
J. Thompson [Advest] Hi, thanks. Jim, I guess I have a couple of
questions. First on the Global Special Risk reserve
charge, I was wondering, have your reserving
standards changed in the last few years or is it
that it's AIG's more conservative view on reserve
adequacy or is it that just international business
blew up this quarter?
J. Rowan I think the answer, Jeff, is really none of the above.
First of all, AIG was not involved with our results in
this quarter. It's simply a matter, I guess if what
you're saying is, did we have accidents in the Global
Special Risk blow up, yes, that's essentially what
we're saying this was. We had accidents, we've
identified what they were and noted the dollar amounts
here of a total gross of almost $50 million worth of
claims in the third quarter primarily in the
international area.
J. Thompson Okay, so it was an international sort of just blew up
this quarter, not of your fault, but you just had
accidents?
J. Rowan That's true.
J. Thompson Can you describe the nature of the accidents?
J. Rowan They were across the book of business, Jeff, they
were not unusual. We're not talking about a typhoon,
you mean like a natural disaster type of thing?
J. Thompson Right.
J. Rowan No, this was normal equipment breakdown type claims.
J. Thompson Okay and is it the kind of thing that could be fixed
with rate or it's really more selection?
J. Rowan I would say rate primarily. These are the types of
claims that one would expect to get in the business.
You simply have to have enough premium to cover
them, Jeff.
J. Thompson Okay. And the loss ratio, do you have a number
excluding all the reserve strengthening? And I ask
only because you don't disclose what is reserve
strengthening in the EIL charts.
J. Rowan Well, it's not reserve strengthening and the loss
ratio ... I guess one of the things you could do but
this would be not a good idea, is to try and separate
out the Special Risks loss for the third quarter.
Special Risks business has losses every quarter
and so I would not suggest that that's a good tact to go
on.
J. Thompson Okay. And then I think this is the last question. On
Engineering Services, the revenues were up 31%,
that's very strong. I was wondering does that
exclude IPT?
J. Rowan 26%.
J. Thompson 26% excluding IPT?
J. Rowan No, it does not exclude IPT. There are some IPT
revenues in the third quarter.
J. Thompson Okay.
J. Rowan Of 2000 and some IPT expenses as well.
J. Thompson Okay. All right, I guess the last question on the
net earned premiums, 12% is about double the rate
we've seen in previous quarters. Can you explain
what's happening there? How much is rate increases,
how much is new business?
J. Rowan Well, the 12% is primarily coming from commercial.
That was the commercial growth rate, just to give
you an idea, during the quarter.
J. Thompson So is it that the bleeding from the large or Special
Risk has stopped and now we're seeing more the
Commercial growth rate come through the top line?
J. Rowan You could look at it that way, yes, Jeff.
J. Thompson Should I look at it that way?
J. Rowan Well, I mean that's certainly a logical way to look
at it, yes. We had been discussing this issue for
quite some time that we've had ... we've got the
run off of the IRI business.
J. Thompson But I'm looking at earned premium.
J. Rowan Yes.
J. Thompson Net earned premium.
J. Rowan Yes, that's right.
J. Thompson So IRI's not in there, right?
J. Rowan Right.
J. Thompson Okay, so it's more that the quarter...
J. Rowan It's more that the Commercial is growing.
J. Thompson Okay.
J. Rowan That's the message. You've got a difference in
reinsurance on those two lines of business.
J. Thompson Right. So the Special Risk is really more just
stopped or bottomed, it's not actually growing yet?
J. Rowan No.
J. Thompson Okay. Thank you very much.
J. Rowan You're welcome.
Operator Ladies and gentlemen, if there are any additional
questions, please press the one at this time.
Remember to pick up your handset before doing so.
Jim Hoffman, please state your question.
J. Hoffman [Pschonefeld Asset Management] Good morning. When
in the quarter did you notice the increase in
gross loss experience?
J. Rowan We noticed it during the quarter. We're not going to
go into, let's see we've got this claim on August
the 3rd and that claim on August the 19th. That's
not something that we're going to discuss.
J. Hoffman Okay. Was AIG aware of the pricing issues before the
definitive agreement was signed?
J. Rowan I can't speak for them, however if they
listened to our conference call at the end of the
first and second quarters they would have had to
have been aware of the pricing issues.
J. Hoffman Thanks, Jim.
Operator Melissa Kuan, please state your question.
L. Warner [Goldman Sachs] Hi, I just had a quick follow up on
some of the charges. I just wanted to make sure
there were no charges related to any type of
contraction of your infrastructure. In other words,
have you shrunk the size of your business in the
quarter at all in the Global Special Risk area and
also in EIL?
J. Rowan Liz, is that you?
L. Warner It's me.
J. Rowan Okay. They're identifying you as somebody else. Yes,
Liz, the EIL charge does represent, if you will, a
shrinkage of the business. There will be less bodies
occupying less desks, occupying less offices on a
global basis. So that is included in the charge.
L. Warner Okay. And can you break out the amount that's
related to the write down of goodwill?
J. Rowan No.
L. Warner Okay, all right. Thanks.
J. Rowan You're welcome.
Operator Jason Dahl, please state your question.
J. Dahl [Aetus Capital] Yes, good morning. I just had an
additional question regarding AIG's comfort level
regarding the numbers. Could you just walk me
through how they're made aware of your quarter? Have
you had an opportunity to sit down with them and go
over the pricing issues that you're experiencing
overseas and your outlook for them? Is that
something you do in the next few days? Has that
occurred or when will it occur?
J. Rowan I'm not going to go through the process except to
say that the issues that we've talked about have
been discussed publicly since the first and second
quarters of this year so that it would be very
logical I would assume that somebody who's involved
in a merger and an acquisition type of thing would
have gone through these issues. That that's part of
the due diligence that AIG would perform.
J. Dahl Is this something that you walked AIG through during
the process, away from their listening to a
conference call?
J. Rowan Well, of course they were involved in discussions
well beyond the conference call. That's how you get
to a definitive agreement, I would think.
J. Dahl Okay, thank you very much.
J. Rowan Okay.
Operator Ladies and gentlemen, at this time if there are any
further questions, please press the one on your
touchtone phone.
Joel Millikan, please state your question.
J. Millikan [Cardinal Capital] Good morning, Jim.
J. Rowan Good morning.
J. Millikan I got in a little late so you've probably already
covered this but comments about the progress of the
merger and timing?
J. Rowan Yes. As a practice AIG does not give out, if you
will, this is where we are day by day and we've got
this filing done and that one's completed. So that
is not something that we're in a position to do.
What we did mention in the press release is that we
have our shareholders' meeting scheduled for
November the 6th and AIG has scheduled a meeting
with the Insurance Commissioner of the State of
Connecticut on November 8th. So those are the dates,
if you will, that are out there that people know
about.
J. Millikan Is it possible that it could be concluded this calendar
year?
J. Rowan We're hopeful that the acquisition can be concluded
this calendar year, yes. That was stated at the
initial conference, that we were hopeful that the
deal would be closed before the end of the year.
J. Millikan To date nothing has occurred to cause you to have to
revise that statement?
J. Rowan That's fair, Joel. That's a fair assessment, yes.
J. Millikan Well, thank you very much and I appreciate your taking
us out via the equity route so that our taxable
shareholders don't have to pay capital gains. Thanks.
J. Rowan Duly noted.
Operator Jeff Thompson, please state your question.
J. Thompson Hi, just two quick follow ups. First, could you
comment on the market in general? The insurance
market, what kind of rate increases you got in the
quarter and what the tone is? And then secondly, I
was wondering what the benefit of your restructuring
actions are on this quarter and going forward?
J. Rowan Okay. Well, first of all in terms of the commercial
book of business, we did a separate study last
quarter for the quarter's release that discussed the
pricing volume issues in terms of our growth there.
And we did not do a special study for this quarter
but would feel that we are seeing the same type of
progress - part unit, part pricing increase, okay?
In terms of the Special Risks, I think one would
have to step back and say that if we thought we
needed X in terms of a price increase in the second
quarter, that clearly it's X plus more looking at
the third quarter results. So that's basically where
we are on that. In terms of the reduction at EIL,
obviously we are doing that to, if you will, size
the business for what we think the future of it is
and so that would be beneficial going forward.
J. Thompson But can you quantify that amount?
J. Rowan No, not other than what you see, Jeff.
J. Thompson Okay, thanks.
Operator Mr. Rowan, at this time there are no further questions.
Please continue with any closing comments.
VI: Closing Comments - J. Rowan and Operator
J. Rowan Okay. Well this could be the last earnings release
that HSB has as a public company and so I would like
to thank the faithful and I would like to also name
some of the faithful, obviously those who have
followed us. Liz Warner, for example, and I think we
also wish her well with her production that she's
into right at the current time. Jeff Thompson, Tom
Burns, Adam Clabber, Larry Greenberg, and I'd also
like to thank the ever hustling Dick Cagney at
Cochran Coronia. And on the West Coast I think we'd
also have to thank the Peter Emlays for setting up
many of the meetings that I've had with those of you
out there.
We will keep you apprised of the shareholder vote
and you'll see where we go from there. So thank you
very much and have a good Fall. Goodbye.
Operator Ladies and gentlemen, that does conclude our
conference for today. You may all disconnect and
thank you for participating.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This communication contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 that are
management's estimates, assumptions and projections and are not guarantees
of future performance. Forward-looking statements involve known and unknown
risks and uncertainties. These and other important factors, including those
mentioned in various Securities and Exchange Commission filings made
periodically by the company, may cause the company's actual results and
performance to differ materially. Investors and prospective investors
should read this news release in conjunction with the company's most recent
Form 10-K, Form 10-Q and other documents filed with the Securities and
Exchange Commission.
* * * * * * * * * * * * * * * * * * *
You are urged to read the proxy statement/prospectus included in American
International Group, Inc.'s Registration Statement on Form S-4 in
connection with the merger of HSB Group, Inc. and a wholly owned subsidiary
of American International Group, Inc. filed with the Securities and
Exchange Commission because the proxy statement/prospectus and the
Registration Statement on Form S-4 contain important information. Investors
will be able to obtain the documents free of charge at the SEC's website,
www.sec.gov. In addition, documents filed with the SEC by HSB Group, Inc.
will be available free of charge from HSB Group, Inc., One State Street,
P.O. Box 5024, Hartford, Connecticut 06102, Attention: James C. Rowan, Jr.
