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
The following Letter to Shareholders was posted on the Investor Relations
section of the HSB Group, Inc. website on October 26, 2000 and is expected
to be mailed on October 30, 2000 to shareholders of record as of October
10, 2000.
HSB GROUP, INC.
Quarterly Report to Shareholders
Dated September 30, 2000
Letter to Shareholders
For the third quarter, HSB had a net loss of $18.0 million or $.62 per
share, compared to net income of $18.8 million or $.64 per share for the
third quarter of 1999.
Results for the third quarter include an extraordinary charge of $.34 a
share associated with the early extinquishment of debt. The results also
include a charge of $20.7 million pretax or $.58 per share with respect to
the special risk insurance business generated by the company's London-based
affiliate, Engineering Insurance Limited. This charge includes provisions
for future claims and certain other expenses as well as a
non-tax-deductible write-down with respect to the goodwill impairment of
that business.
While our domestic Commercial equipment breakdown insurance business
continues to perform very well, the Global Special Risk business has been
adversely affected by a challenging environment. The actions we are taking
position our special risk business appropriately while we work to achieve
improved pricing, terms and conditions.
Also contributing $.53 per share to the loss for the quarter was adverse
loss experience in the company's Global Special Risk segment. The claims
associated with this experience occurred after July 1, 2000, and totaled
$23.2 million after reinsurance recoveries of $24.5 million. The majority
of the gross loss experience was related to international risks. The
insurance combined ratio for the quarter was 121.5 percent excluding the
$20.7 million pretax charge.
Net Engineering Services revenues for the quarter increased 26.5 percent
over the third quarter of 1999. The Engineering Services margin was 6.5
percent compared to 3.6 percent in 1999.
Income from investment operations was $31.3 million compared to $30.0
million in the third quarter of 1999. Realized gains for the quarter were
$.35 per share in 2000 and $.30 per share in 1999.
Please see the remainder of this report for information on the proposed
acquisition of HSB by American International Group as well as other
activities that took place during the quarter.
Sincerely,
/s/ Richard H. Booth
Richard H. Booth
Chairman, President and Chief Executive Officer
Acquisition of HSB by AIG
On August 17, 2000, HSB Group, Inc. (NYSE: HSB) entered into a definitive
agreement whereby American International Group, Inc. (NYSE: AIG) would
acquire 100 percent of the outstanding stock of HSB.
HSB shareholders will receive AIG common stock (or in certain circumstances
at the option of AIG, AIG common stock and cash) with a value equal to $41
per share of HSB common stock. The definitive agreement provides that the
purchase price paid to HSB shareholders will be based on the average
per-share closing sales prices of AIG common stock for each of the 10
consecutive trading days in the period ending five days prior to the
closing date of the merger. HSB and AIG plan to issue a joint press release
announcing the proportion of a share of AIG common stock and cash, if any,
constituting the merger consideration promptly after it is determined. The
total value of the transaction is approximately $1.2 billion.
"Our affiliation with AIG will provide significant opportunities for HSB.
This transaction will permit HSB to leverage the enormous financial
strength, market position and international reach of AIG," said Richard H.
Booth, HSB chairman, president and chief executive officer.
"We are very pleased to have reached this agreement to acquire HSB Group,
Inc., a fine organization that, through its subsidiary, The Hartford Steam
Boiler Inspection and Insurance Company, provides specialty coverages that
complement AIG's insurance products," said AIG Chairman M.R. Greenberg.
"As part of AIG, Hartford Steam Boiler will be able to take advantage of
AIG's relationships and global network to build its business of specialized
insurance and inspection services. Overseas, AIG should be able to open
significant opportunities for Hartford Steam Boiler," said Mr. Greenberg.
HSB will keep its headquarters at One State Street in Hartford, Conn.,
operating under its own brand name and management structure.
In connection with the agreement, HSB has issued to AIG an option to
purchase up to 19.9 percent of its common stock and is also obligated to
pay AIG a fee of $45 million if the agreement is terminated under certain
circumstances. Completion of the acquisition is subject to normal closing
conditions, including approval by HSB's shareholders and various regulatory
approvals. Assuming the satisfaction of such conditions, the companies
expect the closing to occur by the end of this year.
About AIG and More
AIG is the leading U.S.-based international insurance and financial
services organization and the largest underwriter of commercial and
industrial insurance in the United States. Its member companies write a
wide range of commercial and personal insurance products through a variety
of distribution channels in approximately 130 countries and jurisdictions
throughout the world. AIG's global businesses also include financial
services and asset management, including aircraft leasing, financial
products, trading and market making, consumer finance, institutional,
retail and direct investment fund asset management, real estate investment
management, and retirement savings products. American International Group,
Inc.'s common stock is listed on the New York Stock Exchange, as well as
the stock exchanges in London, Paris, Switzerland and Tokyo.
Forward-Looking Statements
This document contains forward-looking statements. These forward-looking
statements are found in various places throughout this report and include,
without limitation, statements concerning the financial conditions, results
of operations and businesses of AIG and HSB. While these forward-looking
statements represent our judgments and future expectations concerning the
development of our business and the timing and benefits of the acquisition,
a number of risks, uncertainties and other important factors could cause
actual developments and results to differ materially from our expectations.
These factors include, but are not limited to, those listed in AIG's 1999
Annual Report on Form 10-K and HSB's 1999 Annual Report on Form 10-K, as
well as the failure of the HSB shareholders to approve the transaction; the
risk that the HSB business will not be successfully integrated into AIG;
the costs related to the transaction; the inability to obtain or meet
conditions imposed for governmental approvals for the transaction; the risk
that anticipated synergies will not be obtained or not obtained within the
time anticipated; and other key factors that we have indicated could
adversely affect our businesses and financial performance contained in our
past and future filings and reports, including those with the United States
Securities and Exchange Commission (the "SEC").
More detailed information about those factors is set forth in filings made
by AIG and HSB with the SEC. Neither AIG nor HSB is under any obligation to
(and expressly disclaims any such obligations to) update or alter its
forward-looking statements whether as a result of new information, future
events or otherwise.
Additional Information and Where to Find It
AIG and HSB have filed a proxy statement/prospectus and other relevant
documents concerning the acquisition with the SEC. WE URGE INVESTORS TO
READ THE PROXY STATEMENT/ PROSPECTUS AND ANY OTHER RELEVANT DOCUMENTS TO BE
FILED WITH THE SEC, BECAUSE THEY CONTAIN IMPORTANT INFORMATION. Investors
are able to obtain the documents free of charge at the SEC's website,
www.sec.gov. In addition, documents filed with the SEC by AIG are available
free of charge from AIG, 70 Pine Street, New York, New York 10270,
Attention: Director of Investor Relations. Documents filed with the SEC by
HSB are available free of charge from HSB, One State Street, P.O. Box 5024,
Hartford, Connecticut 06102-5024, Attention: James C. Rowan, Jr.
Dividend Reinvestment and Direct Deposit Discontinued
If the merger with AIG closes in 2000, HSB's dividend reinvestment and
direct deposit of dividends programs will terminate with the dividend
payable on October 26, 2000, as AIG does not offer either type of program.
Special Shareholders Meeting
A special meeting of HSB shareholders will be held on Monday, November 6,
2000 at 10 a.m. local time at the office of HSB Group, Inc., One State
Street, Hartford, CT 06102-5024 concerning the merger proposal. In order to
help ensure timely delivery by mail, proxies mailed should be sent in by
November 1, 2000. Telephone and internet voting will be accessible until
midnight on November 5, 2000.
HSB Redeems Convertible Capital Securities
On September 14, 2000, HSB redeemed its $300 million convertible capital
securities for a price of $315 million plus accrued interest from Employers
Reinsurance Corporation, a subsidiary of General Electric Capital
Securities Services, Inc.
AIG lent $315 million to HSB, the proceeds of which were used to redeem the
convertible capital securities. This action resulted in an extraordinary
loss of $.34 per share. The five-year term loan to HSB was made in
connection with the previously announced definitive agreement for AIG to
acquire 100 percent of the outstanding stock of HSB.
HSB Sells Integrated Process Technologies to Enron
On September 29, 2000, Hartford Steam Boiler sold its 51 percent interest
in Integrated Process Technologies (IPT) to Enron Energy Services
Operations, Inc., a Houston, Texas-based global energy company. In a
related transaction, HSB completed the sale of a call option the company
held on an additional 29 percent interest in IPT to the other 49 percent
holder in IPT. HSB recognized a pretax gain of $9.8 million or $.22 per
share from these transactions. IPT is a vendor management company that had
been part of HSB's Engineering Services operation since 1997.
Summary of Operations
In millions, except per share amounts
<TABLE>
<CAPTION>
Quarter Percent Year-To-Date Percent
Ended September 30, Change Ended September 30, Change
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross earned premiums $ 157.2 $200.6 -21.6% $ 515.7 $ 616.3 -16.3%
Ceded premiums 51.4 107.9 219.2 333.4
-----------------------------------------------------------------
Insurance premiums $ 105.8 $ 92.7 $ 296.5 $ 282.9
Claims and adjustment expenses 74.0 44.5 150.9 120.7
Policy acquisition expenses 23.3 21.6 64.8 65.5
Underwriting and inspection expenses 31.3 24.4 88.7 72.6
-----------------------------------------------------------------
Insurance operating gain (loss) $ (22.8) $ 2.2 $ (7.9) $ 24.1
-----------------------------------------------------------------
Loss ratio* 70.0% 48.1% 50.9% 42.7%
Expense ratio* 51.5% 49.6% 51.7% 48.8%
Combined ratio* 121.5% 97.7% 102.6% 91.5%
Engineering services revenues $ 38.7 $ 30.6 26.5% $ 115.9 $ 86.0 34.8%
Engineering services expenses 36.2 29.5 107.8 80.3
-----------------------------------------------------------------
Engineering services operating gain $ 2.5 $ 1.1 $ 8.1 $ 5.7
-----------------------------------------------------------------
Engineering services operating margin* 6.5% 3.6% 7.0% 6.6%
Investment income, net of related interest expense $ 16.0 $ 16.5 -3.0% $ 46.5 $ 48.8 -4.7%
Realized investment gains 15.3 13.5 38.8 30.8
-----------------------------------------------------------------
Income from investment operations $ 31.3 $ 30.0 $ 85.3 $ 79.6
-----------------------------------------------------------------
Interest expense 1.5 0.6 2.6 1.6
Provision for international large risk business charges 20.7 - 20.7 -
Gain on sale of interests in Integrated Process Technologies, LLC 9.8 - 9.8 -
-----------------------------------------------------------------
Income (loss) before income taxes and distributions on capital
securities of subsidiary trusts $ (1.4) $ 32.7 $ 72.0 $ 107.8
Income taxes 2.6 9.3 27.1 31.6
Distribution on capital securities of subsidiary trusts, net of
tax 4.1 4.6 13.5 13.6
-----------------------------------------------------------------
Income (loss) before extraordinary item $ (8.1) $ 18.8 $ 31.4 $ 62.6
Loss on extinguishment of capital securities of subsidiary
Trust II, net of tax 9.9 - 9.9 -
-----------------------------------------------------------------
Net income (loss) $ (18.0) $ 18.8 $ 21.5 $ 62.6
=================================================================
Earnings (loss) per common share-assuming dilution:
Income (loss) before extraordinary item $ (0.28)** $ 0.64 $ 1.08 $ 2.10
Net income (loss) $ (0.62)** $ 0.64 $ 0.74 $ 2.10
Dividends declared per common share $ 0.44 $ 0.44 $ 1.32 $ 1.28
Average common shares outstanding and common stock
equivalents 28.8 34.7 29.1 34.6
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Computation excludes rounding
**Net loss per share computed using average common shares outstanding
Summary of Financial Position
In millions, except per share amounts
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and short-term investments $ 118.8 $ 126.5
Fixed maturities, at fair value 486.3 489.8
Equity securities, at fair value 384.1 381.8
-----------------------------------
Cash and invested assets 989.2 998.1
Reinsurance assets 625.4 850.3
Insurance premiums receivable 78.5 104.4
Engineering services receivable 39.5 39.1
Fixed assets 53.5 58.2
Other assets 220.7 213.1
===================================
Total assets $2,006.8 $2,263.2
===================================
Liabilities
Unearned insurance premiums and ceding commissions $ 259.1 $ 420.1
Claims and adjustment expenses 735.3 782.3
Total borrowings 342.6 66.6
Other liabilities 201.3 208.7
-----------------------------------
Total liabilities 1,538.3 1,477.7
Company obligated mandatorily redeemable
capital securities of subsidiary Trust I
holding solely junior subordinated deferrable
interest debentures of the Company,
net of unamortized discount 105.0 109.0
Company obligated mandatorily redeemable
convertible capital securities of subsidiary
Trust II holding solely junior subordinated
deferrable interest debentures of the
Company - 300.0
Shareholders' equity 363.5 376.5
===================================
Total $2,006.8 $2,263.2
===================================
Shareholders' equity per common share* $ 12.56 $ 12.95
Based on common shares outstanding of 28.9 29.1
------------------------------------------------------------------------------------------------
</TABLE>
*Computation excludes rounding
