-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RQUSj74tYlzrhofRZom74uQcDgmGiA39v2Yk547lwXVvlcV27aLJ0M/xg/TuGzDC +cMXyKq6lzwDqChThEPvzA== 0001034588-98-000012.txt : 19980518 0001034588-98-000012.hdr.sgml : 19980518 ACCESSION NUMBER: 0001034588-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HSB GROUP INC CENTRAL INDEX KEY: 0001034588 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061475343 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13135 FILM NUMBER: 98626105 BUSINESS ADDRESS: STREET 1: ONE STATE ST STREET 2: P O BOX 5024 CITY: HARTFORD STATE: CT ZIP: 06102-5024 BUSINESS PHONE: 8607221866 MAIL ADDRESS: STREET 1: ONE STATE ST STREET 2: PO BOX 5024 CITY: HARTFORD STATE: CT ZIP: 06102 10-Q 1 10-Q DOCUMENT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 001-13135 HSB GROUP, INC. (Exact name of registrant as specified in its charter) CONNECTICUT 06-1475343 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. BOX 5024, ONE STATE STREET, HARTFORD, CONNECTICUT 06102-5024 (Address of principal executive offices) (Zip Code) (860) 722-1866 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since the last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the registrant's common stock without par value, as of March 31, 1998: 19,417,647 HSB GROUP, INC. INDEX PART I FINANCIAL INFORMATION PAGE Consolidated Statements of Operations for the Quarters Ended March 31, 1998 and 1997 (unaudited)........3 Statement of Comprehensive Income for the Quarters Ended March 31, 1998 and 1997 (unaudited).................4 Consolidated Statements of Financial Position as of March 31, 1998 (unaudited) and December 31, 1997 ......5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (unaudited) ...6 Notes to Consolidated Financial Statements (unaudited)....7 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations.............................................11 PART II OTHER INFORMATION Item 1 - Legal Proceedings................................18 Item 6 - Exhibits and Reports on Form 8-K.................20 SIGNATURES.......................................................21 -2- HSB GROUP, INC. Consolidated Statements of Operations (in millions, except per share data) (Unaudited) Quarter Ended March 31 1998 1997 ---------- ---------- Revenues: Insurance premiums $ 101.5 $ 122.3 Engineering services 17.6 14.7 Net investment income 15.2 8.0 Realized investment gains 3.2 0.5 ---------- ---------- Total revenues 137.5 145.5 ---------- ---------- Expenses: Claims and adjustment 44.6 51.5 Policy acquisition 12.6 23.5 Underwriting and inspection 33.5 35.3 Net engineering services 16.1 13.6 Interest 0.1 0.2 ---------- ---------- Total expenses 106.9 124.1 ---------- ---------- Income from continuing operations before income taxes and distributions on capital securities $ 30.6 $ 21.4 Gain on sale of IRI 39.0 - Income taxes (benefit): Current 27.6 6.5 Deferred (5.1) (1.0) ---------- ---------- Total income taxes $ 22.5 $ 5.5 Distribution on capital securities of subsidiary trusts, net of income tax benefits of $2.5 and $ --. 4.5 - ---------- ---------- Income from continuing operations $ 42.6 $ 15.9 Discontinued operations: Loss from operations, net of income tax benefits of (6.6) - $3.2 and $--. Gain on disposal, net of income taxes of $23.7 and $--. 36.9 - ---------- ---------- Total discontinued operations $ 30.3 $ - ---------- ---------- Net income $ 72.9 $ 15.9 ========== ========== Per share data assuming stock split: Net income per common share - basic: Income from continuing operations $ 1.45 $ 0.52 Net income $ 2.49 $ 0.52 Net income per common share - assuming dilution Income from continuing operations $ 1.31 $ 0.52 Net income $ 2.17 $ 0.52 Dividends declared per common share $ 0.40 $ 0.38 Average common shares outstanding and common stock equivalents 35.2 30.7 See Notes to Consolidated Financial Statements. -3- HSB GROUP, INC. Statement of Comprehensive Income (in millions) (Unaudited) Quarter Ended March 1998 1997 ----------- ---------- Net income $ 72.9 $ 15.9 Other comprehensive income, net of tax: Unrealized gains on securities: Unrealized holding gains arising during the period (net of taxes of 9.6; 1.7) 17.2 1.9 Add: reclassification adjustment for losses included in net income 0.2 0.2 ----------- ---------- 17.4 2.1 Foreign currency translation adjustments 0.3 (0.3) ----------- ---------- Other comprehensive income 17.7 1.8 Comprehensive income $ 90.6 $ 17.7 ============ ========== See Notes to Consolidated Financial Statements. -4- HSB GROUP, INC. Consolidated Statements of Financial Position (in millions, except per share data) March 31, December 31, 1998 1997 (Unaudited) -------------- ----------- Assets: Cash $ 20.4 $ 45.3 Short-term investments, at cost 147.3 379.2 Fixed maturities, at fair value (cost -$534.6; $241.1) 538.5 248.4 Equity securities, at fair value (cost - $318.2; $231.3 ) 441.1 323.8 ----------- ----------- Total cash and invested assets 1147.3 996.7 Reinsurance assets 307.1 124.5 Insurance premiums receivable 192.7 138 Engineering services receivable 14.4 12.2 Fixed assets 37.5 36.4 Prepaid acquisition costs 55.5 45.5 Capital lease 15.1 15.3 Investment in Radian - 83.4 Other assets 101.9 88.2 ----------- ---------- Total assets $ 1871.5 $ 1540.2 =========== ========== Liabilities: Unearned insurance premiums $ 467.6 $ 290.3 Claims and adjustment expenses 296.7 276.7 Short-term borrowings 0.9 42.4 Long-term borrowings 25.1 25.1 Capital lease 27.9 27.9 Deferred income taxes 36.1 31.5 Accrued dividends and distributions on capital securities 17.6 13.3 Other liabilities 179.4 78.8 ----------- ---------- Total liabilities 1051.3 786.0 ----------- ---------- Convertible redeemable preferred stock- Series B (stated and redemption value; shares authorized, zero issued and outstanding) 0.0 0.0 Company obligated mandatorily redeemable capital securities of subsidiary Trust I holding solely junior subordinated deferrable interest debentures of the Company, net of unamortized discount of $1.1 and $1.1 million, respectively 108.9 108.9 Company obligated mandatorily redeemable convertible capital securities of subsidiary Trust II holding solely junior subordinated deferrable interest debentures of the Company 300.0 300.0 Shareholders' equity: Common stock (stated value; shares authorized 50.0; shares issued 21.3; shares outstanding 19.4; 19.6) 10.0 10.0 Additional paid-in capital 32.2 31.6 Unrealized investment gains, net of tax 77.5 59.8 Retained earnings 298.3 248.8 Benefit plans -6.7 -4.9 ----------- ----------- Total shareholders' equity 411.3 345.3 ----------- ----------- Total $ 1871.5 $ 1540.2 =========== =========== Shareholders' equity per common share $ 14.12 $ 11.75 See Notes to Consolidated Financial Statements. -5- HSB Group, Inc. Consolidated Statements of Cash Flows (in millions) (Unaudited) Quarter Ended March 31, --------------------- 1998 1997 --------- -------- Operating activities: Net income $ 72.9 $ 15.9 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2.4 1.9 Deferred income taxes (benefit) (5.1) (1.0) Realized investment gains (3.2) (0.5) Realized gain from the disposition of Radian (after tax) (30.3) -- Realized gain from the disposition of IRI (after tax) (25.2) -- Change in: Reinsurance assets (182.6) 26.4 Insurance premiums receivable (54.7) (2.2) Engineering services receivable (2.2) 0.4 Prepaid acquisition costs (10.1) (3.3) Unearned insurance premiums 177.3 11.7 Claims and adjustment expenses 20.0 (16.8) Investment in Radian -- (0.8) Other 56.2 (2.3) ------ ----- Cash provided by operating activities 15.4 29.4 ------ ----- Investing activities: Fixed asset additions, net (3.3) (1.3) Investments: Sale of short-term investments, net 231.9 6.6 Purchase of fixed maturities (307.1) (25.8) Proceeds from the disposition of Radian 128.9 -- Proceeds from the disposition of IRI 49.1 -- Proceeds from sale of fixed maturities 11.6 2.1 Redemption of fixed maturities 2.3 1.5 Purchase of equity securities (132.0) (33.1) Proceeds from sale of equity securities 47.3 37.4 ------ ----- Cash provided by (used in) investment activities 28.7 (12.6) ------ ----- Financing Activities: Increase (decrease) in short-term borrowings (14.4) (11.7) Reacquisition of stock (19.7) -- Exercise of stock options 6.6 0.1 ------ ----- Cash used in financing activities (69.0) (8.7) ------ ----- Net increase (decrease) in cash (24.9) 8.1 Cash at beginning of period 45.3 4.5 ------ ----- Cash at end of period $ 20.4 $ 12.6 ======== ======= Interest paid $ 0.1 $ 0.3 -------- ------- Federal income tax paid $ 0.8 $ 3.8 ------ ------- See Notes to Consolidated Financial Statements. -6- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General The interim consolidated financial statements in this report include adjustments based on management's best estimates and judgments, including estimates of future loss payments, which are necessary to present a fair statement of the results for the interim periods reported. These adjustments are of a normal, recurring nature. The financial statements are prepared on the basis of generally accepted accounting principles and should be read in conjunction with the financial statements and related notes in the 1997 Annual Report. Certain amounts for 1997 have been reclassified to conform with the 1998 presentation. 2. Discontinued Operations On January 2, 1998, the Company exercised its option to put its 40 percent share in Radian International LLC (Radian LLC) to The Dow Chemical Company, (Dow) for approximately $129 million, net of expenses. Radian LLC was formed in January 1996 as a joint venture with Dow to provide environmental, engineering, information technology, remediation and strategic chemical management services to industries and governments world-wide. In connection with the formation of the new company, the Company contributed substantially all of the assets of its wholly-owned subsidiary, Radian Corporation to Radian LLC. The results of Radian LLC were classified as discontinued operations following ratification in July 1997 by the Board of Directors of management's decision to exercise its put. The Company's share of Radian LLC's losses incurred subsequent to such decision of approximately $6.6 million after-tax was deferred until the closing of the sale on January 2, 1998. The after-tax gain of $30.3 million recognized in 1998 is net of deferred losses noted above. In 1996 and prior to July 1997, the Company's share of the joint venture's results were recorded as equity in Radian. 3. Industrial Risk Insurers On January 6, 1998, The Hartford Steam Boiler Inspection and Insurance Company (HSBIIC) sold its 23.5 percent share in Industrial Risk Insurers (IRI) to Employers Reinsurance Corporation (ERC), one of the world's largest reinsurance companies, in accordance with a previously announced purchase and sale agreement between ERC and IRI's twenty-three member insurers. The gain on the sale of IRI was $39.0 million pre-tax and $25.2 million after-tax. IRI is a voluntary, unincorporated joint underwriting association, which provides property insurance for the class of business known as "highly protected risks" (HPR) -- larger manufacturing, processing, and industrial businesses which have invested in protection against loss through the use of sprinklers and other means. Contemporaneous with the close of the sale, IRI was reconstituted with ERC (with a 99.5 percent share) and HSBIIC (with a .5 percent share) as the sole members. The new association has been renamed HSB Industrial Risk Insurers. HSBIIC writes the business for HSB Industrial Risk Insurers using its insurance licenses and provides certain other management and technical services. In addition, through various reinsurance agreements with ERC and HSB Industrial Risk Insurers, HSBIIC transferred its manufacturing book of business to HSB Industrial Risk Insurers and will retain 85% of the equipment breakdown insurance and 15% of the property insurance of the combined insurance portfolio. -7- 4. Recent Accounting Developments In June 1997 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130 " Reporting Comprehensive Income" which requires items that comprise comprehensive income be reported in a financial statement display with the same prominence as other financial statements. This presentation will include such items as market value adjustments of securities, foreign currency translation, and certain adjustments made for benefit plans, which are currently reported as components of the changes in shareholders' equity. This statement is effective beginning in 1998 with retroactive restatement of prior periods required. Also in June of 1997 the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". This standard requires companies to report financial and descriptive information about reportable operating segments. It includes disclosure requirements relating to products and services, geographic areas and major customers. This statement will be effective beginning year end 1998. 5. Legal Proceedings HSBIIC is involved in two arbitration or litigation proceedings regarding the extent to which certain explosion events are insured under boiler and machinery policies of HSBIIC or under the all-risk property insurance policies issued by other companies. Management believes HSBIIC's policies do not provide coverage for losses resulting from the explosion events that are the subject of these proceedings. HSBIIC has accrued $6.5 million with respect to these cases for potential LAE, including legal costs to defend HSBIIC's position. One case is in the process of pre-trial summary judgment motions and appeals; the other case is involved in both arbitration and litigation proceedings. A trial date has not been set for either case. In the event that HSBIIC is held liable for one or both of the remaining claims, amounts in excess of HSBIIC's net maximum aggregate retention of $8.5 million is recoverable from reinsurers. Claim amounts potentially recoverable from reinsurers in the event of a possible adverse outcome in these cases could range, in the aggregate, from $40 million to $195 million. The obligations of HSBIIC's reinsurers with respect to these cases are not in dispute. Therefore, management believes that any adverse outcomes in these cases will not, in the aggregate, have a material effect on either the results of operations or financial condition of the Company. HSBIIC's reinsurance contracts do not require HSBIIC to reimburse its reinsurers for any losses such reinsurers might incur should these cases not be decided in HSBIIC's favor. Nevertheless, reinsurers often quote rates for future coverages based upon their or other reinsurers' experience on a particular account. Therefore, in the event HSBIIC's reinsurers pay significant sums pursuant to the arbitration or litigation proceedings described above, it is likely HSBIIC's reinsurance rates would increase in future periods. However, given the insured capacity that exists in reinsurance markets worldwide, coupled with HSBIIC's ability to negotiate a redesign or restructuring of its reinsurance program, it does not necessarily mean that such an increase would be material. -8- HSBIIC was involved in a third proceeding regarding coverage for loss regarding an explosion event. A lower court ruling in that case held that an explosion did occur, and that HSBIIC was not liable for losses of the insured resulting from the explosion. In a further action, the court denied HSBIIC's motion for summary judgment on certain issues, thus leaving HSBIIC potentially liable for certain unqualified losses resulting from events prior to the explosion. In the first quarter of 1997, HSBIIC and the property insurer jointly settled the case with the insured. A final allocation of the loss in this case was reached in the decision of a mediator dated February 2, 1998. The decision had no material effect on HSB earnings. The Company is also involved in various other legal proceedings as defendant or co-defendant that have arisen in the normal course of its business. In the judgment of management, after consultation with counsel, it is improbable that any liabilities which may arise from such litigation will have a material adverse impact on the results of operations or the financial position of the Company. 6. Earnings per share In February 1997, FASB issued SFAS No. 128, "Earnings per Share". This statement established standards for computing and presenting earnings per share (EPS). It replaced the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The requirements of this statement became effective for year end 1997 financial statements with prior restatement required. Accordingly, comparative information presented in the Consolidated Statements of Operation have been restated in compliance with SFAS No. 128. Previously, the company reported EPS of $ 0.78 per share for the period ended March 31, 1997. On April 21, 1998 the Board of Directors approved a three-for-two stock split for shares held of record on May 1, 1998. Additional shares resulting from the split will be distributed on or about May 22, 1998. In accordance with SFAS No. 128, all earnings per share presentations have been adjusted to reflect the impact of the stock split, including retroactive restatement of prior periods. Earnings per share on a pre-split basis are as follows: Quarter Ended March 31, 1998 1997 ---- ---- Net income per share-basic $3.73 $0.78 Net income per share-assuming dilution $3.26 $0.78 -9- Computation of Earnings Per Share: (shares adjusted to reflect stock split) Quarter Ended March 31, 1998 Income Shares Per Share Net income $72.9 Basic EPS: Income available to common shareholders $72.9(A) Weighted Average Common Shares Outstanding 29.3(B) Net income per common share-basic: $2.49(A/B)* Effect of dilutive securities: After-tax interest on convertible capital securities $ 3.4 Convertible capital securities 5.3 Stock options 0.6 Diluted EPS: Income available to common and assumed conversions: $76.3(C) 35.2(D) Net income per common share-assuming dilution: $2.17 (C/D)*
Quarter Ended March 31, 1997 Income Shares Per Share Net income $15.9 Less: convertible preferred stock dividends 0.4 Basic EPS: Income available to common shareholders $15.5(A) Weighted Average Common Shares Outstanding 30.1(B) Net income per common share-basic: $0.52(A/B)* Effect of dilutive securities: Preferred stock dividends 0.4 Convertible preferred stock 0.6 Stock options - Diluted EPS: Income available to common and assumed conversions: $15.9(C) 30.7(D) Net income per common share-assuming dilution: $0.52 (C/D)
* Computation excludes rounding. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 1998 RESULTS OF OPERATIONS (dollar amounts in millions) Consolidated Overview Quarter Ended March 31 1998 1997 ---- ---- Gross Earned Premium $ 181.7 $ 155.7 Ceded Premium 80.2 33.4 -------- --------- Insurance premium $ 101.5 $ 122.3 Net engineering services revenue 17.6 14.7 Net investment income 15.2 8.0 Realized investment gains 3.2 0.5 -------- --------- Total revenues $ 137.5 $ 145.5 ======== ========= Pre-tax Income from Continuing Operations: Pre-tax income excluding sale of IRI $ 30.6 $ 21.4 Pre-tax Gain on Sale of IRI $ 39.0 -- -------- --------- Pre-tax income $ 69.6 $ 21.4 Income taxes on Continuing Operations $ 22.5 $ 5.5 Distributions on Capital Securities $ 4.5 -- --------- --------- Income From Continuing Operations $ 42.6 $ 15.9 After-tax Gain on Radian Disposal $ 30.3 -- -------- --------- Net income $ 72.9 $ 15.9 ======== ========= Net income per common share: Basic $ 2.49 $ .52 Diluted $ 2.17 $ .52 Net income for the first quarter of 1998 included after-tax gains on the sale of HSB's interests in Industrial Risk Insurers (IRI) of $ 25.2 million and Radian International LLC of $ 30.3 million. The Radian International LLC gain is net of after-tax operating losses of $6.6 million that were deferred in 1997 when the decision was made to exercise HSB's option to put the Company's interest to The Dow Chemical Company. As a result, HSB's interest in Radian International LLC was classified as a discontinued operation. Absent these sales, HSB's after-tax earnings increased 9.9 percent from the first quarter of 1997 due to improved engineering margins and higher realized gains. -11- Gross earned premiums grew 16.7% percent compared to the prior year. Much of this growth is attributable to HSB Industrial Risk Insurers. Contemporaneous with the sale of IRI, the IRI association was reconstituted with Employers Reinsurance Corporation (ERC) (with a 99.5 percent share) and The Hartford Steam Boiler Inspection and Insurance Company (HSBIIC) (with a .5 percent share) as sole members. The new association has been renamed HSB Industrial Risk Insurers. HSBIIC writes the business for HSB Industrial Risk Insurers using its insurance licenses and provides certain other services. HSBIIC transferred its highly protected risk (HPR) manufacturing book of business to HSB Industrial Risk Insurers and through various reinsurance arrangements with ERC, HSBIIC will retain 85 percent of the equipment breakdown business and 15 percent of the property business of the combined insurance portfolio. This arrangement is the largest contributing factor in the growth of both the gross earned premium and the ceded premium. As a result, both the Unearned insurance premium and the Reinsurance assets reflected in the Consolidated Statements of Financial Position have increased significantly. The first quarter combined ratio improved to 89.0 percent in 1998 from 90.0 percent in 1997. Net engineering services revenue increased 19.7 percent for the first quarter and margins in this business grew to 8.4 percent from 7.1 percent in the first quarter of 1997. The effective tax rate on income from continuing operations for the first quarter was 32 percent compared to 26 percent for the comparable prior period. Typically tax rate fluctuations occur as underwriting and engineering services results and realized gains change the mix of pre-tax income between fully taxable earnings and tax preferred earnings that can be obtained by investing in certain instruments. In the first quarter of 1998 the taxes associated with the sale of IRI contributed to the higher effective tax rate. The Company continues to manage its use of tax advantageous investments to maximize after tax earnings. Recent Accounting Developments In June of 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This standard requires companies to report financial and descriptive information about reportable operating segments. It includes disclosure requirements relating to products and services, geographic areas and major customers. This statement will be effective with calendar year 1998, however application is not required for interim financial statements in the initial year. It is possible that this standard may redefine our segment information. However, the Company has not yet determined how SFAS No. 131 will be applied. -12- Insurance Operations Insurance operations include the insurance results of The Hartford Steam Boiler Inspection and Insurance Company; HSB Engineering Insurance Limited (HSB-EIL); The Boiler Inspection and Insurance Company of Canada (BI&I) and The Allen Insurance Company, Ltd. Quarter Ended March 31 1998 1997 ---- ---- Gross earned premium $ 181.7 $ 155.7 Ceded premium 80.2 33.4 --------- --------- Insurance premium 101.5 122.3 Claims and adjustment expenses 44.6 51.5 Underwriting, acquisition and other expenses 46.1 58.8 --------- --------- Underwriting gain $ 10.8 $ 12.0 ========= ========= Loss ratio 43.9% 42.1% Expense ratio 45.1% 47.9% ----- ----- Combined ratio 89.0% 90.0% ===== ===== Gross earned premiums in the first quarter increased 16.7 percent from the comparable period in 1997. This increase was primarily attributable to the new arrangement with HSB Industrial Risk Insurers. Gross earned premiums from IRI increased $24.6 million in 1998 compared to the comparable period in 1997. Gross earned premiums representing coverage outside the U.S. for non HSB Industrial Risk Insurers business increased 5 percent in the first quarter from the comparable period in 1997. In certain areas of our direct domestic and foreign business, the market is experiencing price erosion. HSB will not write business at rates which would lessen our ability to maintain underwriting profit. -13- Increases in ceded premium of 140 percent in the current quarter were the result of both the new HSB Industrial Risk Insurers arrangement previously discussed and related reinsurance with ERC, and changes in the Company's reinsurance programs which now utilize more quota share reinsurance on certain of our books of business. We anticipate these new reinsurance contracts and the HSB Industrial Risk Insurers arrangement will continue to result in high growth in gross earned premium but lower growth in net earned premium. The loss ratio increased from 42.1 percent in the first quarter of 1997 to 43.9 percent in the current quarter. First quarter 1998 results were impacted by severe ice storms in Canada. These storms impacted the loss ratio by approximately 6 percentage points. In the first quarter of 1997 flood related losses impacted the loss ratio by 1.2 percentage points. Gross claims and adjustment expenses for the first quarter 1998 and 1997 were $89.4 million and $74.9 million, respectively. The expense ratio improved to 45.1% in the first quarter of 1998 from 47.9% in the first quarter of 1997. The new quota share reinsurance agreements and the HSB Industrial Risk Insurers arrangement with ERC, both of which result in ceding commissions to HSBIIC have positively impacted our expense ratio by approximately 8 percentage points. Ceding commission should continue to positively impact the expense ratio throughout 1998. A portion of such ceding commission is intended to reimburse HSB for the additional costs of managing HSB Industrial Risk Insurers. Engineering Services Operations Quarter Ended March 31 1998 1997 ---- ---- Net engineering services revenue $ 17.6 $ 14.7 Net engineering services expenses 16.1 13.6 -------- ------- Operating gain $ 1.5 $ 1.1 ======== ======= Net margin 8.4% 7.1% -14- Engineering services operations include the results of HSB's and BI&I's engineering services, HSB Reliability Technologies (HSBRT) and the Company's other engineering services subsidiaries. Net engineering services revenues increased $2.9 million in the first quarter compared to the same period in 1997. The growth in revenues was primarily due to increases generated by HSBRT as their revenues increased 17.7 percent, as well as revenues generated by some recent small acquisitions which were made in the latter part of 1997. The improvement in operating gain from the previous periods reflects efforts to improve staff utilization and a refocus in certain areas on pricing strategies. We are still incurring costs to develop new products which have the objective of increasing growth rates. The Company has been focusing on identifying acquisition candidates in the niche engineering management consulting service business, primarily in process industries, in order to grow the engineering service segment of the business. On May 1, 1998 HSB and Solomon Associates, Inc. (SAI) announced an agreement for HSB to acquire SAI. SAI provides comparative performance benchmarking to 80 percent of the worldwide petroleum refining industry and had gross sales of $13 million in 1997. The company also serves petro-chemical and power generation customers and conducts performance improvement consulting, business valuation assessments, performance monitoring and maintenance database services. Investment Operations Quarter Ended March 31 1998 1997 Net investment income $ 15.2 $ 8.0 Realized investment gains 3.2 0.5 --------- --------- Pretax income from investment operations $ 18.4 $ 8.5 ========== ========== Net investment income for the first quarter increased significantly compared to the first quarter of 1997 due to the investment of proceeds from capital securities issued during the second half of 1997. In addition, proceeds from the January sales of HSB's interests in IRI and Radian International LLC significantly increased investable funds. Realized investment gains were largely driven in 1998 by call premiums on fixed income investments. In 1997 realized gains were reduced by $1.4 million to reflect the estimated fair value of three "zero cost" collar contracts entered into at the end of 1996 which were used to mitigate the effects of market risk on the U.S. common stock portfolio. -15- The Company's investment strategy continues to be to maximize total return on the investment portfolio through investment income and capital appreciation. Investment strategies for any given year are developed based on many factors including operational results, tax implications, regulatory requirements, interest rates, dividends to stockholders and market conditions. The investment portfolio includes a wide variety of high quality equity securities and both domestic and foreign fixed maturities. The Company continues to manage its use of tax advantageous investments to maximize after tax investment earnings. Liquidity and Capital Resources Balances at March 31 December 31 1998 1997 ------------ ------------- Total assets $ 1,871.5 $ 1,540.2 Short-term investments 147.3 379.2 Cash 20.4 45.3 All other invested assets 979.6 572.2 Short-term borrowing .9 42.4 Common shareholder's equity 411.3 345.3 Liquidity refers to the Company's ability to generate sufficient funds to meet the cash requirements of its business operations. The Company receives a regular inflow of cash from maturing investments and engineering services and insurance operations. The mix of the investment portfolio is managed to respond to expected claim pay-out patterns and other cash requirements. The Company also maintains a highly liquid short-term portfolio to provide for immediate cash needs and to offset a portion of interest rate risk relating to certain capital securities. Cash provided from operations was $ 15.4 million in the first three months of 1998 compared to $29.4 million for the same period in 1997. The reduction is primarily the result of the timing of settlement of portfolio transfers related to IRI in the first quarter of 1998 as compared to the first quarter of 1997. Aside from IRI activity, premiums collected were essentially flat compared to the first quarter of 1997 while claims paid declined approximately 36 percent. Net settlements with reinsurers declined 41 percent in the same time period. -16- Capital resources consist of shareholders' equity, capital securities and debt outstanding and represent those funds deployed or available to be deployed to support business operations and investment activities. Common shareholders' equity of $411.3 million at March 31, 1998 increased by $66.0 million since December 31, 1997. The increase primarily reflects net income of $72.9 million for the quarter and an increase in unrealized gains, net of tax, of $17.7 million, offset by common dividends of $11.7 million and common stock repurchases of $19.7 million. At March 31, 1998, the Company had significant short-term and long-term borrowing capacity. The Company is currently authorized to issue up to $75 million of commercial paper. Commercial paper outstanding at March 31, 1998 was $.9 million The Company is involved in two arbitration or litigation proceedings regarding the extent to which certain explosion events are insured under boiler and machinery policies of the Company or under the all-risk property insurance policies issued by other companies. Management believes the Company's policies do not provide coverage for losses resulting from the explosion events that are the subject of these proceedings. In the opinion of management any adverse outcomes in these cases will not, in the aggregate, have a material effect on either the results of operations or financial condition of the Company. More information pertaining to these legal proceedings may be found under note 5 of the Notes to Consolidated Financial Statements herein. The Company continues to evaluate the potential coverage exposures arising out of the year 2000 and its impact on insured equipment. As has been well publicized, many computer systems and date controlled equipment may cease to function or may function in a different manner when the year 2000 arrives because they are programmed to recognize only the last two digits of the year. During the first quarter the Company filed with the various jurisdictions an endorsement to its equipment breakdown forms which reiterates that coverage is not provided for the inherent inability of computers and computerized equipment to properly recognize a particular date or time, such as the year 2000. Quantification of the Company's exposure to year 2000 losses is not possible at this time as applicable policy wordings have not been legally tested in the context of such losses. See discussion on other year 2000 uncertainties in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations in the Company's 1997 Report on Form 10-K. -17- Forward-Looking Statements Certain statements contained in this report are forward-looking and are based on management's current expectations. Actual results may differ materially from such expectations depending on the outcome of certain factors described with such forward-looking statements and other factors including: significant natural disasters and severe weather conditions; changes in interest rates and the performance of the financial markets; changes in the availability, cost and collectibility of reinsurance; changes in domestic and foreign laws, regulations and taxes; the entry of new or stronger competitors and the intensification of pricing competition; the loss of current customers or the inability to obtain new customers; changes in the coverage terms selected by insurance customers, including higher deductibles and lower limits; adverse development on losses and loss adjustment expenses related to claims arising in prior periods; new insurance and reinsurance contract interpretations, including coverage issues related to Year 2000 events; changes in asset valuations; consolidation and restructuring in the financial services industry; changes in the Company's participation in joint underwriting associations, and in particular IRI; changes in the demand and customer base for engineering and inspection services offered by the Company, whether resulting from changes in the law or otherwise, and other general market conditions. PART II - OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- HSBIIC is involved in two arbitration or litigation proceedings regarding the extent to which certain explosion events are insured under boiler and machinery policies of HSBIIC or under the all-risk property insurance policies issued by other companies. Management believes HSBIIC's policies do not provide coverage for losses resulting from the explosion events that are the subject of these proceedings. HSBIIC has accrued $6.5 million with respect to these cases for potential LAE, including legal costs to defend HSBIIC's position. One case is in the process of pre-trial summary judgment motions and appeals; the other case is involved in both arbitration and litigation proceedings. A trial date has not been set for either case. In the event that HSBIIC is held liable for one or both of the remaining claims, amounts in excess of HSBIIC's net maximum aggregate retention of $8.5 million is recoverable from reinsurers. Claim amounts potentially recoverable from reinsurers in the event of a possible adverse outcome in these cases could range, in the aggregate, from $40 million to $195 million. -18- The obligations of HSBIIC's reinsurers with respect to these cases are not in dispute. Therefore, management believes that any adverse outcomes in these cases will not, in the aggregate, have a material effect on either the results of operations or financial condition of the Company. HSBIIC's reinsurance contracts do not require HSBIIC to reimburse its reinsurers for any losses such reinsurers might incur should these cases not be decided in HSBIIC's favor. Nevertheless, reinsurers often quote rates for future coverages based upon their or other reinsurers' experience on a particular account. Therefore, in the event HSBIIC's reinsurers pay significant sums pursuant to the arbitration or litigation proceedings described above, it is likely HSBIIC's reinsurance rates would increase in future periods. However, given the insured capacity that exists in reinsurance markets worldwide, coupled with HSBIIC's ability to negotiate a redesign or restructuring of its reinsurance program, it does not necessarily mean that such an increase would be material. HSBIIC was involved in a third proceeding regarding coverage for loss regarding an explosion event. A lower court ruling in that case held that an explosion did occur, and that HSBIIC was not liable for losses of the insured resulting from the explosion. In a further action, the court denied HSBIIC's motion for summary judgment on certain issues, thus leaving HSBIIC potentially liable for certain unqualified losses resulting from events prior to the explosion. In the first quarter of 1997, HSBIIC and the property insurer jointly settled the case with the insured. A final allocation of the loss in this case was reached in the decision of a mediator dated February 2, 1998. The decision had no material effect on HSB earnings. The Company is also involved in various other legal proceedings as defendant or co-defendant that have arisen in the normal course of its business. In the judgment of management, after consultation with counsel, it is improbable that any liabilities which may arise from such litigation will have a material adverse impact on the results of operations or the financial position of the Company. -19- Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10(ii) - Operating agreement for HSB-IRI Property Insurance Business by and among Employers Reinsurance Corporation, HSB Industrial Risk Insurers L.L.C., Industrial Risk Insurers, and The Hartford Steam Boiler Inspection and Insurance Company, effective as of January 1, 1998 Exhibit 10(iii)(a) - HSB Group, Inc. Long-Term Incentive Plan, as amended and restated effective January 1, 1998 Exhibit 10(iii)(b) - HSB Group, Inc. Short-Term Incentive Plan, as amended and restated effective January 1, 1998 Exhibit 10(iii)(c) - The HSB Group, Inc. Directors Stock and Deferred Compensation Plan, as amended and restated effective January 1, 1998 Exhibit (27.1) - Financial Data Schedule Exhibit (27.2) - Financial Data Schedule (b) Reports on Form 8-K (i) Form 8-K dated January 12, 1998 to report sale of interest in Industrial Risk Insurers and $300 million of convertible capital securities to Employers Reinsurance Corporation; and (ii) Form 8-K dated January 28, 1998 to report Fourth Quarter 1997 Results of Registrant -20- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HSB GROUP, INC. Date: May 15, 1998 By: /s/ Saul L. Basch Saul L. Basch Senior Vice President, Treasurer and Chief Financial Officer Date: May 15, 1998 By: /s/ Robert C. Walker Robert C. Walker Senior Vice President and General Counsel -21- INDEX TO EXHIBITS Exhibit No. Description - ---------- ----------- 10(ii) Operating agreement for HSB-IRI Property Insurance Business by and among Employers Reinsurance Corporation, HSB Industrial Risk Insurers L.L.C., Industrial Risk Insurers, and The Hartford Steam Boiler Inspection and Insurance Company, effective as of January 1, 1998 10(iii)(a) HSB Group, Inc. Long-Term Incentive Plan, as amended and restated effective January 1, 1998 10(iii)(b) HSB Group, Inc. Short-Term Incentive Plan, as amended and restated effective January 1, 1998 10(iii)(c) The HSB Group, Inc. Directors Stock and Deferred Compensation Plan, as amended and restated effective January 1, 1998 27.1 Financial Data Schedule 27.2 Financial Data Schedule EX-10 2 OPERATING AGR. FOR HSB-IRI PROP. INS. BUSINESS Exhibit 10(ii) OPERATING AGREEMENT FOR HSB-IRI PROPERTY INSURANCE BUSINESS by and among EMPLOYERS REINSURANCE CORPORATION HSB INDUSTRIAL RISK INSURERS L.L.C. INDUSTRIAL RISK INSURERS THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Effective as of January 1, 1998 TABLE OF CONTENTS Page No. ARTICLE I - DEFINITIONS 1.1 Definitions..........................................................2 ARTICLE II - GUIDELINES FOR OPERATING THE HSB-IRI BUSINESS 2.1 Operating Guidelines.................................................2 2.1.1 Trade Name...........................................................2 2.1.2 Business Strategy....................................................2 2.1.3 Operation and Management.............................................2 2.1.4 Insurance Policies Issued by HSB.....................................2 2.1.5 Reinsurance Contracts Issued by IRI..................................3 2.1.6 Apportionment of Insurance Risk......................................3 2.1.7 Loss Adjustment Expenses.............................................3 ARTICLE III - APPOINTMENT OF OPERATING MANAGER 3.1 HSB Licensed Status..................................................4 3.2 Appointment of HSB as Operating Manager..............................4 3.3 Performance of Duties................................................4 3.4 Access to Facilities, Property, Books and Records...................4 3.5 License to use IRI Trade Name, Trademarks and Service Marks..........4 3.6 License to use HSB Trade Name, Trademarks and Service Marks..........4 ARTICLE IV -UNDERWRITING, OUTWARD REINSURANCE, LOSS ADJUSTMENT AND ENGINEERING RESPONSIBILITIES OF THE OPERATING MANAGER 4.1 Underwriting Responsibilities........................................5 4.2 Outward Reinsurance..................................................5 4.3 Loss Adjustment......................................................5 4.4 Engineering and Inspection Services..................................6 4.5 Disputes Involving Losses............................................6 ARTICLE V - ACCOUNTING AND REPORTING RESPONSIBILITIES OF THE OPERATING MANAGER 5.1 Premium Collection..................................................6 5.2 Books and Records...................................................6 5.3 Periodic Reporting..................................................6 5.4 Statutory Accounting Principles.....................................7 5.5 Filings in Connection with the HSB-IRI BUSINESS. ...................7 ARTICLE VI - IRI WORKING CAPITAL FUND AND EXPENSE REIMBURSEMENT TO IRI 6.1 IRI Working Capital Fund............................................7 6.2 Funding Level.......................................................7 6.3 Funding of IRI Working Capital Fund Shortfall.......................7 6.4 IRI Claims Fund.....................................................7 6.5 Offsets from Reimbursement Obligation...............................7 6.6 Restructuring and Transitional Expenses. ...........................8 6.7 Reimbursement Payments to IRI.......................................9 6.8 Offset.............................................................10 6.9 Allocation of Investment Earnings..................................10 ARTICLE VII - COMPENSATION TO HSB 7.1 Ceding Commission for Reinsurance Ceded to IRI.....................10 7.2 Ceding Commission on Other Business................................10 7.3 Quarterly Sharing in Savings/Expenses..............................11 7.4 Adjustment to Ceding Commission....................................11 ARTICLE VIII - TERM AND TERMINATION OF AGREEMENT 8.1 Term of Agreement..................................................12 8.2 Termination........................................................12 8.3 Non-Solicitation of Employees......................................13 ARTICLE IX - DISPUTE RESOLUTION 9.1. Negotiation between Executives.....................................13 9.2 Mediation..........................................................13 9.3 Disputes Involving Losses..........................................14 ARTICLE X - MISCELLANEOUS 10.1 Indemnification....................................................14 10.2 Notices............................................................14 10.3 Confidentiality....................................................15 10.4 Invalidity or Unenforceability.....................................15 10.5 Assignablility.....................................................16 10.6 Headings and Exhibits.............................................16 10.7 Execution in Counterparts..........................................16 10.8 Amendments.........................................................16 10.9 Further Assurances.................................................16 10.10 Governing Law......................................................16 EXHIBIT A - Definitions EXHIBIT B - Reinsurance Agreement between HSB and IRI EXHIBIT C - Reinsurance Agreement between ERC and HSB EXHIBIT D - Reinsurance Agreement between HSB and ERC EXHIBIT E - Guarantee of ERC EXHIBIT F - 1997 and 1998 Business Plans OPERATING AGREEMENT for HSB-IRI PROPERTY INSURANCE BUSINESS This Operating Agreement is entered into effective as of January 1, 1998, by and among Employers Reinsurance Corporation (ERC), a Missouri corporation having a principal place of business at 5200 Metcalf, Overland Park, Kansas; HSB Industrial Risk Insurers L.L.C. (LLC), a Connecticut limited liability corporation having a principal place of business at 85 Woodland Street, Hartford, Connecticut; Industrial Risk Insurers (IRI), an unincorporated joint underwriting association having a principal place of business at 85 Woodland Street, Hartford, Connecticut; and The Hartford Steam Boiler Inspection and Insurance Company (HSB), a Connecticut corporation having a principal place of business at One State Street, Hartford, Connecticut. WHEREAS, ERC, pursuant to the Asset and Capacity Sale Agreement and through its subsidiary organization, IRI Management Services L.L.C. (IMS), has acquired, effective as of January 1, 1998, certain of the tangible and intangible assets of IRI and its affiliated Canadian association, Canadian Industrial Risk Insurers (CIRI), both of which are joint underwriting associations offering first party property insurance to highly protected risk (HPR) accounts in industrial/manufacturing occupancies; and WHEREAS, pursuant to the Asset and Capacity Sale Agreement, efffective January 1, 1998 IRI has been reconstituted with ERC having a 99.5% share and HSB having a .5% share and ERC and HSB have agreed to reinsure the former members of IRI for certain liabilities, as more specifically set forth in the Reinsurance Agreement, in accordance with such shares; WHEREAS, HSB owns and operates a property insurance business known as HSB Special Risks-Manufacturing Division offering first party property insurance to HPR accounts in industrial/manufacturing occupancies with principal facilities located in the United States; WHEREAS, ERC and HSB have formed LLC by filing Articles of Organization with the Secretary of State of Connecticut on February 2, 1998 (and as to LLC, this Agreement takes effect from such date) for the purpose of operating a combined venture offering property insurance for HPR industrial/manufacturing occupancies and to which ERC has contributed the IRI book of business and a royalty-free license to use the assets of IMS, and HSB has contributed its U.S. Special Risk-Manufacturing book of business and a royalty-free license to use the HSB trademark/tradename; and WHEREAS, ERC and IRI desire to appoint HSB, and HSB desires to serve, as operating manager for the HPR property insurance venture. NOW THEREFORE, for and in consideration of the mutual promises and covenants contained herein, the parties agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. Capitalized terms used in this Agreement which are not otherwise defined herein shall have the meanings given to such terms in Exhibit A. ARTICLE II GUIDELINES FOR OPERATING THE HSB-IRI BUSINESS 2.1 Operating Guidelines. ERC and HSB, directly and through their Affiliates, shall conduct the HSB-IRI BUSINESS in general accordance with Schedule 4.09 of the Asset and Capacity Sale Agreement and the following: 2.1.1 Trade Name. The HSB-IRI BUSINESS will be conducted under the trade name " HSB Industrial Risk Insurers" and/or variations thereof. 2.1.2 Business Strategy. Business strategy, products and underwriting guidelines will be established by the Members of LLC. 2.1.3 Operation and Management. Day-to-day business operations will be managed by HSB utilizing staff and other resources resident at or made available to LLC, IRI and HSB. HSB shall have discretion in determining the type, quantity, and source of services required to support the HSB-IRI BUSINESS. 2.1.3.1 HSB will be paid the Ceding Commissions specified in Article VII of this Agreement in connection with policies issued by HSB pursuant to Paragraph 2.1.4 and reinsurance assumed by IRI in accordance with Paragraph 2.1.5. Costs of marketing, underwriting, and servicing the HSB-IRI BUSINESS, including the reimbursement to IRI provided under Article VI, except as specifically set forth in this Agreement or as otherwise agreed to by the parties, shall be paid by HSB, or deducted from the Ceding Commissions to be paid to HSB. 2.1.3.2 In operation of the HSB-IRI BUSINESS, it is the general intent of the parties to perform, or to have performed a) customer relationships, marketing, and underwriting activities at IRI, and b) engineering and other technical services at HSB, and c) back office and other business support services at a combination of IRI, LLC, HSB and ERC. 2.1.4 Insurance Policies Issued by HSB. Insurance policies issued in the conduct of the HSB-IRI BUSINESS will be issued on either IRI forms or HSB forms, in either case with HSB (or HSB's subsidiary insurer, The Boiler Inspection and Insurance Company of Canada (BI&I), in the case of insurance covering Canadian locations), as the named insurer. 2.1.5 Reinsurance Contracts Issued by IRI. Reinsurance contracts issued in the conduct of the HSB-IRI BUSINESS will be issued in the name of IRI on behalf of the members of IRI. 2.1.6 Apportionment of Insurance Risk. Policies issued by HSB in accordance with Paragraph 2.1.4 of this Agreement shall be reinsured 100% by IRI and policies issued by BI&I shall be reinsured 100% by CIRI or IRI as determined by the Members of the LLC. Any policies reinsured by CIRI will be reinsured 100% by IRI. Reinsurance by IRI of HSB, BI&I or CIRI will be in accordance with the IRI Reinsurance Agreement attached hereto as Exhibit B, and therefore, ERC and HSB, as the sole members of IRI, will be liable for losses under IRI policy forms in accordance with the Constitution of IRI in proportion to their respective membership shares in the IRI. It is contemplated however, that such risk will be reapportioned between ERC and HSB pursuant to reinsurance agreements executed between each of ERC and HSB substantially in the form attached hereto as Exhibit C and D such that HSB will be liable for 85% of the boiler and machinery losses and 15% of all other property insurance losses associated with the HSB-IRI BUSINESS, and ERC will be responsible for 15% of the boiler and machinery losses and 85% of all other property insurance losses associated with the HSB-IRI BUSINESS. Notwithstanding the foregoing, ERC and HSB at some future date may agree to apportion HSB-IRI BUSINESS written by HSB pursuant to this Agreement in accordance with a Reinsurance Agreement to be executed between ERC and HSB directly without ceding 100% of such business to/or through IRI. Upon request of any Intermediary, ERC agrees to furnish a Guarantee, substantially in accordance with the form attached hereto as Exhibit E, which will guarantee the direct payment to the insured of its IRI membership share of liability for losses, net of any reinsurance recoverable from HSB, pursuant to the HSB Reinsurance Agreement, unless ERC has a reasonable basis for refusing to issue such a guarantee. 2.1.7 Loss Adjustment Expenses. Loss Adjustment Expenses shall be paid by ERC and/or HSB in connection with, and in proportion to, any loss paid in accordance with Paragraph 2.1.6, as adjusted for any retrocession made to HSB and ERC or any direct reinsurance of HSB by ERC as contemplated by Paragraph 2.1.6. ARTICLE III APPOINTMENT OF OPERATING MANAGER 3.1 HSB Licensed Status. HSB represents that it is licensed by the appropriate insurance regulatory authority in all fifty states, the District of Columbia and the territories of Puerto Rico and the U.S. Virgin Islands to write the lines of insurance which comprise the HSB-IRI BUSINESS. BI&I is licensed to write similar lines of insurance in each of the Canadian provinces and territories. With respect to any HSB-IRI BUSINESS covering Canadian locations, HSB will cause such business to be written by BI&I under HSB's direction and shall be treated for purposes of this Agreement as insurance written directly by HSB in connection with the HSB-IRI BUSINESS and apportioned between HSB and IRI in accordance with Paragraph 2.1.5. 3.2 Appointment of HSB as Operating Manager. Except as expressly provided in this Agreement and subject to those actions requiring the prior approval of the Members of LLC, HSB shall be the sole and exclusive operating manager for the HSB-IRI BUSINESS, with full authority on behalf of the parties hereto to manage, conduct and operate the HSB-IRI BUSINESS, and to do all of those things which are necessary, proper or desirable in support of the HSB-IRI BUSINESS. 3.3 Performance of Duties. In discharge of its authority and obligations pursuant to Paragraph 3.2., HSB may perform activities directly, or indirectly through IRI, LLC, Affiliates of the Members of LLC, or any other entity capable of performing such activities. 3.4 Access to Facilities, Property, Books and Records. LLC and IRI shall make available to HSB such space within and access to the physical facilities and property owned, licensed to, or leased by LLC or IRI as is reasonably necessary to permit HSB to fully discharge its duties under this Agreement. HSB shall have full and complete access to the books and records of LLC and IRI, subject to the confidentiality restrictions of Paragraph 10.3, in order to enable HSB to discharge its duties hereunder. ERC shall also make available the books and records of IMS in order to allow HSB to verify any reimbursable operating costs of IRI which relate to the use of assets of IMS. 3.5 License to use IRI Trade Name, Trademarks and Service Marks. ERC shall grant, or cause its Affiliates to grant, to LLC and HSB a royalty-free, terminable license to use any and all necessary trade names, trademarks or service marks which are related to the HSB-IRI BUSINESS, including but not limited to the trade name "Industrial Risk Insurers", "IRI" and/or variations thereof. 3.6 License to use HSB Trade Name, Trademarks and Service Marks. HSB shall grant, or cause its Affiliates to grant, to IRI and LLC a royalty-free, terminable license to use any and all necessary trade names, trademarks or service marks which are related to the HSB-IRI BUSINESS, including but not limited to the trade name "HSB" and/or variations thereof. ARTICLE IV UNDERWRITING, OUTWARD REINSURANCE, LOSS ADJUSTMENT AND ENGINEERING RESPONSIBILITIES OF THE OPERATING MANAGER 4.1 Underwriting Responsibilities. HSB shall be responsible for and shall have authority to perform, or cause to be performed, the following underwriting functions in support of the HSB-IRI BUSINESS: 4.1.1 To accept applications, prepare quotes and issue policy forms or other contracts for insurance and reinsurance in cooperation with the management of IRI and in accordance with the underwriting guidelines, rules and practices established by the Underwriting Committee of LLC. 4.1.2 To file such policy forms and endorsements, rating plans and underwriting rules used in connection with the HSB-IRI BUSINESS as required under the laws and regulations of the jurisdictions within which the HSB-IRI BUSINESS is conducted. 4.1.3 To give and receive notices of cancellation and non-renewals and process cancellations and non-renewals pursuant to the terms and conditions of the policies and reinsurance contracts issued in connection with the HSB-IRI BUSINESS and applicable laws and regulations. 4.2 Outward Reinsurance. The parties will cooperate in the development of Outward Reinsurance strategies and programs in support of the HSB-IRI BUSINESS which HSB and ERC shall be free to participate in or not in accordance with their respective needs. 4.3 Loss Adjustment. HSB shall, in cooperation with the management of IRI and LLC, be responsible for and shall have authority to perform, or cause to be performed, the following loss adjustment functions in support of the HSB-IRI BUSINESS: 4.3.1 To control the investigation, establishment of reserves, adjustment, including litigation, if necessary, settlement and payment of all claims and expenses arising under policies and contracts of insurance and reinsurance issued in connection with the HSB-IRI BUSINESS. 4.3.2 To enforce the subrogation and recovery rights of HSB on its own behalf as the policy issuing entity and on behalf of IRI and/or ERC as reinsurer of such policies, or polices or contracts of insurance or reinsurance issued by other insurers, to remit the proceeds thereof, net of the costs and expenses of recovery and HSB's allocable portion, to ERC (in its capacity as a direct reinsurer of HSB or as a member of IRI) in accordance with the terms of this Agreement, the IRI Reinsurance Agreement and/or of the ERC Reinsurance Agreement. 4.4 Engineering and Inspection Services. HSB shall, in cooperation with the management of IRI and LLC, be responsible for and shall have authority to perform, or cause to be performed, engineering and inspection services in connection with the underwriting, loss prevention and loss adjustment activities provided in support of the HSB-IRI BUSINESS. 4.5 Disputes Involving Losses. Any disputes between ERC and HSB involving insurance losses in connection with the HSB-IRI BUSINESS shall be resolved in accordance with the terms of the ERC Reinsurance Agreement and the HSB Reinsurance Agreement. ARTICLE V ACCOUNTING AND REPORTING RESPONSIBILITIES OF THE OPERATING MANAGER 5.1 Premium Collection. HSB shall (i) collect and account for, or cause to be collected and accounted for, premiums and other remittances or amounts due from policyholders, Outward Reinsurers, all former members of IRI and from any collection facility, including Intermediaries and other persons or institutions that receive remittances with respect to the HSB-IRI BUSINESS and pay commissions related thereto; and (ii) disburse, or cause to be disbursed, such premiums, subject to the offset provisions under Article VI, in accordance with this Agreement. 5.2 Books and Records. HSB shall prepare and maintain, or cause to be prepared and maintained, separate books and records for all transactions on behalf of HSB and ERC relating to the HSB-IRI BUSINESS, including but not limited to underwriting files, claim files, records pertaining to disbursements to third parties and filings with regulatory authorities. Such books and records will be available for inspection by IRI and ERC, and their auditors or designees, during normal business hours upon reasonable notice. In the event of termination of this Agreement, HSB will turn over the books and records relating to the HSB-IRI BUSINESS to ERC, subject to HSB's rights to retain duplicates of such books and records and to have access to the original records to the extent necessary to satisfy any regulatory or contractual obligations. 5.3 Periodic Reporting. HSB will prepare and forward, or cause to be prepared and forwarded, to ERC the following periodic reports relating to the HSB-IRI BUSINESS: 5.3.1 Within thirty (30) days following the end of each month, a monthly income statement which shows the aggregate written premium and other revenues attributable to the HSB-IRI BUSINESS, losses paid (i.e. gross losses less salvage, subrogation, and other recoveries), Loss Adjustment Expenses paid, commissions, the Ceding Commission in accordance with Paragraphs 7.1 and 7.2, any Restructuring or Transitional Expenses paid in accordance with Paragraph 6.6, any other expenses attributable to the HSB-IRI BUSINESS, and the net written premiums due ERC and HSB under the ERC and HSB Reinsurance Agreements. 5.3.2 Within a reasonable period of time following a request by ERC, such other reports, forms and additional information as may be reasonably requested by ERC. 5.4 Statutory Accounting Principles. Reports furnished to ERC in accordance with Paragraph 5.3 shall be prepared on the basis of statutory accounting principles. 5.5 Filings in Connection with the HSB-IRI BUSINESS. HSB shall prepare, or cause to be prepared, and file all returns and reports relating to the HSB-IRI BUSINESS which are required to be made with any governmental authorities, including filings with insurance regulators, residual markets and guaranty associations and filings and premium tax returns with taxing authorities. ARTICLE VI IRI WORKING CAPITAL FUND AND EXPENSE REIMBURSEMENT TO IRI 6.1 IRI Working Capital Fund. ERC and HSB will establish an IRI Working Capital Fund to be used to fund the day-to-day operations of IRI in performing services delegated to it by HSB in accordance with this Agreement. The Working Capital Fund will be funded by HSB and ERC in accordance with their respective membership shares in IRI. The initial funding for the IRI Working Capital Fund will be in the amount of $25 Million., of which ERC will contribute $24,875,000 and HSB will contribute $125,000. 6.2 Funding Level. The IRI Working Capital Fund shall be funded on an on-going basis at a level reasonably estimated by IRI on the basis of its previous experience to cover not more than two months' operating expenses for the HSB-IRI BUSINESS. Reimbursements made by HSB pursuant to Paragraph 6.5 shall be credited to such fund when received. Any cash on hand will be invested in short-term instruments as directed by HSB and the investment earnings thereon will be credited to the Fund. 6.3 Funding of IRI Working Capital Fund Shortfall. Within 15 days following the end of each month IRI shall prepare and submit to HSB a detailed statement supporting its claim for reimbursement of expenses paid by it during the previous month in performing services in accordance with this Agreement. At the same time IRI shall determine the amount of funds, if any, it requires to maintain the funding level specified under Paragraph 6.2, taking into account the reimbursement claim for such month that IRI anticipates submitting to HSB in accordance with Paragraph 6.7 and any other receivables. Any shortfall in the funding level shall be paid by HSB and ERC in accordance with their membership shares within 15 days after receiving the statement reporting such shortfall. 6.4 IRI Claims Fund. There shall be established a Claims Fund from which claim payments of $100,000 or less shall be made arising under policies or contracts of insurance or reinsurance reinsured by IRI pursuant to the IRI Reinsurance Agreement. Loss payments exceeding $100,000 shall be funded by ERC and HSB in accordance with the provisions contained in Section 5.3 of the ERC Reinsurance Agreement and Section 5.3 of the HSB Reinsurance Agreement. The Claims Fund shall initially be funded .5% by HSB and 99.5% by ERC in an aggregate amount of $1,000,000. Thereafter, any shortfall in the Fund will be funded in accordance with each party's proportionate share of the losses giving rise to the shortfall after taking into account the ERC and HSB Reinsurance Agreements. Such shortfall will be determined within 15 days after the end of each month and will be funded by the parties in accordance with the preceding sentence within 15 days after receiving the statement reporting such shortfall. The Claims Fund will be invested in short-term instruments as directed by HSB and the investment earnings thereon will be credited thereto prior to determining any shortfall. 6.5 Offsets from Reimbursement Obligation. The following amounts shall be offset against the reimbursement IRI is entitled to under this Article VI: (i) any revenues for engineering, technical services, underwriting or other similar administrative services performed by IRI or HSB in connection with the issuance or servicing of an insurance policy or reinsurance contract pursuant to the HSB-IRI BUSINESS collected by IRI; and (ii) amounts receivable by IRI and ERC pursuant to the Administrative Services Agreement to the extent that the expenses of providing services under such agreement are reimbursable by HSB hereunder. Other "fee for service" revenues collected by IRI and not includable under subparagraph (i) above will not be treated as an offset against HSB's reimbursement obligation. Such revenues and any related expenses will be accounted for in the manner determined by HSB and ERC pursuant to the LLC Agreement. 6.6 Restructuring and Transitional Expenses. HSB shall not be responsible for reimbursing IRI for any Restructuring Expenses or Transitional Expenses as defined below. 6.6.1 For the purposes of this Paragraph 6.6 "Restructuring Expenses" shall be defined as any cost incurred by ERC, or any of its Affiliates, or IRI at the direction of HSB as operating manager hereunder or otherwise, for the primary purpose of reducing the costs of operating or supporting the HSB-IRI BUSINESS over time including, but not limited to, the following: (i) any severance benefits or other termination-related payments payable by IRI, ERC or any of its Affiliates pursuant to any plan, agreement or arrangement to an employee or former employee of IRI in connection with such employee's termination of employment; (ii) any penalty payment incurred in connection with the early termination of an office lease, equipment lease, software license or other contract obligation relating to any operational expense; (iii) relocation and related expenses incurred in transferring or relocating employees in connection with the HSB-IRI BUSINESS; and (iv) one-time costs to equalize benefits in connection with the transfer or relocation of employees in connection with the HSB-IRI BUSINESS. 6.6.2 To be excludable from reimbursement in accordance with this Paragraph 6.6 a Restructuring Expense must be paid in accordance with a restructuring plan approved in advance by ERC or otherwise be specifically approved by ERC. 6.6.3 For the purposes of this Paragraph 6.6, "Transitional Expenses" shall be defined as any costs incurred within twelve months following the effective date of this Agreement by ERC, or any of its Affiliates, or IRI at the direction of HSB as operating manager hereunder or otherwise: (i) which arise out of the reconstitution of IRI or changes in its membership including, but not limited to, the costs of new marketing materials, signage and stationary; or (ii) which represent the costs of performing overdue certificate inspections (including any fees and penalties payable to jurisdictional authorities in connection with such inspections) and overdue engineering service commitments under IRI service plans in effect on the date of this Agreement. Such costs will be determined in accordance with a methodology to be developed and agreed upon by HSB and ERC within thirty days following execution of this Agreement. 6.7 Reimbursement Payments to IRI. 6.7.1 Requests for reimbursement of expenses of IRI, supported by such documentation and detail as HSB may reasonably request, shall be paid by HSB within 30 days following receipt of such request, except for such specific expense items which HSB is disputing pursuant to this Paragraph 6.7. 6.7.2 Any allocated costs for the use of the assets of IMS in connection with the HSB-IRI BUSINESS shall be calculated using proper cost accounting methods and principles. Any rental payments in connection with the lease dated June 28, 1982, as amended, between IRI Holdings, Inc. (formerly known as 85 Woodland Street Corporation) and IMS as assignee of IRI for the offices of IRI at 85 Woodland Street and any other IMS leases for field offices of IRI shall be reimbursed by HSB on a pass-through basis with no additional mark-up or allocation for ERC or IMS overhead. 6.7.3 If HSB proposes to dispute a specific expense, it will notify IRI of the basis of the denial within 15 days after receiving the reimbursement request. The parties will make a good faith attempt to settle such disputed claim within 30 days after IRI's receipt of the notice referred to in the preceding sentence. If such disputed amount remains outstanding after such 30 days, such dispute will be resolved in the manner set forth under Article IX. 6.8 Offset. ERC, HSB or IRI may offset any balance(s), whether on account of premium, commission, claims or losses, Loss Adjustment Expenses, other expenses, salvage or subrogation recovery or any other amount due from one party to the other under this Agreement, the ERC Reinsurance Agreement, the HSB Reinsurance Agreement, the IRI Reinsurance Agreement, or any other agreement heretofore or hereinafter entered into between or among the parties to this Agreement, which relates to the HSB-IRI BUSINESS when making any payments to the other party under this Agreement. 6.9 Allocation of Investment Earnings. There will be an allocation of investment earnings to ERC and HSB proportionate to each party's ultimate share (after application of the IRI, ERC and HSB Reinsurance Agreements) of the premium dollars which are written in connection with the HSB-IRI BUSINESS. ARTICLE VII COMPENSATION TO HSB 7.1 Ceding Commission for Reinsurance Ceded to IRI. Subject to any agreement between ERC and HSB under which ERC agrees to directly reinsure HSB with respect to the HSB-IRI BUSINESS, HSB agrees to cede and IRI agrees to accept 100% of the liability, including loss adjustment expenses, under policies written in connection with the HSB-IRI BUSINESS in accordance with the terms and conditions of the IRI Reinsurance Agreement attached hereto as Exhibit B. As premium for the reinsurance, HSB shall pay to IRI 100% of the gross premiums written in connection with such business, less a ceding commission of 33% which, together with the Ceding Commissions provided under Paragraph 7.2, shall compensate HSB for the services it performs in connection with this Agreement. 7.2 Ceding Commission on Other Business. With respect to reinsurance contracts entered into in connection with the HSB-IRI BUSINESS under which IRI acts as the assuming reinsurer, HSB shall be paid a Ceding Commission of 33% of the gross written premium ceded to IRI pursuant to such reinsurance contracts. 7.3 Quarterly Sharing in Savings/Expenses. 7.3.1 In the event that the annual Expense Ratio for the HSB-IRI BUSINESS is in excess of 30%, HSB and ERC will share equally in the amount of Operating Costs comprising such excess. In the event that the annual Expense Ratio is below 30%, HSB and ERC will share equally in any savings in Operating Costs with respect to Expense Ratios below 30% and at or above 26%, and will share in any savings in Operating Costs below an Expense Ratio of 26% on the basis of ERC receiving a 75% share and HSB receiving a 25% share. 7.3.2 Within 30 days following the end of each calendar quarter HSB will calculate and notify ERC of the actual year-to date Expense Ratio for operating the HSB-IRI BUSINESS. The Expense Ratio will be computed as follows: X / Y where: X= Operating Costs on a year-to-date basis Y= Gross Written Premiums on a year-to date basis 7.3.3 On the basis of the notice prepared by HSB pursuant to Paragraph 7.3.2, ERC or HSB shall remit to the other, as the case may be, any amounts owed to the other after giving effect to the allocation of any expenses/costs savings set forth in Paragraph 7.3.1 above, taking into account any amounts which have been remitted to each other for any prior quarters within such calendar year. 7.3.4 Attached as Exhibit F is a pro forma business plan for 1997 and a projected business plan for 1998 assuming the HSB-IRI BUSINESS had been operated under this Agreement commencing on January 1, 1997. Exhibit F illustrates the application of the calculation set forth in this Paragraph 7.3. 7.4 Adjustment to Ceding Commission. It is the intent of the parties to operate the HSB-IRI BUSINESS at an expense ratio of 33% or less of Gross Written Premiums, inclusive of HSB's policy issuing and service costs calculated at 3% of Gross Written Premiums, and to share equally, as illustrated in Paragraph 7.3, Operating Costs in excess of 30% and savings in Operating Costs below 30%. However, in the event that the initial expense structure exceeds such 30%, or in the event that any external factor, including but not limited to a change in the commission structure paid brokers or agents (including incentive commissions), causes the expense ratio to exceed the indicated 30% on a constant basis then the parties agree to reexamine the level of commissions set forth in this Article VII (and in the IRI, ERC and HSB Reinsurance Agreements) in a manner that provides HSB with reimbursement of the policy issuing and service costs calculated at 3% of Gross Written Premium as set forth above. ARTICLE VIII TERM AND TERMINATION OF AGREEMENT 8.1 Term of Agreement. This Agreement shall become effective as of January 1, 1998 and shall remain in effect until terminated in accordance with Paragraph 8.2 below. 8.2 Termination. 8.2.1 This Agreement is subject to termination by HSB upon written notice to LLC and ERC, on the occurrence of any of the following events: (i) a voluntary or involuntary proceeding is commenced in any state by or against ERC for the purpose of conserving, rehabilitating or liquidating ERC; (ii)ERC is no longer an accredited reinsurer and arrangements to the satisfaction of HSB to enable it to obtain credit for the reinsurance ceded under the IRI Reinsurance Agreement and ERC Reinsurance Agreement pursuant to applicable laws and regulations are not made; (iii) there is a material breach by ERC, IRI or LLC of any term or condition of this Agreement, and ERC, IRI or LLC has not cured or taken reasonable steps to commence to cure such breach within 20 days of receipt of written notice from HSB of such breach; 8.2.2 This Agreement is subject to termination by ERC, IRI or LLC upon written notice to HSB, on the occurrence of any of the following events: (i) a voluntary or involuntary proceeding is commenced in any state by or against HSB for the purpose of conserving, rehabilitating or liquidating HSB or HSB (or an HSB subsidiary acceptable to ERC) is no longer a licensed insurer in any of the jurisdictions in which direct insurance policies are issued in connection with the HSB-IRI BUSINESS, or an accredited reinsurer and arrangements to the satisfaction of ERC to enable it to obtain credit for the reinsurance ceded under the HSB Reinsurance Agreement are not made; (ii) there is a material breach by HSB of any term or condition of this Agreement, and HSB has not cured or taken reasonable steps to commence to cure such breach within 20 days of receipt of written notice from ERC, IRI or LLC of such breach. 8.2.3 This Agreement may be terminated at any time upon mutual written consent of HSB and ERC, which writing shall state the effective date of termination. 8.2.4 This Agreement will terminate automatically upon the closing date of ERC's purchase of HSB's Member Interest in LLC pursunat to Section 6.2 of the LLC Agreement. 8.3 Non-Solicitation of Employees. During the term of this Agreement and for a period of two years thereafter: (i) HSB agrees that it will not solicit or recruit, nor cause any Affiliate, the principal headquarters of which are located in the United States, to solicit or recruit, any employees of IRI; and (ii) ERC agrees that it will not solicit or recruit, nor cause any Affiliate, the principal headquarters of which are located in the United States, to solicit or recruit, any employees of HSB; provided however, that the foregoing restrictions shall not preclude the solicitation or recruitment by HSB of any former HSB employees who were transferred to the employment of IRI or CIRI, or the solicitation by ERC, IRI or CIRI of any former employees of IRI or CIRI who were transferred to the employment of HSB, during the term of this Agreement. ARTICLE IX DISPUTE RESOLUTION 9.1. Negotiation between Executives. The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiations between executives who have authority to settle the controversy. Any party may give the other party written notice of any dispute not resolved in the normal course of business. Within 20 days after delivery of said notice, executives of the parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to exchange relevant information and to attempt to resolve the dispute. If the matter has not been resolved within 60 days of the disputing party's notice, or if the parties fail to meet within 20 days, either party may initiate mediation of the controversy or claim as provided hereinafter. If a negotiator executive intends to be accompanied at a meeting by an attorney, the other negotiator executive shall be given at least three working days' notice of such intention and may also be accompanied by an attorney. All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of the Federal Rules of Evidence and state rules of evidence. 9.2 Mediation. If the dispute has not been resolved by negotiation as provided above, the parties shall endeavor to settle the dispute by submitting it to the Center for Public Resources (CPR) Institute for Dispute Resolution, New York, New York for mediation under the then current CPR Model Procedure for Mediation of Business Disputes. The neutral third party will be selected from the CPR Panel of Neutrals. If the parties encounter difficulty in agreeing on a neutral, they will seek the assistance of CPR in the selection process. 9.3 Disputes Involving Losses. Disputes involving losses under Policies and contracts of insurance or reinsurance in connection with the HSB-IRI BUSINESS shall be resolved in the manner set forth in the ERC Reinsurance Agreement and the HSB Reinsurance Agreement. ARTICLE X MISCELLANEOUS 10.1 Indemnification. 10.1.1 IRI and ERC shall indemnify HSB and each of its officers, directors, employees and agents (each an "Indemnified Party"), against all judgments, fines, amounts paid in settlement, reasonable costs and expenses, including attorneys' fees, and any other liabilities that may be incurred as a result of any claim, action, suit or proceeding against an Indemnified Party arising out of the provision of services by HSB pursuant to this Agreement, provided, however, that an Indemnified Party shall not be entitled to indemnification if and to the extent that the liability otherwise to be indemnified for results from (i) any act or omission of an Indemnified Party that involves actual fraud or willful misconduct or (ii) any transaction from which an Indemnified Party derives improper personal benefit. HSB shall indemnify ERC and IRI against all judgments, fines, amounts paid in settlement, reasonable costs and expenses, including attorneys' fees, and any other liabilities that may be incurred as a result of any claim, action, suit or proceeding against ERC or IRI arising out of actual fraud or willful misconduct of HSB, its officers, directors, employees or agents in the provision of services by HSB pursuant to this Agreement. The indemnities provided hereunder shall survive termination of the Company and this Agreement. 10.1.2 Any indemnification payment made by IRI pursuant to Paragraph 10.1.1 shall not be a reimbursable expense under Article VI hereunder. 10.1.3 This Paragraph 10.1 shall not apply with respect to the liability of ERC or HSB under any policy or certificate of insurance or contract of reinsurance issued pursuant to this Agreement in connection with the HSB-IRI BUSINESS. 10.2 Notices. Notices required or permitted by this Agreement shall be in writing and shall be delivered personally (by courier or otherwise), sent by facsimile transmission (confirmation received) or sent by certified, registered or express mail, postage prepaid. Any such notice will be deemed given when so delivered personally or sent by facsimile transmission or, if mailed, three days after the date of deposit into the United States mails. All notices or communications under this agreement shall be addressed as follows or to such other address as any party may designate by notice given in accordance with this agreement to the other parties. If to ERC: Employers Reinsurance Corporation 5200 Metcalf Overland Park, Kansas 62201 Attention: General Counsel Facsimile No.: (913) 676-5483 If to HSB: The Hartford Steam Boiler Inspection and Insurance Company One State Street Hartford, CT 06102 Attention: General Counsel Facsimile No.: (860) 722-1818 If to LLC or IRI: HSB Industrial Risk Insurers L.L.C. 85 Woodland Street Hartford, CT 06102 Attention: Chief Executive Officer Facsimile No.: (860) 520-7559 10.3 Confidentiality. IRI will use its best efforts to obtain a waiver of any confidentiality obligations to third parties in connection with the HSB-IRI BUSINESS that would otherwise restrict HSB in performing its duties under this agreement. HSB agrees that it will hold, and will cause its Affiliates and each of their respective directors, officers, employees, partners, counsel, financial advisors, accountants and other representatives to hold, any information so obtained in confidence to the extent reasonably required by such third party. 10.4 Invalidity or Unenforceability. The invalidity or unenforceability of any particular provision of this agreement shall not effect the other provisions and it shall be construed in all respects as if any invalid or unenforceable provision has been amended to the minimum extent necessary to render it valid and enforceable. 10.5 Assignablility. This agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, permitted assigns and legal representatives. Neither this Agreement, nor any right, duty or obligation hereunder, may be assigned by either party (in whole or in part) without the prior written consent of the other party hereto. 10.6 Headings and Exhibits. Headings used herein are not a part of this Agreement and shall not affect the terms hereof. 10.7 Execution in Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. 10.8 Amendments. This Agreement cannot be modified changed or supplemented except in writing and executed to the same degree of formality as that to which this Agreement has been executed. 10.9 Further Assurances. Each of the parties hereto shall execute such documents and other papers and perform such further acts as may be reasonably required to carry out the provisions of this Agreement. 10.10 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to the principles of conflicts of laws thereof. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed by their duly authorized representatives as of the date first above written. EMPLOYERS REINSURANCE CORPORATION By_______________________________________ Its: HSB INDUSTRIAL RISK INSURERS L.L.C. By_______________________________________ Its: INDUSTRIAL RISK INSURERS By_______________________________________ Its: THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY By_______________________________________ Its: EXHIBIT A DEFINITIONS The following definitions are applicable to both the singular and the plural forms of each term defined below. "Administrative Services Agreement" means the Administrative Services Agreement by and among Industrial Risk Insurers, The Members of Industrial Risk Insurers and Employers Reinsurance Corporation dated as of January 6, 1998. "Agreement" has the meaning set forth in the introductory paragraph. "Affiliates" means, with respect to any Person, at the time in question, any other Person controlling, controlled by or under common control with such Person. "Asset and Capacity Sale Agreement" means the Asset and Capacity Sale Agreement entered into by and among Industrial Risk Insurers, The Members of Industrial Risk Insurers and Employers Reinsurance Corporation dated as of December 11, 1997. "Ceding Commissions" means the Ceding Commissions payable to HSB pursuant to Article VII of the Agreement. "Claims Fund" means the Claims Fund of IRI established pursuant to Paragraph 6.4. "Constitution" means the Constitution of Industrial Risk Insurers as in effect on the date of the Agreement, and as amended from time to time hereafter. "ERC Reinsurance Agreement" means the Reinsurance Agreement dated as of January 1, 1998 between ERC as Reinsurer and HSB as Ceding Company relating to the HSB-IRI BUSINESS. "Gross Written Premiums" means the gross premiums written by IRI in connection with the HSB-IRI BUSINESS. "HSB-IRI BUSINESS" means the HPR property insurance business written pursuant to this Agreement on industrial/manufacturing risks with principal facilities located in the United States or Canada, and including any multi-national locations of such risks , and which initially comprises the business underwritten by IRI and the U.S Special Risk Manufacturing business underwritten by HSB on the effective date of this Agreement "HSB Reinsurance Agreement" means the Reinsurance Agreement dated as of January 1, 1998 between HSB as Reinsurer and ERC as Ceding Company related to the HSB-IRI BUSINESS. "Intermediaries" means an individual or entity designated by a policyholder as its broker of record or as the individual or entity that will act on such policyholder's behalf, in some or all respects, in connection with such policyholder's insurance policy. "IRI Reinsurance Agreement" means the Reinsurance Agreement dated as of January 1, 1998 between IRI as Reinsurer and HSB as Ceding Company. "LLC Agreement" means the Limited Liability Company Agreement of HSB Industrial Risk Insurers LLC by and between ERC and HSB. "Members" means the Members of LLC. "Operating Costs" means the expenses of operating the HSB-IRI BUSINESS, net of revenues received for engineering and technical services in support of the HSB-IRI BUSINESS. Such costs include the fully allocated costs, plus a proportionate share of overhead, of HSB to operate the HSB-IRI BUSINESS. "Outward Reinsurance" means reinsurance on the HSB-IRI BUSINESS ceded by IRI on behalf of its members. "Outward Reinsurers" means the reinsurers on the Outward Reinsurance. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Reinsurance Agreement" means the Reinsurance Agreement dated as of January 6, 1998 between ERC and HSB, as reinsurers, and the Members of Industrial Risk Insuirers. "Underwriting Committee" means the Underwriting Committee established pursuant to Section 3.6 of the LLC Agreement. "Working Capital Fund" means the Working Capital Fund of IRI described under Paragraph 6.1. of this Agreement. EXHIBIT B [REINSURANCE AGREEMENT BETWEEN HSB AND IRI] EXHIBIT C [REINSURANCE AGREEMENT BETWEEN ERC AND HSB] EXHIBIT D [REINSURANCE AGREEMENT BETWEEN HSB AND ERC] EXHIBIT E [GUARANTEE OF ERC] EX-10 3 HSB GROUP, INC. LONG TERM INCENTIVE PLAN Exhibit 10(iii)(a) As Amended and restated effective 1/1/98 HSB GROUP, INC. LONG-TERM INCENTIVE PLAN 1. Purposes of Plan The purposes of this Plan are: (a) to provide an additional incentive for Senior Officers and other selected key employees to increase the earnings of the Company on a long-term basis; (b) to attract and retain in the employ of the Company persons of outstanding abilities; and (c) to more closely align the interests of the Senior Officers and other selected key employees with those of the shareholders of the Company. 2. Definitions (a) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (b) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (c) "Board" shall mean the Board of Directors of the Company. (d) "Change in Control" shall be deemed to have occurred if the events set forth in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 23, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 23, 1996 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii)there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities; or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) "Committee" shall mean the Human Resource Committee of the Board or any future committee of the Board performing similar functions. (g) "Company" shall mean HSB Group, Inc. and, except in determining under this Plan whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes this Plan by operation of law, or otherwise. (h) "Disability" shall mean any condition which would entitle an employee of the Company to receive benefits under the Company's Long-Term Disability Plan. (i) "Dividend Equivalent" shall mean an amount equal to the cash dividends that would have been paid with respect to an award of Performance Contingent Units paid hereunder if the award constituted Stock, duly issued and outstanding on the date on which a dividend is payable on the Shares. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (k) "Fair Market Value" shall mean the average of the high and low prices per share of the Company's Shares as reported by the New York Stock Exchange Composite Transaction Reporting System (NYSE) on the date for which the Fair Market Value is being determined, or if no quotations are available for the Company's Shares, for the next preceding date for which such a quotation is available. If Company Shares are not then listed on the NYSE, Fair Market Value shall be reasonably determined by the Committee in its sole discretion. (l) "Participant" shall mean an employee of the Company to whom an award has been made under the Plan. (m) "Performance Contingent Award" shall mean an award of Performance Contingent Units. (n) "Performance Contingent Unit" shall mean the right to receive up to 100% of the value of Shares, which value may be paid in cash or a Stock Grant, as determined by the Committee, contingent upon the achievement of Performance Goals established by the Committee. (o) "Performance Goals" shall mean specific levels of one or more Performance Measures at a corporate and/or business unit level established in writing by the Committee for a particular Performance Period. (p) "Performance Measures" shall mean any of the following: - Insurance Combined Ratio - Expense Ratio - Net Income Per Share - Return on Equity - Total Shareholder Return - Return on Assets - Revenues - Operating Margin - Increase in Book Value - Market Share (q) "Performance Period" shall mean a three-year period, or such other period established by the Committee during which any Performance Goals set by the Committee with respect to a Performance Contingent Award are to be measured. (r) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. (s) "Plan" shall mean the HSB Group, Inc. Long-Term Incentive Plan. (t) "Retirement" shall mean the termination of employment under circumstances which entitle an employee to receive retirement benefits under the Company's Employees' Retirement Plan. (u) "Shares" shall mean the Common Stock of the Company. (v) "Stock Grant" shall mean a grant of Shares or of a right to receive Shares (or their cash equivalent or a combination of both) in the future subject to such conditions and restrictions as the Committee shall determine at the time of grant. 3. Administration of the Plan The Plan shall be administered by the Committee as defined herein. Each member of the Committee shall be a "disinterested director" within the meaning of Rule 16b-3 of the General Rules and Regulations promulgated under the Exchange Act and an "outside director" within the meaning of Section 162(m) of the Code. The Committee is authorized to interpret the Plan and shall adopt guidelines for carrying out the Plan as it may deem appropriate. Such guidelines shall be consistent with the Plan and may include, but need not be limited to, the size and terms of awards to be made and the conditions for payment of such awards. Decisions of the Committee shall be final, conclusive and binding upon all parties concerned, unless otherwise determined by a vote of a majority of the disinterested members of the Board of Directors. 4. Shares Subject To the Plan Subject to Section 9 of the Plan the maximum number of Shares that may be delivered to Participants and their beneficiaries under the Plan shall be 250,000. Any Shares covered by a Stock Grant which are subsequently forfeited, withheld to cover tax withholding or settled in cash shall be deemed to have not been delivered for purposes of determining the maximum number of Shares available for delivery under the Plan. 5. Eligibility (a) All Senior Officers of the Company (presently defined as Chief Executive Officer, President, Executive Vice President, Senior Vice President, Corporate Secretary, Treasurer, General Counsel and Chief Financial Officer) other than any individual expressly excluded by the Committee, are eligible to participate in this Plan. An individual who is elected by the Board as a Senior Officer following the commencement of a Performance Period shall, unless otherwise determined by the Committee, be eligible for an award for such Performance Period(s) based on such individual's Base Salary in effect at the time of such election, and prorated for the number of full months within such Performance Period that such individual was a Senior Officer. (b) The Committee, in its sole discretion, may designate from time to time certain other officers or key employees of the Company, its affiliates and subsidiaries who may participate in this Plan. 6. Establishment of Performance Goals and Performance Contingent Awards (a) Prior to or within ninety days (or such shorter period as is required under Section 162(m) of the Code) following the commencement of each Performance Period, the Committee shall establish in writing for each Participant, or all Participants as a group, specific Performance Goals based on one or more Performance Measures. For each Performance Goal an award schedule of Performance Contingent Units shall be established for minimum, target and maximum attainment of such goal. The actual Performance Contingent Award to be paid to a Participant at the conclusion of the Performance Period shall be based on the level of attainment of the Performance Goals established for such period. The Committee may designate that Performance Contingent Awards shall be credited with Dividend Equivalents during the Performance Period which shall be paid when and if such awards are paid. (b) After Performance Goals have been established, they shall not be modified in respect to the Performance Period to which they relate. 7. Payment of Performance Contingent Awards and Dividend Equivalents (a) Following the end of a Performance Period, the Committee shall ascertain and certify in writing whether and the degree to which the Performance Goals for such period have been met. A Participant shall be entitled to receive payment of an amount not exceeding the Fair Market Value of the maximum award of Performance Contingent Units established by the Committee pursuant to Section 6 hereof based upon the level of attainment of the Performance Goals determined by the Committee. The Committee shall have the authority to reduce the award of any Participant even if the Performance Goals attributable to such award have been met. The Committee shall have no authority hereunder to increase any award calculated under this Plan, except in accordance with Section 16. (b) As soon as practicable following certification by the Committee pursuant to Section 7(a), payment of awards to Participants shall be made. Payments shall be made in cash, a Stock Grant or a combination of the foregoing as prescribed by the Committee and shall be subject to such other conditions and restrictions as the Committee shall establish. (c) Payment of any award of Dividend Equivalents shall be made at the same time as payment of the Performance Contingent Award to which it relates and shall be made in cash or a Stock Grant as prescribed by the Committee. (d) The maximum aggregate Fair Market Value of Performance Contingent Units (determined as of the first trading day of the Performance Period) and Dividend Equivalents which may be awarded to any Participant for any Performance Period shall not exceed $2 million. 8. Deferral of Payment (a) A Participant may, with permission of the Committee elect to defer receipt of all or a specified part of any Performance Contingent Award and related Dividend Equivalents. Such an election shall be subject to such terms and conditions as are prescribed by the Committee. Deferral elections are irrevocable and must be made during the time period and in the manner prescribed by the Committee. (b) To the extent that the Committee, in its discretion, determines that the payment of a Performance Contingent Award would not be deductible by the Company pursuant to Section 162(m) of the Code, the Committee may defer payment of all or the non-deductible portion of such award until such time as such amount would be deductible. The terms and conditions of any such deferral shall be prescribed by the Committee. (c) The right of a Participant to receive any unpaid portion of any amount deferred hereunder shall be an unsecured claim against the general assets of the Company. 9. Adjustments in the Event of Change in Common Stock of the Company In the event of any change in the Shares of the Company by reason of any stock dividend, stock split, recapitalization, reorganization, merger, consolidation, split-up, combination, or exchange of shares, or rights offering to purchase Shares at a price substantially below Fair Market Value, or of any similar change affecting the Shares, the number of Performance Contingent Units awarded which have not been paid and the number of Shares covered by a Stock Grant which have not been delivered, and the number of Shares which may be delivered hereunder, shall be appropriately adjusted consistent with such change in such manner as the Board in its discretion may deem equitable to prevent substantial dilution or enlargement of the awards and rights granted to, or available for Participants hereunder. Any fractional shares resulting from such adjustments shall be eliminated. 10. No Right to an Award or Continued Employment (a) Nothing contained in this Plan or in any resolution adopted or to be adopted by the Board of Directors will constitute the granting of an award hereunder. The granting of an award pursuant to the Plan will take place only when authorized by the Committee. No award and no rights of ownership thereunder will be transferable otherwise than pursuant to Section 12. There is no obligation imposed on the Committee for uniformity of treatment of Participants under the Plan. (b) Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company. 11. Rights on Termination of Employment (a) If a Participant in this Plan shall terminate employment with the Company on account of Retirement or Disability or otherwise terminate employment with the written consent of the Company prior to the expiration of any Performance Period(s) in respect of which such Participant may be eligible for an award, or if a subsidiary at which a Participant is employed shall cease to be a subsidiary of the Company prior to the expiration of any Performance Period(s), the award(s) paid to such Participant shall be prorated according to the number of months of employment in each such Performance Period. (b) A Participant whose employment terminates by dismissal with or without cause, or who voluntarily terminates employment without consent prior to the expiration of a Performance Period, shall lose any right to receive payment of such award. (c) In no event shall an award or a portion thereof the payment of which has been deferred pursuant to Section 8 be subject to forfeiture. 12. Death of a Participant (a) A Participant may file with the Corporate Secretary of the Company a designation of a beneficiary or beneficiaries on the appropriate form, which designation may be changed or revoked by the Participant's sole action, provided that the change or revocation is filed with the Corporate Secretary. In case of the death of the Participant, before or after termination of employment, any earned but unpaid portion of an award to which he or she is entitled and any deferred portions of a deceased Participant's award shall be delivered to the beneficiary or beneficiaries so designated or, if no beneficiary has been designated or survives such Participant, shall be delivered to, or in accordance with the directions of, the executor or administrator of such Participant's estate. (b) If a Participant shall die during a Performance Period, such Participant's beneficiary shall only be entitled to receive the award declared for the Performance Period ending in the year of the Participant's death. 13. Tax Withholding The Company shall have the right to require Participants to remit to the Company an amount sufficient to satisfy any tax withholding requirements or to deduct from any payments made pursuant to the Plan amounts sufficient to satisfy tax withholding requirements. 14. Modification or Termination (a) The Committee may at any time terminate or from time to time modify or suspend, and if suspended, may reinstate any or all of the provisions of this Plan, subject to any requirement for shareholder approval imposed by applicable law, except that no modification of this Plan may be made which will adversely affect any rights or obligations with respect to any awards theretofore made under the Plan. (b) The Corporate Secretary of the Company shall be authorized to make minor or administrative changes in the Plan or changes required by or made desirable by law or government regulation. 15. Change in Control (a) In the event of a Change in Control of the Company, this Plan shall continue to be binding upon the Company, any successor in interest to the Company and all persons in control of the Company or any successor thereto, and no transaction or series of transactions shall have the effect of reducing or canceling the award of a Participant that has been declared but not paid unless consented to in writing by such affected Participant. (b) As soon as practicable following a Change in Control, a Participant shall be paid a lump sum amount in cash equal to the aggregate value of the Performance Contingent Awards payable to the Participant for each of the Performance Periods within which the date of the Change in Control occurs, calculated as to each such Performance Period by multiplying the award that the Participant would have earned on the last day of such Performance Period, assuming the achievement of each of the Performance Goals at the target level established for such Performance Period, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such Performance Period prior to the Change in Control by the total number of months contained in such Performance Period. For purposes of the preceding sentence, the amount of cash delivered in payment of the value of the Performance Contingent Awards shall equal the number of Performance Contingent Units constituting such each such award multiplied by the greater of (i) the highest Fair Market Value per share of Stock at any time during the 60-day period preceding the Change in Control and (ii) if applicable, the price of a Share which is paid or offered to be paid, by any person or entity, in connection with the transaction constituting the Change in Control. The amount paid hereunder shall be in lieu of any other awards payable under this Plan for the Performance Periods within which the Change in Control occurs. (c) Upon a Change in Control, the restrictions and deferral limitations applicable to any Stock Grant made pursuant to Section 7 hereunder shall lapse as of the date of such Change in Control. (d) As soon as practicable following a Change in Control, any awards or Dividend Equivalents previously deferred in accordance with Section 8 hereof, plus interest accrued thereon up until the date of payment, shall be paid in full. 16. Other Plans and Special Awards (a) Nothing contained in this Plan shall prohibit the Committee or the Board from granting other awards or establishing other incentive compensation plans providing for the payment of incentive compensation to employees, including Participants. (b) Notwithstanding Section 6 and the intention of the Committee to maintain tax deductibility of awards granted hereunder pursuant to Section 162(m) of the Code, the Committee reserves the right to grant awards which do not meet the requirements of Section 162(m) as to deductibility (for example, awards based on measures other than Performance Measures or not established in accordance with Section 6 ) in order to recognize unanticipated business conditions or events which have, or are expected to have, a significant effect on the Company. 17. Unfunded Obligations; Trust Agreement (a) The Company will pay from its general assets all awards to be made hereunder. However, the Company may in its discretion, establish a trust, escrow agreement or similar arrangement in order to aid the Company in meeting its obligations hereunder. (b) Any assets transferred by the Company into any such arrangement shall remain at all times assets of the Company and subject to the claims of the Company's general creditors in the event of bankruptcy or insolvency of the Company. No security interest in such assets shall be created in a Participant's favor and a Participant's rights under this Plan and under any such arrangement shall be those of a general unsecured creditor of the Company. 18. Assignment and Alienation Benefits under this Plan may not be anticipated, assigned (either at law or in equity), alienated, or subjected to attachment, garnishment, levy, execution or other legal or equitable process. If any Participant or beneficiary under this Plan becomes bankrupt or attempts to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any benefit under this Plan, such benefit shall, in the discretion of the Committee, cease and terminate, in which event the Committee may hold or apply the same or any part thereof for the benefit of such Participant, his or her beneficiary, spouse, children, other dependents or any of such individuals, in such manner and in such proportion as the Committee may deem proper. 19. Effective Date and Termination of the Plan This Plan, as amended, shall become effective as of January 1, 1998 subject to the approval of the shareholders at their annual meeting in 1998. Unless earlier terminated by the Committee subject to Section 14, the Plan shall terminate on December 31, 2003. No Performance Contingent Award shall be made pursuant to this Plan after the termination date, but awards made prior to its termination date may extend beyond that date. EX-10 4 HSB GROUP, INC. SHORT-TERM INCENTIVE PLAN Exhibit 10(iii)(b) As amended and restated effective 1/1/98 HSB GROUP, INC. SHORT-TERM INCENTIVE PLAN 1. Purpose of Plan The purposes of this Plan are: (a) to provide an additional incentive for officers and other selected key employees to make significant contributions to the performance and growth of the Company, and (b) to attract and retain in the employ of the Company persons of exceptional ability. 2. Definitions As used in the Plan, the following terms shall have the meanings set forth below: a) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. b) "Award" shall mean any award payable under this Plan. c) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. d) "Board" shall mean the Board of Directors of the Company. e) "Change in Control" shall be deemed to have occurred if the events set forth in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 23, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 23, 1996 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii)there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities; or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. f) "Code" shall mean the Internal Revenue Code of 1986, as amended. g) "Committee" shall mean the Human Resource Committee of the Board or any future committee of the board performing similar functions. h) "Company" shall mean HSB Group, Inc. and, except in determining under this Plan whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes this Plan by operation of law, or otherwise. i) "Covered Employee" shall mean a "covered employee" within the meaning of Section 162(m) of the Code. j) "Disability" shall mean any condition which would entitle an employee of the Company to receive benefits under the Company's Long-Term Disability Plan. k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. l) "Fair Market Value" shall mean the average of the high and low prices per share of the Company's Shares as reported by the New York Stock Exchange Composite Transaction Reporting System (NYSE) on the date for which the Fair Market Value is being determined, or if no quotations are available for the Company's Shares, for the next preceding date for which a quotation is available. If the Company's Shares are not then listed on the NYSE, Fair Market Value shall be reasonable determined by the Committee in its sole discretion. m) "Net Income" shall mean after-tax income per share, before cumulative effect of accounting changes, as determined under generally accepted accounting principles, consolidating all subsidiaries and inclusive of realized capital gains and losses. n) "Participant" shall mean an employee of the Company to whom an award has been made under the Plan. o) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries; (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates; (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. p) "Plan" shall mean the HSB Group, Inc. Short-Term Incentive Plan. q) "Plan Year" shall mean a calendar year. r) "Retirement" shall mean the termination of employment under circumstances which entitle an employee to receive retirement benefits under the Company's Employees' Retirement Plan. s) "Shares" shall mean the Common Stock of the Company. t) "Stock Grant" shall mean a grant of Shares or of a right to receive Shares (or their cash equivalent or a combination of both) in the future subject to such conditions and restrictions as the Committee shall determine at the time of grant. u) "Target Award" shall mean an Award level that may be paid if a certain level of Net Income is achieved for a Plan Year. 3. Administration of the Plan The Plan shall be administered by the Committee as defined herein. Each member of the Committee shall be a "disinterested director" within the meaning of Rule 16b-3 of the General Rules and Regulations promulgated under the Exchange Act and an "outside director" within the meaning of Section 162(m) of the Code. The Committee is authorized to interpret the Plan and shall adopt guidelines for carrying out the Plan as it may deem appropriate. Such guidelines shall be consistent with the Plan and may include, but need not be limited to, the size and terms of awards to be made and the conditions for payment of such awards. Decisions of the Committee shall be final, conclusive and binding upon all parties concerned, unless otherwise determined by a vote of a majority of the disinterested members of the Board of Directors. 4. Eligibility for Awards Any employee who is an Officer of the Company (other than any Officer who is the chief executive officer of any Affiliate of the Company and is a participant in the annual bonus plan of such subsidiary, or any individual expressly excluded by the Committee) on or prior to December 31 of each Plan Year is eligible to participate in the Plan and receive an Award pursuant to Section 5 except as provided in Section 6. The Committee may in its discretion designate other key employees to participate in the Plan. Eligibility will be determined at the close of each Plan Year. 5. Basis of Awards At the beginning of each Plan Year, the Committee shall establish Target Awards and the level of Net Income which must be achieved for a Plan Year in order for Target Awards to be payable to Participants. The maximum amount of any Award to be paid to a Participant under the Plan is $2,000,000. The Committee shall have the sole authority to determine the amount of any Award within the above maximum for each Participant. In determining such Award, the Committee shall consider the contribution made by the Participant towards achievement of the Net Income and such other factors as the Committee considers appropriate. 6. Awards to Covered Employees a) If the Committee determines at the time that a Target Award is established for a Participant that such Participant is, or may be as of the end of the tax year for which the Company would claim a tax deduction for such Award, a Covered Employee, then the Committee may provide that this Section 6 is applicable to such Award under such terms as the Committee shall determine. b) If an award is subject to this Section 6, then the level of Net Income which must be achieved for a Plan Year will be established by the Committee within 90 days of the beginning of a Plan Year or within such other time period set forth under Section 162(m) of the Code or any regulations thereunder in order for such level to be considered "pre-established". c) The Committee may, in its discretion reduce the Award payable to a Covered Employee at any time prior to payment based on such criteria it may establish. Notwithstanding any provision in this Plan to the contrary, the Committee may not adjust upwards the amount payable pursuant to any award subject to this Section 6, nor may it waive the achievement of Net Income pre-established by the Committee pursuant to this Section 6 except in the case of a Participant who no longer is a Covered Employee at the time such award is paid. d) Prior to the payment of any Award to a Covered Employee pursuant to this Section 6, the Committee shall certify in writing that the Net Income level applicable to such Award has been met. e) The Committee shall have the power to impose such other restrictions on awards subject to this Section 6 as it may deem necessary or appropriate to ensure that such Awards satisfy all requirements for "performance-based compensation" within the meaning of section 162(m) of the Code, and any regulations thereunder. 7. Timing and Form of Payment of Awards The Committee will have the sole discretion to determine the form of payment of an Award for each Participant. Awards may be payable in cash or in the form of a Stock Grant, or a combination of the foregoing and shall be subject to such other conditions and restrictions as the Committee shall establish. 8. Deferral of Payment a) A Participant may, with permission of the Committee elect to defer receipt of all or a specified part of any Award. Such an election shall be subject to such terms and conditions as are prescribed by the Committee. Deferral elections are irrevocable and must be made during the time period and in the manner prescribed by the Committee. b) To the extent that the Committee, in its discretion, determines that the payment of an Award would not be deductible by the Company pursuant to Section 162(m) of the Code, the Committee may defer payment of all or the non-deductible portion of such Award until such time as such amount would be deductible. The terms and conditions of any such deferral shall be prescribed by the Committee. c) The right of a Participant to receive any unpaid portion of any amount deferred hereunder shall be an unsecured claim against the general assets of the Company. 9. Tax Withholding The Company shall have the right to require Participants to remit to the Company an amount sufficient to satisfy any tax withholding requirements or to deduct from any payments made pursuant to the Plan amounts sufficient to satisfy tax withholding requirements. 10. No Right to an Award or Continued Employment a) Nothing contained in this Plan or in any resolution adopted or to be adopted by the Board of Directors will constitute the granting of an Award hereunder. The granting of an Award pursuant to the Plan will take place only when authorized by the Committee. No Award and no rights of ownership thereunder will be transferable otherwise than pursuant to Section 12. There is no obligation imposed on the Committee for uniformity of treatment of Participants under the Plan. b) Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company. 11. Rights on Termination of Employment a) If a Participant in this Plan shall terminate employment with the Company on account of death, Retirement or Disability or otherwise terminates employment with the written consent of the Committee prior to the end of any Plan Year in respect of which such Participant may be eligible for an Award, the amount of the award, if any, payable to the Participant or his or her beneficiary, shall be prorated based upon the number of full and partial months of employment within such Plan Year. b) A Participant whose employment terminates by dismissal with or without cause, or who voluntarily terminates his or her employment without consent prior to the expiration of a Plan Year, will not be entitled to receive an award under the Plan. Notwithstanding the foregoing, a Participant whose employment terminates within two years following a Change in Control and prior to the end of any Plan Year shall be entitled to receive an Award as though such termination was with the written consent of the Committee. c) In no event shall an Award or a portion thereof, the payment of which has been deferred pursuant to Section 8 be subject to forfeiture. 12. Designation of Beneficiary A Participant may file with the Corporate Secretary of the Company a designation of a beneficiary or beneficiaries on the appropriate form, which designation may be changed or revoked by the Participant's sole action, provided that the change or revocation is filed with the Corporate Secretary. In case of the death of the Participant, before or after termination of employment, any Award to which he or she is entitled and any deferred portions of a deceased Participant's Award shall be delivered to the beneficiary or beneficiaries so designated or, if no beneficiary has been designated or survives such Participant, will be delivered to, or in accordance with the directions of, the executor or administrator of such Participant's estate. 13. Change in Control a) In the event of a Change in Control of the Company, this Plan shall continue to be binding upon the Company, any successor in interest to the Company and all persons in control of the Company or any successor thereto and no transaction or series of transactions shall have the effect of reducing or canceling the Award of a Participant that has been declared but not paid unless consented to in writing by such affected Participant. b) As soon as practicable following a Change in Control, a Participant shall be paid a lump sum amount in cash equal to the Target Award payable to the Participant (in lieu of any other award payable hereunder for the Plan Year within which the Change in Control occurs) and any Awards previously deferred in accordance with Section 8 hereof, plus interest accrued thereon up until the date of payment. c) Upon a Change in Control the restrictions and deferral limitations and other conditions applicable to any Stock Grant made pursuant to Section 7 shall lapse as of the date of such Change in Control. 14. Unfunded Obligations; Trust Agreement a) The Company will pay from its general assets all awards to be made hereunder. However, the Company may in its discretion establish a trust, escrow agreement or similar arrangement in order to aid the Company in meeting its obligations hereunder. b) Any assets transferred by the Company into any such arrangement shall remain at all times assets of the Company and subject to the claims of the Company's general creditors in the event of bankruptcy or insolvency of the Company. No security interest in such assets shall be created in a Participant's favor and a Participant's rights under this Plan and under any such arrangement shall be those of a general unsecured creditor of the Company. 15. Assignment and Alienation Benefits under this Plan may not be anticipated, assigned (either at law or in equity), alienated, or subjected to attachment, garnishment, levy, execution or other legal or equitable process. If any Participant or beneficiary under this Plan becomes bankrupt or attempts to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any benefit under this Plan, such benefit shall, in the discretion of the Committee, cease and terminate, in which event the Committee may hold or apply the same or any part thereof for the benefit of such Participant, his or her beneficiary, spouse, children, other dependents or any of such individuals, in such proportion as the Committee may deem proper. 16. Modification or Termination of the Plan a) The Committee may at any time terminate or from time to time modify or suspend, and if suspended, may reinstate any or all of the provisions of this Plan, subject to any requirement for shareholder approval imposed by applicable law, except that no modification of this Plan may be made which will adversely affect any rights or obligations with respect to any awards theretofore made under the Plan. b) The Corporate Secretary of the Company shall be authorized to make minor or administrative changes in the Plan or changes required by or made desirable by law or government regulation. 17. Other Plans and Special Awards a) Nothing contained in this Plan shall prohibit the Committee or the Board from granting other awards or establishing other incentive compensation plans providing for the payment of incentive compensation to employees, including Participants. b) Notwithstanding Section 6 and the intention of the Committee to maintain tax deductibility of awards granted hereunder to Covered Employees pursuant to Section 162(m) of the Code, the Committee reserves the right to grant awards which do not meet the requirements of Section 162(m) as to deductibility (for example, awards based on measures other than Net Income or otherwise not established in accordance with Section 6 ) in order to recognize unanticipated business conditions or events which have, or are expected to have, a significant effect on the Company. 18. Shares Subject to the Plan a) Subject to Section 18 ( b), the maximum number of Shares that may be delivered to Participants and their beneficiaries under the Plan shall be 250,000. Any Shares covered by a Stock Grant which are subsequently forfeited, withheld to cover tax withholding or settled in cash shall be deemed to have not been delivered for purposes of determining the maximum number of Shares available for delivery under the Plan. b) In the event of any change in the Shares of the Company by reason of any stock dividend, stock split, recapitalization, reorganization, merger, consolidation, split-up, combination, or exchange of shares, or rights offering to purchase Shares at a price substantially below Fair Market Value, or of any similar change affecting the Shares, the number of Shares covered by a Stock Grant which have not been delivered, and the number of Shares which may be delivered hereunder, shall be appropriately adjusted consistent with such change in such manner as the Board in its discretion may deem equitable to prevent substantial dilution or enlargement of the awards and rights granted or made available to Participants hereunder. Any fractional Shares resulting from such adjustments shall be eliminated. 19. Effective Date This Plan as amended and restated shall be effective as of January 1, 1998, subject to approval by shareholders at their annual meeting in 1998, and shall remain in effect until such time as it shall be terminated by the Committee. EX-10 5 DIRECTORS STOCK AND DEFERRED COMPENSATION PLAN Exhibit 10(iii)(c) As amended and restated effective January 1, 1998 THE HSB GROUP, INC. DIRECTORS STOCK AND DEFERRED COMPENSATION PLAN 1. Purposes of the Plan. The purposes of The HSB Group, Inc. Directors Stock and Deferred Compensation Plan are: (a) to attract and retain persons of ability as directors of the Company; (b) to more closely align directors' interests with those of shareholders; and (c) to encourage the highest level of contribution by directors to the financial success of the Company by providing a significant portion of their compensation in the form of equity in the Company. 2. Definitions. "Annual Award" shall mean the annual award made to a Director of Stock Equivalent Units or Restricted Stock as determined pursuant to Section 5. "Board" shall mean the Board of Directors of the Company. "Cash Compensation" shall mean the total of the annual cash retainer and fees for attending and/or chairing any meeting of the Board or a committee of the Board payable to a Director for any Plan Year. "Change in Control" shall have occurred for purposes of this Plan if : (a) any "person" (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five (25%) or more of the Company's then outstanding securities; (b) during any period within two (2) consecutive years there shall cease to be a majority of the Board of Directors comprised as follows: individuals who at the beginning of such period constitute the Board of Directors and any new director(s) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved; or (c) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of voting securities after such merger or consolidation or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 25% of the combined voting power of the Company's then outstanding securities; or (d) the shareholders of the Company approve (i) a plan of complete liquidation of the Company or (ii) the sale or other disposition of all or substantially all the Company assets. "Committee" shall mean the Governance Committee of the Board or any future committee of the Board performing similar functions. "Company" shall mean HSB Group, Inc. "Deferred Account" shall mean the account established and maintained for a Director under the Plan pursuant to an election made pursuant to Section 8. "Deferral Election" shall mean the election to defer receipt of Cash Compensation in accordance with Section 8. "Director" shall mean a non-employee director of the Company. "Dividend Equivalent" shall mean an amount equal to the dividend that would have been paid with respect to a Stock Equivalent Unit if such unit had constituted a share of Stock, duly issued and outstanding on the date a dividend is payable on the Stock. "Fair Market Value" shall mean the average of the high and low prices per share of the Company's Stock as reported by the New York Stock Exchange Composite Transaction Reporting System (NYSE) on the date for which the Fair Market Value is being determined, or if no quotations are available for the Company's Stock, for the next preceding date for which such a quotation is available. If shares of Company Stock are not then listed on the NYSE, Fair Market Value shall be reasonably determined by the Committee in its sole discretion. "Plan" shall mean The HSB Group, Inc. Directors Stock and Deferred Compensation Plan. "Plan Year" shall mean the calendar year. "Restricted Stock" shall mean shares of Stock awarded to a Director under Section 7 of the Plan and subject to the terms and conditions set forth in the Plan. "Stock" shall mean the common stock of the Company. "Stock Equivalent Unit" shall mean the right to receive the Fair Market Value of a share of Stock in the form of cash or Stock as elected in accordance with Section 10 hereof and subject to the conditions set forth in the Plan. 3. Administration of the Plan. The Plan shall be administered by the Committee as defined herein. The Committee is authorized to interpret the Plan and shall adopt guidelines for carrying out the Plan as it may deem appropriate. Decisions of the Committee shall be final, conclusive and binding upon all parties concerned, unless otherwise determined by the Board of Directors. 4. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum number of shares of Stock which may be delivered to Directors under the Plan shall be 100,000. Any shares of Stock covered by a Restricted Stock award which are subsequently forfeited or withheld to cover tax withholding shall be deemed to have not been delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan. 5. Annual Awards Annual Awards for the 1997 Plan Year were made to all participating Directors in the form of Stock Equivalent Units. For the 1998 and subsequent Plan Years, Annual Awards shall be made in the form of Restricted Stock, however, if an award would be currently taxable to a Director based on the laws of the country under which the awards payable hereunder would be taxed, such Director's Annual Award will be made in the form of Stock Equivalent Units. Awards of Stock Equivalent Units and Restricted Stock are made subject to the provisions of Articles 6 and 7, respectively. 6. Award of Stock Equivalent Units. If a Director's Annual Award for a Plan Year is to be made in the form of Stock Equivalent Units, as of the last day of such Plan Year, an award of Stock Equivalent Units shall be made to such Director in an amount equal to 550 multiplied by a fraction where the numerator is the number of full or partial months within such Plan Year that such individual served as a Director and the denominator is 12. In the event that such Director's service on the Board terminates for any reason prior to the end of the Plan Year, as soon as practicable following such termination such Director's award will be determined in accordance with the formula in the preceding sentence but as of the date of such Director's termination. 7. Award of Restricted Stock (a) If a Director's Annual Award for a Plan Year is to be made in the form of Restricted Stock, as of the last day of such Plan Year, an award of Restricted Stock shall be made to such Director in an amount equal to 550 multiplied by a fraction where the numerator is the number of full or partial months within such Plan Year that such individual served as a Director and the denominator is 12. In the event that such Director's service on the Board terminates as a result of any of the circumstances described in Section 7(c) prior to the end of the Plan Year, as soon as practicable following such termination such Director's award will be determined in accordance with the formula in the preceding sentence but as of the date of such Director's termination. (b) Each Restricted Stock award shall be evidenced by a written instrument delivered to the Director in such form as the Committee shall prescribe. The Restricted Stock subject to such award shall be registered in the name of the Director and held in escrow by the Committee until the restrictions on such shares lapse as described herein. (c) Restricted Stock awarded to a Director may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, prior to the earliest of the following dates: (i) the Director's death, disability or retirement from the Board after reaching age 70; (ii) the occurrence of a Change in Control of the Company; or (iii) the Director's resignation from the Board in specific circumstances (as determined in accordance with procedures established by the Committee) with the consent of a majority of the Board of Directors. (d) If a Director's service on the Board terminates for reasons other than those provided in Section 7(c), any shares remaining subject to restrictions shall thereupon be forfeited by the Director and transferred to and reacquired by the Company at no cost to the Company, and any Restricted Stock credited to a Director but not yet awarded pursuant to Section 7(a) shall not be awarded. (e) After the shares of Restricted Stock are actually awarded, Directors shall, subject to Section 7(c), possess all incidents of ownership of the shares of Restricted Stock including the right to receive dividends with respect to such shares and to vote such shares. Dividends will be paid to Directors in cash. 8. Election to Defer Receipt of Cash Compensation. (a) A Director shall have the right to make on an annual basis an election to defer payment of all, or a percentage of, the total Cash Compensation to be earned during the ensuing Plan Year (a "Deferral Election"). In order to make a Deferral Election pursuant to this Section 8, a Director shall deliver to the Corporate Secretary of the Company no later than the last business day prior to the commencement of the first Plan Year to which such election relates a written notice setting forth the percentage of Cash Compensation to be deferred and whether such cash should be (i) converted into Stock Equivalent Units in accordance with subsection (b) below; (ii) converted into shares of Restricted Stock in accordance with subsection (c) below; or (iii) credited as cash to a Deferred Account maintained for such Director on the date such compensation would otherwise be paid. Individuals who become Directors during a Plan Year shall have thirty days following their election or appointment to make a Deferral Election for the remainder of the Plan Year. Any Deferral Election made pursuant to this Section 8 shall remain in effect for subsequent Plan Years until a new election form is delivered to the Corporate Secretary in accordance with this section. (b) As soon as practicable following the end of a Plan Year, each Director who made a Deferral Election in the form of Stock Equivalent Units will be credited as of the last day of the Plan Year with the number of units, including fractional units, equal to the amount of the Cash Compensation, the payment of which has been deferred, divided by the Fair Market Value of shares of Stock on the date such compensation would otherwise have been paid. In the event that a Director's service on the Board terminates for any reason prior to the end of a Plan Year, the calculation referred to in the preceding sentence shall be made as soon as practicable following such Director's date of termination. (c) As soon as practicable following the end of a Plan Year, each Director who made a Deferral Election in the form of Restricted Stock will be awarded as of the last day of the Plan Year the number of whole shares of Restricted Stock approximately equal to the amount of the Cash Compensation, the payment of which has been deferred, divided by the Fair Market Value of shares of Stock on the date such compensation would otherwise have been paid. Any fractional number obtained by dividing the amount of Cash Compensation by the Fair Market Value will be rounded up or down to the nearest whole number of shares. In the event that a Director's service on the Board terminates as a result of circumstances described in Section 7(c) prior to the end of a Plan Year, the calculation referred to in the preceding sentence shall be made as soon as practicable following such Director's date of termination and payment shall be made in shares of Stock. 9. Dividend Equivalents Payable on Stock Equivalent Units and Restricted Stock and Interest Paid on Deferred Cash Accounts. (a) Dividend Equivalents shall be credited on Stock Equivalent Units held by Directors based upon dividends paid on shares of Stock between the date such Stock Equivalent Units are credited to Directors and the date they are ultimately paid out in accordance with the Plan. (b) Dividend Equivalents shall, at the election of the Director, be either (i) paid in the form of cash as soon as practicable following the end of a Plan Year; or (ii) converted into Stock Equivalent Units following the end of a Plan Year based on the number of Stock Equivalent Units credited to a Director's account, plus, if applicable, the number of shares of Restricted Stock to be awarded pursuant to Section 7 for a Plan Year, as of the dividend record dates falling within such Plan Year multiplied by the cash dividends (or the fair market value of any property other than cash paid as a dividend) per share of Stock payable during such Plan Year divided by the Fair Market Value of Stock on the last day of the Plan Year. (c) Dividend Equivalents will be payable on Stock Equivalents Units granted under Section 6 for the Plan Year for which a grant is made in accordance with subsections (a) and (b) above as though such Stock Equivalent Units had been granted as of the first day of such Plan Year, provided however, such Dividend Equivalents shall not be credited to a Director until the Stock Equivalent Units to which they relate are credited to the Director in accordance with Section 6. (d) Dividend Equivalents will be payable on Restricted Stock to be granted under Section 7 for the Plan Year for which an Annual Grant is to be made based upon dividends paid on shares of Stock for such Plan Year as though such Restricted Stock had been granted as of the first day of such Plan Year, provided however, such Dividend Equivalents shall not be credited to a Director until the shares of Restricted Stock to which they relate are actually awarded to the Director in accordance with Section 7. Dividend Equivalents credited under this Section 9(d) shall be payable in accordance with Section 9(b). (e) Dividend Equivalents will be payable on Stock Equivalent Units credited pursuant to a Deferral Election pursuant to Section 8 in accordance with subsections (a) and (b) above as though such Stock Equivalent Units had been credited to a Director on the date the Cash Compensation to which the Deferral Election relates would otherwise have been paid, provided however, such Dividend Equivalents shall not be credited to a Director's account until the Stock Equivalent Units to which they relate are credited to the Director in accordance with Section 8. (f) Dividend Equivalents will be payable on shares of Restricted Stock credited but not yet actually awarded pursuant to a Deferral Election pursuant to Section 8, based upon dividends paid on shares of Stock between the date such Cash Compensation to which the Deferral Election relates would otherwise have been paid and the date the shares of Restricted Stock are actually awarded, provided however, such Dividend Equivalents shall not be credited to a Director's account until the shares of Restricted Stock to which they relate are actually awarded to the Director in accordance with Section 8. Dividend Equivalents credited under this Section 9(f) shall be payable in accordance with Section 9(b). (g) At the end of each Plan Year, and at the time of payment of any amounts held in a Deferred Account, interest at the rate of the average of the yields at issuance of five-year Treasury Notes issued during the prior twelve-month period plus 1% shall be credited to each Deferred Account on the average daily balance held in such accounts for the preceding Plan Year or portion thereof. 10. Time and Form of Payment. (a) Payment in settlement of Stock Equivalent Units and any amounts held in a Deferred Account will commence as soon as practicable after the date the Director ceases to be a member of the Board, unless, with respect to amounts held in a Deferred Account, a Director has specified an alternate date in his or her Deferral Election. (b) Payment in settlement of Stock Equivalent Units and any amounts held in a Deferred Account will be made in a lump sum or, if elected by a Director at least one year prior to the date such Director ceases to be a member of the Board, in a specified number (not to exceed ten) of annual installments. Such election may be modified or revoked by the Director, provided that no such modification or revocation will be given effect unless it is made prior to the date specified in the preceding sentence. (c) Amounts held in a Deferred Account shall be paid in cash and Stock Equivalent Units held by a Director shall be paid in an equivalent number of shares of Stock unless prior to the commencement of payment, a Director elects to receive a cash payment in lieu of shares of Stock. Such cash payment shall be equal to the Fair Market Value of the shares on the date such Director ceases to be a member of the Board, or in the case of an installment election made pursuant to subsection (b) above, on the anniversary date of such date with respect to the installment then payable. (d) The Company shall deliver to the Director all of the shares of Stock that were awarded to the Director as Restricted Stock within 30 days following the lapse of restrictions as described in Section 7(c). (e) Whenever a fractional share would otherwise be required to be issued in accordance with the terms of this Section 10, the Fair Market Value of such fractional share shall be paid in cash. 11. Payment in the Event of Death. (a) In the event of a Director's death, any shares of Restricted Stock previously awarded shall vest as described in Section 7(c), payment of amounts credited to such Director's Deferred Account shall be paid in cash and payment of Stock Equivalent Units shall be made in the form previously elected by the Director, provided that if no such election had been made prior to such Director's death, payment shall be made in shares of Stock except for any fractional share the Fair Market Value of which shall be paid in cash. (b) Payment shall be made as soon as practicable following the death of the Director in a single lump sum to the beneficiary designated in writing by the Director, of if no designation was made, to the person legally entitled thereto, as designated under the will of the Director, or to such heir or heirs as determined under the laws of intestacy of the Director's domicile. 12. Adjustments in the Event of Change in Common Stock of the Company. In the event that there is any change in the Stock by reason of any stock dividend, stock split, combination of shares, exchange of shares, warrants or rights offering to purchase Stock at a price below its fair market value, reclassification, recapitalization, merger, consolidation, spin-off or other change in capitalization, appropriate adjustment shall be made in the number and kind of shares or other property subject to the Plan and the number and kind of shares or other property credited to the Directors under the Plan, and any other relevant provisions of the Plan by the Committee, whose determination shall be binding and conclusive on all persons. 13. Change in Control. In the event of a Change in Control, the following shall occur on the date thereof (the "Change in Control Date"): (i) the last day of the then current Plan Year shall be deemed to occur on the Change in Control Date; (ii) pursuant to Sections 5, 6, 7 and 8, Directors shall be credited with Stock Equivalent Units or awarded shares of Stock, as if for this purpose Directors' service as Directors ceased on the Change in Control Date; (iii) Dividend Equivalents on Stock Equivalent Units and Restricted Stock, including those credited under clause (ii), and interest on any Deferred Accounts shall be credited in accordance with Section 9; and (iv) the Company shall pay a lump sum cash payment in settlement of the amount of cash credited to each Director's Deferred Account and the number of Stock Equivalent Units then credited to such Director, including cash and Stock Equivalent Units credited pursuant to clauses (ii) and (iii) above. For purposes of the preceding sentence, the amount of cash delivered in payment of Stock Equivalent Units shall equal such units multiplied by the greater of (i) the highest Fair Market Value per share of Stock at any time during the 60-day period preceding the Change in Control and (ii) if applicable, the price of a share of Stock which is paid or offered to be paid, by any person or entity, in connection with the transaction constituting the Change in Control. 14. Rights with respect to Stock Equivalent Units. Except to the extent otherwise set forth in the Plan, Directors shall not have any of the rights of a shareholder with respect to the Stock Equivalent Units credited to them. 15. General Restrictions. (a) No shares of Stock shall be issued under the Plan prior to compliance by the Company, to the satisfaction of its counsel, with any applicable law. The Company shall not be obligated to, but may in its discretion, take any action under applicable federal or state law (including registration or qualification of the Plan or the Stock) necessary for compliance therewith in order to permit the issuance of shares hereunder. (b) The Company may impose such restrictions on the sale or other disposition of shares of Stock issued under the Plan as it deems necessary to comply with applicable securities laws. 16. Withholding. The Company may defer making payment or delivery of shares of Stock under the Plan until satisfactory arrangements have been made for the payment of any Federal, state or local income taxes required to be withheld with respect to such payment or delivery, including without limitation by the withholding of shares that would otherwise be so delivered, by withholding from any other payment due to the Director, or by a cash payment to the Company by a Director. 17. No Right to Nomination for Reelection. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any Director for reelection by the Company's shareholders or to limit the rights of the shareholders to remove any Director. 18. Amendment and Termination of the Plan. The Board may at any time amend or terminate the Plan, in whole or in part, however, no amendment or termination shall without the written consent of a Director, reduce the Director's rights with respect to awards previously granted hereunder or any fees previously earned the payment of which has been deferred pursuant to the terms of the Plan. 19. Governing Law. The Plan and all actions taken thereunder shall be construed in accordance with and governed by the laws of the State of Connecticut. EX-27.1 6 RESTATED FINANCIAL DATA SCHEDULE
7 PER SHARE INFORMATION CONTAINED IN THIS SCHEDULE HAS BEEN RESTATED TO CONFORM TO THE PROVISIONS OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE". SUCH PER SHARE INFORMATION ALSO REFLECTS THE COMPANY'S MAY 1, 1998 THREE FOR TWO STOCK SPLIT. THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1997 MAR-31-1998 527 0 0 441 11 0 979 168 308 56 1872 297 468 0 0 26 0 409 10 401 1872 102 10 3 57 45 13 48 66 23 43 30 0 0 73 2.49 2.17 0 0 0 0 0 0 0 Cash includes short-term investments. Company obligated mandatorily redeemable capital securities and convertible capital securities classified at mezzanine level on Consolidated Statements of Financial Position. Includes gain on sale of IRI. Net gain on discontinued operations of Radian. Reflects the impact of three-for-two stock split approved by the Board of Directors on April 21, 1998.
EX-27.2 7 RESTATED FIANCIAL DATA SCHEDULE
7 PER SHARE INFORMATION CONTAINED IN THIS SCHEDULE HAS BEEN RESTATED TO CONFORM TO THE PROVISIONS OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE". SUCH PER SHARE INFORMATION ALSO REFLECTS THE COMPANY'S MAY 1, 1998 THREE FOR TWO STOCK SPLIT. THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1997 MAR-31-1997 244 0 0 264 11 0 499 104 136 44 1120 286 282 0 0 31 0 20 10 342 1120 122 8 1 15 52 23 49 22 6 16 0 0 0 16 .52 .52 0 0 0 0 0 0 0 Cash includes short-term investments Convertible redeemable preferred stock classified at mezzanine level on Consolidated Statements of Financial Position. Excludes 1.0 pre-tax Investment in Radian Reflects the impact of three-for-two stock split approved by Board of Directors on April 21, 1998.
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