-----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, FXT4hmZxweL8Mfgw8pV2IFUvJ35hTNdJcl/K/pOIBnJG4jgaXBgl7WPxgtN4Bobj PtsDa8FqJwWDl9j7dlkjAQ== 0000310823-96-000009.txt : 19960402 0000310823-96-000009.hdr.sgml : 19960402 ACCESSION NUMBER: 0000310823-96-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARTFORD STEAM BOILER INSPECTION & INSURANCE CO CENTRAL INDEX KEY: 0000310823 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 060384680 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10527 FILM NUMBER: 96542931 BUSINESS ADDRESS: STREET 1: ONE STATE ST CITY: HARTFORD STATE: CT ZIP: 06102 BUSINESS PHONE: 2037221866 MAIL ADDRESS: STREET 1: ONE STATE STREET STREET 2: P.O. BOX 5024 CITY: HARTFORD STATE: CT ZIP: 06102-5024 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 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 0-13300 THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY (Exact name of registrant as specified in its charter) Connecticut 06-0384680 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 5024 One State Street Hartford, Connecticut 06102-5024 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 722-1866 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common stock, without par value New York Stock Exchange, Inc. Rights to Purchase Depositary Receipts New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant(1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes...X..., No....... Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K....... The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 6, 1996 was $1,021,493,866. Number of shares of common stock outstanding as of February 6, 1996: 20,288,661. Documents Incorporated By Reference Portions of the Proxy Statement dated February 27, 1996 for the Annual Meeting of Shareholders to be held April 16, 1996 are incorporated by reference in Parts III and IV herein. PART I Item 1. Business. A. GENERAL DEVELOPMENT OF BUSINESS The Hartford Steam Boiler Inspection and Insurance Company (together with its subsidiaries referred to as "Registrant" or the "Company" hereinafter) was chartered under the laws of the State of Connecticut in 1866. The Company's operations are divided into three industry segments - insurance, engineering services and investments. The most significant business of the Company is boiler and machinery insurance, which provides insurance against losses from accidents to boilers, pressure vessels, and a wide variety of mechanical and electrical machinery and equipment along with a high level of inspection services aimed at loss prevention. Earned premiums for boiler and machinery insurance and the Company's other insurance products were $389.1 million for 1995, which accounted for approximately 58 percent of the Company's revenues. See Note 11 to the Consolidated Financial Statements located in Item 8 of Part II herein for information on the Company's net written and net earned premiums over the last three years. The Company conducts its business in Canada through its subsidiary, The Boiler Inspection and Insurance Company of Canada. Insurance for risks located in countries other than the United States and Canada is written by HSB Engineering Insurance Limited (HSB EIL). In December 1994, the Company purchased the remaining 50% interest in HSB EIL's parent company, Engineering Insurance Group (EIG) from General Reinsurance Corporation. Effective December 1, 1995 the Company increased its membership participation in Industrial Risk Insurers (IRI) from .5 percent to 14 percent. IRI is a voluntary joint underwriting association funded by twenty-three members (each of which is a property-casualty insurance company) which provides property insurance for the class of business known as "highly protected risks" -- larger manufacturing, processing, and industrial businesses which have invested in protection against loss through the use of sprinklers and other means. The Company increased its share because it believes that it is important for the U.S. property and casualty industry to maintain a high-quality, stock- insurer-based, risk-sharing mechanism for underwriting coverage on large risks. The Company's increased share will enable the Company to have a more significant role in helping IRI be an effective and profitable provider of essential property insurance and loss prevention services to larger risks. IRI has a fiscal year ending November 30, and provides reports to its members on a quarterly basis. As a result, the Company's increased participation will initially be reflected in the first quarter financial results for 1996. The Company also offers professional scientific and technical consulting services for industry and government on a world-wide basis through its Engineering Department and its engineering subsidiaries, the largest of which is Radian Corporation, acquired by Hartford Steam Boiler in 1975 and headquartered in Austin, Texas. In 1995 net Engineering Services revenues were $252.1 million, which accounted for approximately 38 percent of the Company's revenues. In January 1996, the Company completed the formation of Radian International LLC, a joint venture with The Dow Chemical Company 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 Registrant contributed substantially all of the assets of Radian Corporation and The Dow Chemical Company contributed the assets of Dow Environmental, Inc., its wholly-owned subsidiary, as well as access to certain of its technologies which are in support of the businesses expected to be conducted by the new company. Radian International LLC currently is 40 percent owned by Radian Corporation and 60 percent owned by Dow Environmental Inc. The Registrant is a multi-national company operating primarily in North American, European, and Asian markets. Currently, the Company's principal market for its insurance and engineering services is the United States. However, the Company does desire to become a stronger competitor in the international machinery breakdown insurance and related engineering services markets as it believes that there is significant opportunity for profitable growth overseas. This was the primary reason for the acquisition of the remaining 50% interest in EIG in late 1994. In 1995 the revenues and pre-tax income associated with operations outside of the United States were approximately 13.5 percent and 20.5 percent, respectively, an increase of approximately 100 percent over the respective consolidated amounts for 1994. Assets associated with operations outside of the United States are approximately 22% of the consolidated amount. The growth in the Company's non U.S. operations is primarily attributable to the EIG acquisition and full consolidation. For additional information on the Company's business segments, see Notes 1 and 7 to the Consolidated Financial Statements located in Item 8 of Part II herein. B. PRODUCTS AND SERVICES Insurance Boiler and machinery insurance provides for the indemnification of the policyholder for financial loss resulting from destruction or damage to an insured boiler, pressure vessel, or other item of machinery or equipment caused by an accident. This financial loss can include the cost to repair or replace the damaged equipment (property damage), and product spoilage, lost profits and expenses to avert lost profits (business interruption) stemming from an accident. The Company distinguishes itself from other insurance suppliers by providing a high level of loss prevention, failure analysis and other engineering services with the insurance product. This heavy emphasis on loss prevention historically has had the dual effect of increasing underwriting and inspection expenses, while reducing loss and loss adjustment expenses. An important ancillary benefit for the policyholder is that the inspection performed by the Company's inspector on a boiler, pressure vessel, or other piece of equipment, as part of the insurance process, is normally viewed by state and other regulatory jurisdictions as acceptable for their certification purposes. Without the issuance of a certificate of inspection by the insurance carrier or another inspection agency, policyholders cannot legally operate many types of equipment. The Company also writes other types of insurance, primarily as an adjunct to its boiler and machinery insurance. Such insurance accounted for approximately 19% percent of net earned premium in 1995. By far the largest of these other lines is the Company's all risk property insurance product. The all risk line is marketed to customers with equipment and machinery exposures, such as electric utilities, where sophisticated engineering services are important to loss prevention and control. These customers are offered technical services such as computerized evaluation of fire protection systems in addition to fire inspections and boiler and machinery inspections. The Company also writes all risk coverage specifically tailored for data processing systems. Engineering Services Separate divisions of the Company's Engineering Department provide quality assurance services, training for nondestructive testing, inspections to code standards of the American Society of Mechanical Engineers (ASME), ISO certification services and other specialized consulting and inspection services related to the design and applications of boilers, pressure vessels, and many other types of equipment for domestic and foreign equipment manufacturers and their customers. Hartford Steam Boiler is the largest Authorized Inspection Agency for ASME codes in the world. In addition, the Company's Engineering Department, often in conjunction with Radian, its engineering affiliate, focuses on researching and developing potential new products and services, and new markets for current services. Radian is an international engineering and technical services firm that provides a wide range of environmental based consulting services to industries and governments around the world. Its customer base is almost equally divided between the government and private sector. Industries served in the private sector include chemical and petroleum producers, manufacturers and utilities. Radian's areas of expertise include environmental engineering, health and safety, materials and mechanical technologies, specialty chemicals, electronic systems and services, and information technologies. Its strategy is to provide its customers with the full range of environmental technical services required to conduct their businesses on a global basis. Radian International LLC, the joint venture company formed with The Dow Chemical Company described on page 2, was a significant step in implementing this strategy, as the new company integrates the environmental and engineering strengths of Radian with Dow's access to chemical industry process technology and environmental remediation capabilities. Other engineering subsidiaries provide fire protection consulting services, and computerized maintenance management systems and services. C. COMPETITION Insurance The Company is the largest writer of boiler and machinery insurance in North America and is establishing a presence in the engineering insurance market outside of North America. Based on gross earned premium, the Company's U.S. market share, at approximately 40%, has remained fairly stable over the past ten years. Based on net premiums written reported in the 1995 edition of Bests Aggregates and Averages, no other single company has more than a 10% market share. Members of an affiliated group of insurers, the Factory Mutual System, have a market share of approximately 22%. In general, the insurance market is influenced by the total insurance capacity available based on policyholder surplus which in turn is driven by the level of profits experienced by the industry. In addition, competition in the boiler and machinery insurance market is based on price and service to the insured. Service includes maintaining customer relationships, engineering and loss prevention activities, and claims settlement. The Company prices its product competitively in the marketplace, but competes by offering a high level of service, not by offering the lowest- priced product. Over the past few years, economic and competitive pressures have caused insurance customers to select programs with higher deductibles to offset price increases. This, together with the Company's increased focus on risk selectivity, has resulted in a slower premium growth for the Company. The Company is predominantly a writer of risks which require engineering expertise, unlike its competitors which write boiler and machinery insurance as an adjunct to their primary lines of insurance for fire and extended perils. Many of its competitors have more assets than the Company. However, the Company's leading position in the industry has allowed it to develop the largest force of inspectors, engineers and scientists in the industry. Engineering Services The Company provides a wide range of engineering, consulting and inspection services as described on pages 3-4. For most of these services it has numerous competitors, some of whom are much larger and have greater financial resources than the Company. Competition in these areas is based on price and on the qualifications, experience and availability of the individuals who perform the work. The Company's force of inspectors, engineers, scientists and technicians is spread throughout the world. Ongoing training programs ensure that the Company's inspectors, engineers, scientists and technicians are kept up-to-date on the latest engineering and scientific developments. D. MARKETING Insurance The Company's various functional operations are aligned to focus on its two principal customer groups, commercial risks and special risks. The Company believes that this organizational structure allows it to service its customers more effectively and efficiently and at the same time to be a more aggressive and flexible competitor. Currently, the Company's principal market for its insurance business is the United States. In 1995 76% of its net written premiums related to risks located in the U.S. Of the direct premiums written in the United States in 1995 (gross premiums less return premiums and cancellations, excluding reinsurance assumed and before deducting reinsurance ceded), less than 10 percent was written in any one state and with the exception of California, Florida, Illinois, New York, Pennsylvania and Texas, no state accounted for more than 5% of such premiums. The Company has contracts with independent insurance agencies in all fifty states, the District of Columbia, Puerto Rico and Canada. These agencies market the Company's direct insurance to its small and medium commercial accounts. Personal contact with these independent insurance agents is accomplished through the Company's field sales force which operates out of 24 branch offices across the country and in Canada. It is the Company's policy in appointing agents to be selective, seeking to maintain and strengthen its existing relationships and to develop relationships with new agents whom the Company believes will become a continuing source of profitable business. The Company periodically reviews its agency contracts and selectively reduces them in order to retain only those agents who consistently produce certain levels of business for the Company. Large, engineering-intensive U.S. and international accounts are primarily marketed and serviced by account teams comprised of underwriting, marketing, engineering and claims staff who have specialized knowledge of particular customer industries. U.S. customers are serviced primarily by Hartford Steam Boiler. Canadian customers are serviced by The Boiler Inspection and Insurance Company of Canada. Overseas customers are serviced by HSB Engineering Insurance Limited, based in London, with additional offices in Hong Kong, Madrid, Miami and Kuala Lumpur. The Company's large, engineering intensive accounts generate approximately 36% of its net earned premium. The Company's reinsurance assumed business (see page 11) is marketed through the distribution channels of the reinsured companies. Engineering Services The Company's engineering services are marketed in a variety of ways. Customized services related to loss prevention, failure analysis, and equipment testing are generally sold in conjunction with the insurance contract but are also available separately. Most other engineering services, including those performed by Radian, are marketed on a bid or proposal basis. While such business is usually price sensitive, the exacting standards and requirements set by industry and government for most of the services offered by the Company tend to diminish that effect. Engineering services are marketed and serviced primarily by personnel located in the Company's various domestic and international offices. While the primary market for engineering services continues to be the U.S., the Company has been focusing on expanding its international business, primarily in Europe and the Pacific Rim as demand for engineering services, particularly environmental consulting services, is expected to grow at a faster rate in these developing regions than in the U.S. In 1995 the Company derived approximately 13 percent of its revenues from engineering contracts with various agencies and departments of the U.S. government. E. REGULATION Insurance The Company's insurance operations are subject to regulation throughout the United States. Various aspects of the insurance operations are regulated, including the type and amount of business that can be written, the price that can be charged for particular forms of coverage, policy forms, trade and claim settlement practices, reserve requirements and agency appointments. Regulations also extend to the form and content of financial statements filed with such regulatory authorities, the type and concentration of permitted investments for insurers, and the extent and nature of transactions between members of a holding company system, including dividends involving insurers. In general, such transactions must be on fair and reasonable terms, and in some cases, prior regulatory approval is required. See Note 8 to the Consolidated Financial Statements located in Item 8 of Part II herein for additional information. The nature and extent of regulations pertaining to the business the Company writes outside of the U.S. varies considerably. Regulations cover various financial and operational areas, including such matters as amount and type of reserves, currency, policy language, repatriation of assets and compulsory cessions of reinsurance. In December 1993, the National Association of Insurance Commissioners (NAIC) adopted risk based capital (RBC) requirements applicable to property and casualty insurers. The RBC formula establishes a required statutory surplus level for an insurer based on the risks inherent in its overall operations which are identified as underwriting risk, invested asset risk, credit risk and off-balance sheet risk. The law provides for regulatory responses ranging from requiring a plan of corrective action to placing the insurer under regulatory control for insurers whose surplus is below the prescribed RBC target. The Company's adjusted capital significantly exceeded the authorized control level RBC for 1995 and 1994, the first year for which the requirements were effective. NAIC Insurance Regulatory Information System (IRIS) Ratios are part of the solvency impairment early warning system of the NAIC. They consist of twelve categories of financial data with defined acceptable ranges for each. Companies with ratios outside of the acceptable ranges are selected for closer review by regulators. The Company's IRIS ratios were within acceptable ranges for 1995. The Company's operations are subject to examination by insurance regulators at regular intervals. An insurance financial examination is currently being concluded for the year ending December 31, 1994 by the Connecticut Insurance Department, the Company's domestic regulator. No material findings are expected to be included in the final report of the examination. Similar regulatory procedures govern the Company's U.S. insurance subsidiaries and its foreign subsidiaries. Insurance guaranty fund laws exist in all states which subject insurers to assessments up to prescribed limits for certain obligations of insolvent insurers to their policyholders and claimants. The increase in insolvencies in recent years has resulted in higher assessments against the Company. The Company is permitted to recover a portion of these assessments through premium tax offsets and policy surcharges. The Company has recorded its ultimate estimate of assessments in its financial statements. In the third quarter of 1994, the Company established a reserve of $2.9 million for the rollback obligation plus interest alleged to be payable to California policyholders pursuant to Proposition 103 which had been passed by California voters in 1988. The Company recently concluded an administrative hearing with the California Insurance Department on its rollback obligation, however, no decision has been rendered to date. Given the amount the Company has reserved for this matter, any adverse decision resulting from such hearing is not expected to materially affect the Company's future results. The NAIC is currently working on a model investment law which would provide guidelines for insurers in structuring their investment portfolios. These guidelines are intended to preserve principal, assure diversification as to investment, issuer and credit quality, and promote prudent investment management strategies to ensure companies are positioned to cover reasonably foreseeable contingencies. While it is uncertain at this time whether the model investment law will be adopted, the Company does not expect such guidelines in their current form to have a material effect on its investment practices. Regulator concerns about the consistency and comparability of statutory accounting practices (SAP) has prompted the NAIC to undertake a codification project which will replace prescribed or permitted SAP as the regulatory basis of accounting for insurance companies. Conversion to new statutory accounting standards is expected to be required sometime after 1996. As discussed earlier, the Company's insureds receive, in addition to the insurance product, inspections which meet state, county or municipally mandated requirements. In order for the Company's inspectors to perform these mandated inspections, they must be commissioned. Commissioning is conducted by the National Board of Boiler and Pressure Vessel Inspectors and the various state jurisdictional authorities. The majority of the Company's inspectors are commissioned, and the Company believes that it has an adequate number of commissioned inspectors to conduct its business affairs. Engineering Services A portion of the Company's engineering services revenue comes from certifying that boilers and pressure vessels are being constructed according to standards adopted by the American Society of Mechanical Engineers (ASME). The commission that authorizes inspectors to conduct insurance inspections also authorizes them to perform ASME Code inspections. Customers of the Company, and to a much lesser extent the Company, are subject to various state and federal environmental laws. Although the liabilities imposed by these laws more directly relate to the business operations of the Company's customers, in the course of providing services, and in particular environmental consulting services, which may involve the handling or disposal of hazardous materials of the Company's customers, the Company could become subject to liabilities under such laws. The Company believes that it is unlikely that the nature of its operations will give rise to liabilities under such laws and regulations which will have a material adverse impact on its consolidated results of operations or financial condition. Other The Company and members of its professional and technical staff are subject to a variety of other state, local and foreign licensing and permit requirements and other laws generally applicable to corporations and businesses. F. INSURANCE OPERATIONS Rates Rates for the Company's products are developed based upon estimated claim costs, expenses related to the acquisition and servicing of the business, engineering expenses and a profit component. Traditionally, the Company has used boiler and machinery rates that were established by the Insurance Services Office (ISO) and filed in the various jurisdictions within which the Company does business for its direct insurance products. Due to the Company's large market share in the boiler and machinery line of insurance, it has provided the largest impact on the data used by ISO. Consequently, ISO rates have been reflective of the Company's experience. The Company has also developed its own rates, based on ISO rates, for some of its boiler and machinery products. The Company also has utilized rates developed and filed by ISO for its all risk product. The Company's loss experience has been only a small factor in the all risk line, and therefore its experience has not meaningfully affected the industry ISO rates. ISO no longer develops and files advisory rates for its member companies, rather it compiles and files loss cost information based upon loss data furnished by its members which the Company and other insurers can then use to develop their own rates and file with the states. The Company currently is in the process of developing and filing boiler and machinery rates in various states utilizing ISO's loss cost filing. Coverages for unique risks are judgment-rated, taking into account deductibles, the condition of the insured's equipment, loss prevention and maintenance programs of the insured, and other factors. Policies Policies are normally written for a term of one year. Most of the Company's policies provide coverage for property damage and business interruption to insured property (including buildings and structures under the Company's all risk policy) resulting from covered perils. Property insured under the Company's boiler and machinery policies includes such equipment as steam boilers, hot water boilers, pressure vessels, refrigerating and air conditioning systems, motors, generators, compressors, pumps, engines, fans, blowers, gear sets, turbines, transformers, electrical switch gear, data processing and business equipment and a wide variety of production and processing equipment. Reinsurance Assumed The predominant practice in the insurance industry is to combine several types of insurance coverages into one policy referred to as a package policy. In response to this, the Company has negotiated reinsurance agreements with several large and medium sized multi-line insurance companies to reach the small to mid-size customers that purchase such package policies. To date, more than 100 insurance companies have signed reinsurance agreements with the Company. This business primarily focuses on small and mid-sized commercial customers. It has consistently been more profitable than the Company's large accounts and offers more opportunity for growth by the Company since boiler and machinery coverage has historically been excluded from commercial package policies. Under the reinsurance agreements, the Company's reinsured companies may include boiler and machinery exposures in their multi-peril policies, and such risks will be assumed by the Company under the terms of the agreement. These plans generally provide that the Company will assume 100% of each boiler and machinery risk, subject to the capacity specified in the agreement, and will receive the entire boiler and machinery premium except for a ceding commission which will be retained by the reinsured company for commissions to agents and brokers, premium taxes and handling expenses. Although the Company assumes the role of reinsurer, it continues to have selling and underwriting responsibilities as well as involvement in inspecting and claims adjusting. In effect, the Company becomes the boiler and machinery department of the reinsured company and provides all boiler and machinery services as if it were part of that organization. Traditionally, the Company retains the right to decline or restrict coverage in the same manner as it does for its own business, however, the Company does offer some programs under which it agrees to underwrite an entire book of business meeting specific underwriting guidelines and occupancy parameters. The written premium generated through reinsurance assumed totaled $182.9 million in 1995, representing approximately 45% of the Company's net written premium. The insurance industry, in general is undergoing a significant shakeout and consolidation. Considerable merger and acquisition activity has occurred recently and more is anticipated in the future. Depending on the specific companies involved in these activities and other market factors, the level of reinsured business the Company assumes in the future could be affected. Reinsurance Ceded The Company participates in various facultative, quota share and excess of loss reinsurance agreements to limit its exposure, particularly to catastrophic losses, and to provide additional capacity to write business. Under the Company's current treaty reinsurance program, its retention on any one risk is generally limited to $3 million, with potentially higher per risk retentions dependent on aggregate losses experienced by the Company during the reinsurance program period. In addition, the Company uses facultative reinsurance on certain high exposure risks and has catastrophe reinsurance for aggregate losses greater than $15 million. The Company utilizes well-capitalized domestic and international insurance companies and syndicates for its reinsurance program and monitors their financial condition on an ongoing basis. In the unlikely event that the Company's reinsurers are unable to meet their obligations, the Company would continue to have primary liability to policyholders for losses incurred. Uncollectible reinsurance recoverables have not had, and are not expected by management to have in the future, a material adverse effect on the consolidated results of operations or financial position of the Company. The Company is not party to any contracts that do not comply with the risk transfer provisions of SFAS 113. As a result of the Company's acquisitions and global expansion, combined with loss experience in prior years, the Company has been incurring much higher ceded reinsurance costs in recent years. The Company modestly increased its retention in 1995 to lessen the impact of higher reinsurance costs and also structured its current program in such a way as to give the Company flexibility and greater control over the program in future years. In 1995 the Company's reinsurance ceded costs increased $20.8 million (46%) over 1994 in part because of the acquisition and full consolidation of Engineering Insurance Group. For additional information on reinsurance, see Note 11 to the Consolidated Financial Statements located in Item 8 of Part II herein. Pools and Joint Underwriting Associations With the exception of Industrial Risk Insurers as described on page 1, the Company does not participate to any significant degree in voluntary reinsurance pools of other insurance companies because the Company generally chooses to insure only those risks which it has inspected or has the right to inspect. The Company is required to participate in certain joint underwriting associations which provide insurance for particular classes of insureds when insurance in the voluntary market is unavailable. The unprecedented level of catastrophes in recent years has required the Company to pay higher assessments to such associations. Claims and Claim Adjustment The overwhelming majority of claims are handled by the Company's own claims adjusters. Management believes that this is much more cost-efficient than the retention of independent claims adjusters and that the Company's adjusters are better able to make the connection between loss prevention and loss control. The Company employs claims adjusters in its various branch offices throughout the country, Canada and the U.K. and also operates a claims department in its home office in Hartford, Connecticut. Adjusters in the various branch offices and the Company's home office are assigned to particular customer groups in order to apply specialized industry knowledge to the adjustment of claims. Claims and adjustment expense reserves comprise one of the largest liabilities of the Company. Reserves are established to reflect the Company's estimates of total losses and loss adjustment expenses that will ultimately be paid under direct and assumed insurance contracts. Loss reserves include claims and adjustment expenses on claims that have been reported but not settled and those that have been incurred but not yet reported to the Company. The Company's loss reserve estimates reflect such variables as past loss experience and inflation. In addition, due to the nature of much of the Company's coverages, complex engineering judgments are involved. Subjective judgments are an integral component of the loss reserving process, due to the nature of the variables involved. Previously established loss reserves are regularly adjusted as loss experience develops and new information becomes available. Adjustments to previously established reserves are reflected in the financial statements in the period in which the estimates are changed. The normal turnaround time in paying small claims is less than six months. The vast majority of claims are settled within one year and very few remain unsettled two years after the loss occurs. This pattern is skewed in terms of claim dollars (as noted in the schedule on page 18) as it is the larger claims that take longer to settle. Compared to the property-casualty industry as a whole, the Company has a very "short-tail". The Company's claims expenses are based on estimates of the current costs of replacing productive capacity. The Company does not employ discounting techniques in establishing liabilities for claims and claim adjustment expenses. For those relatively few claims involving litigation, the Company uses both its in-house law department and outside counsel, depending on the issues, costs, and staffing requirements. The following table provides a reconciliation of the beginning and ending reserves for net claims and claim adjustment expenses for the years ended December 31, 1995, 1994 and 1993. RECONCILIATION OF NET LIABILITY FOR CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1995 1994 1993 ------ ------ ------ (In millions) Net liability for claims and claim adjustment expenses at January 1 $161.3 $171.3 $132.8 ------ ------ ------ Plus: Provision for claims and claim adjustment expenses occurring in the current year 152.2 141.7 172.2 Increase in estimated claims and claim adjustment expenses arising in prior years 2.7 1.5 26.9 ------ ------ ------ Total incurred claims and claim adjustment expenses 154.9 143.2 199.1 ------ ------ ------ Less: Payment for claims arising in: Current year 58.9 63.5 60.9 Prior years 111.8 108.7 99.7 ------ ------ ------ Total payments 170.7 172.2 160.6 ------ ------ ------ Plus: Full Consolidation of EIG Co. at December 31, 1994 - 19.0 - ------ ------ ------ Net liability for claims and claim adjustment expenses at December 31 $145.5 $161.3 $171.3 ====== ====== ======
The 1995 loss ratio was 39.8 percent compared to 42.5 percent and 57.1 percent for 1994 and 1993, respectively. The continued improvement in 1995 is largely attributable to the reunderwriting efforts which began in 1993. In 1993, adverse development of prior year reserves was attributable to the settlement of certain large losses for which the Company initially determined it would not have liability; the settlement of some outstanding claims for more than was originally anticipated; unusually late notice of loss provided by the insured for several large losses; and reserves established for losses on which the coverage was being contested. At December 31, 1995, the amount recoverable from reinsurers on paid and unpaid claims and adjustment expenses was $47.9 million compared to $44.9 million in 1994 and $44.5 million in 1993. The following table shows a reconciliation of the net liability to the gross liability for claims and claim adjustment expenses based on reinsurance recoverable on unpaid losses. RECONCILIATION OF NET LIABILITY TO GROSS LIABILITY FOR CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1995 1994 1993 ------ ------ ------ (In millions) Net liability for claims and claim $145.5 $161.3 $171.3 adjustment expenses at December 31 Reinsurance recoverable on unpaid losses 45.4 38.1 43.1 ------ ------ ------ Gross liability for claims and claim adjustment expenses at December 31 $190.9 $199.4 $214.4 ====== ====== ======
The claim and claim expense reserve runoff table on the following pages shows the amounts of the net liability for 1985 through 1995 and the amounts of the gross liability for 1993 through 1995. The ten-year development table for gross liabilities will be constructed progressively, with 1993 as the base year. Within the tables for net and gross liabilities, each column shows the reserve established at each calendar year-end as well as cumulative totals for claims payments and re-estimated liabilities for both that accident year and all previous years that combined make up that year-end reserve. The redundancy (deficiency) shown on a gross and net basis is a cumulative number for that year and all previous years. The net deficiencies in 1990, 1991 and 1992 were attributable to the same factors that contributed to the 1993 adverse development of prior year reserves described on the previous page. The redundancies shown for 1985 through 1988 were attributed to the difficulty in estimating claims due to inflationary impacts and business interruption, which became a larger component of claims. The claim reserves established in those years have been favorably settled, adjusted or closed based on the results of claim audits, technical loss analysis, subrogation, settlement with property carriers and the latest available information. The net impact of those favorable settlements was to decrease claims expenses as reported by $10.2 million in 1990 and $28.0 million in 1989. RECONCILIATION OF BEGINNING AND ENDING CLAIMS RESERVES AND EXHIBIT OF REDUNDANCIES (DEFICIENCIES) (In Millions)
Net Reserves YEAR ENDED 1985 1986 1987 1988 1989 1990* 1991* 1992* 1993* 1994 1995 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Net Liability for Unpaid Claims and Claim $99.9 $126.1 $147.5 $157.4 $139.6 $118.2 $115.4 $141.3 $186.7 $161.3 $145.5 Adjustment Expenses Cumulative Amount Paid as of: End of Year - - - - - - - - - - - One Year Later 51.1 54.9 57.4 78.8 85.6 89.6 93.7 103.5 115.9 111.7 - Two Years Later 65.8 73.6 75.9 92.1 104.2 112.9 119.8 140.4 161.8 - - Three Years Later 70.6 79.5 74.5 95.5 110.3 124.0 131.8 162.0 - - - Four Years Later 73.3 79.7 75.4 95.4 112.5 131.1 142.5 - - - - Five Years Later 74.3 80.4 74.5 93.6 118.9 136.2 - - - - - Six Years Later 74.5 79.0 74.2 100.5 123.0 - - - - - - Seven Years Later 74.2 78.8 80.4 101.5 - - - - - - - Eight Years Later 74.0 84.1 80.4 - - - - - - - - Nine Years Later 79.3 84.1 - - - - - - - - - Ten Years Later 80.2 - - - - - - - - - - Net Liability Reestimated as of: End of Year 99.9 126.1 147.5 157.4 139.6 118.2 115.4 141.3 186.7 161.3 145.5 One Year Later 104.7 126.4 131.9 129.4 129.4 139.2 142.3 167.5 186.5 164.0 - Two Years Later 101.1 115.8 100.4 108.7 127.4 141.6 145.1 174.3 186.4 - - Three Years Later 94.7 96.1 86.0 106.8 127.8 140.5 146.4 173.4 - - - Four Years Later 85.9 88.0 83.7 103.0 125.0 141.5 146.9 - - - - Five Years Later 80.8 86.9 80.8 102.3 125.8 139.2 - - - - - Six Years Later 80.9 83.6 82.0 104.0 125.5 - - - - - - Seven Years Later 80.7 85.7 82.9 103.8 - - - - - - - Eight Years Later 84.1 86.0 82.6 - - - - - - - - Nine Years Later 84.5 86.4 - - - - - - - - - Ten Years Later 82.4 - - - - - - - - - - Cumulative Redundancy (Deficiency) 17.5 39.7 64.9 53.6 14.1 (21.0) (31.5) (32.1) 0.3 (2.7) - Gross Reserves YEAR ENDED 1993* 1994 1995 Gross Liability for ---- ---- ---- Unpaid Claims and Claim Adjustment Expenses $233.3 $199.4 $190.9 Cumulative Amount Paid as of: End of Year - - - One Year Later 153.5 135.2 - Two Years Later 201.9 Gross Liability Reestimated as of: End of year 233.3 199.4 190.9 One Year Later 242.6 212.0 - Two Years Later 242.9 - - Cumulative Redundancy (Deficiency) (9.6) (12.6) -
*Amounts for these years have been restated to include EIG Co. as though it were 100% owned by the Company in those years. G. INVESTMENTS Income from the Company's investment portfolio contributes significantly to operating income. Each year there is a significant net inflow of cash from insurance, engineering services and investment operations. In addition, cash flow is affected by the normal maturity of fixed income investments, and the purchase and sale of equity securities. The Company's investment strategy continues to be to maximize total return on the investment portfolio over the long term through investment income and capital appreciation. The mix of the portfolio is managed to respond to anticipated claim pay-out patterns. The company also maintains a highly liquid short-term portfolio to provide for immediate cash needs. Investment strategies are developed based on many factors including operational results, tax implications, regulatory requirements, interest rates and market conditions. The Company's investment portfolio consists of high quality equity securities and both domestic and foreign fixed maturities. The Company held no derivative financial instruments in its investment portfolio at December 31, 1995 and 1994. At year-end 1995 the Company had approximately 47 percent of its invested assets in fixed maturities as compared to 41 percent at year-end 1994. See "Investment Operations" in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations located in Item 7 and Note 9 to Consolidated Financial Statements in Item 8 of Part II herein for additional information. The following table summarizes the investment results of the Company's investment portfolio:
Net Invest- Annualized Rate Cash and ment Income of Return (2) Investment Invested Less Before After Gains (Losses) (3) Assets, Less Interest Income Income Change in Borrowed Money Expense (1) Taxes Taxes Realized Unrealized -------------- ----------- ------ ------ -------- ----------- (In Millions) (In Millions) 1995 $514.8 $26.7 5.8% 4.9% $2.8 $48.9 1994 438.2 24.6 5.6 4.6 8.7 (42.7) 1993 462.6 27.5 6.1 5.3 26.1 (10.3)
(1) Net investment income excludes realized investment gains and is reduced by investment expenses, but is before the deduction for income taxes. (2) The rates of return on investments shown above have been determined in accordance with rules prescribed by the National Association of Insurance Commissioners. These rates have been determined by the following formula: 2I --------- A + B - I I is equal to net investment income, before taxes, earned on investment assets. A+B is equal to the sum of the beginning and end of the year amounts shown under "Cash and Invested Assets, Less Borrowed Money". The after tax rates of return are computed in the same manner, but net investment income is reduced by income taxes. (3) Realized and unrealized investment gains (losses) are before income taxes. H. EMPLOYEES At year-end 1995, the Company, including its subsidiaries, employed 4,400 full and part-time employees. Of this total, 2,385 were employed by Radian Corporation. Management believes that its relations with its employees are satisfactory. Item 2. Properties. The Hartford Steam Boiler Inspection and Insurance Company leases approximately 233,145 square feet for its home office at One State Street, Hartford, Connecticut under a long-term capital lease with One State Street Limited Partnership. In addition to its home office facility, the Company leases facilities for its branch offices and subsidiaries throughout the United States, and in a small number of other foreign locations. The Company considers the office facilities to be suitable and adequate for its current and anticipated level of operations. See Notes 13 and 15 to Consolidated Financial Statements located in Item 8 of Part II herein for additional information. Item 3. Legal Proceedings. The Company is involved in various legal proceedings as defendant or co-defendant that have arisen in the normal course of its business. In the judgment of management, after consultation with counsel, it is improbable that any liabilities which may arise from such litigation will have a material adverse impact on the consolidated financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 4(a). Executive Officers of the Registrant. All officers are elected by the Board of Directors to hold office until the next Annual Meeting of Shareholders. An officer may be removed at any time by the Board of Directors. Gordon W. Kreh, 48, Chief Executive Officer since 4/94; President and Director since 9/93; Senior Vice President - Marketing 4/92 - 9/93; President - Engineering Insurance Group 10/89 - 4/92; Vice President 11/84 - 10/89; Assistant Vice President 4/81 - 11/84. Donald M. Carlton, 58, Executive Vice President since 4/92; Director since 7/75; President and Chief Executive Officer of Radian International LLC since 1/96; President and Chairman of the Board - Radian Corporation since 1969. Saul L. Basch, 49, Senior Vice President, Treasurer and Chief Financial Officer since 10/95; Partner, Coopers & Lybrand LLP 9/73 - 10/95; most recently Partner-in-Charge of Coopers & Lybrand's New York Insurance Industry Practice. Michael L. Downs, 46, Senior Vice President - Special Risks since 2/94; Managing Director - Engineering Insurance Co., Ltd. 1/91 - 2/94; Second Vice President 7/87 - 1/91; Assistant Vice President 2/85 - 7/87; Assistant Secretary 4/80 - 2/85. John J. Kelley, 50, Senior Vice President - Commercial Risks since 2/94; Corporate Secretary and Special Assistant to the President 5/87 - 2/94; Assistant Vice President and Special Assistant to the President 9/83 - 5/87; Assistant Vice President 9/79 - 9/83; Assistant Secretary 4/77 - 9/79. William A. Kerr, 57, Senior Vice President - Engineering since 9/95; Vice President and General Manager, Pratt & Whitney Turbo Power and Marine Division, United Technologies Corporation 8/95 - 9/95; Vice President of Aftermarket Operations, Pratt & Whitney 4/92 - 8/95; Vice President of Development Operations and Materials Engineering, Pratt & Whitney 1989-4/92. R. Kevin Price, 49, Senior Vice President and Corporate Secretary since 2/94; Second Vice President 4/89 - 2/94; Assistant Vice President 1/84 - 4/89. William Stockdale, 50, Senior Vice President since 9/95; Managing Director and Chief Executive Officer of HSB Engineering Insurance Ltd., London, since 9/94; Director of Engineering, Engineering Insurance Co., Ltd. 9/92-9/94; Managing Director Scottish Power PLC, Glasgow, Scotland 1/89 - 8/92. Robert C. Walker, 52, General Counsel since 1/95; Senior Vice President - Claims since 3/94; Associate General Counsel and head of Corporate Litigation Department of United Technologies Corporation 5/89-3/94. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's common stock is traded on the New York Stock Exchange under the symbol HSB. As of February 6, 1996, the Company had 5,854 holders of record. Dividends paid by the Company are limited by state insurance regulations. Regulatory approval was required and received by the Company from the Connecticut Insurance Commissioner for the payment of 1995 dividends. Approval from the Insurance Commissioner is required for dividend distributions within a twelve-month period which would exceed the greater of (i) 10 percent of an insurer's statutory surplus or (ii) net income (net investment income under the prior standard) calculated as of the December 31st last preceding. The Company does not expect to be required to request regulatory approval for the payment of any dividends in 1996. Under statutory accounting practices, $65.3 million of statutory surplus is available for distribution to shareholders in 1996 without prior regulatory approval. Dividends declared for the 1995 and 1994 fiscal years were as follows:
First Second Third Fourth Year --------------------------------------------- 1995...........$.55 $.55 $.57 $.57 $2.24 1994...........$.53 $.53 $.55 $.55 $2.16
Quarterly market prices for the registrant's common stock were as follows for the two most recent fiscal years: First Second Third Fourth Year ----------------------------------------------- 1995 High......$43 3/4 $45 7/8 $49 3/8 $50 3/8 $50 3/8 1995 Low.......$39 1/4 $41 5/8 $42 5/8 $45 3/8 $39 1/4 1994 High......$53 3/8 $49 1/8 $45 7/8 $44 3/8 $53 3/8 1994 Low.......$44 $43 3/4 $42 3/4 $36 1/8 $36 1/8 Item 6. Selected Financial Data. The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes included elsewhere herein.
(In millions, except per share amounts) - ------------------------------------------------------------------------------------------------ 1995 1994(c) 1993 1992 1991 Summary of Statements of Operations Revenues: Insurance premiums $ 389.1 $ 336.6 $ 349.2 $ 342.9 $ 318.8 Net engineering services 252.1 232.1 231.5 231.0 210.3 Income from investment operations 31.0 34.9 55.4 62.8 70.4 Total revenues 672.2 603.6 636.1 636.7 599.5 Income before taxes and accounting changes 86.3 73.6 16.9 73.4 101.0 Income taxes 23.7 21.7 3.8 17.1 27.1 Income before accounting changes 62.6 51.9 13.1 56.3 73.9 Income per share before accounting changes 3.07 2.54 0.63 2.71 3.53 Dividends declared per share 2.24 2.16 2.12 2.06 1.90 Summary of Statements of Financial Position Total assets $ 971.5 $ 905.7 $ 877.9 $ 886.4 $ 843.6 Long-term borrowings and capital lease obligations 53.4 28.4 28.4 28.4 28.5 Shareholders' equity 341.1 299.5 324.7 374.3 402.8 Per share 16.81 14.67 15.80 18.05 19.16 Return on average equity before accounting changes 19.5% 16.9% 3.7% 14.8% 19.5% Stock price per share: High $ 50.38 $ 53.38 $ 59.50 $ 59.25 $ 63.75 Low 39.25 36.13 43.25 45.13 46.25 Close 50.00 39.88 44.50 58.38 57.50 Common shares outstanding at end of year (a) 20.3 20.4 20.5 20.7 21.0 Insurance Operating gain (loss) $ 34.2 $ 20.7 $ (26.4) $ 1.8 $ 22.9 Loss ratio 39.8% 42.5% 57.1% 50.3% 43.6% Expense ratio 50.9% 50.5% 50.5% 49.2% 49.2% Combined ratio (b) 90.7% 93.0% 107.6% 99.5% 92.8% Engineering Services Gross revenues $ 280.9 $ 253.6 $ 256.1 $ 264.7 $ 232.1 Subcontract & equipment resale costs 28.8 21.5 24.6 33.7 21.8 Net revenues 252.1 232.1 231.5 231.0 210.3 Operating gain 22.6 18.2 11.8 14.7 14.0 Gross margin 8.0% 7.2% 4.6% 5.6% 6.0% Net margin 8.9% 7.9% 5.1% 6.4% 6.7% Investments Net investment income $ 28.2 $ 26.2 $ 29.3 $ 32.0 $ 36.5 Realized investment gains 2.8 8.7 26.1 30.8 33.9 Income from investment operations 31.0 34.9 55.4 62.8 70.4
(a) Reflects the repurchase of approximately .1 million shares in 1995, .1 million shares in 1994, .2 million shares in 1993 and .3 million shares in 1992. (b) 1995 excludes minority interest and goodwill related to EIG, Co. 1994 Combined ratio excludes charge for Proposition 103. (c) See note 4 to Notes to Consolidated Financial Statements in Item 8 of Part II herein regarding EIG, Co. consolidation. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollar amounts in millions, except per share amounts)
SUMMARY OF RESULTS OF OPERATIONS For the years ended December 31, 1995 1994 1993 ------ ------ ------ Revenues: Insurance premium $389.1 $336.6 $349.2 Net engineering services revenues 252.1 232.1 231.5 Net investment income 28.2 26.2 29.3 Realized investment gains 2.8 8.7 26.1 ------- ------- ------- Total revenues $672.2 $603.6 $636.1 ======= ======= ======= Income before cumulative effect of change in accounting $ 62.6 $ 51.9 $ 13.1 Cumulative effect of change in accounting for post- employment benefits - - (3.6) ------- ------- ------- Net income $ 62.6 $ 51.9 $ 9.5 ======= ======= ======= Net income per share $ 3.07 $ 2.54 $ .46 ======= ======= =======
Net income in 1995 increased 21 percent from 1994 reflecting continued improvement in underwriting results for the insurance business and higher margins in engineering services operations, which outpaced the planned reduction in realized capital gains. Improvement in 1994 results relative to 1993 were driven by higher margins in insurance operations, resulting in part from the Company's program of reunderwriting its book of business and focusing on more profitable contracts. Results in 1993 include a $20 million restructuring charge, significant strengthening of claims reserves and increased costs of reinsurance. Consolidated revenues increased 11 percent in 1995 to $672.2 million, reflecting the impact of the acquisition and full consolidation of EIG, Co. and growth in both the domestic and global insurance markets. On December 30, 1994, the Company acquired the remaining 50 percent interest in EIG from General Reinsurance Corporation (Gen Re). EIG was the parent of Engineering Insurance Company Limited, a London based insurer which offers machinery breakdown coverage to business and industry outside the United States and Canada. (See note 4 in Notes to Consolidated Financial Statements in Item 8 of Part II herein.) The consolidated revenues in 1994 were below 1993 as marginal growth in gross premiums was offset by higher reinsurance costs and a decline in realized investment gains. In January 1996, The Hartford Steam Boiler Inspection and Insurance Company (HSB) and The Dow Chemical Company (Dow) formed a new company, Radian International LLC (Limited Liability Company), which will provide environmental, information technology, and strategic chemical management services to industries and governments worldwide. According to the terms of the agreement, the ownership of Radian International LLC will be initially 60 percent Dow and 40 percent HSB, via the wholly owned subsidiaries of each company. Income will be subject to a preference return to HSB in the first two years. In 1996, HSB's interest in Radian International LLC will be accounted for on the consolidated financial statements under the equity method of accounting. (See note 5 in Notes to Consolidated Financial Statements in Item 8 of Part II herein.) Effective December 1, 1995 the Company increased its participation in Industrial Risk Insurers (IRI) from approximately .5 percent to 14 percent. IRI is a voluntary joint underwriting association providing property insurance for the class of business known as Highly Protected Risks - larger manufacturing, processing, and industrial businesses which have invested in protection against loss through the use of sprinklers and other means. IRI has a fiscal year ending November 30 and provides quarterly reports to member companies of the association. As a result, HSB's increased participation will initially be reflected in the first quarter financial reports for 1996. The effective tax rate for 1995 was 27 percent compared to 29 and 22 percent for 1994 and 1993, respectively. The change from 1994 is due primarily to the change in the mix of foreign and domestic business and utilization of related credits. The difference from 1993 to 1994 is primarily due to the change in the mix between fully taxable earnings and tax preferred investment income.
INSURANCE OPERATIONS For the years ended December 31, 1995 1994 1993 ---- ---- ---- Gross earned premium $455.0 $381.7 $378.5 Ceded premium 65.9 45.1 29.3 ------ ------ ------ Insurance premium $389.1 $336.6 $349.2 Claims and adjustment expenses 154.9 143.2 199.1 Underwriting, acquisition and other expenses 200.0 172.7 176.5 ------ ------ ------ Underwriting gain (loss) $ 34.2 $ 20.7 $(26.4) ====== ====== ======
Insurance operations include the insurance results of HSB, The Boiler Inspection and Insurance Company of Canada (BI&I) and EIG, Co. Insurance premiums in 1995 increased 16 percent from 1994. The EIG, Co. acquisition and full consolidation accounted for a significant amount of this increase. Had EIG, Co. been 100 percent owned and fully consolidated throughout 1994, the growth in gross earned premium would have been approximately 7 percent. Global operations, which represent 19 percent of the 1995 total, grew 24 percent with expansion into India, China and other Asian markets representing our largest contributors to such growth. The Company sees continued opportunities for growth, particularly in those countries where infrastructure development is moving to the private sector. At the same time, softening of the market has occurred as the number of insurers offering capacity has expanded. In the domestic insurance markets a program of more disciplined underwriting principles, arising from a major reunderwriting effort begun in 1993, has resulted in improved risk selectivity while at the same time slowing the growth in gross insurance premiums. In addition, many customers responded to economic and competitive pressures by selecting programs with higher deductibles to offset the effective price increases. Higher deductibles have contributed to slower premium growth over the past few years. New business growth in the past several years has been largely attributable to growth in the reinsurance assumed book of business. The insurance industry, in general, continues to undergo significant shakeout and consolidation. Considerable merger and acquisition activity has occurred recently and more is anticipated in the future. Depending on the specific companies involved in these activities and other market factors, the level of reinsured business the Company assumes in the future could be impacted. HSB is positioned to benefit from these changes over the long term due to its strong market position and reinsurance relationships with more than 100 multi-line carriers; while over the shorter term there is both opportunity and challenge. The Company participates in various facultative, quota share and excess of loss reinsurance agreements to limit its exposure, particularly to catastrophic losses and high risk lines, and to provide additional capacity to write business. The Company's reinsurance costs continue to be impacted by loss experience from prior years. In 1995, the Company's reinsurance ceded costs increased $20.8 million from 1994. Had EIG, Co. been 100 percent owned and fully consolidated in 1994, the increase would have been approximately $10 million. In 1995, the Company centralized and consolidated its treaty reinsurance ceded program to cover global operations. This strategy will enable HSB to more closely manage its costs. In 1994 HSB increased its retention in order to mitigate the rising cost of reinsurance. This change could result in higher claim costs in future periods. The increase in claims and adjustment expenses in 1995 compared to 1994 is the result of the acquisition and full consolidation of EIG, Co. Claims and adjustment expenses, exclusive of EIG, Co., decreased $3.9 million in the current year compared with 1994. Claim costs in 1994 include $4.8 million of losses relating to the California earthquake. The 1993 claims and adjustment expenses include catastrophic losses of $5.3 million for winter storms and $6.8 million for Midwest floods as well as the previously noted reserve strengthening. In 1995, there were no material catastrophic losses experienced by the Company. The components of claims and adjustment expenses, net of reinsurance, were as follows:
1995 1994 1993 ---- ---- ---- Provision for clams and adjust- ment expenses occurring in the current year $152.2 $141.7 $172.2 Increase in estimated claims and adjustment expenses arising in prior years 2.7 1.5 26.9 ------ ------ ------ Total incurred claims and adjustment expenses $154.9 $143.2 $199.1 ====== ====== ====== Loss ratio 39.8% 42.5% 57.1% ====== ====== ======
The improvement in the loss ratios over both periods is attributable to the reunderwriting efforts begun in 1993. In 1993, adverse development of prior year reserves was attributable to the settlement of certain large losses for which the Company initially determined it would not have liability; the settlement of some outstanding claims for more than was originally anticipated; unusually late notice of loss provided by the insured for several large losses; and reserves established for losses on which the coverage was being contested. Claims and adjustment expense reserves comprise one of the largest liabilities on the Company's Statements of Financial Position. Reserves are established to reflect the Company's estimates of total losses and loss adjustment expenses that will ultimately be paid under direct and assumed insurance contracts. Loss reserves include claims and adjustment expenses on claims that have been reported but not settled and those that have been incurred but not yet reported to the Company. The length of time that reserves are carried on the Statements of Financial Position is a function of the pay-out patterns associated with the types of coverages involved. The majority of risks the Company insures are short-tailed in nature, relative to the property/casualty industry as a whole, meaning they generally settle shortly after claims are reported. The Company's loss reserve estimates reflect such variables as past loss experience and inflation. In addition, due to the nature of much of the Company's coverages, complex engineering judgments are involved. Previously established loss reserves are regularly adjusted as loss experience develops and new information becomes available. Adjustments to previously established reserves are reflected in the financial statements in the period in which the estimates are changed. Failures of some insurance companies, in recent years, have caused increased interest and concern on the part of both the public and regulators. Various state laws require the Company to participate in guaranty associations, which pay policyholders' claims in the event of an insurer's insolvency, and certain joint underwriting associations, which provide insurance for particular classes of insureds when insurance in the voluntary market is unavailable. The increase in insurer insolvencies and the unprecedented level of catastrophes in recent years have resulted in higher assessments against the Company from the associations in which it participates. The Company has recorded its ultimate estimate of assessments in its financial statements.
ENGINEERING SERVICES OPERATIONS For the years ended December 31, 1995 1994 1993 ----- ------ ------ Net engineering services revenues $252.1 $232.1 $231.5 Net engineering services expenses 229.5 213.9 219.7 ------ ------ ------ Operating gain $ 22.6 $ 18.2 $ 11.8 ====== ====== ====== Net margin 8.9% 7.9% 5.1% ====== ====== ======
Engineering services operations includes the results of HSB's and BI&I's engineering services, Radian Corporation, HSB Reliability Technologies (HSBRT), HSB Professional Loss Control and HSB International. HSB presents both its engineering services revenues and expenses net of revenue and expenses for subcontractors. Net engineering services revenue increased 9 percent over 1994 with Radian accounting for most of the increase. Radian increased revenues by 10 percent in the current year through increases in market share in the defense, petroleum/chemical and general manufacturing sectors. HSB's consolidated engineering services pretax operating gain increased 24 percent in 1995 to $22.6 million. The 1995 gain, another record year for the Company, was achieved through growth at Radian and improved margins at HSBRT. HSBRT's margin increased $3.4 million in 1995 over 1994 as certain unprofitable operations were disposed of in 1994. The increase in operating gain in 1994 over 1993 was achieved through improved margins at Radian as they undertook cost control measures and improved staff utilization.
INVESTMENT OPERATIONS For the years ended December 31, 1995 1994 1993 ---- ---- ---- Net investment income $ 28.2 $ 26.2 $ 29.3 Realized investment gains 2.8 8.7 26.1 ------ ------ ------ Income from investment operations $ 31.0 $ 34.9 $ 55.4 ====== ====== ====== Total cash and invested assets, at fair value $553.8 $489.7* $506.0 Net unrealized gains, pretax 65.4 16.5 59.2
*Includes $63.1 million resulting from consolidation of EIG, Co. The Company's investment strategy continues to be to maximize total return on the investment portfolio over the long term through investment income and capital appreciation. The investment portfolio includes a wide variety of high quality equity securities and both domestic and foreign fixed maturities. The mix of the portfolio is managed to respond to anticipated claim pay-out patterns. The Company also maintains a highly liquid short-term portfolio to provide for immediate cash needs. Investment strategies are developed based on many factors including operational results, tax implications, regulatory requirements, interest rates and market conditions. Net investment income increased slightly in 1995. The 8 percent growth was due to the full consolidation of EIG, Co. offset by lower interest rates. The decrease in 1994 resulted from a lower average investment portfolio, as equity holdings were liquidated to meet cash flow requirements. Cash was used to pay dividends, repay debt and to purchase fixed assets and treasury stock. The effective tax rate on investment income was 14.0, 17.9 and 13.5 percent in 1995, 1994 and 1993, respectively. The decrease in 1995 resulted from a shift in the mix of the portfolio to more holdings in tax preferred securities. In 1993, the portfolio was heavily weighted to equity securities with the effective rate reduced by lower taxes on dividend income. The Company's investment portfolio continues to consist of high grade domestic and foreign investments. At the end of 1995, the Company's fixed maturities portfolio comprised 47 percent of the value of the invested assets. The credit quality of the Company's bond investments at December 31, 1995, averaged AA rating. The Company's portfolio does not include any bonds in default as to either principal or interest. Bonds held at December 31, 1995, had a fair value of $183.9 million. Redeemable preferred stocks averaged a BBB rating. Declining yields available on new fixed maturities relative to higher yields on maturing investments over the past few years have curtailed any significant investment income growth. The carrying value of the equity securities portfolio represented 40 percent of the investments at December 31, 1995. This included $60.4 million of unrealized investment gains, which increased $34.2 million from 1994 on a sharp upturn in the stock market in 1995. The Company recorded $8.6 million of dividends and $3.5 million of net pretax realized gains from this portfolio in 1995. The Company's largest single holding accounted for less than 1 percent of total assets.
LIQUIDITY AND CAPITAL RESOURCES Balances at December 31, 1995 1994 1993 ------ ------ ------ Total assets $971.5 $905.7* $877.9 Short-term investments 73.8 73.8** 53.8 Cash 9.3 12.1 7.3 Short-term borrowings 13.4 50.9*** 42.7 Shareholders' equity 341.1 299.5 324.7
*Includes $100.9 million resulting from consolidation of EIG, Co. **Includes $22.6 million resulting from consolidation of EIG, Co. ***Includes $24.1 million resulting from consolidation of EIG,Co. 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 its engineering and insurance operations, and maintains a highly liquid investment portfolio. The Company manages its cash and short-term investment position to meet its operating expense and claim payment needs. In addition, the Company has capacity to generate cash of up to $75 million through its short-term commercial paper program. At December 31, 1995, $12.0 million was outstanding. Commercial paper outstanding is primarily used to fund engineering services operations. In 1995, the company repaid $24.1 million of EIG, Co. short-term debt and EIG, Co. subsequently issued $25.0 million of senior notes due May, 15, 2000 at an interest rate of 6.83 percent. The Company does not anticipate any significant capital commitment associated with the Radian/Dow transaction and currently has no significant capital commitments planned for 1996. However, the Company will probably guaranty up to 40 percent of future Radian International LLC borrowings. Based upon the business plan of Radian International LLC, the Company's guarantee could range from $20 to $50 million. Cash provided from operations was $95.5 million in 1995 compared to $40.3 million in 1994 and $53.3 million in 1993. In 1995, $17 million is attributable to the full consolidation of EIG, Co. Additional improvement in 1995 is due to better underwriting and engineering services results. Excluding the impact of EIG, Co., cash flow from insurance operations grew as premiums collected increased by 6 percent while claim payments decreased by 5 percent from 1994. Engineering services revenue collected also increased by 7 percent. Cash provided by operating and investing activities was used to pay dividends, repay short-term borrowings, and repurchase Company stock. The Company repurchased 136,943; 147,486; and 229,992 shares of its common stock in 1995, 1994 and 1993, respectively. Dividends paid by the Company are limited by state insurance regulations. The current restriction is the greater of 10 percent of prior year's statutory surplus or net income as reported to the regulatory agencies. Currently, the Company can pay $65.3 million in dividends in 1996 without requesting regulatory approval. Due to the Company's strong financial position, regulatory approval was received for the payment of 1995 dividends. Pursuant to the terms of the acquisition agreement for EIG, HSB has the option to exchange the EIG, Co. preferred stock, which was issued to Gen Re at the time of the acquisition, for HSB convertible preferred stock at the end of 1996. As part of HSB's strategic planning process the Company periodically assesses its capital structure to ensure that appropriate capital is available to grow its core business. DEVELOPMENTS IN INSURANCE REGULATIONS In December 1993, the National Association of Insurance Commissioners (NAIC) adopted the property and casualty risk based capital (RBC) formula. RBC is used by regulators as an early warning tool to identify insurers with weak or deteriorating financial positions requiring further regulatory attention, or the initiation of regulatory action. The RBC formula monitors elements of risk defined as underwriting risk, invested asset risk, credit risk and off balance sheet risk. Property and casualty insurers were required to report the results of the formula for the first time in their 1994 statutory filings. HSB substantially exceeded the RBC requirements in 1995 and 1994. The NAIC is currently working on a model investment law which would provide guidelines for insurers in structuring their investment portfolios. These guidelines are intended to preserve principal, assure diversification as to investment, issuer and credit quality, and promote prudent investment management strategies to ensure companies are positioned to cover reasonably foreseeable contingencies. The guidelines are expected to be issued during 1996 for adoption by the states. The Company does not expect such guidelines to have a material effect on its investment practices. Regulator concerns about the consistency and comparability of statutory accounting practices (SAP) has prompted the NAIC to undertake a codification project which will replace prescribed or permitted SAP as the regulatory basis of accounting for insurance companies. Conversion to new statutory accounting standards is expected to be required sometime after 1996. Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page No. Report of Independent Accountants Financial Statements Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Financial Position - December 31, 1995 and 1994. Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993. Notes to Consolidated Financial Statements Schedule I - Summary of Investments- Other than Investments in Related Parties Schedule IV - Reinsurance Schedule V - Valuation and Qualifying Accounts No other schedules are required to be filed herewith pursuant to Article 7 of Regulation S-X. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of The Hartford Steam Boiler Inspection and Insurance Company We have audited the consolidated financial statements and the financial statement schedules of The Hartford Steam Boiler Inspection and Insurance Company and its subsidiaries listed in item 8 of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Hartford Steam Boiler Inspection and Insurance Company and its subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for postemployment benefits during 1993. Coopers & Lybrand Hartford, Connecticut January 22, 1996
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, (in millions, except per share amounts) 1995 1994 1993 ----- ------ ----- REVENUES: Insurance premiums $389.1 $336.6 $349.2 Net engineering services 252.1 232.1 231.5 Net investment income 28.2 26.2 29.3 Realized investment gains 2.8 8.7 26.1 ------ ------ ------- Total revenues 672.2 603.6 636.1 ------ ------ ------- EXPENSES: Claims and adjustment 154.9 143.2 199.1 Policy acquisition 78.1 64.7 64.2 Underwriting and inspection 121.9 105.1 112.3 Net engineering services 229.5 213.9 219.7 Interest 1.5 1.6 1.8 Restructuring - - 20.0 Charge for Proposition 103 - 2.9 - ------ ------ ------- Total expenses 585.9 531.4 617.1 Equity in operations of insurance association - 1.4 (2.1) INCOME BEFORE TAXES AND CUMULATIVE ------ ------ ------- EFFECT OF CHANGE IN ACCOUNTING 86.3 73.6 16.9 ------ ------ ------- INCOME TAXES (BENEFIT): Current 24.3 18.7 6.9 Deferred (.6) 3.0 (3.1) ------ ------ ------- Total income taxes 23.7 21.7 3.8 INCOME BEFORE CUMULATIVE EFFECT ------- ------ ------- OF CHANGE IN ACCOUNTING 62.6 51.9 13.1 Cumulative effect of change in accounting for postemployment benefits (net of income tax of $1.9) - - (3.6) ------- ------- ------- NET INCOME $ 62.6 $ 51.9 $ 9.5 ======= ======= ======= PER COMMON SHARE: Income before accounting change $ 3.07 $ 2.54 $ .63 Cumulative effect of change in accounting - - (.17) ------- ------- ------- Net income $ 3.07 $ 2.54 $ .46 ======= ======= ======= Average shares outstanding 20.4 20.5 20.7 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION At December 31, (in millions, except per share amounts) 1995 1994 -------- -------- ASSETS: Cash $ 9.3 $ 12.1 Short-term investments, at cost 73.8 73.8 Fixed maturities, at fair value (cost - $247.6; $205.2) 255.3 198.9 Equity securities, at fair value (cost - $155.0; $178.7) 215.4 204.9 ------- ------- Total cash and invested assets 553.8 489.7 Insurance premiums receivable 87.2 83.1 Engineering services receivable 68.8 72.1 Fixed assets 62.3 64.2 Prepaid acquisition costs 34.1 35.5 Capital lease 16.8 17.5 Reinsurance recoverable 47.9 44.9 Other assets 100.6 98.7 ------- ------- Total assets $971.5 $905.7 ======= ======= LIABILITIES: Unearned insurance premiums $216.2 $201.3 Claims and adjustment expenses 190.9 199.4 Short-term borrowings 13.4 50.9 Long-term borrowings 25.6 .6 Capital lease 27.8 27.8 Deferred income taxes 18.9 (4.6) Dividends payable 11.6 11.2 Minority interest 20.0 20.0 Other liabilities 106.0 99.6 ------- ------- Total liabilities 630.4 606.2 ------- ------- SHAREHOLDERS' EQUITY: Common stock (stated value; shares authorized 50.0; shares issued 21.3; shares outstanding 20.3; 20.4) 10.0 10.0 Additional paid-in capital 33.9 34.0 Unrealized investment gains, net of tax 43.9 13.9 Retained earnings 305.1 288.1 Treasury stock, at cost (shares 1.0; .9) (47.7) (41.9) Benefit plans (4.1) (4.6) ------- ------- Total shareholders' equity 341.1 299.5 ------- ------- Total liabilities and shareholders' equity $971.5 $905.7 ======= ======= Shareholders' equity per common share $ 16.81 $ 14.67 ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, (in millions) 1995 1994 1993 ------- ------ ------- OPERATING ACTIVITIES: Net income $ 62.6 $ 51.9 $ 9.5 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23.1 23.6 20.6 Deferred income taxes (.6) 3.0 (3.1) Realized investment gains (2.8) (8.7) (26.1) Change in: Insurance premiums receivable (4.1) (4.3) (6.5) Engineering services receivable 3.3 6.9 (7.8) Prepaid acquisition costs 1.4 (2.0) - Reinsurance recoverable (3.0) 3.8 (4.6) Unearned insurance premiums 14.9 8.5 (1.7) Claims and adjustment expenses (8.5) (37.2) 41.7 Other 9.2 (5.2) 31.3 ------- ------- ------- Cash provided by operating activities 95.5 40.3 53.3 ------- ------- ------- INVESTING ACTIVITIES: Fixed asset additions (16.8) (16.8) (14.3) Investments: Sale (purchase) of short-term investments, net - 2.5 (7.2) Purchase of fixed maturities (152.1) (52.3) (29.9) Proceeds from sale of fixed maturities 91.5 13.5 7.1 Redemption of fixed maturities 17.0 20.5 27.5 Purchase of equity securities (95.0) (151.1) (488.5) Proceeds from sale of equity securities 122.9 216.6 516.2 Cash acquired in connection with EIG acquisition - .3 - ------ ------- ------- Cash provided by (used in) investment activities (32.5) 33.2 10.9 ------ ------- ------- FINANCING ACTIVITIES: Decrease in short-term borrowings, net (37.5) (15.9) (9.5) Repayment of long-term debt (.1) (.1) (.1) Increase of long-term debt 25.1 - - Dividends paid to shareholders (45.3) (43.9) (43.9) Repayment of employee stock ownership plan debt (1.7) (2.1) (1.9) Purchase of treasury stock (6.3) (6.7) (10.2) ------- ------- ------- Cash used in financing activities (65.8) (68.7) (65.6) ------- ------- ------- Net increase (decrease) in cash (2.8) 4.8 (1.4) Cash at beginning of period 12.1 7.3 8.7 ------- ------- ------- Cash at end of period $ 9.3 $ 12.1 $ 7.3 ======= ======= ======= INTEREST PAID $ 1.5 $ 1.6 $ 1.8 ------- ------- ------- FEDERAL INCOME TAX PAID $ 23.4 $ 8.2 $ 4.3 ------- ------- -------
NON-CASH INVESTING AND FINANCING ACTIVITIES: Acquisition of EIG through issuance of EIG, Co. preferred stock of $20 million in 1994. The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY For the years ended December 31, (in millions) Net Total Unrealized Share- Additional Investment holders' Common Paid-in Gains Retained Treasury Benefit Equity Stock Capital (Losses) Earnings Stock Plans - ---------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1992 $ 374.3 $ 10.0 $ 33.4 $ 51.9 $ 314.8 $ (26.9) $ (8.9) - ---------------------------------------------------------------------------------------------------------------------- Net income 9.5 - - - 9.5 - - Dividends declared (43.9) - - - (43.9) - - Change in unrealized investment gains, net of tax (13.0) - - (13.0) - - - SFAS 115 accounting change 5.3 - - 5.3 - - - Benefit plans 1.4 - .2 - - .4 .8 Exercise of stock options .9 - .3 - - .6 - Purchase of treasury stock (9.8) - - - - (9.8) - - ---------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1993 $ 324.7 $ 10.0 $ 33.9 $ 44.2 $ 280.4 $ (35.7) $ (8.1) - ---------------------------------------------------------------------------------------------------------------------- Net income 51.9 - - - 51.9 - - Dividends declared (44.2) - - - (44.2) - - Change in unrealized investment gains, net of tax (30.3) - - (30.3) - - - Benefit plans 4.0 - - - - .5 3.5 Exercise of stock options .1 - .1 - - - - Purchase of treasury stock (6.7) - - - - (6.7) - - ---------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1994 $ 299.5 $ 10.0 $ 34.0 $ 13.9 $ 288.1 $ (41.9) $ (4.6) - ---------------------------------------------------------------------------------------------------------------------- Net income 62.6 - - - 62.6 - - Dividends declared (45.6) - - - (45.6) - - Change in unrealized investment gains, net of tax 30.0 - - 30.0 - - - Benefit plans .9 - (.1) - - .5 .5 Purchase of treasury stock (6.3) - - - - (6.3) - - ---------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1995 $ 341.1 $ 10.0 $ 33.9 $ 43.9 $ 305.1 $ (47.7) $ (4.1) ======================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions, except per share amounts) 1. ACCOUNTING POLICIES Consolidation The accompanying financial statements present the consolidated accounts of The Hartford Steam Boiler Inspection and Insurance Company and its subsidiaries (collectively, the Company) and are prepared in accordance with generally accepted accounting principles (GAAP). Significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in accordance with GAAP requires the use of estimates in reporting certain assets and liabilities. Actual results could differ from those estimates. Insurance Insurance premium revenues are net of reinsurance ceded and are generally earned on a pro rata basis over the contract period. The portion of gross insurance premiums not earned at the end of the period is recorded as unearned insurance premiums on the Consolidated Statements of Financial Position. Unearned ceded premiums are included in other assets on the Consolidated Statements of Financial Position. Prepaid acquisition costs, consisting of commissions and premium taxes, are amortized as the related insurance premiums are earned. All other acquisition costs are charged to operations as incurred. Liabilities for claims and adjustment expenses for boiler and machinery, property and other coverages represent estimated reserves on claims and adjustment expenses reported but not yet settled and the cost of claims and adjustment expenses incurred but not yet reported. Reserves for claims and adjustment expenses are undiscounted and are gross of amounts recoverable from reinsurers. Reserves are reduced for estimated amounts of salvage and subrogation and deductibles recoverable from customers. The length of time that reserves for claims and adjustment expenses are carried on the Consolidated Statements of Financial Position is a function of the pay-out patterns associated with the types of coverages involved. Estimates for these reserves reflect such variables as past loss experience, changes in judicial interpretation of legal liability, policy coverage and inflation, and require complex engineering judgments. Due to the nature of the variables involved in the reserving process, subjective judgments are an integral component. Previously estimated reserves are regularly adjusted as loss experience develops and new information becomes available. Since reserves are based on estimates, the ultimate liability may be more or less than such reserves. The effects of changes in estimated reserves are included in the results of operations in the period in which the estimates are changed. (See note 12.) The Company records subrogation when recoverability is probable, such as when a judgment is returned, liability is admitted to or settlement is reached. Reinsurance recoverable represents amounts due from reinsurers for paid and unpaid claims and adjustment expenses through ceded reinsurance agreements. Engineering Services The Company recognizes the majority of its engineering services revenues as the service is provided, net of related subcontract costs of $28.8, $21.5 and $24.6 million in 1995, 1994 and 1993, respectively. Generally, revenues from contracts are recognized on the percentage-of-completion method; costs on such contracts are included in operations as incurred. Provisions are made for losses on contracts at the time such losses become known. Investments Short-term investments have a maturity of one year or less and are carried at cost which approximates fair value. Fixed maturities include bonds, notes and redeemable preferred stocks. Equity securities include common and non-redeemable preferred stocks. All fixed maturities and equity securities are classified as available for sale. Accordingly, these investments are carried at estimated fair value. Estimated fair values of securities classified as available for sale are based principally upon quoted market prices. Investment income is net of investment expenses. Realized investment gains and losses are determined on the basis of costs related to those investments sold and are recorded on the trade date. Also included in realized investment gains and losses are losses arising from declines in the realizable value of investments considered to be other than temporary. Unrealized gains and losses on investments classified as available for sale and foreign exchange gains and losses on certain investments in foreign operations are included net of income tax in Shareholders' equity. The carrying values of short-term investments, investment income accrued and securities transactions in the course of settlement approximate their fair value because of the relatively short period of time between origination of the instruments and their expected realization. Income Taxes Deferred tax assets and liabilities are generally determined based on the difference between financial statement and tax bases for certain assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are allowed if future realization is more likely than not. Deferred income taxes are provided for unrealized appreciation on fixed maturities and equity securities available for sale, prepaid acquisition costs, unearned premiums, certain employee benefit costs and other items which are the result of temporary differences in the treatment of such items for tax and financial statement purposes. Fixed Assets Fixed assets are carried at cost less accumulated depreciation. Depreciation is calculated on the basis of estimated useful lives using straight-line and accelerated methods. Upon retirement or replacement, any gain or loss is included in operations. Goodwill and Other Intangible Assets Goodwill is generally amortized over 15 years and other intangible assets over their estimated useful lives. These assets are included in other assets on the Consolidated Statements of Financial Position and amounted to $21.5 and $22.9 million at December 31, 1995 and 1994, respectively. The Company evaluates the realizability of goodwill based upon projections of undiscounted cash flows. 2. CHANGE IN ACCOUNTING PRINCIPLE In 1993, the Company adopted Statement of Financial Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for Postemployment Benefits," with retroactive application to January 1, 1993. The adoption of SFAS 112 resulted in a non-cash, after- tax charge of $3.6 million or $.17 per share. This charge was recognized as the cumulative effect of a change in accounting in the Consolidated Statements of Operations. 3. FUTURE CHANGES IN ACCOUNTING PRINCIPLES In March 1995, the Financial Accounting Standards Board (the Board) issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective for fiscal years beginning after December 31, 1995. SFAS 121 requires that entities review long-lived assets, certain intangibles and goodwill for possible impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 also requires that long-lived assets and certain intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Implementation of SFAS 121 is not expected to have a material impact on the Company's financial results. In October 1995, the Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock- Based Compensation," effective for fiscal years beginning after December 15, 1995. SFAS 123 allows entities to adopt the fair value based method of accounting for stock compensation or continue under current accounting practice. Entities electing to remain with current accounting must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting in this Statement had been applied. The Company expects to make pro forma disclosure of awards granted in 1995 and future years and has not yet settled on a method of valuation. 4. ACQUISITION In December 1994, The Hartford Steam Boiler Inspection and Insurance Company (HSB) acquired the remaining 50 percent interest in Engineering Insurance Group (EIG), a partnership which was jointly formed by the Company and General Reinsurance Corporation (Gen Re) in 1988. The partnership was the parent of Engineering Insurance Company Limited, a London based insurer formed in 1989 principally to offer machinery breakdown coverage to business and industry outside the United States and Canada. Coincident with the December 1994 acquisition, the partnership was incorporated with the Company acquiring all outstanding common shares and Gen Re acquiring preferred shares of the new company, EIG, Co. HSB has the option to exchange the EIG, Co. preferred stock for HSB convertible preferred stock at the end of 1996. The Company has accounted for this transaction as a purchase resulting in the recording of assets and liabilities acquired at fair value, and goodwill of $15.9 million, which is being amortized over 15 years. The Company's interest in EIG, Co. has been fully consolidated in the Consolidated Statements of Financial Position beginning December 31, 1994, reflecting the preferred issuance as a minority interest. Prior to this acquisition, the Company's 50 percent ownership in EIG had been accounted for under the equity method. Accordingly, the results of operations for 1994 and 1993 have been reflected under the caption "Equity in operations of insurance association" in the Consolidated Statements of Operations, while the 1995 results of operations for EIG, Co. are fully consolidated. 5. SUBSEQUENT EVENTS In January 1996, HSB and The Dow Chemical Company (Dow) formed a new company, Radian International LLC (Limited Liability Company), which will provide environmental, information technology, and strategic chemical management services to industries and governments worldwide. According to the terms of the agreement, the ownership of Radian International LLC initially will be 60 percent Dow and 40 percent HSB, via the wholly owned subsidiaries of each company. Income will be subject to a preference return to HSB in the first two years. As is customary in joint ventures, the agreements between HSB and Dow specify certain circumstances under which the business can be sold, venture assets and liabilities can be distributed or partners' interests can be sold subject to certain rights of first refusal. In 1996, HSB's interest in Radian International LLC will be accounted for on the consolidated financial statements under the equity method of accounting. Had the transaction occurred at the beginning of 1995 total revenues and total expenses would have been $470.7 and $399.7 million, respectively, and consolidated assets and liabilities at December 31, 1995 would have been $954.1 and $613.0, respectively. 6. RESTRUCTURING In September of 1993, the Company recorded a $20 million charge for the cost of restructuring its insurance and engineering services businesses. Restructuring costs include severance and other costs related to planned staff reductions and charges related to a realignment of the Company's operations. At December 31, 1995, $.5 million of restructuring liability remains. 7. SEGMENT INFORMATION HSB is a multi-national company operating primarily in North American, European, and Asian markets. The most significant business is boiler and machinery insurance, which provides insurance against losses from accidents to boilers, pressure vessels, and a wide variety of mechanical and electrical machinery and equipment, along with a high level of inspection services aimed at loss prevention. The Company also offers professional scientific and technical consulting for industry and government on a worldwide basis. While the principal market for insurance and engineering services is the United States, the Company continues to see growth opportunities in overseas markets. The Company operates three principal businesses - insurance, engineering services and investments. Revenues, expenses and receivables are shown for these segments in the Company's financial statements. The Company does not allocate assets between business segments. In 1995, the Company derived approximately 13 percent of its total revenues from engineering services contracts with various agencies and departments of the U.S. government. The following presents financial data of the Company based on geographic location:
For the Years Ended December 31, --------------------- 1995 1994 1993 --------------------- REVENUES U.S. $581.7 $561.6 $595.6 Non-U.S. 90.5 42.0 40.5 ------ ------ ------ Total revenues $672.2 $603.6 $636.1 ====== ====== ====== INCOME BEFORE TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING U.S $ 68.6 $ 66.9 $ 13.5 Non-U.S. 17.7 6.7 3.4 ------ ------- ------ Total income before taxes and cumulative effect of change in accounting $ 86.3 $ 73.6 $ 16.9 ====== ======= ====== At December 31, -------------------------- 1995 1994 1993 -------------------------- IDENTIFIABLE ASSETS U.S. $758.2 $744.0 $807.3 Non-U.S. 213.3 161.7* 70.6 ------- ------ ------ Total assets $971.5 $905.7 $877.9 ======= ====== ======
*Includes $100.9 million resulting from consolidation of EIG, Co. (See note 4.) 8. STATUTORY FINANCIAL INFORMATION HSB is a Connecticut domiciled insurance company which is licensed to conduct business in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The annual statements for state insurance regulatory authorities are currently prepared using accounting methods prescribed or permitted by such authorities (statutory basis). Statutory accounting practices (SAP) differ in certain respects from GAAP. With respect to the Company's financial statements, these differences are primarily comprised of the accounting for prepaid acquisition costs, deferred income taxes, fixed maturity investments, valuation of certain non-insurance affiliates and employee benefit plans. At year-end 1995 and 1994, policyholders' surplus on a statutory basis was $280.6 and $238.0 million, respectively. Statutory net income, adjusted to include the earnings of all HSB domestic insurance subsidiaries for 1995, 1994 and 1993 was $66.7, $40.1 and $20.1 million, respectively. The Company is currently subject to various regulations that limit the maximum amount of dividends available to shareholders without prior approval of insurance regulatory authorities. Under SAP, $65.3 million of statutory surplus is available for distribution to shareholders in 1996 without prior regulatory approval. In December 1993, the National Association of Insurance Commissioners (NAIC) adopted the property and casualty risk based capital (RBC) formula which allows regulators to more closely monitor insurers with weak or deteriorating financial positions and take regulatory action under certain conditions. The RBC formula for property and casualty companies monitors elements of risk defined as underwriting risk, invested asset risk, credit risk and off-balance sheet risk. Property and casualty insurers were required to report the results of the formula for the first time in their 1994 statutory filings. HSB substantially exceeded the RBC requirements in 1995 and 1994. The NAIC is currently working on a model investment law that would provide guidelines for insurers in structuring their investment portfolios. These guidelines are intended to preserve principal, assure diversification as to investment, issuer and credit quality, and promote prudent investment management strategies to ensure companies are positioned to cover reasonably foreseeable contingencies. The guidelines are expected to be issued during 1996 for adoption by the states. Regulator concerns about the consistency and comparability of SAP has prompted the NAIC to undertake a codification project that will replace prescribed or permitted SAP as the regulatory basis of accounting for insurance companies. Conversion to new statutory accounting standards is expected to be effective sometime after 1996. 9. INVESTMENTS
1995 1994 1993 --------------------- INCOME FROM INVESTMENT OPERATIONS Net investment income: Short-term interest $ 6.2 $ 2.0 $ 1.3 Fixed maturities: Taxable interest 9.0 4.1 3.7 Tax exempt interest 1.9 2.5 2.1 Redeemable preferred dividends 6.3 6.4 6.9 Equity securities: Common dividends 4.0 6.7 10.5 Non-redeemable preferred dividends 4.6 5.1 6.3 Other 1.2 2.3 1.0 ----- ----- ----- Total investment income 33.2 29.1 31.8 Investment expenses (5.0) (2.9) (2.5) ----- ----- ----- Net investment income $28.2 $26.2 $29.3 ===== ===== ===== Realized investment gains (losses): Fixed maturities: Bonds: Gains $ .7 $ 1.2 $ 1.0 Losses (1.5) (.7) (.6) ----- ----- ----- Net gains (losses) (.8) .5 .4 Redeemable preferred stocks: Gains .7 1.7 .6 Losses (.6) (.2) (.4) ----- ----- ----- Net gains .1 1.5 .2 Equity securities: Common stocks: Gains 11.4 19.3 37.3 Losses (7.4) (17.3) (16.0) ----- ----- ----- Net gains 4.0 2.0 21.3 Non-redeemable preferred stocks: Gains .2 5.0 4.2 Losses (.7) (.3) - ----- ----- ----- Net gains (losses) (.5) 4.7 4.2 ----- ----- ----- Realized investment gains $ 2.8 $ 8.7 $26.1 ===== ===== =====
Realized investment gains and losses for 1994 included $1.5 million of losses on common stocks arising from declines in the realizable value of investments considered to be other than temporary. There were no material declines in the realizable value of investments considered to be other than temporary for 1995.
UNREALIZED INVESTMENT GAINS, NET OF TAX 1995 1994 1993 -------------------- Fixed maturities: Gains $ 9.3 $ 2.4 $ 9.1 Losses (1.6) (8.7) (.9) ----- ----- ----- Net gains (losses) 7.7 (6.3) 8.2 Equity securities: Gains 64.2 35.8 59.3 Losses (3.8) (9.6) (6.1) ----- ----- ----- Net gains 60.4 26.2 53.2 Foreign exchange (2.7) (3.4) (2.2) ----- ----- ----- Total unrealized investment gains 65.4 16.5 59.2 Income taxes (21.5) (2.6) (15.0) Unrealized investment ----- ----- ----- gains, net of tax $43.9 $13.9 $44.2 ===== ===== =====
FIXED MATURITIES The amortized cost, estimated fair values (based principally upon quoted market prices) and gross unrealized gains and losses of fixed maturities at December 31, were as follows:
1995 ------------------------------------------- Estimated Gross Gross Amortized Fair Unrealized Unrealized Category Cost Value Gains Losses - -------- ------------------------------------------- Redeemable preferred stocks $ 70.0 $ 71.4 $ 2.9 $ 1.5 States and municipalities 25.3 27.0 1.8 .1 Foreign governments 45.3 46.7 1.4 - Corporate and other 106.9 110.1 3.2 - U.S. Treasury and agencies .1 .1 - - ------ ------ ------ ------ Total fixed maturities $247.6 $255.3 $ 9.3 $ 1.6 ====== ====== ====== ======
1994 ------------------------------------------- Estimated Gross Gross Amortized Fair Unrealized Unrealized Category Cost Value Gains Losses - --------- ------------------------------------------- Redeemable preferred stocks $ 67.0 $ 63.9 $ 1.6 $ 4.7 States and municipalities 49.5 47.8 .7 2.4 Foreign governments 27.5 26.4 .1 1.2 Corporate and other 61.0 60.6 - .4 U.S. Treasury and agencies .2 .2 - - ------ ------ ------ ------ Total fixed maturities $205.2 $198.9 $ 2.4 $ 8.7 ====== ====== ====== ======
The amortized cost and estimated fair value of fixed maturities at December 31, by contractual years-to-maturity follow. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations.
1995 -------------------- Estimated Amortized Fair Maturity Cost Value - -------- -------------------- One year or less $ 15.1 $ 15.4 Over one year through five years 108.4 111.8 Over five years through ten years 80.8 83.4 Over ten years 43.3 44.7 ------ --------- Total fixed maturities $247.6 $255.3 ====== =========
EQUITY SECURITIES The cost, estimated fair values (based principally upon quoted market prices) and gross unrealized gains and losses of equity securities at December 31, were as follows:
1995 -------------------------------------- Estimated Gross Gross Fair Unrealized Unrealized Cost Value Gains Losses -------------------------------------- Common stocks $ 98.2 $153.5 $ 56.7 $ 1.4 Non-redeemable preferred stocks 56.8 61.9 7.5 2.4 ------ ------ ------ ------ Total equity securities $155.0 $215.4 $ 64.2 $ 3.8 ====== ====== ====== ====== 1994 --------------------------------------- Estimated Gross Gross Cost Fair Unrealized Unrealized Value Gains Losses --------------------------------------- Common stocks $126.4 $153.7 $ 32.7 $ 5.4 Non-redeemable preferred stocks 52.3 51.2 3.1 4.2 ------ ------ ------ ------ Total equity securities $178.7 $204.9 $ 35.8 $ 9.6 ====== ====== ====== ======
The Company held no derivative financial instruments in its investment portfolio at December 31, 1995 and 1994. The Company sells covered call options, at times, to protect against adverse changes in market values. Premiums received on options written are deferred and recognized as a component of gross realized gains when the option contracts are exercised or expire. During 1995 and 1994, aggregate premiums received by the Company on covered call options amounted to less than $.l and $.7 million, respectively. Net gains recognized on sales of underlying instruments amounted to less than $.l and $.4 million for 1995 and 1994, respectively. Generally the duration of covered call options written by the Company does not exceed 30 days. 10. ENGINEERING SERVICES RECEIVABLE Engineering services receivable is summarized as follows:
1995 1994 ------ ------ Amounts billed $ 45.9 $ 41.0 Amounts unbilled 18.1 26.0 Amounts due upon completion of contracts 5.5 5.7 ------ ------ 69.5 72.7 Less allowance for bad debts (.7) (.6) ------ ------ Engineering services receivable $ 68.8 $ 72.1 ====== ======
11. REINSURANCE The components of net written and net earned insurance premiums were as follows:
1995 1994 1993 ------ ------ ------ Written premiums: Direct $285.3 $251.7 $246.1 Assumed 182.9 137.9 131.0 Ceded (59.9) (49.3) (32.6) ------ ------ ------ Net written insurance premiums $408.3 $340.3 $344.5 ====== ====== ====== Earned Premiums: Direct $279.7 $242.6 $246.9 Assumed 175.3 139.1 131.6 Ceded (65.9) (45.1) (29.3) ------ ------ ------ Net earned insurance premiums $389.1 $336.6 $349.2 ====== ====== ======
The Company writes direct business through agencies and brokerage firms. In addition, the Company assumes boiler and machinery business through treaty and facultative reinsurance with over 100 insurance companies and several insurance pools. A significant amount of this assumed book is underwritten by the Company. The insurance industry, in general, is undergoing a significant shakeout and consolidation. Considerable merger and acquisition activity has occurred recently and more is anticipated in the future. Depending on the specific companies involved in these activities and other market factors, the level of reinsured business the Company assumes in the future could be impacted. As a property insurer, the Company is subject to losses that may arise from catastrophic events. The Company participates in various facultative, quota share and excess of loss reinsurance agreements to limit its exposure, particularly to catastrophic losses, and to provide additional capacity to write business. In the unlikely event that ceded reinsurers are unable to meet their obligations, the Company would continue to have primary liability to policyholders for losses incurred. Reinsurance recoverable on unpaid claims and the unearned portion of ceded reinsurance premiums are reported as assets, rather than netted against the related liability accounts. The Company is not party to any contracts that do not comply with the risk transfer provisions of SFAS 113. The Company recorded $18.5 and $31.0 million of reinsurance recoveries as a reduction of its claims and adjustment expenses during the years 1995 and 1994, respectively. Reinsurance recoverable on paid claims and adjustment expenses was $2.5 and $6.8 million at December 31, 1995 and 1994, respectively. Effective December 1, 1995 the Company increased its participation in Industrial Risk Insurers (IRI) from approximately .5 percent to 14 percent. IRI is a voluntary joint underwriting association providing property insurance for the class of business known as Highly Protected Risks - larger manufacturing, processing, and industrial businesses which have invested in protection against loss through the use of sprinklers and other means. IRI has a fiscal year ending November 30, and provides quarterly reports to member companies of the association. As a result, HSB's increased participation will initially be reflected in the first quarter financial reports for 1996. 12. RECONCILIATION OF NET LIABILITY FOR CLAIMS AND ADJUSTMENT EXPENSES The following table provides a reconciliation of the beginning and ending reserves for claims and adjustment expenses, net of reinsurance recoverables.
1995 1994 1993 ------ ------ ------ Net liability for claims and adjustment expenses at January 1, $161.3 $171.3 $132.8 ------ ------ ------ Plus: Provision for claims and adjustment expenses occurring in the current year 152.2 141.7 172.2 Increase in estimated claims and adjustment expenses arising in prior years 2.7 1.5 26.9 ------ ------ ------ Total incurred claims and adjustment expenses 154.9 143.2 199.1 ------ ------ ------ Less: Payment for claims arising in: Current year 58.9 63.5 60.9 Prior years 111.8 108.7 99.7 ------ ------ ------ Total payments 170.7 172.2 160.6 ------ ------ ------ Plus: Full consolidation of EIG, Co. at December 31, 1994 (See note 4) - 19.0 - ------ ------ ------ Net liability for claims and adjustment expenses at December 31 $145.5 $161.3 $171.3 ====== ====== ======
The 1993 claims and adjustment expenses included adverse development of prior years' reserves. The adverse development of the 1992 year-end reserves was attributable to the settlement of certain large losses for which the Company initially determined it would not have liability, the settlement of some outstanding claims for more than was originally anticipated, unusually late notice of loss provided by the insured for several large losses, and reserves established for losses on which the coverage is being contested. In 1993 the Company enhanced the evaluation techniques used in its reserving process. This process resulted in significant reserve strengthening in that year. The re-estimation of the 1993 reserve at December 31, 1994 resulted in an increase in the reserve estimate of less than 1 percent of the consolidated reserve balance. A reconciliation of the net liability to the gross liability for claims and adjustment expenses is as follows:
1995 1994 1993 ------------------------- Net liability for claims and adjustment expenses at December 31, $145.5 $161.3 $171.3 Reinsurance recoverable on unpaid claims and adjustment expenses 45.4 38.1 43.1 ------ ------ ------ Gross liability for claims and adjustment expenses at December 31, $190.9 $199.4 $214.4 ====== ====== ======
13. FIXED ASSETS Fixed assets are summarized as follows:
1995 1994 ----------------- Land and buildings $ 7.4 $ 7.4 Furniture, equipment and other 129.9 123.1 ------ ------ 137.3 130.5 Less accumulated depreciation (75.0) (66.3) ------- ------ Fixed assets $ 62.3 $ 64.2 ======= ======
14. INCOME TAXES Tax Provision A reconciliation of income taxes (benefit) at U.S. statutory rates to the income taxes (benefit) as reported is as follows:
1995 1994 1993 ---------------------------------------------- % of % of % of Pre-Tax Pre-Tax PreTax Amount Income Amount Income Amount Income ---------------------------------------------- Income before taxes $86.3 100% $73.6 100% $16.9 100% ===== ===== ===== ==== ===== ===== Tax at statutory rates $30.2 35% $25.8 35% $ 5.9 35% Income taxed at foreign rates .2 - .2 - .1 - Dividends received deduction (3.9) (5) (4.3) (6) (5.7) (34) Tax exempt interest (.7) (1) (.7) (1) (.7) (4) Restructuring - - - - 3.5 21 Tax credits and others (2.1) (2) .7 1 .7 4 ----- ----- ----- ---- ----- ----- Total income taxes and effective tax rate $23.7 27% $21.7 29% $ 3.8 22% ===== ===== ===== ==== ===== =====
Income taxes (benefit) consisted of the following: 1995 1994 1993 ---------------------------------- Current provision: U.S. $16.1 $15.6 $ 4.6 Foreign 8.2 3.1 2.3 ------ ------ ------ Current provision 24.3 18.7 6.9 ------ ------ ------ Deferred provision: U.S. .8 2.8 (3.3) Foreign (1.4) .2 .2 ------ ------ ------ Deferred provision (.6) 3.0 (3.1) ------ ------ ------ Total income taxes $23.7 $21.7 $ 3.8 ====== ====== ======
Deferred Income Taxes Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company's deferred tax liabilities and assets as of December 31, 1995 and 1994 are as follows:
1995 1994 --------------------- Deferred tax liabilities: Prepaid acquisition costs $ (9.8) $(11.7) Accelerated depreciation (3.8) (3.4) Pension asset (11.5) (9.9) Unrealized investment gains (21.5) (2.6) Other (13.8) (6.6) ------ ------ Total deferred tax liabilities (60.4) (34.2) ------ ------ Deferred tax assets: Benefit plans 10.8 11.2 Capital lease 3.6 3.8 Unearned insurance premiums 12.4 12.2 Loss reserve discounting 5.9 6.8 Other 8.8 4.8 ------ ------ Total deferred tax assets 41.5 38.8 ------ ------ Net deferred tax assets (liabilities) $(18.9) $ 4.6 ====== ======
Other Information Federal income tax returns for the years 1994, 1993 and 1992 are open to examination by the Internal Revenue Service. If examined, no significant tax adjustments are anticipated. 15. LEASES The Company leases its home office facility at One State Street under a long-term capital lease with the One State Street Limited Partnership. The lease obligation of $26.1 million was recorded at July 1, 1983 at an interest rate of 15 percent. Accumulated amortization was $9.3 and $8.6 million at December 31, 1995 and 1994, respectively. Terms of the lease require annual payments of approximately $4 million a year through June 30, 2018. In addition, the Company is required to pay over the lease term a proportional share of the facilities variable operating expenses. This amounted to approximately $2.8, $2.8 and $2.9 million for the years ended 1995, 1994 and 1993, respectively. The Company owns the One State Street land and leases it to the One State Street Limited Partnership. The Company receives a base rental for the land and a participation in the cash flow of the Partnership. The Company has a right of first refusal should the Partnership decide to sell the facility. If the Company does not exercise its right of first refusal, it will receive 65 percent of the net sale proceeds. In addition to its home office facility, the Company leases facilities and certain equipment which are accounted for as operating leases. Lease expenses amounted to $14.3, $15.1 and $14.7 million in 1995, 1994 and 1993, respectively. At December 31, 1995, future minimum rental commitments under noncancelable leases accounted for as operating leases with initial or remaining terms of more than one year were as follows:
1996 $15.0 1997 13.0 1998 11.1 1999 9.3 2000 5.9 2001 and thereafter 6.4 ------ Total $60.7 ======
16. SHORT-TERM AND LONG-TERM BORROWINGS During 1995, the Company borrowed on a short-term basis through its commercial paper program which has a limit of $75 million. Commercial paper outstanding at December 31, 1995 and 1994 was $12.0 and $26.7 million, respectively. Commercial paper outstanding at December 31, 1995 and 1994 had maturity dates through January, 1996 and April, 1995, respectively. Short-term borrowings at December 31, 1994 included $24.1 million recorded as a result of The Company's acquisition of the remaining interest in EIG. (See note 4.) This debt was repaid in 1995. Long-term debt at December 31, 1995 included $25.0 million of senior notes due May 15, 2000 at an interest rate of 6.83 percent. Long-term borrowings mature on or before December 31, 2001. 17. PENSION PLANS The Company maintains various types of pension plans covering employees of HSB and certain affiliates. The plans are non- contributory and benefits are based upon an employee's years of service and final average pay based upon the highest three out of five years. Vesting occurs after five years of service in compliance with the provisions of the Tax Reform Act of 1986. The Company's funding policy is to contribute an amount necessary to satisfy the minimum requirements under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code, plus such additional amounts as the Company determines appropriate. Assets available for plan benefits include approximately $16.8 million of Company stock at December 31, 1995. The pension expense for the U.S. pension plans was a net credit to earnings for 1995, 1994 and 1993 due to the over funded status of the primary plan. The components of the credit were as follows:
1995 1994 1993 ----- ------ ------ Service costs $ 2.9 $ 3.6 $ 3.2 Interest costs 10.2 9.7 9.3 Return on assets (30.9) 6.6 (5.2) Net amortization and deferral 15.3 (22.0) (11.0) ----- ------ ------ Net pension credit $(2.5) $(2.1) $(3.7) ===== ====== ======
The following table represents a reconciliation of the U.S. plans funded status and the amounts recognized in the Company's Statements of Financial Position at December 31:
Funded Unfunded ------------------------------ 1995 1994 1995 1994 ------------------------------ Actuarial present value of benefit obligations: Vested benefit obligation $95.8 $81.7 $24.0 $20.3 ============================== Accumulated benefit obligation $96.5 $82.4 $26.0 $21.6 ============================== Projected benefit obligation 113.8 97.0 $27.8 $23.0 Assets available for plan benefits (equity securities and fixed income investments at fair value) 164.8 135.5 - - ------------------------------ Assets in excess of (less than) projected benefit obligation 51.0 38.5 (27.8) (23.0) ------------------------------ SFAS 87 unamortized net transition asset (obligation) 12.6 14.7 (1.4) (1.6) Unrecognized prior service costs (2.3) (2.7) (4.1) (3.7) Unrecognized net loss (3.4) (11.6) (7.1) (4.1) ------------------------------ Unrecognized net asset (liability) 6.9 .4 (12.6) (9.4) Additional liability - - (5.5) (3.2) ------------------------------ Net pension asset (liability) $44.1 $38.1 $(20.7) $(16.8) ==============================
Assumptions used for the primary U.S. plan at years ended were as follows: 1995 1994 1993 ------------------------------ Discount rate 7.5% 8.5% 7.5% Long-term rate of return on assets 9.5% 9.5% 9.5% Rate of increase in future compensation levels 5.0% 5.0% 5.5%
18. POSTRETIREMENT PLANS The Company makes available health care and life insurance benefits for retired employees of HSB and certain subsidiaries. The Company makes contributions to the plans as claims are incurred. Contributions totaled $2.6, $2.3 and $1.8 million for 1995, 1994 and 1993, respectively. At December 31, 1995, 1994 and 1993 these plans were unfunded. Retirees' contributions to these plans vary, based upon retiree's age, years of service and coverage elected. The Company periodically amends the plan, changing the contribution rate of retirees and amounts of coverage. Components of net periodic postretirement benefit cost were:
Years Ended December 31, -------------------------- 1995 1994 1993 -------------------------- Service cost $ .3 $ .3 $ .2 Interest cost 2.3 2.2 2.1 Amortization of unrecognized obligations - .2 - -------------------------- Net periodic postretirement benefit cost $ 2.6 $ 2.7 $ 2.3 ==========================
The following table sets forth the amounts recognized in the Consolidated Statements of Financial Position at December 31, in accordance with SFAS 106:
1995 1994 --------------------- Accumulated postretirement benefit obligations for: Retirees $ 24.9 $ 23.6 Other fully eligible plan participants 1.5 1.2 Other active plan participants 4.7 4.3 ---------------------- Total accumulated postretirement benefit obligation 31.1 29.1 Unrecognized net loss (6.6) (4.8) --------------------- Accrued postretirement benefit liability $ 24.5 $ 24.3 =====================
The assumptions used to calculate the obligations at December 31, were as follows:
1995 1994 --------------------- Weighted average discount rate 7.5% 8.5% Current year health care cost trend rate 12.0% 14.0% Ultimate health care cost trend rate 5.0% 5.5% Number of years to reach ultimate 6 7
The health care cost trend rate assumption has a significant effect on the amount reported. To illustrate, increasing the assumed health care cost trend rates by 1 percent each year would increase the accumulated postretirement benefit obligation as of January 1, 1995 of $27.2 million by approximately $1.6 million and the aggregate of the service and interest cost for the year ended December 31, 1995 by $.l million. 19. STOCK OPTION PLANS The Company has a Stock Option Plan under which key employees of the Company and its subsidiaries may be granted restricted stock and stock options. The Company's restricted stock is an award of common shares that may not be sold or transferred during the restriction period, usually three years, from the date on which the award is granted. During the restriction period, the employee is the registered owner, receives dividends and may vote the restricted shares. Compensation expense is based on the market value of the Company's common stock at the date of grant and is recognized over the period of the restriction. Compensation expense for this plan in 1995, 1994, and 1993 was $1.1, $2.2 and $3.3 million, respectively. The unamortized compensation expense related to this plan is included in Benefit plans as a component of Shareholders' equity. These amounts were $.7 and $1.4 million in 1995 and 1994, respectively. A stock option award under the Company's stock option plan allows for the purchase of the Company's common stock at no less than the market price on the date of grant. Options granted to date are exercisable no earlier than one year after the grant date and expire no more than ten years from the date of grant. Information with respect to restricted stock and stock options follows:
Options Outstanding Shares --------------------- Available Average For Grant Shares Option Price ---------- --------- ------------ Balance, December 31, 1992 751,348 776,983 $ 55.58 ---------- --------- ------------ Options granted (355,400) 355,400 55.39 Options forfeited (exercised, expired or forfeited) 8,800 (37,283) 40.22 Restricted stock granted (29,220) - - ---------- --------- ------------ Balance, December 31, 1993 375,528 1,095,100 56.03 ---------- --------- ------------ Options granted (305,250) 305,250 46.31 Options forfeited (exercised, expired or forfeited) 84,600 (136,800) 49.21 Restricted stock granted (10,375) - - ---------- --------- ------------ Balance, December 31, 1994 144,503 1,263,550 54.42 ---------- --------- ------------ Authorized 850,000 - - Options granted (303,500) 303,500 42.54 Options forfeited (exercised, expired or forfeited) 53,247 (272,550) 58.22 Restricted stock granted (9,350) - - ---------- --------- ------------ Balance, December 31, 1995 734,900 1,294,500 $50.86 ========== ========= ============
In 1989, the Company established a Restricted Stock Plan for non- employee Directors of the Company. Stock awards are made on the date of the annual meeting to each Director elected or continuing in office. The maximum number of restricted shares which may be granted under the Plan shall be 20,000 shares of common stock. Under this plan, 2,336; 1,935; and 1,413 shares of restricted stock were granted in 1995, 1994 and 1993, respectively. 20. EMPLOYEE STOCK OWNERSHIP PLAN The Company has an Employee Stock Ownership Plan (ESOP) which is administered through The Hartford Steam Boiler Inspection and Insurance Company Leveraged Employee Stock Ownership Plan Trust. The final allocation of approximately 86,000 shares will be distributed to employees before January 31, 1996 in accordance with the Plan. ESOP expense was $1.5, $1.9 and $1.6 million for the years ended December 31, 1995, 1994 and 1993, respectively. 21. STOCK PURCHASE RIGHTS On November 28, 1988, the Board of Directors created and authorized 250,000 shares of Series A Junior Participating Preferred Stock at no par value and declared a dividend distribution of one right for each outstanding share of common stock to shareholders of record on December 8, 1988. The rights will separate from the common stock and become exercisable if a person or group acquires ownership of 20 percent or more of the outstanding common stock of the Company, commences a tender or exchange offer to acquire 20 percent or more of the outstanding shares, or if any person or group has become the beneficial owner of an amount of common stock which the Board determines to be substantial and not in the best interest of the shareholders. The rights entitle holders to purchase preferred shares at an exercise price of $110 per share. If an acquirer obtains 20 percent or more of the Company's common stock and the Board of Directors determines that such acquisition is not in the best interest of the shareholders, the rights will entitle holders to purchase common shares of the Company at a discount. If the Company is involved in a merger or other transactions in which shares are exchanged, the rights will entitle holders to purchase common shares of the acquirer at a discount. The rights expire on November 28, 1998 and may be redeemed by the Company for $.01 per right any time until the tenth business day following public announcement that a 20 percent position has been acquired. 22. CONSOLIDATED QUARTERLY DATA (unaudited)
First Second Third Fourth 1995 Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------------- Insurance Premiums $ 93.6 $ 98.1 $ 98.3 $ 99.1 $389.1 Net engineering services 61.0 63.4 65.9 61.8 252.1 Net investment income 6.8 7.2 6.5 7.8 28.2 Realized investment gains .2 1.2 1.0 .3 2.8 --------------------------------------------- Total revenues $161.6 $169.9 $171.7 $169.0 $672.2 ============================================= Income before taxes $ 19.9 $ 22.4 $ 23.1 $ 21.0 $ 86.3 Income taxes 5.9 6.7 6.8 4.4 23.7 --------------------------------------------- Net income $ 14.0 $ 15.7 $ 16.3 $ 16.6 $ 62.6 ============================================= Per common share: Net income $ .69 $ .77 $ .80 $ .81 $ 3.07 ============================================= Dividends declared $ .55 $ .55 $ .57 $ .57 $ 2.24 Common stock price ranges: High $43 3/4 $45 7/8 $49 3/8 $50 3/8 $50 3/8 Low 39 1/4 41 5/8 42 5/8 45 3/8 39 1/4 Close 43 44 3/8 48 3/8 50 50 Shareholders at December 31, 5,864 First Second Third Fourth 1994 Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------------ Insurance premiums $ 83.3 $ 84.1 $ 84.3 $ 84.9 $336.6 Net engineering services 56.2 58.3 57.5 60.1 232.1 Net investment income 6.5 6.2 6.4 7.1 26.2 Realized investment gains 3.6 2.7 1.8 .6 8.7 --------------------------------------------- Total revenues $149.6 $151.3 $150.0 $152.7 $603.6 ============================================= Income before taxes $ 16.2 $ 20.0 $ 17.6 $ 19.8 $ 73.6 Income taxes 4.3 5.7 5.3 6.4 21.7 --------------------------------------------- Net income $ 11.9 $ 14.3 $ 12.3 $ 13.4 $ 51.9 ============================================= Per common share: Net income $ .58 $ .70 $ .60 $ .66 $ 2.54 ============================================= Dividends declared $ .53 $ .53 $ .55 $ .55 $ 2.16 Common stock price ranges: High $53 3/8 $49 1/8 $45 7/8 $44 3/8 $ 53 3/8 Low 44 43 3/4 42 3/4 36 1/8 36 1/8 Close 48 3/4 44 3/4 43 7/8 39 7/8 39 7/8 Shareholders at December 31, 5,782
SCHEDULE I THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Summary of Investments - Other Than Investments in Related Parties (in millions)
Column A Column B Column C Column D Column E Column F Column G - ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- 1995 1994 ---------------------------------- --------------------------------- Amount Amount Shown Shown In The In The Market Balance Market Balance Type of investment Cost Value Sheet Cost Value Sheet - ----------------------------------------------------------------------------------------------------- Fixed Maturities: Bonds: U.S. Goverment and Government Agencies and Authorities $ 0.1 $ 0.1 $ 0.1 $ 0.2 $ 0.2 $ 0.2 States, Municipalities and Political Subdivisions 25.3 27.0 27.0 49.5 47.8 47.8 Foreign Governments 45.3 46.7 46.7 27.5 26.4 26.4 Convertibles and Bonds with Warrants Attached 0.0 0.0 0.0 0.0 0.0 0.0 All Other Bonds 95.8 99.0 99.0 49.9 49.5 49.5 Mortgage Receivable 11.1 11.1 11.1 11.1 11.1 11.1 Redeemable Preferred Stocks 70.0 71.4 71.4 67.0 63.9 63.9 ---------------------------- -------------------------------- Total Fixed Maturities $247.6 $255.3 $255.3 $205.2 $198.9 $198.9 ---------------------------- -------------------------------- Equity Securities: Common Stocks: Public Utilities $ 6.3 $ 7.0 $ 7.0 $ 16.3 $ 16.7 $ 16.7 Banks and Insurance 10.6 13.6 13.6 6.7 6.9 6.9 Industrial and Other 81.3 132.9 132.9 103.4 130.1 130.1 Non-Redeemable Preferred 56.8 61.9 61.9 52.3 51.2 51.2 Stocks ---------------------------- -------------------------------- Total Equity Securities $155.0 $215.4 $215.4 $178.7 $204.9 $204.9 ---------------------------- -------------------------------- Short Term Investments and Cash: $ 83.1 $ 83.1 $ 83.1 $ 85.9 $ 85.9 $ 85.9 ---------------------------- -------------------------------- Total Investments $485.7 $553.8 $553.8 $469.8 $489.7 $489.7 ============================ ================================
Schedule IV The Hartford Steam Boiler Inspection and Insurance Company Reinsurance (in millions) Column A Column B Column C Column D Column E Column F Insurance Gross Ceded to Assumed Net Percentage of Premiums Amount Other From Other Amount Amount Assumed Companies Companies to Net - ---------------------------------------------------------------------------------- 1995 Property and Liability Insurance $279.7 $65.9 $175.3 $389.1 45.1% 1994 Property and Liability Insurance $242.6 $45.1 $139.1 $336.6 41.3% 1993 Property and Liability Insurance $246.9 $29.3 $131.6 $349.2 37.7%
SCHEDULE V THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Valuation and Qualifying Accounts (in millions) Column A Column B Column C Column D Column E Column F - -------------------------------- ---------- ---------- ---------- ---------- ---------- Description Balance at Charged to Charged to Balance Beginning of Costs and Other Deductions At End of Period Expenses Account Describe (a) Period - ---------------------------------------------------------------------------------------------------- 1995 Reserve for Accounts Receivable $3.1 $2.6 $0.0 $2.1 $3.6 1994 Reserve for Accounts Receivable $2.1 $2.2 $0.0 $1.2 $3.1 1993 Reserve for Accounts Receivable $2.4 $2.7 $0.0 $3.0 $2.1
(a) Engineering Services and Insurance Premium Receivables written-off as uncollectible. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. "Nominees for Election to the Board of Directors for Three-Year Term Expiring in 1999" and "Members of the Board of Directors Continuing in Office" on pages 2-6 of the Company's Proxy Statement dated February 27, 1996 are incorporated herein by reference. Also see pages 21-22 herein. Item 11. Executive Compensation. "Meetings and Remuneration of the Directors" on pages 6- 8, "Human Resources Committee Report on Executive Compensation" on pages 10-14, "Summary Compensation Table" on pages 15-16, "Stock Option and Long-Term Incentive Plan Tables" on pages 16-17, "Retirement Plans" on pages 18-19, "Employment Arrangements" on page 19, "Compensation Committee Interlocks and Insider Participation" on page 20, and "Performance Graph" on page 20 of the Company's Proxy Statement dated February 27, 1996 are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. "Security Ownership of Certain Beneficial Owners and Management" on pages 8-9 of the Company's Proxy Statement dated February 27, 1996 is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. "Compensation Committee Interlocks and Insider Participation" on page 20 of the Company's Proxy Statement dated February 27, 1996 is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The financial statements and schedules listed in the Index to Financial Statements and Financial Statement Schedules on page 34 herein are filed as part of this report. (b) Reports on Form 8-K - Form 8-K filed on October 23, 1995 to report Registrant's and The Dow Chemical Company's announcement of plans for two of their wholly-owned subsidiaries to form a new company which will provide environmental, information technology, and strategic chemical management services to industries and government worldwide. (c) The exhibits listed in the accompanying Index to Exhibits are filed as part of this report. SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY (Registrant) By: /s/ Gordon W. Kreh President and Chief Executive Officer March 29, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. (Signature) (Title) By:/s/ Gordon W. Kreh Gordon W. Kreh President, Chief Executive March 29, 1996 Officer and Director /s/ Saul L. Basch Senior Vice President, Treasurer Saul L. Basch and Chief Financial Officer March 29, 1996 (Principal Financial Officer and Principal Accounting Officer) (Joel B Alvord)* Director (Colin G. Campbell)* Director (Richard G. Dooley)* Director (William B. Ellis)* Director (E. James Ferland)* Director (John A. Powers)* Director (Lois Dickson Rice)* Director (John M. Washburn, Jr.)* Director (Wilson Wilde)* Director *By: /s/ Robert C. Walker Robert C. Walker (Attorney-in-Fact) March 29, 1996 INDEX TO EXHIBITS Exhibit Number Description (3)(i) Charter of The Hartford Steam Boiler Inspection and Insurance Company, as restated effective April 17, 1990. (3)(ii) By-laws of The Hartford Steam Boiler Inspection and Insurance Company amended July 24, 1995; incorporated by reference to Exhibit (3)(ii) to registrant's Form 10-Q for the quarter ended June 30, 1995. (4)(i) Rights Agreement dated as of November 28, 1988 between the registrant and The First National Bank of Boston, as Rights Agent. (4)(iii) Instruments defining the rights of holders of long- term debt of the registrant are not being filed since the total amount of securities authorized under each such instrument does not exceed ten percent of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant shall furnish copies of such instruments to the Securities and Exchange Commission upon request. (10)(i) (a) Lease Agreement with One State Street Limited Partnership; incorporated by reference to Exhibit (10)(i) to registrant's Form 10. File No. 0-13300, filed March 18, 1985. (b) Transaction Agreement between registrant and General Reinsurance Corporation dated December 30, 1994; incorporated by reference to Exhibit 2 to the registrant's Current Report on Form 8-K. File No. 0-13300, filed January 17, 1995. (c) Contribution Agreement among the registrant, The Dow Chemical Company, Dow Environmental Inc. and Radian Corporation dated January 30, 1996; incorporated by reference to Exhibit 99.1 to the registrant's Current Report on Form 8-K. File No. 0-13300, filed February 14, 1996. (d) Limited Liability Company Agreement between Radian Corporation and Dow Environmental Inc. dated January 30, 1996; incorporated by reference to Exhibit 99.2 to the registrant's Current Report on Form 8-K. File No. 0-13300, filed February 14, 1996. (10)(iii) (a) Employment Agreement dated February 28, 1988 between the registrant and various executive officers; incorporated by reference to Exhibit (10)(iii)(a) to registrant's Form 10-K for the year ended December 31, 1992. * (b) The Hartford Steam Boiler Inspection and Insurance Company Long-Term Incentive Plan, as amended and restated effective January 1, 1994; incorporated by reference to Exhibit (10)(iii) to registrant's Form 10-Q for the quarter ended June 30, 1995. * (c) The Hartford Steam Boiler Inspection and Insurance Company Short-Term Incentive Plan, as amended and restated February 26, 1996. * (d) The Hartford Steam Boiler Inspection and Insurance Company 1985 Stock Option Plan, as amended and restated April 21, 1992; incorporated by reference to Exhibit (10)(iii)(d) to registrant's Form 10-K for the year ended December 31, 1992. * (e) The Hartford Steam Boiler Inspection and Insurance Company 1995 Stock Option Plan, effective April 18, 1995; incorporated by reference to Exhibit (10)(iii) to registrant's Form 10-Q for the quarter ended June 30, 1995. * (f) Pre-Retirement Death Benefit and Supplemental Pension Agreement between the registrant and various executive officers, as amended February 1, 1994; incorporated by reference to registrant's Form 10-K for the year ended December 31, 1994. * (g) Pre-Retirement Death Benefit and Supplemental Pension Agreement between the registrant and William A. Kerr, dated September 18, 1995; incorporated by reference to Exhibit (10)(iii) to registrant's Form 10-Q for the quarter ended September 30, 1995. * (h) Employment Agreement between the registrant and Saul L. Basch, dated October 2, 1996. * (i) Retirement Plan for Outside Directors, as amended and restated October 24, 1988; incorporated by reference to Exhibit (10)(iii)(e) to registrant's Form 10-K for the year ended December 31, 1993. * (j) The Hartford Steam Boiler Inspection and Insurance Company 1989 Restricted Stock Plan for Non-Employee Directors; as amended and restated November 1, 1991; incorporated by reference to Exhibit (10)(iii)(f) to registrant's Form 10-K for the year ended December 31, 1992. * (k) The Radian Corporation Supplemental Executive Retirement Plan effective January 1, 1991; incorporated by reference to Exhibit (10)(iii)(h) to registrant's Form 10-K for the year ended December 31, 1994. * (l) Salary Continuation Agreement between Radian Corporation and Donald M. Carlton dated January 1, 1986; incorporated by reference to Exhibit (10)(iii)(h) to registrant's Form 10-K for the year ended December 31, 1992. * (m) Salary Continuation Agreement between Radian Corporation and Donald M. Carlton dated April 4, 1989; incorporated by reference to Exhibit (10)(iii)(i) to registrant's Form 10-K for the year ended December 31, 1992. * (n) Executive Employment Bonus Agreement between the registrant and Donald M. Carlton dated January 1, 1996. * (o) Executive Employment Agreement between Radian International LLC and Donald M. Carlton dated January 30, 1996. * (p) Description of certain arrangements not set forth in any formal documents, as described on pages 6 - 7 , with respect to directors' compensation, and on pages 10 - 19, with respect to executive officer's compensation, which pages are incorporated by reference to registrant's Proxy Statement dated February 27, 1996. * (21) Subsidiaries of the registrant. (23) Consent of experts and counsel - consent of Coopers & Lybrand. (24) Power of attorney. (27) Financial Data Schedule. P(28) Information from reports furnished to state insurance regulatory authorities. Schedule P of the Consolidated Annual Statement of The Hartford steam Boiler Inspection and Insurance Company and its Affiliated Insurers for 1995. (Filed under cover of Form SE.) * Management contract, compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report. EX-3 2 Exhibit (3)(i) CHARTER of THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Hartford, Connecticut as RESTATED EFFECTIVE APRIL, 1990 CHARTER of THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Section 1. The Hartford Steam Boiler Inspection and Insurance Company shall continue under that name, a body corporate, with power to purchase or otherwise acquire, have, hold and enjoy lands, rents, tenements, hereditaments, goods, monies, chattels, choses in action and property and effects of every kind, and also any or all of the shares or other securities or any interest in, or obligation of, any insurance corporation or any other corporation or governmental unit and the same to sell, grant and convey and to loan, invest, reinvest, alienate and dispose of any of such assets in any manner permitted on or after the effective date of this act in the case of any other corporation chartered on or after said date by Connecticut and empowered to do a class of business referred to in Section 2 hereof, and to have and enjoy all the rights, privileges, powers and immunities granted on or after to said date to corporations under the general statutes, including the power to amend this charter from time to time. Section 2. The Corporation shall have the power to write boiler and machinery, fire, marine, casualty, liability, indemnity, accident and health and fidelity insurance and any and all other forms of insurance against hazards or risks of every kind and description which on or after the effective date of this act may lawfully be the subject of insurance except life and endowment insurance and contracts for the payment of annuities; and the Corporation is specifically empowered to accept and to cede reinsurance of any such risks or hazards. The Corporation shall have the power to make inspections and render inspection and engineering services in connection with the design, construction, maintenance or operation of boilers, machinery or any equipment regardless of whether policies of insurance are issued in connection therewith. The Corporation may exercise such powers outside of Connecticut to the extent permitted by the laws of the particular jurisdiction. Policies or other contracts may be issued, stipulated to be with or without participation in profits; and they may be with or without seal. Section 3. The capital stock of the Corporation shall not be less than one million dollars. The authorized number of shares, which may be increased from time to time when and if authorized by the stockholders shall consist of 50,000,000 shares of common stock without par value and 500,000 shares of preferred stock without par value. The Board of Directors is authorized to fix and determine the terms, limitations and relative rights and preferences of the preferred stock including, without limitation, any voting rights thereof, to divide and issue the preferred stock in series, to fix and determine the variations among series to the extent permitted by law and to provide that shares of the preferred stock, or any series thereof, may be convertible into the same or a different number of shares of common stock. No stockholder shall have any preemptive right to purchase or subscribe to any shares of any class of stock of the Corporation, whether authorized on or after the effective date of this act, or to any securities convertible into shares of any class of stock of the Corporation. The capital stock of the Corporation shall be transferable in accordance with the bylaws, and one or more transfer agents may be employed. Section 4. The corporate office shall be in Hartford or in such other town in Connecticut as the Board of Directors may deter- mine. The annual meeting of the stockholders shall be held at such time and place within the state and upon such notice as may be determined from time to time either by or in accordance with the bylaws. At all meetings of the stockholders and subject, in the case of preferred stockholders, to such provisions concerning voting rights as the Board of Directors may determine pursuant to the authority granted in Section 3 hereof, each stockholder shall be entitled to vote in person or by an attorney duly authorized by a written proxy and each share of stock represented at the meeting shall be entitled to one vote. Section 5. The business property and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than nine nor more than fourteen directors, the exact number of directorships to be determined from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The class of directors that was elected by the stockholders at the 1984 annual meeting of stockholders shall be assigned to Class I for a term expiring in 1987; the current directors in the class expiring in 1986 shall be assigned to Class II for a term expiring in 1986; the current directors in the class expiring in 1985 shall be assigned to Class III for a term expiring in 1985. At each annual meeting of stockholders, successors to the class of directors whose term expires at the annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a reduction of the number of directors remove any director in office or shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, removal from office or order of court that, by reason of incompetency or any other lawful cause, he is no longer a director in office. Any vacancy on the Board of Directors that results from an increase in the number of directors may be filled by the concurring vote of directors holding a majority of the directorships, which number of directorships shall be the number prior to the vote on the increase, and any other vacancy occurring in the Board of Directors may be filled by concurring vote of a majority of the remaining directors then in office, although less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. Any director or the entire Board of Directors may be removed only for cause by the affirmative vote of eighty percent (80%) of the votes entitled to be cast by the holders of all then outstanding shares of voting stock of the Corporation, voting together as a single class. For the purposes of this Section 5, "cause" shall be defined as (a) a final non-appealable order of conviction of a felony involving moral turpitude by a court of competent jurisdiction in the United States or (b) a final non-appealable order of a court of competent jurisdiction in the United States finding gross negligence in the performance of duties as a director or officer of the Corporation. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Charter applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section 5 unless expressly provided by such term. Notwithstanding any other provisions of this Charter or the bylaws of the Corporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law, this Charter or the bylaws of the Corporation) the affirmative vote of the holders of not less than eighty percent (80%) of the votes entitled to be cast by the holders of all then outstanding shares of voting stock of the Corporation, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with this Section 5; provided, however, that this paragraph shall not apply to, and such eighty percent (80%) vote shall not be required for any amendment, repeal or adoption recommended by three-quarters of the entire Board if all of such directors are persons who were members of the Board at the annual meeting of stockholders of the Corporation held prior to the proposal of any such amendment, repeal or adoption or persons nominated by such members. Section 6. The directors of the Corporation shall choose from among their number a president and shall elect one or more vice presidents, a treasurer, a secretary and such other officers as they may deem desirable. The officers shall be elected to hold office until the next annual meeting and until their successors have been chosen; they may be removed at any time at the pleasure of the directors. Section 7. A. In addition to any affirmative vote required by law or this Charter or the bylaws of the Corporation, and except as otherwise expressly provided in Section B of this Section 7, a Business Combination (as hereinafter defined) shall require the affirmative vote of not less than eighty percent (80%) of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock (as hereinafter defined), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage or separate class vote may be specified, by law or in any agreement with any national securities exchange or otherwise. B. The provisions of Section A of this Section 7 shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law or by any other provision of this Charter or the bylaws of the Corporation, or any agreement with any national securities exchange, if all of the conditions specified in either of the following Paragraphs 1 or 2 are met: 1. The Business Combination shall have been approved by two-thirds (whether such approval is made prior to or subsequent to the acquisition of beneficial ownership of the Voting Stock that caused the Interested Stockholder, as hereinafter defined to become an Interested Stockholder) of the Continuing Directors, as hereinafter defined. 2. All of the following conditions shall have been met: a. The aggregate amount of cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest amount determined under clauses (i), (ii), (iii) and (iv) below: (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any share of Common Stock in connection with the acquisition by the Interested Stockholder of beneficial ownership of shares of Common Stock within the two-year period immediately prior to the first public announcement of the proposed Business Combination (the "Announcement Date"); (ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (the "Determination Date"), whichever is higher; (iii) (if applicable) the price per share equal to the Fair Market Value per share of Common Stock determined pursuant to the immediately preceding clause (ii), multiplied by the ratio of (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any share of Common Stock in connection with the acquisition by the Interested Stockholder of beneficial ownership of shares of Common Stock within the two-year period immediately prior to the Announcement Date to (y) the Fair Market Value per share of Common Stock on the first day in such two-year period on which the Interested Stockholder acquired beneficial ownership of any share of Common Stock; and (iv) The Corporation's net income per share of Common Stock for the four full consecutive fiscal quarters immediately preceding the Announcement Date, multiplied by the higher of the then price/earnings multiple (if any) with respect to common stock of such Interested Stockholder or the highest price/earnings multiple with respect to Common Stock within the two-year period immediately preceding the Announcement Date (such price/earnings multiples being determined as customarily computed and reported in the financial community); b. The aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Capital Stock (as hereinafter defined), other than Common Stock, shall be at least equal to the highest amount deter- mined under clauses (i), (ii), (iii) and (iv) below: (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any share of such class or series of Capital Stock in connection with the acquisition by the Interested Stockholder within the two-year period immediately prior to the Announcement Date; (ii) the Fair Market Value per share of such class or series of Capital Stock on the Announcement Date or on the Determination Date, whichever is higher; (iii) (if applicable) the price per share equal to the Fair Market Value per share of such class or series of Capital Stock determined pursuant to the immediately preceding clause (ii), multiplied by the ratio of (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any share of such class or series of the Capital Stock in connection with the acquisition by the Interested Stockholder of beneficial ownership of shares of such class or series of Capital Stock within the two-year period immediately prior to the Announcement Date to (y) the Fair Market Value per share of such class or series of Capital Stock on the first day in such two-year period on which the Interested Stockholder acquired beneficial ownership of any share of such class or series of Capital Stock; and (iv) (if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Capital Stock would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, regardless of whether the Business Combination to be consummated constitutes such an event. The provision of this Paragraph 2.b shall be required to be met with respect to every class or series of outstanding Capital Stock, whether or not the Interested Stockholder has previously acquired beneficial ownership of any shares of a particular class or series of Capital Stock. c. The consideration to be received by holders of a particular class or series of outstanding Capital Stock shall be in cash or in the same form as previously has been paid by or on behalf of the Interested Stockholder in connection with its direct or indirect acquisition of beneficial ownership of shares of such class or series of Capital Stock. If the consideration so paid for shares of any class or series of Capital Stock varied as to form, the form of consideration for such class or series of Capital Stock shall be either cash or the form used to acquire beneficial ownership of the largest number of shares of such class or series of Capital Stock previously acquired by the Interested Stockholder. d. After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (i) except as approved by two-thirds of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) payable in accordance with the terms of any outstanding Capital Stock; (ii) there shall have been no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any stock split, stock dividend or subdivision of the Common Stock), except as approved by two-thirds of the Continuing Directors; (iii) there shall have been an increase in the annual rate of dividends paid on the Common Stock as necessary to reflect fully any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of Common Stock, unless the failure so to increase such annual rate is approved by two-thirds of the Continuing Directors; and (iv) such Interested Stockholder shall not have become the beneficial owner of any additional shares of Capital Stock except as part of the transaction that results in such Interested Stockholder becoming an Interested Stockholder and except in a transaction that, after giving effect thereto, would not result in any increase in the Interested Stockholder's percentage beneficial ownership of any class or series of Capital Stock. e. After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder of this Corporation), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by this Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. f. A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (the "Act") (or any subsequent provi- sions replacing such Act, rules and regulations) or the insurance laws and regulations of the State of Connecticut, if applicable, shall be mailed to all stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required by law to be mailed). The proxy or information statement shall contain on the first page thereof, in a prominent place, any statement as to the advisability (or inadvisability) of the Business Combination that the Continuing Directors, or any of them, may choose to make and, if deemed advisable by a majority of the Continuing Directors, the opinion of an investment banking firm selected by a majority of the Continuing Directors as to the fairness (or not) of the terms of the Business Combination from a financial point of view to the holders of the outstanding shares of Capital Stock other than the Interested Stockholder and its Affiliates or Associates (as hereinafter defined), such investment banking firm to be paid a reasonable fee for its services by the Corporation. C. For the purposes of this Section 7: 1. The term "Business Combination" shall mean: a. any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Stockholder or (ii) any other corporation (whether or not itself an Interested Stockholder) which is or after such merger or consolidation would be an Affiliate or Associate of an Interested Stockholder; or b. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) with any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder involving any assets or securities of this Corporation, any subsidiary or any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder having an aggregate Fair Market Value of $10,000,000 or more; or c. the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or d. any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or otherwise involving an Interested Stockholder) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder: or e. any agreement, contract or other arrangement providing for any one or more of the actions specified in the foregoing clauses (a) to (d). 2. The term "Capital Stock" shall mean all stock of the Corporation authorized to be issued from time to time under Section 3 of this Charter, and the term "Voting Stock" shall mean all Capital Stock which by its terms may be voted on all matters submitted to stockholders of the Corporation generally. 3. The term "person" shall mean any individual, firm, corporation or other entity and shall include any group comprised of any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Capital Stock. 4. The term "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary and other than any profit-sharing, employee stock ownership or other employee benefit plan of the Corporation or any Subsidiary or any trustee of or fiduciary with respect to any such plan when acting in such capacity) who (a) is the beneficial owner of Voting Stock representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock or (b) is an Affiliate or Associate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of Voting Stock representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock. 5. A person shall be a "beneficial owner" of any Capital Stock (a) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; (b) which such person or any of its Affiliates or Associates has, directly or indirectly, (i) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, convertible securities, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, convertible securities, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding; or (c) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Capital Stock. For the purposes of determining whether a person is an Interested Stockholder pursuant to Paragraph 4 of this Section C, the number of shares of Capital Stock deemed to be outstanding shall include shares deemed beneficially owned by such person through application of Paragraph 5 of this Section C, but shall not include any other shares of Capital Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 6. The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Act as in effect on March 1, 1984 (the term "registrant" in said Rule 12b-2 meaning in this case the Corporation). 7. The term "Subsidiary" means any corporation of which a majority of any class of equity security is beneficially owned by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in Paragraph 4 of this Section C, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is beneficially owned by the Corporation. 8. The term "Continuing Director" means any member of the board of directors of the Corporation (the "Board") while such person is a member of the Board, who is not an Affiliate or Associate or representative of the Interested Stockholder and was a Member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director, while such successor is a member of the Board, who is not an Affiliate or Associate or representative of the Interested Stockholder and is recommended or elected to succeed the Continuing Director by a majority of Continuing Directors. 9. The term "Fair Market Value" means (a) in the case of cash, the amount of such cash; (b) in the case of stock, the highest closing sales price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Act on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock as determined by a majority of the Continuing Directors in good faith; and (c) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors. 10. In the event of any Business Combination in which this Corporation survives, the phrase "consideration other than cash to be received" as used in Paragraphs 2.a and 2.b of Section B of this Section 7 shall include the shares of Common Stock and/or the shares of any other class or series of Capital Stock retained by the holders of such shares. D. The Board of Directors shall have the power and duty to determine for the purposes of this Section 7 on the basis of information known to them after reasonable inquiry, (a) whether a person is an Interested Stockholder, (b) the number of shares of Capital Stock or other securities beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another, and (d) whether the assets that are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by this Corporation have, or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $10,000,000 or more. Any such determination made in good faith shall be binding and conclusive on all parties. E. Nothing contained in this Section 7 shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. F. The fact that any Business Combination complies with the provisions of Section B of this Section 7 shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board, or any member thereof, to approve such Business Combination or recommend its adoption or approval to the stockholders of this Corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board, or any member thereof, with respect to evaluations of or actions and responses taken with respect to such Business Combination. G . Notwithstanding any other provisions of this Charter or the Bylaws of the Corporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law, this Charter or the bylaws of the Corporation), the affirmative vote of the holders of not less than eighty percent (80%) of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, this Section 7; provided, however, that this Section G shall not apply to, and such eighty percent (80%) vote shall not be required for, any amendment, repeal or adoption unanimously recommended by the Board if all of such directors are persons who would be eligible to serve as Continuing Directors within the meaning of Section C, Paragraph 8 of this Section 7. Section 8. To the fullest extent permitted by the Connecticut General Statutes as the same exists or may hereafter be amended, the personal liability of a director to the Corporation or its stockholders for monetary damages for breach of duty as a director shall be limited to an amount that is not less than the compensation received by such director for serving the Corporation during the year of the violation. If the Connecticut General Statutes are amended after approval by the stockholders of this Section 8 to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of each director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Connecticut General Statutes, as so amended. Any repeal or modification of this Section 8 by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. EX-4 3 Exhibit (4)(iii) THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY and THE FIRST NATIONAL BANK OF BOSTON, as Rights Agent Rights Agreement Dated as of November 28, 1988 TABLE OF CONTENTS SECTION 1 Certain Definitions 2 Appointment of Rights Agent 3 Issue of Rights Certificates 4 Form of Rights Certificates 5 Countersignature and Registration 6 Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates 7 Exercise of Rights; Purchase Price; Expiration Date of Rights 8 Cancellation and Destruction of Rights Certificates 9 Form of Depositary Receipts 10 Countersignature and Registration of Depositary Receipts 11 Deposit of Stock 12 Transfer, Split Up, Combination and Exchange of Depositary Receipts; Mutilated, Destroyed, Lost or Stolen Depositary Receipts 13 Exchange of Depositary Receipts for Preferred Stock 14 Limitations on Execution and Delivery, Transfer, Surrender and Exchange of Depositary Receipts 15 Cancellation and Destruction of Surrendered Depositary Receipts 16 Distributions 17 Notice of Dividends, Fixing of Record Date for Receipt Holders 18 Voting Rights 19 Changes Affecting Deposited Securities and Reclassifications, Recapitalizations, etc. 20 Reports 21 Lists of Depositary Receipt Holders 22 Reservation and Availability of Capital Stock 23 Preferred Stock Record Date 24 Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights 25 Certificate of Adjusted Purchase Price or Number of Shares 26 Consolidation, Merger or Sale or Transfer of Assets or Earning Power 27 Fractional Rights and Fractional Shares 28 Rights of Action 29 Agreement of Rights Holders 30 Rights Certificate Holder Not Deemed a Shareholder 31 Concerning the Rights Agent 32 Merger or Consolidation or Change of Name of Rights Agent 33 Duties of Rights Agent 34 Change of Rights Agent 35 Issuance of New Rights Certificates 36 Redemption and Termination 37 Notice of Certain Events 38 Notices 39 Supplements and Amendments 40 Successors 41 Determinations and Actions by the Board of Directors, etc. 42 Benefits of this Agreement 43 Severability 44 Governing Law 45 Counterparts 46 Descriptive Headings Exhibit A - Certificate of Designation, Preferences and Rights Exhibit B - Form of Depositary Receipt Exhibit C - Form of Rights Certificate Exhibit D - Form of Summary of Rights RIGHTS AGREEMENT RIGHTS AGREEMENT, dated as of November 28, 1988 (the "Agreement"), between The Hartford Steam Boiler Inspection and Insurance Company, a Connecticut corporation (the "Company"), and The First National Bank of Boston a national banking association (the "Rights Agent"). W I T N E S S E T H WHEREAS, on November 28, 1988 (the "Rights Dividend Declaration Date"), the Board of Directors of the Company authorized and declared a dividend distribution of one Right for each share of common stock, without par value, of the Company (the "Common Stock") outstanding at the close of business on December 8, 1988 (the "Record Date"), and has authorized the issuance of one Right (as such number may hereinafter be adjusted pursuant to the provisions of Section 24(p) hereof) for each share of Common Stock of the Company issued between the Record Date (whether originally issued or delivered from the Company's treasury) and the Distribution Date each Right initially representing the right to purchase one Depositary Receipt which is exchangeable for one two-hundredth of a share of Series A Junior Participating Preferred Stock of the Company having the rights, powers and preferences set forth in the form of Certificate of Designation, Preferences and Rights attached hereto as Exhibit A, upon the terms and subject to the conditions hereinafter set forth (the "Rights"); NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 20% or more of the shares of Common Stock then outstanding, but shall not include the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan. (b) "Adverse Person" shall mean any Person declared to be an Adverse Person by The Board of Directors upon determination that the criteria set forth in Section 24(a)(ii)(B) apply to such Person. (c) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended and in effect on the date of this Agreement (the "Exchange Act"). (d) A Person shall be deemed the "Beneficial Owner" of, and shall be deemed to "beneficially own," any securities: (i) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," (A) securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange, or (B) securities issuable upon exercise of Rights at any time prior to the occurrence of a Triggering Event, or (C) securities issuable upon exercise of Rights from and after the occurrence of a Triggering Event which Rights were acquired by such Person or any of such Person's Affiliates or Associates prior to the Distribution Date or pursuant to Section 3(a) or Section 35 hereof (the "Original Rights") or pursuant to Section 24(i) hereof in connection with an adjustment made with respect to any Original Rights; (ii) which such person or any of such person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing; Provided, however, that a person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this subparagraph (ii as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding: (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to,, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act, and (B) is not also then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing), for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to subparagraph (ii) of this paragraph (d)) or disposing of any voting securities of the Company; provided, however, that nothing in this paragraph shall cause a person engaged in business as an underwriter of securities to be the "Beneficial Owner" of, or to "beneficially own", any securities acquired through such person's participation in good faith in a firm commitment underwriting until the expiration of forty days after the date of such acquisition. (e) "Business Day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the Commonwealth of Massachusetts or the State of New York are authorized or obligated by law or executive order to close. (f) "Close of business" on any given date shall mean 5:00 P.M., Boston time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M., Boston time, on the next succeeding Business Day. (g) "Common Stock" shall mean the common stock, without par value, of the Company, except that "Common Stock" when used with reference to any Person other than the Company shall mean the capital stock of such Person with the greatest voting power, or the equity securities or other equity interest having power to control or direct the management, of such Person. (h) "Depositary Preferred Stock" shall mean the rights represented by the Depositary Receipts issued hereunder and the right to acquire Preferred Stock and all interests in respect thereof represented thereby. (i) "Depositary Receipts" shall mean the certificates evidencing the Depositary Preferred Stock, which certificate shall be substantially in the form of Exhibit B hereto. (j) "Person" shall mean any individual, firm corporation, partnership or other entity. (k) "Preferred Stock" shall mean shares of Series A Junior Participating Preferred Stock, without par value, of the Company, and, to the extent that there are not a sufficient number of shares of Series A Junior Participating Preferred Stock authorized to permit the full exercise of the Rights, any other series of Preferred Stock, without par value, of the Company designated for such purpose containing terms substantially simi- lar to the terms of the Series A Junior Participating Preferred Stock. (1) "Section 24(a)(ii) Event" shall mean any event described in Section 24(a)(ii) (A) or (B) hereof. (m) "Section 26 Event" shall mean any event described in clauses (x), (y) or (z) of Section 26(a) hereof. (n) "Stock Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such. (o) "Subsidiary" shall mean, with reference to any Person, any corporation of which an amount of voting securities sufficient to elect at least a majority of the directors of such corporation is beneficially owned, directly or indirectly, by such Person, or otherwise controlled by such Person. (p) "Triggering Event" shall mean any Section 24(a)(ii) Event or any Section 26 Event. Section 2. Appointment of Rights Agent. The Company hereby appoints The Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall, prior to the Distribution Date, also be the holders of the Common Stock) and as depositary with respect to the Preferred Stock for the Company and the holders of Depositary Receipts, in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable. Section 3. Issue of Rights Certificates. (a) Until the earliest of (i) the close of business on the tenth Business Day after the Stock Acquisition Date (or, if the tenth day after the Stock Acquisition Date occurs before the Record Date, (the close of business on the Record Date), or (ii) the close of business on the tenth Business Day (or such later date as may be determined by the Board of Directors) after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company or any Subsidiary of the Company for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act if, upon consummation thereof, such Person would be the Beneficial Owner of 20% or more of the shares of Common Stock then outstanding, (iii) the close of business on the tenth Business Day after the Board of Directors determines, pursuant to the criteria set forth in Section 24(a)(ii B) hereof, that a Person is an Adverse Person (the earliest of (i), (ii) and (iii) being herein referred to as the "Distribution Date", (x) Rights will be evidenced (subject to the provisions of paragraph (b) of this Section 3) by the certificates for the Common Stock registered in the names of the holders of the Common Stock (which certificates for Common Stock shall be deemed also to be certificates for Rights) and not by separate certificates, and (y) the Rights will be transferable only in connection with the transfer of the underlying shares of Common Stock (including a transfer to the Company). As soon as practicable after the Distribution Date, the Rights Agent will send by first-class, insured, postage prepaid mail, to each record holder of the Common Stock as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, one or more right certificates, in substantially the form of Exhibit B hereto (the "Rights Certificates"), evidencing one Right for each share of Common Stock so held, subject to adjustment as provided herein. In the event that an adjustment in the number of Rights per share of Common Stock has been made pursuant to Section 24(p) hereof, at the time of distribution of the Rights Certificates, the Company shall make the necessary and appropriate rounding adjustments (in accordance with Section 27(a) hereof) so that Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of and after the Distribution Date, the Rights will be evidenced solely by such Rights Certificates. (b) As promptly as practicable following the Record Date, the Company will send a copy of a Summary of Rights, in substantially the form attached hereto as Exhibit D (the "Summary of Rights"), by first-class, postage prepaid mail, to each record holder of the Common Stock as of the close of business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for the Common Stock outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates for the Common Stock and the registered holders of the Common Stock shall also be the registered holders of the associated Rights. Until the earlier of the Distribution Date or the Expiration Date (as such term is defined in Section 7(a) hereof), the transfer of any certificates representing shares of Common Stock in respect of which Rights have been issued shall also constitute the transfer of the Rights associated with such shares of Common Stock. (c) Rights shall be issued in respect of all shares of Common Stock which are issued (whether originally issued or from the Company's treasury) after the Record Date but prior to the earlier of the Distribution Date or the Expiration Date. Certificates representing such shares of Common Stock shall also be deemed to be certificates for Rights, and shall bear the following legend: This certificate also evidences and entitles the holder hereof to certain Rights as set forth in the Rights Agreement between The Hartford Steam Boiler Inspection and Insurance Company (the "Company") and The First National Bank of Boston (the "Rights Agent") dated as of November 28, 1988 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge, promptly after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person or an Adverse Person or any Affiliate or Associate of either (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void. With respect to such certificates containing the foregoing legend, until the earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights associated with the Common Stock represented by such certificates shall be evidenced by such certificates alone and registered holders of Common Stock shall also be the registered holders of the associated Rights, and the transfer of any of such certificates shall also constitute the transfer of the Rights associated with the Common Stock represented by such certificates. Section 4. Form of Rights Certificates. (a) The Rights Certificates (and the forms of election to purchase and of assignment and related certificates to be printed on the reverse thereof) shall each be substantially in the form set forth in Exhibit C hereto and may have such marks of identification or designation and such legends, summaries or en- dorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 24 and Section 35 hereof, the Rights Certificates, whenever distributed, shall be dated as of the Record Date and on their face shall entitle the holders thereof to purchase such number of Depositary Receipts as shall be set forth therein at the price set forth therein (such exercise price per one one-hundredth of a share, the "Purchase Price"), but the amount and type of securities purchasable upon the exercise of each Right and the Purchase Price thereof shall be subject to adjustment as provided herein. (b) Any Rights Certificate issued pursuant to Section 3(a) or Section 35 hereof that represents Rights beneficially owned by: (i) an Acquiring Person, Adverse Person or any Associate or Affiliate of an Acquiring Person or an Adverse Person, (ii) a transferee of an Acquiring Person or an Adverse Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person or the Adverse Person becomes such, or (iii) a transferee of an Acquiring Person or an Adverse Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person or the Adverse Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person or the Adverse Person to holders of equity interests in such Acquiring Person or Adverse Person or to any Person with whom such Acquiring Person or Adverse Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect avoidance of Section 7(e) hereof, and any Rights Certificate issued pursuant to Section 6 or Section 24 hereof upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to in this sentence, shall contain (to the extent feasible) the following legend: The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Adverse Person or an Affiliate or Associate of an Acquiring Person or an Adverse Person (as such terms are defined in the Rights Agreement). Accordingly, this Rights Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of such Rights Agreement. Section 5. Countersignature and Registration. (a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board, its President or any Vice President, either manually or by facsimile signature, and shall have affixed thereto the Company's seal or a facsimile thereof which shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Rights Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased to be such officer of the Company; and any Rights Certificates may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its principal office or offices designated as the appropriate place for surrender of Rights Certificates upon exercise or transfer, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the date of each of the Rights Certificates. Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. (a) Subject to the provisions of Section 4(b), Section 7(e) and Section 27 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the Expiration Date, any Rights Certificate or Certificates may be transferred, split up, combined or exchanged for another Rights Certificate or Certificates, entitling the registered holder to purchase a like number of one one-hundredths of a share of Preferred Stock (or, following a Triggering Event, Common Stock, other securities, cash or other assets, as the case may be) as the Rights Certificate or Certificates surrendered then entitled such holder (or former holder in the case of a transfer) to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate or Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Certificates to be transferred, split up, combined or exchanged, with the form of assignment and certificate duly executed, at the office or offices of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Rights Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e) and Section 27 hereof, countersign and deliver to the Person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Rights Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will execute and deliver a new Rights Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. (a) Subject to Section 7(e) hereof, the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein including, without limitation, the restrictions on exercisability set forth in Section 22(c), Section 24(a)(iii) and Section 36(a) hereof) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase and the certificate on the reverse side thereof duly executed, to the Rights Agent at the office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price with respect to the total number of Depositary Receipts (or other securities, cash or other as- sets, as the case may be) as to which such surrendered Rights are then exercisable, at or prior to the earlier of (i) the close of business on November 28, 1988 (the "Final Expiration Date"), or (ii) the time at which the Rights are redeemed as provided in Section 36 hereof (the earlier of (i) and (ii) being herein referred to as the "Expiration Date"). (b) The Purchase Price for each Depositary Receipt pursuant to the exercise of a Right shall initially be $110.00, and shall be subject to adjustment from time to time as provided in Sections 24 and 26(a) hereof and shall be payable in accordance with paragraph (c) below. (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed, accompanied by payment, with respect to each Right so exercised, of the Purchase Price per Depositary Receipt (or other shares, securities, cash or other assets, as the case may be) to be purchased as set forth below and an amount equal to any applicable transfer tax, the Rights Agent shall, subject to Section 33(k) hereof, thereupon promptly (i) make available certificates for the total number of Depositary Receipts to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (ii) requisition from the Company the amount of cash, if any, to be paid in lieu of fractional Depositary Receipts in accordance with Section 27 hereof, (iii) after receipt of such Depositary Receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, and (iv) after receipt thereof, deliver such cash, if any, to or upon the order of the registered holder of such Rights Certificate. The payment of the Purchase Price (as such amount may be reduced pursuant to Section 24(a)(iii) hereof) shall be made in cash or by certified bank check or bank draft payable to the order of the Company. In the event that the Company is obligated to issue other securities (including Common Stock) of the Company, pay cash and/or distribute other property pursuant to Section 24(a) hereof, the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. (d) In case the registered holder of any Rights Certificate shall exercise less than all the Rights evidenced thereby, a new Rights Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent and delivered to, or upon the order of, the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, subject to the provi- sions of Section 27 hereof. (e) Notwithstanding anything in this Agreement to the contrary , from and after the first occurrence of a Section 24(a)(ii) Event, any Rights beneficially owned by (i) an Acquiring Person, an Adverse Person or an Associate or Affiliate of an Acquiring Person or an Adverse Person, (ii) a transferee of an Acquiring Person or an Adverse Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person or the Adverse Person becomes such, or (iii) a transferee of an Acquiring Person or an Adverse Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person or the Adverse Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person or the Adverse Person to holders of equity interests in such Acquiring Person or Adverse Person or to any Person with whom the Acquiring Person or the Adverse Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e), shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to insure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no liability to any holder of Rights Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person or an Adverse Person or any of their respective Affiliates, Associates or transferees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. Cancellation and Destruction of Rights Certificates. All Rights Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Rights Certificates, and in such case shall deliv- er a certificate of destruction thereof to the Company. Section 9. Form of Depositary Receipts. The Depositary Receipts (and the forms of election to exercise and of assignment to be printed on the reverse thereof) shall each be substantially in the form set forth in Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation make pursuant thereto or with any rule or regulation of any stock exchange on which the Depositary Receipts may from time to time be listed, or to conform to usage. Subject to the provisions of this Agreement, the Depositary Receipts, whenever issued, shall be dated as of the date of issuance and on their face shall entitle the holders thereof to exchange each Depositary Preferred Share for one two-hundredth of a share of Preferred Stock, subject to adjustment as provided herein. Section 10. Countersignature and Registration of Depositary Receipts. (a) The Depositary Receipts shall be executed on behalf of the Company by its Chairman of the Board, its President or any Vice President, either manually or by facsimile signature, and shall have affixed thereto the Company's seal or a facsimile thereof which shall be attested by the Corporate Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Depositary Receipts shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Depositary Receipts shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Depositary Receipts, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Depositary Receipts had not ceased to be such officer of the Company; and any Depositary Receipts may be signed on behalf of the Company by any person who, at the actual date of the execution of such Depositary Receipts, shall be a proper officer of the Company to sign such Depositary Receipts, although at the date of the execution of this Rights Agreement any such person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its office or offices designated as the appropriate place for surrender of Depositary Receipts upon exercise or transfer, books for registration and transfer of the Depositary Receipts issued hereunder. Such books shall show the names and addresses of the respective holders of the Depositary Receipts and the number of shares of Depositary Preferred Stock evidenced on its face by each of the Depositary Receipts. Depositary Receipts shall be in denominations of any whole number of shares of Depositary Preferred Stock. Section 11. Deposit of Stock. (a) Subject to the terms and conditions of this Agreement, no later than the Distribution Date, the Company shall deposit by delivery to the Rights Agent a certificate or certificates representing all the authorized shares of Preferred Stock, properly endorsed or accompanied, if required by law, by a duly executed instrument of transfer or endorsement, in form satisfactory to the Rights Agent, together with all such certifications as may be required by the Rights Agent in accordance with the provisions of this Agreement. (b) The Rights Agent shall hold shares of Preferred Stock deposited by the Company in trust separate and apart from its other assets, at the Rights Agent's office designated for such purpose. Section 12. Transfer, Split Up, Combination and Exchange of Depositary Receipts; Mutilated, Lost or Stolen Depositary Receipt.. (a) Subject to the provisions of this Agreement at any time after the close of business on the Distribution Date, any Depositary Receipt or Receipts may be transferred, split up, combined or exchanged for another Depositary Receipt or Receipts entitling the registered holder to exchange such Depositary Receipt or Receipts for a like number of shares of Depositary Preferred Stock as the Depositary Receipt or Receipts surrendered then entitled such holder (or former holder in the case of a transfer) to receive upon surrender for exchange. Any registered holder desiring to transfer, split up, combine or exchange any Depositary Receipt or Receipts shall make such request in writing delivered to the Rights Agent, and shall surrender the Depositary Receipt or Receipts to be transferred, split up, combined or exchanged at the office or offices of the Rights Agent designated for such purpose. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Depositary receipt, and, in the case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and reimbursement to the Company and the Rights Agent of all reasonable expenses incidental there- to, and upon surrender to the Rights Agent and cancellation of the Depositary Receipt if mutilated, the Company will execute and deliver a new Depositary Receipt of like tenor to the Rights Agent for countersignature and delivery to the registered owner in lieu of the Depositary Receipt so lost, stolen, destroyed or mutilated. Section 13. Exchange of Depositary Receipts for Preferred Stock. (a) Subject to Section 27(b) hereof, at any time after the Distribution Date, the registered holder of any Depositary Receipt may exchange the Depositary Receipts evidenced thereby in whole or in part for one two-hundredth of a share of Preferred Stock and all money and other property represented thereby, if any, by surrendering Depositary Receipts representing such shares of Depositary Preferred Stock for such purpose, in an integral multiple of one such share, at the Rights Agent's office designated for such purpose. Thereafter, without unreasonable delay, the Rights Agent shall deliver to such holder, or to the person or persons designated by such holder as hereinafter provided, the number of whole shares, if any, of Preferred Stock and all money and other property represented by the Depositary Preferred Shares so surrendered for withdrawal. (b) In case the registered holder of any certificate evidencing Depositary Receipts shall exercise less than all the Depositary Receipts evidenced thereby, a new certificate evidencing Depositary Receipts equivalent to the Depositary Receipts remaining unexercised shall be issued by the Rights Agent and delivered to, or upon the order of, the registered holder of such Depositary Receipt, registered in the name or names as may be designated by such holder, subject to the provisions of Section 27 hereof. (c) If the Preferred Stock and the money and other property being withdrawn is to be delivered to a person or persons other than the holder of the Depositary Receipts being surrendered for withdrawal, such holder shall execute and deliver to the Rights Agent a written order so directing the Rights Agent and the Rights Agent may require that the Depositary Receipt surrendered for withdrawal by such holder by properly endorsed in blank or accompanied by a properly executed instrument of transfer in blank. (d) Delivery of the Preferred Stock and the money and other property represented by Depositary Receipts surrendered for exchange shall be made by the Rights Agent at its office designated for such purpose, except that, at the written request, risk and expense of the holder surrendering such shares, and for the account of the holder thereof, such delivery may be made at such other place as may be designated by such holder. Section 14. Limitations on Execution and Delivery, Transfer, Surrender and Exchange of Depositary Receipts. (a) As a condition precedent to the execution and delivery, transfer, split-up, combination, surrender or exchange of any Depositary Receipt, the Rights Agent, or any agent of the Rights Agent, may require payment to it of a sum sufficient for reimbursement of any tax or other governmental charge with respect thereto (including any such tax or charge with respect to Preferred Stock being withdrawn), may require the production of proof satisfactory to it as to the identity and genuineness of any signature and may also require compliance with such regulations, if any, as the Rights Agent may establish consistent with the provisions of this Agreement. (b) The transfer of Depositary Receipts may be refused, or the transfer, surrender or exchange of outstanding Depositary Receipts may be suspended during any period when the register of stockholders of the Company is closed, or if any such action is deemed necessary or advisable by the Rights Agent or the Company at any time or from time to time because of any requirement of law or of any government or governmental body or commission or stock exchange, or under any provision of this Agreement. Section 15. Cancellation and Destruction of Surrendered Depositary Receipts. All Depositary Receipts surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it and no Depositary Receipts shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Depositary Receipts purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Depositary Receipts to the Company. Section 16. Distributions. (a) Whenever the Rights Agent shall receive any case dividend or other cash distribution on the Preferred Stock, the Rights Agent shall distribute such amount to record holders of Depositary Receipts on the record date fixed pursuant to Section 17 hereof in proportion to the number of Depository Receipts held by them; provided, however, that in case the Company or the Rights Agent shall be required to withhold and does withhold from any cash dividend or other cash distribution in respect of the Preferred Stock an amount on account of taxes, the amount made available for distribution or distributed on the Depositary Re- ceipts issued in respect of such Preferred Stock shall be reduced accordingly. The Rights Agent shall distribute or make available for distribution, as the case may be, only such amount, however, as can be distributed without attributing to any record holder of a Depositary Receipt a fraction of one cent and any balance not so distributable shall be held by the Rights Agent (without liability for interest thereon) and shall be added to and be treated as part of the next sum received by the Rights Agent for distribution to record holders of Depositary Receipts then outstanding. (b) Whenever the Rights Agent shall receive any distribution other than cash upon the Preferred Stock, the Rights Agent shall cause such securities or property received by it to be distributed to the record holders of Depositary Receipts on the record date fixed pursuant to Section 17 hereof in proportion to the number of Depositary Receipts held by them, in any manner that the Rights Agent may deem equitable and practicable for accomplishing such distribution. If in the opinion of the Rights Agent such distribution cannot be made proportionately among the record holders of Depositary Receipts entitled thereto, or if for any other reason (including any requirement that the Company or the Rights Agent withhold an amount on account of taxes) the Rights Agent deems such distribution not to be feasible, the Rights Agent may adopt such method as it deems equitable and practicable for the purpose of effecting such distribution, including the public or private sale of the securities or property thus received, or any part thereof, at such place or places and upon such terms as it may deem proper. The net proceeds of any such sale shall be distributed or made available for distribution, as the case may be, by the Rights Agent to the holders of Depositary Receipts entitled thereto as in the case of a distribution received in cash. (c) Whenever the Company shall offer or cause to be offered to the holders of the Preferred Stock any rights, preferences or privileges to subscribe for or to purchase any securities or any rights, preferences or privileges of any other nature, such rights, preferences or privileges shall be made available by the Rights Agent to the holders of Depositary Receipts in such manner as the Rights Agent may determine, either by the issue to the record holders of Depositary Receipts on the record date fixed pursuant to Section 17 hereof of warrants representing such rights, preferences or privileges or by such other methods as may be approved by the Rights Agent in its discretion; provided, however, that if at the time of issue or offer of any such rights, preferences or privileges, the Rights Agent determines that it is not lawful or feasible to make such rights, preferences or privileges available to holders of Depositary Receipts by the issue of warrants or otherwise, or if and to the extent so instructed by holders of Depositary Receipts who do not desire to exercise such rights, preferences or privileges, the Rights Agent, in its discretion, may, if applicable law permits transfer, sell such rights, preferences or privileges at public or private sale, at such place or places and upon such terms as it may deem proper. The net proceeds of any such sale shall be distributed by the Rights Agent to the record holders of Depositary Receipts entitled thereto as in the case of a distribution received in cash. (d) If registration under the Securities Act of the securities to which any rights, preferences or privileges relate is required in order for holders of Depositary Receipts to be offered or sold the securities to which such rights, preferences or privileges relate, the Company agrees with the Rights Agent that it will file promptly a registration statement pursuant to the Securities Act with respect to such rights, preferences or privileges and securities and use its best efforts and take all steps available to it to cause such registration statement to become effective within a reasonable period of time before such rights, preferences or privileges shall expire. In no event shall the Rights Agent make available to the holders of Depositary Receipts any right, preference or privilege to subscribe for or to purchase any securities unless and until such a registration statement is in effect, or unless the offering and sale of such securities to the holders of such Depositary Receipts are exempt from registration under the provisions of the Securities Act. (e) If any other action under the laws of any jurisdiction or any governmental or administrative authorization, consent or permit is required in order for such rights, preferences or privileges to be made available to holders of Depositary Receipts, the Company agrees with the Rights Agent that the Company will use its best efforts to take such action to obtain such authorization, consent or permit sufficiently in advance of the expiration of the rights, preferences or privileges to enable holders of Depositary Receipts to exercise such rights, preferences or privileges. Section 17. Notice of Dividends, Fixing of Record Date for Receipt-Holders. Whenever any cash dividend or other cash distribution shall become payable or any distribution other than cash shall be made, or whenever rights, preferences or privileges shall be offered, with respect to the Preferred Stock, or whenever the Rights Agent shall receive notice of any meeting at which holders of Preferred Stock are entitled to vote or of which holders of Preferred Stock are entitled to notice, the Rights Agent shall fix a record date (which shall be the record date fixed by the Company with respect to the Preferred Stock) for the determination of the holders of Depositary Receipts who shall be entitled to receive such dividend, distribution, rights, preferences or privileges or the net proceeds of the sale thereof, to give instructions for the exercise of voting rights at any such meeting or who shall be entitled to notice of such meeting, and, not less than 10 days prior to such record date, the Rights Agent shall mail notice of such record date to the holders of record of Depositary Receipts as of the date notice of such record date is received by the Rights Agent from the Company; provided, however, that the Company shall have given the Rights Agent not less than 15 days' prior written notice of such record date. Section 18. Voting Rights. Upon receipt of notice of any meeting at which the holders of Preferred Stock are entitled to vote, the Rights Agent shall include in the notice required to be mailed to the record holders of Depositary Receipts pursuant to Section 17: (a) such information as is contained in the notice of meeting received from the Company; (b) a statement that the holders of Depositary Receipts at the close of business on the record date specified therein will be entitled, subject to any applicable provisions of law and of the Charter of the Company, to instruct the Rights Agent as to the exercise of the voting rights pertaining to the amount of Preferred Stock represented by their respective shares of Depositary Preferred Stock; and (c) a brief statement as to the manner in which such instructions may be given. Upon the written request of a holder of a Depositary Receipt on such record date, the Rights Agent shall endeavor insofar as practicable to vote or cause to be voted the amount of Preferred Stock represented by such Depositary Receipt in accordance with the instructions set forth in such request. The Company hereby agrees to take all action which may be deemed necessary by the Rights Agent in order to enable the Rights Agent to vote such Preferred Stock or cause such Preferred Stock to be voted. In the absence of specific instructions from the holder of a Depositary Receipt, the Rights Agent will abstain from voting to the extent of the Preferred Stock underlying such Depositary Receipt. Section 19. Changes Affecting Deposited Securities and Reclassifications, Recapitalizations, etc. Upon any change in par or stated value, split-up, consolidation or any other reclassification of the Preferred Stock, or upon any recapitalization, reorganization, merger, consolidation or sale of assets affecting the Company or to which it is a party, the Rights Agent shall, with the approval of the Company and in such manner as the Rights Agent may deem equitable, treat any securities into which the Preferred Stock shall be changed or which shall be received in respect of the Preferred Stock shall be changed or which shall be received by the Rights Agent in exchange for or in respect of the Preferred Stock as new deposited securities under this Agreement, and Depositary Receipts then outstanding shall thereafter be exchangeable for the new securities into which the Preferred Stock shall be changed or which are so received in exchange or conversion. In any such case the Rights Agent may in its discretion, with the approval of the Company, execute and deliver additional Depositary Receipts, or may call for the surrender of all outstanding Depositary Receipts to be exchanged for new receipts specifically describing such new deposited securities, or, if appropriate, and-at the direction of the Company, shall call for the surrender of all outstanding Depositary Receipts in exchange for the new deposited securities. Section 20. Reports. The Rights Agent shall make available for inspection by holders of Depositary Receipts at its office designated for such purpose, and at such other places as it may from time to time deem advisable, any reports and communications received from the Company which are both (a) received by the Rights Agent as the depositary for the Preferred Stock and (b) made generally available to the holders of such Preferred Stock by the Company. Section 21. Lists of Depositary Receipt Holders. Promptly upon request by the Company, the Rights Agent shall furnish to it a list, as of the most recent date practicable, of the names, addresses and holding as of shares of Depositary Preferred Stock by all persons in whose names Depositary Receipts are registered on the depositary books of the Rights Agent. Section 22. Reservation and Availability of Capital Stock. (a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued shares of Preferred Stock (and, following the occurrence of a Triggering Event, out of its authorized and unissued shares of Common Stock and/or other securities or out of its authorized and issued shares held in its treasury), the number of shares of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) that provided in this Agreement including Section 24(a)(iii) hereof, will be sufficient to permit the exercise in full of all outstanding Rights. (b) So long as the shares of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) issuable and deliverable upon the exercise of the Rights may be listed on any national securities exchange, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable, all shares reserved for such issuance to be listed on such exchange upon official notice of issuance upon such exercise. (c) The Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the first occurrence of a Section 24(a)(ii) Event on which the consideration to be delivered by the Company upon exercise of the Rights has been determined in accordance with Section 24(a)(iii) hereof, a registration statement under the Securities Act of 1933 (the "Act"), with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities or (B) the date of the expiration of the Rights. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or "blue sky" laws of the various states in connection with the exercisability of the Rights. The Company may temporarily suspend, for a period of time not to exceed ninety (90) days after the date set forth in clause (i) of the first sentence of this Section 22(c), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. In addition, if the Company shall determine that a registration statement is required fol- lowing the Distribution Date, the Company may temporarily suspend the exercisability of the Rights until such time as a registration statement has been declared effective. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction if the requisite qualification in such jurisdiction shall not have been obtained, the exercise thereof shall not be permitted under applicable law or a registration statement shall not have been declared effective. (d) The Company covenants and agrees that it will take all such action as ma be necessary to ensure that all Depositary Receipts (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable. (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Rights Certificates and of any certificates for a number of Depositary Receipts (or Common Stock and/or other securities, as the case may be) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a Person other than, or the issuance or delivery of a number of Depositary Receipts (or Common Stock and/or other securities, as the case may be) in respect of a name other than that of, the registered holder of the Rights Certificates evidencing Rights surrendered for exercise or to issue or deliver any certificates for a number of Depositary Receipts (or Common Stock and/or other securities, as the case may be) in a name other than that of the registered holder upon the exercise of any Rights until such tax shall have been paid (any such tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. Section 23. Preferred Stock Record Date. Each person in whose name any certificate for a number-of Depositary Receipts (or Common Stock and/or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of such fractional shares of Preferred Stock (or Common Stock and/or other securities, as the case may be) represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and all applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Stock (or Common Stock and/or other securities, as the case may be) transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares (fractional or otherwise) on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Stock (or Common Stock and/or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a stockholder of the Company with respect to shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 24. Adjustment of Purchase Price Number and Kind of Shares or Number of Rights. The Purchase Price, the number and kind of Depositary Receipts covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 24. (a)(i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdi- vide the outstanding Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of shares, or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 24(a) and Section 7(e) hereof, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of Preferred Stock or capital stock, as the case may be, issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the Purchase Price then in effect, the aggregate number and kind of Depositary Receipts or capital stock, as the case may be, which, if such Right had been exercised immediately prior to such date and at a time when the Depositary Receipt transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an ad- justment under both this Section 24(a)(i) and Section 24(a)(ii) hereof, the adjustment provided for in this Section 24(a)(1) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 24(a)(ii) hereof. (ii) In the event: (A) any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan), alone or together with its Affiliates and Associates, shall, at any time after the Rights Dividend Declaration Date, become the Beneficial Owner of 20% or more of the shares of Common Stock then outstanding, unless the event causing the 20% threshold to be crossed is a transaction set forth in Section 26(a) hereof, or is an acquisition of shares of Common Stock pursuant to a tender offer or an exchange offer for all outstanding shares of Common Stock at a price and on terms determined by at least a majority of the members of the Board of Directors who are not officers of the Company and who are not representatives, nominees, Affiliates or Associates of an Acquiring Person, after receiving advice from one or more investment banking firms, to be (a) at a price which is fair to shareholders (taking into account all factors which such members of the Board deem relevant including, without limitation prices which could reasonably be achieved if the Company or its assets were sold on an orderly basis designed to realize maximum value) and (b) otherwise in the best interests of the Company and its shareholders, or (B) the Board of Directors shall declare any Person to be an Adverse Person, upon a determination that such Person, alone or together with its Affiliates and Associates, has, at any time after the Rights Dividend Declaration Date, become the Beneficial Owner of an amount of Common Stock which the Board of Directors determines to be substantial (which amount shall in no event be less than 10% of the shares of Common Stock then outstanding) and a determination by the Board of Directors of the Company, after reasonable inquiry and investigation, including consultation with such persons as such directors shall deem appropriate, that (a) such Beneficial Ownership by such Person is intended to cause the Company to repurchase the Common Stock beneficially owned by such Person or to cause pressure on the Company to take action or enter into a transaction or series of transactions intended to provide such Person with short-term financial gain under circumstances where the Board of Directors determines that the best long-term interests of the Company and its shareholders would not be served by taking such action or entering into such transaction or series of transactions at that time or (b) such Beneficial Ownership is causing or reasonably likely to cause a material adverse impact (including, but not limited to, by jeopardizing the Company's licenses or authorizations from, or relationships with, state insurance regulators, or by impairing relationships with customers or the Company's ability to maintain its competitive position) on the business or prospects of the Company to the detriment of the Company's shareholders, then promptly following the occurrence of a Section 24(a)(ii) Event, proper, provision shall be made so that each holder of a Right (except as provided below and in Section 7(e) hereof) shall thereafter have the right to receive, upon exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, in lieu of a number of Depositary Receipts, such number of shares of Common Stock of the Company as shall equal the result obtained by (x) multiplying the then current Purchase Price by the then number of one two hundredths of a share of Preferred Stock for which a Depositary Receipt was exercisable immediately prior to the first occurrence of a Section 24(a)(ii) Event, and (y) dividing that product (which, following such first occurrence, shall thereafter be referred to as the "Purchase Price" for each Right and for all purposes of this Agreement) by 50% of the current market price (determined pursuant to Section 24(d) hereof) per share of Common Stock on the date of such first occurrence (such number of shares, the "Adjustment Shares"). (iii) In the event that the number of shares of Common Stock which are authorized by the Company's Charter but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights are not sufficient to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii) of this Section 24(a), the Company shall: (A) determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of a Right (the "Current Value") over (2) the Purchase Price (such excess, the "Spread"), and (B) with respect to each Right, make adequate provision to substitute for the Adjustment Shares, u on payment of the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3) Common Stock or other equity securities of the Company (including, without limitation, shares, or units of shares, of preferred stock which the Board of Directors of the Company has deemed to have the same value as shares of Common Stock (such shares of referred stock,, "common stock equivalents"), (4) debt securities of the Company, (5) other assets or (6) any combina- tion of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors of the Company based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company; provided, however, if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) the first occurrence of a Section 24(a)(ii) Event and (y) the date on which the Company' s right of redemption pursuant to Section 36(a) expires (the later of (x) and (y) being referred to herein as the "Section 24(a)(ii) Trigger Date"), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, shares of Common Stock (to the extent available) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. If the Board of Directors of the Company shall determine in good faith that it is likely that sufficient additional shares of Common Stock could be authorized for issuance upon exercise in full of the Rights, the thirty (30) day period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 24(a)(ii) Trigger Date, in order that the Company may seek shareholder approval for the authorization of such additional shares (such period, as it may be extended, the "Substitution Period"). To the extent that the Company determines that some action need be taken pursuant to the first and/or second sentences of this Section 24(a)(iii), the Company (x) shall provide, subject to Section 7(e) hereof, that such action shall apply uniformly to all outstanding Rights, and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 24(a)(iii), the value of the Common Stock shall be the current market price (as determined pursuant to Section 24(d) hereof) per share of the Common Stock on the Section 24(a)(ii) Trigger Date and the value of any "common stock equivalent" shall be deemed to have the same value as the Common Stock on such date. (b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Stock entitling them to subscribe for or purchase (for a period expiring within forty-five (45 calendar days after such record date) Preferred Stock (or shares having the same rights, privileges and preferences as the shares of Preferred Stock (equivalent preferred stock") or securities convertible into Preferred Stock or equivalent preferred stock at a price per share of Preferred Stock or per share of equivalent preferred stock (or having a conversion price per share, if a security convertible into Preferred Stock or equivalent preferred stock) less than the current market price (as determined pursuant to Section 24(d) hereof) per share of Preferred Stock on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of shares of Preferred Stock which the aggregate offering price of the total number of shares of Preferred Stock and/or equivalent preferred stock so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price, and the denominator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of additional shares of Preferred Stock and/or equivalent preferred stock to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid by delivery of consideration part or all of which may be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Shares of Preferred Stock owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed, and in the event that such rights or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for a distribution to all holders of Preferred Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness, cash (other than a regular quarterly cash dividend out of the earnings or retained earning of the Company), assets (other than a dividend payable in Preferred Stock, but including and dividend payable in stock other than Preferred Stock or subscription rights or warrants (excluding those referred to in Section 24(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the current market price (as determined pursuant to Section 24(d) hereof) per share of Preferred Stock on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be de- scribed in a statement filed with the Rights Agent) of the portion of the cash, assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to a share of Preferred Stock and the denominator of which shall be such current market price (as determined pursuant to Section 24(d) hereof) per share of Preferred Stock. Such adjustments shall be made successively whenever such a record date is fixed, and in the event that such distribution is not so made, the Purchase Price shall be adjusted to be the Purchase Price which would have been in effect if such record date had not been fixed. (d)(i) For the purpose of any computation hereunder, other than computations made pursuant to Section 24(a)(iii) hereof, the "current market price" per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the thirty (30) consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date, and for purposes of computations made pursuant to Section 24(a )(iii ) hereof, the "current market price" per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the ten (10) consecutive Trading Days immediately following such date; provided, however, that in the event that the current market price per share of the Common Stock is determined during a period following the announcement by the issuer of such Common Stock of (A) a dividend or distribution on such Common Stock payable in shares of such Common Stock or securities convertible into shares of such Common Stock (other than the Rights), or (B) any subdivision, combination or reclassification of such Common Stock, and prior to the expiration of the requisite thirty (30) Trading Day or ten (10) Trading Day period, as set forth above, after the ex-dividend date for such dividend or distribution, or the record date for such subdivision combination or reclassification, then, and in each such case, the "current market price" shall be properly adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of Common Stock are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ*") or such other system then in use, or, if on any such date the shares of Common Stock are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Board of Directors of the Company. If on any such date no market maker is making a market in the Common Stock, the fair value of such shares on such date as determined in good faith by the Board of Directors of the Company shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading is open for the transaction of business or, if the shares of Common Stock are not listed or admitted to trading on any national securities Exchange, a Business Day. If the Common Stock is not publicly held or not so listed or traded, "current market price" per share shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. (ii) For the purpose of any computation hereunder, the "current market price" per share of Preferred Stock shall be determined in the same manner as set forth above for the Common Stock in clause (i) of this Section 24(d) (other than the last sentence thereof). If the current market price per share of Preferred Stock cannot be determined in the manner provided above or if the Preferred Stock is not publicly held or listed or traded in a manner described in clause (i) of this Section 24(d), the "current market price" per share of Preferred Stock shall be conclusively deemed to be an amount equal to 200 (as such number may be appropriately adjusted for such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock occurring after the date of this Agreement) multiplied by the current market price per share of the Common Stock. If neither the Common Stock nor the Preferred Stock is publicly held or so listed or traded, "current market price" per share of the Preferred Stock shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. For all purposes of this Agreement, the "current market price" of one two-hundredth of a share of Preferred Stock shall be equal to the "current market price" of one share of Preferred Stock divided by 200. (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least one percent 1%) in the Purchase Price; provided, however, that any adjustments which by reason of this Section 24(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 24 shall be made to the nearest cent or to the nearest ten-thousandth of a share of Common Stock or other share or one-millionth of a share of Preferred Stock, as the case may be. Notwithstanding the first sentence of this Section 24(e), any adjustment required by this Section 24 shall be made no later than the earlier of (i) three (3) years from the date of the transaction which mandates such adjustment or (ii) the Expiration Date. (f) If as a result of an adjustment made pursuant to Section 24(a)(ii) or Section 26(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock other than Preferred Stock, thereafter the number of such other shares so receivable upon exercise of any Right and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Stock contained in Sections 24(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections 7. 22, 239 26 and 27 hereof with respect to the Preferred Stock shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of Depositary Receipts purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 24(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 24(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of Depositary Receipts (calculated to the nearest one-millionth) ob- tained by (i) multiplying (x) the number of Depositary Receipts covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately after such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in lieu of any adjustment in the number of Depositary Receipts purchasable upon the exercise of a Right. Each of the Rights outstanding after the adjustment in the number of Rights shall be exercisable for the number of Depositary Receipts for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one-ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten (10) days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 24(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 27 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of Depositary Receipts issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per Depositary Receipt and the number of Depositary Receipts which were expressed in the initial Rights Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then stated value, if any, of the Depositary Preferred Stock issuable upon exercise of the Depositary Receipts, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of Preferred Stock at such adjusted Purchase Price. (l) In any case in which this Section 24 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date the number of Depositary Receipts and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the number of Depositary Receipts and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) or securities upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 24 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 24, as and to the extent that in their good faith judgment the Board of Directors of the Company shall determine to be advisable in order that any (i) consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares of Preferred Stock at less than the current market price, (iii) issuance wholly for cash of shares of Preferred Stock or securities which by their terms are convertible into or exchangeable for shares of Preferred Stock, (iv) stock dividends or (v) issuance of rights, options or warrants referred to in this Section 24 hereafter made by the Company to holders of its Preferred Stock shall not be taxable to such shareholders. (n) The Company covenants and agrees that it shall not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a transaction which complies into any with Section 24(o)-hereof), (ii) merge with or other Person (other than a Subsidiary of the Company in a transaction which complies with Section 24(o) hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a series of related transactions, assets, cash flow or earning power aggregating more than 50% of the assets, cash flow or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 24(o) hereof), if (x) at the time of or immediately after such consolidation, merger or sale there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger or sale, the shareholders of the Person who constitutes, or would constitute, the "Principal Party" for purposes of Section 26(a) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates. (o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Section 36 or Section 39 hereof, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. (p) Anything in this Agreement to the contrary notwithstanding in the event that the Company shall at any time after the Rights Dividend Declaration Date and prior to the Distribution Date (i) declare a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, the number of Rights associated with each share of Common Stock then outstanding, or issued or delivered thereafter but prior to the Distribution Date, shall be proportionately adjusted so that the number of Rights thereafter associated with each share of Common Stock following any such event shall equal the result obtained by multiplying the number of Rights associated with each share of Common Stock immediately prior to such event by a fraction the numerator which shall be the total number of shares of Common Stock outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of shares of Common Stock outstanding immediately following the occurrence of such event. (q) The failure by the Board of Directors to declare a Person to be an Adverse Person following such Person becoming the Beneficial Owner of 10% or more of the outstanding Common Stock shall not imply that such Person is not an Adverse Person or limit the Board of Directors' right at any time in the future to declare such Person to be an Adverse Person. In considering whether to declare a Person to be an Adverse Person,, the Board of Directors may consider the actions or findings of one or more state insurance regulators with respect to any required approvals by such regulators of such Person's actions with respect to the Company. Notwithstanding the foregoing, the approval by any one or more state insurance regulators of any action of any Person shall not be deemed to prohibit or restrict the ability of the Board of Directors to declare that such Person is an Adverse Person upon determination that the criteria set forth in Section 24(a)(ii)(B) apply to such Person. Section 25. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Section 24 and Section 26 hereof, the Company shall (a) promptly prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent, and with each transfer agent for the Preferred Stock and the Common Stock, a copy of such certificate and (c) mail a brief summary thereof to each holder of a Rights Certificate (or, if prior to the Distribution Date, to each holder of a certificate representing shares of Common Stock) in accordance with Section 38 hereof. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained and shall not be deemed to have knowledge of any such adjustment unless and until it shall have received such certificate. Section 26. Consolidation, Merger, or Sale or Transfer of Assets, Cash Flow or Earning Power. (a) In the event that, following the Stock Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 24(o) hereof), and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (y) any Person (other than a Subsidiary of the Company in a transaction which complies with Section 24(o) hereof) shall consolidate with, or merge with or into, the Company, and the Company shall be the continuing or surviving corporation of such consolidation or merger and, in connection with such consolidation or merger, all or part of the outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property or (z) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one transaction or a series of related transactions, assets, cash flow or earning power aggregating more than 50% of the assets, cash flow or earning power of the Company and its Subsidiaries (taken as a whole) to any Person or Persons (other than the Company or any Subsidiary of the Company in one or more transactions each of which complies with Section 24(o) hereof), then, and in each such case (except as may be contemplated by Section 26(d) hereof), proper provision shall be made so that: (i) each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, such number of validly authorized and issued, fully paid, non-assessable and freely tradable shares of Common Stock of the Principal Party (as such term is hereinafter defined), not subject to any liens, encumbrances, rights of first refusal or other adverse claims, as shall be equal to the result obtained by (1) multiplying the then current Purchase Price by the number of Depositary Receipts for which a Right is exercisable immediately prior to the first occurrence of a Section 26 Event (or, if a Section 24(a)(ii) Event has occurred prior to the first occurrence of a Section 26 Event, multiplying the number of such Depositary Receipts for which a Right was exercisable immediately prior to the first occurrence of a Section 24(a)(ii) Event by the Purchase Price in effect immediately prior to such first occurrence), and dividing that product (which, following the first occurrence of a Section 26 Event, shall be referred to as the "Purchase Price" for each Right and for all purposes of this Agreement) by (2) 50% of the current market price (determined pursuant to Section 24(d)(i) hereof) per share of the Common Stock of such Principal Party on the date of consummation of such Section 26 Event; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 26 Event, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 24 hereof shall apply only to such Principal Party following the first occurrence of a Section 26 Event; (iv) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Stock) in connection with the consummation of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its shares of Common Stock thereafter deliverable upon the exercise of the Rights; and (v) the provisions of Section 24(a)(ii) hereof shall be of no effect following the first occurrence of any Section 26 Event. (b) "Principal Party" shall mean (i) in the case of any transaction described in clause (x) or (y) of the first sentence of Section 26(a), the Person that is the issuer of any securities into which shares of Common Stock of the Company are converted in such merger or consolidation, and if no securities are so issued, the Person that is the other party to such merger or consolidation; and (ii) in the case of any transaction described in clause (z) of the first sentence of Section 26(a), the Person that is the party receiving the greatest portion of the assets, cash flow or earning power transferred pursuant to such transaction or transactions; provided, however, that in any such case, (1) if the Common Stock of such Person is not at such time and has not been continuously over the preceding twelve (12) month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another Person the Common Stock of which is and has been so registered "Principal Party" shall refer to such other Person; and (2) in case such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Stocks of two or more of which are and have been so registered, "Principal Party" shall refer to whichever of such Persons is the issuer of the Common Stock having the greatest aggregate market value. (c) The Company shall not consummate any such consolidation, merger, sale or transfer unless the Principal Party shall have a sufficient number of authorized shares of its Common Stock which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 26 and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in paragraphs(a) and (b) of this Section 26 and further providing that, as soon as practicable after the date of any consolidation, merger or sale of assets mentioned in paragraph (a) of this Section 26, the Principal Party will (i) prepare and file a registration statement under the Act with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form and will use its best efforts to cause such registration statement to (A) become effective as soon as practicable after such filing and (B) remain effective (with a prospectus at all times meeting the requirements of the Act) until the Expiration Date; and (ii) will deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all respects with the requirements for registration on Form 10 under the Exchange Act. The provisions of this Section 26 shall similarly apply to successive mergers or consolidations or sales or other transfers. In the event that a Section 26 Event shall occur at any time after the occurrence of a Section 24(a)(ii) Event, the Rights which have not theretofore been exercised shall thereafter become exercisable in the manner described in Section 26(a). (d) Notwithstanding anything in this Agreement to the contrary, Section 26 shall not be applicable to a transaction described in subparagraphs (x) and (y) of Section 26(a) if (i) such transaction is consummated with a Person or Persons who acquired shares of Common Stock pursuant to a tender offer or exchange offer for all outstanding shares of Common Stock which complies with the provisions of Section 24(a)(ii)(A) hereof (or a wholly owned subsidiary of any such Person or Persons), (ii) the price per share of Common Stock offered in such transaction is not less than the price per share of Common Stock paid to all holders of shares of Common Stock whose shares were purchased pursuant to such tender offer or exchange offer and (iii) the form of consideration being offered to the remaining holders of shares of Common Stock pursuant to such transaction is the same as the form of consideration paid pursuant to such tender offer or exchange offer. Upon consummation of any such transaction contemplated by this Section 26(d), all Rights hereunder shall expire. Section 27. Fractional Rights and Fractional Shares. (a) The Company shall not be required to issue fractions of Rights, except prior to the Distribution Date as provided in Section 24(p) hereof, or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For purposes of this Section 27(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price of the Rights for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading, or if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used. (b) The Company shall not issue fractions of shares of Preferred Stock upon exercise of the Depositary Receipts or distribute certificates which evidence fractional shares of Preferred Stock. In lieu of fractional shares of Preferred Stock, the Company shall pay to the registered holders of Depositary Receipts at the time such Depositary Receipts are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one two-hundredth of a share of Preferred Stock. For purposes of this Section 27(b), the current market value of one two-hundredth of a share of Preferred Stock shall be one two-hundredth of the closing price of one share of Preferred Stock (as determined pursuant to Section 24(d)(ii) hereof) for the Trading Day immediately prior to the date of such exercise. (c) Following the occurrence of a Triggering Event, the Company shall not issue fractions of shares of Common Stock upon exercise of the Rights or to distribute certificates which evidence fractional shares of Common Stock. In lieu of fractional shares of Common Stock, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one (1) share of Common Stock. For purposes of this Section 27(c), the current market value of one share of Common Stock shall be the closing price of one share of Common Stock (as determined pursuant to Section 24(d)(i) hereof) for the Trading Day immediately prior to the date of such exercise. (d) The holder of a Right by the acceptance of such Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right, except as permitted by this Section 27. Section 28. Rights of Action. All rights of action in respect or this Agreement, except those rights of action vested in the Rights Agent pursuant to Sections 31 or 33 hereof, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of the Common Stock); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of the Common Stock), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or prior to the Distribution Date, of the Common Stock), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and shall be entitled to specific performance of the obligations hereunder and injunctive relief against actual or threatened violations of the obligations hereunder of any Person subject to this Agreement. Section 29. Agreement of Rights Holders. Every holder of a Right by accepting the same consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of Common Stock; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office or offices of the Rights Agent designated for such purposes, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed; (c) subject to Section 6(a) and Section 7(f) hereof, the Company and the Rights Agent may deem and treat the person in whose name a Rights Certificate (or, prior to the Distribution Date, the associated Common Stock certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated Common Stock certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent, subject to the last sentence of Section 7(e) hereof, shall be required to be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; provided, however, the Company must use its best efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible. Section 30. Rights Certificate Holder Not Deemed a Shareholder. No holder as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the number of shares of Preferred Stock or any other securities of the Company which may at any time be issuable on the exchange of the Depositary Receipts issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in Section 37 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. Section 31. Concerning the Rights Agent. (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and disbursements and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. The indemnification provided for hereunder shall survive the expiration of the Rights and the termination of this Agreement. (b) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any Rights Certificate or certificate for Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorse- ment, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons. Section 32. Merger or Consolidation or Change of Name of Right Agents. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, however, that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 34 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of a predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. Section 33. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any Acquiring Person or Adverse Person and the determination of it current market price") be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Corporate Secretary or any Assistant Secretary of the Company and delivered to the Rights. Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder only for its own negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Rights Certificates or be required to verify the same (except as to its countersignature on such Rights Certificates), but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any adjustment required under the provisions of Section 24 or Section 26 hereof or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after receipt of the certificate described in Section 25 hereof); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock or Preferred Stock to be issued pursuant to this Agreement or any Rights Certificate or as to whether any shares of Common Stock or Preferred Stock will, when so issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, the President, any Vice President, the Corporate Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent under this Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Rights Agent shall not be liable for any action taken by, or omission of, the Rights Agent in accordance with a proposal included in such application on or after the dated specified in such application (which date shall not be less than five Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to an earlier date) unless prior to taking any such action (or the effective date in the case of an omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct; Provided, however, reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Right Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause 1 and/or 2 thereof, the Rights Agent shall not take any further action with respect to such requested exercise of transfer without first consulting with the Company. (l) The Rights Agent shall not be required to take notice or be deemed to have notice of any fact, event or determination (including the occurrence of a section 24(a)(ii) Event) under this Agreement unless and until the Rights Agent shall be specifically notified in writing by the Company of such fact, event or determination. Section 34. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon thirty (30) days' notice in writing mailed to the Company, and to each transfer agent of the Common Stock and Preferred Stock, by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock and Preferred Stock, by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. if the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit his Rights Certificate for inspection by the Company), then any registered holder of any Rights Certifi- cate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (a) a corporation organized and doing business under the laws of the United States or of the State of New York or the Commonwealth of Massachusetts (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the State of New York or the Commonwealth of Massachusetts), in good standing, having a principal office in the State of New York or the Common laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50,000,000 or (b) an Affiliate of a corpora- tion described in clause (a) of this sentence. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such Appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock and the Preferred Stock, and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 34, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 35. Issuance of New Rights Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock following the Distribution Date and prior to the redemption or expiration of the Rights, the Company (a) shall, with respect to shares of Common Stock so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, granted or awarded as of the Distribution Date, or upon the exercise, conversion or exchange of securities hereinafter issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) no such Rights Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued, and (ii) no such Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. Section 36. Redemption and Termination. (a) The Board of Directors of the Company may, at its option, at any time prior of (i) the close of business on the tenth day following the Stock Acquisition Date (or, if the Stock Acquisition Date shall have occurred prior to the Record Date, the close of business on the tenth day following the Record Date) or (ii) the Final Expiration Date, redeem all but not less than all the then outstanding Rights at a redemption price of $.01 per Right, as such amount may be appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"). Notwithstanding the foregoing, the Board of Directors may not redeem any Rights following a determination pursuant to Section 24(a (ii)(B) that any Person is an Adverse Person. Notwithstanding anything contained in this Agreement to the contrary, the Rights shall not be exercisable after the first occurrence of a Section 24(a)(ii) Event until such time as the Company's right of redemption hereunder has expired. The Company may, at its option, pay the Redemption Price in cash, shares of Common Stock (based on the "current market price", as defined in Section 24(d)(i) hereof, of the Common Stock at the time of redemption) or any other form of consideration deemed appropriate by the Board of Directors. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights, evidence of which shall have been filed with the Rights Agent and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price for each Right so held. Promptly after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice to all such holders at each holder s last address as it appears upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the Transfer Agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Section 37. Notice of Certain Events. (a) In case the Company shall propose, at any time after the Distribution Date, (i) to pay any dividend payable in stock of any class to the holders of Preferred Stock or to make any other distribution to the holders of Preferred Stock (other than a regular quarterly cash dividend out of earnings or retained earnings of the Company), or (ii) to offer to the holders of Preferred Stock rights or warrants to subscribe for or to purchase any additional shares of Preferred Stock or shares of stock of any class or any other securities, rights or options, or (iii) to effect any reclassification of its Preferred Stock (other than a reclassification involving only the subdivision of outstanding shares of Preferred Stock), or (iv) to effect any consolidation or merger into or with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 24(o) hereof), or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one transaction or a series of related transactions, of more than 50% of the assets, cash flow or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 24(o) hereof), or (v) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to each holder of a Rights Certificate, to the extent feasible and in accordance with Section 38 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the shares of Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (-ii) above at least twenty (20) days prior to the record date for determining holders of the shares of Preferred Stock for purposes of such action, and in the case of any such other action, at least twenty (20) days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the shares of Preferred Stock whichever shall be the earlier. (b) In case any of the events set forth in Section 24(a)(ii) hereof shall occur, then, in any such case, (i) the Company shall as soon as practicable thereafter give to each holder of a Rights Certificate, to the extent feasible and in accordance with Section 38 hereof, a notice of the occurrence of such event, which shall specify the event and the consequences of the event to holders of Rights under Section 24 a)(ii) hereof, and (ii) all references in the preceding paragraph to Preferred Stock shall be deemed thereafter to refer to Common Stock and/or, if appropriate, other securities. Section 38. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: The Hartford Steam Boiler Inspection and Insurance Company One State Street Hartford, Connecticut 06102 Attention: Corporate Secretary Subject to the provisions of Section 34, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: The First National Bank of Boston P.O. Box 1865 Boston, Massachusetts 02105 Attention: Shareholder Services Division Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate (or, if prior to the Distribution Date, to the holder of certificates representing shares of Common Stock) shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 39. Supplements and Amendments. Prior to the Distribution Date and subject to the penultimate sentence of this Section 39, the Company and the Rights Agent shall, if the Company so directs, supplement or amend any provision of this Agreement without the approval of any holders of certificates representing shares of Common Stock. From and after the Distribution Date and subject to the penultimate sentence of this Section 39, the Company and the Rights Agent shall, if the Company so directs, supplement or amend this Agreement without the approval of any holders of Rights Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) to shorten or lengthen any time period hereunder or (iv) to change or supplement the provisions hereunder in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Rights Certificates (other than an Acquiring Person, an Adverse Person or an Affiliate or Associate of an Acquiring Person or an Adverse Person); provided, this Agreement may not be supplemented or amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time period relating to when the Rights may be redeemed at such time as the Rights are not then redeemable, or (B) any other time period unless such lengthening is for the purpose of protecting, enhancing or clarifying the rights of, and/or the benefits to, the holders of Rights. Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 39, the Rights Agent shall execute such supplement or amendment. Notwithstanding anything contained in this Agreement to the contrary, no supplement or amendment shall be made which changes the Redemption Price, the Final Expiration Date, the Purchase Price or the number of Depositary Receipts for which a Right is exercisable. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Stock. Section 40. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 41. Determinations and Actions by the Board of Directors, etc. For all purposes of this agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company (or, as set forth herein, certain specified members thereof) shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board (or, as set forth herein, certain specified members thereof) or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend the Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Board (or as set forth herein certain specified members thereof) in good faith shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights and all other parties and (y) not subject the Board to any liability to the holders of the Rights. Section 42. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certifi- cates (and, prior to the Distribution Date, registered holders of the Common Stock). Section 43. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 36 hereof shall be reinstated and shall not expire until the close of business on the tenth day following the date of such determination by the Board of Directors. Section 44. Governing Law. This Agreement, each Right and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Connecticut and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts made and to be performed entirely within such State. Section 45. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 46. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. [ Seal ] Attest: THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY By /s/ Roberta A. O'Brien By /s/ John J. Kelley Name: Roberta A. O'Brien Name: John J. Kelley Title: Assistant Secretary Title: Corporate Secretary [ Seal] Attest: THE FIRST NATIONAL BANK OF BOSTON, as Rights Agent By /s/ Kenyon Bissell By /s/ Darlene M. DioDato Name: Kenyon Bissell Name: Darlene M. DioDato Title: Assistant Vice President Title: Vice President EXHIBIT A FORM OF CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Pursuant to Section 33-340 of the Connecticut Stock Corporation Act THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY, a corporation organized and existing under and by virtue of the laws of Connecticut (hereinafter called the "Corporation"), pursuant to the provisions of Section 33-340 of the Connecticut Stock Corporation Act, does by Wilson Wilde, its President, and John J. Kelley, its Corporate Secretary, hereby certify that, pursuant to authority expressly vested in the Board of Directors of the Corporation by the provisions of its Charter, said Board of Directors at a meeting duly called and held on November 28, 1988, duly adopted resolutions providing for the issuance of a series of Preferred Stock, without par value, of the Corporation and setting forth the voting powers, designation, preferences and relative, participating, optional and other special rights of such series and the qualifications, limitations and restrictions of such rights, to the extent that the foregoing are not set forth in the Charter of the Corporation, which resolutions are as follows: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Charter, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" and the number of shares constituting such series shall be 250,000. Section 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last business day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date ), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $12.00 or (b) subject to the provision for adjustment hereinafter set forth, 200 times the aggregate per share amount of all cash dividends, and 200 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, without par value, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date,, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after November 28, 1988 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in Paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $12.00 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred stock unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 200 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (C) (i) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence' of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) Directors. (ii) During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of shareholders, and thereafter at annual meetings of shareholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of Directors shall be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any in the Board of Directors as may then exist up to two (2) Directors or, if such right is exercised at an annual meeting, to elect two (2) Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior Participating Preferred Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any shareholder or shareholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this paragraph (C)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any shareholder or shareholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the shareholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have exercised their right to elect two (2) Directors voting as a class, after the exercise of which right (x) the Directors so elected by the hold- ers of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period and (y) any vacancy in the Board of Directors may (except as provided in paragraph (C)(ii) of this Section 3.5)be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of stock which elected the Director whose office shall have become vacant. References in this paragraph (C) to Directors elected by the holders of a particular class of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period,(x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate and (z) the number of Directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (D) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; (iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating-Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received $200 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Par- ticipating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 200 (as appropriately adjusted as set forth in paragraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stocks if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger. etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 200 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. Optional Redemption. (A) The Corporation shall have the option to redeem the whole or any part of the Series A Junior Participating Preferred Stock at any time at a redemption price equal to, subject to the provision for adjustment hereinafter set forth, 200 times the "current per share market price" of the Common Stock on the date of the mailing of the notice of redemption, together with unpaid accumulated dividends to the date of such redemption. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares or (iv) issue any shares by reclassification of its shares of Common Stock, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock shall be otherwise entitled immediately prior to such event under the immediately preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that shall have been outstanding immediately prior to such event. The "current per share market price" on any date shall be deemed to be the average of the closing prices per share of such Common Stock for the 10 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date. The closing price for each day shall be the last sale price, regular way, or, in case no such sale shall take place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Common Stock shall not be listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the principal national securities exchange on which the Common Stock shall not be listed or admitted to trading or, if the Common Stock shall not be listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in use or, if on any such date the Common Stock shall not be quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Board of Directors of the Corporation. If on such date no such market maker shall be making a market in the Common Stock, the fair value of the Common Stock on such date as determined in good faith by the Board of Directors of the Corporation shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Stock shall be listed or admitted to trading shall be open for the transaction of business or, if the Common Stock shall not be listed or admitted to trading on any national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the State of New York shall not be authorized or obligated by law or executive order to close. (B) Notice of any such redemption shall be given by mailing to the holders of the Series A Junior Participating Preferred Stock a notice of such redemption, first class postage prepaid, not later than the thirtieth day and not earlier than the sixtieth-day before the date fixed for redemption, at their last address as the same shall appear upon the books of the Corpora- tion. Any notice which shall be mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the stockholder shall have received such notice, and failure duly to give such notice by mail, or any defect in such notice, to any holder of Series A Junior Participating Preferred Stock shall not affect the validity of the proceedings for the redemption of such Series A Junior Participating Pre- ferred Stock. (C) If less than all the outstanding shares of the Series A Junior Participating Preferred Stock are to be redeemed by the Corporation, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be determined by lot or pro rata or in such fair and equitable other manner as may be prescribed by resolution of the Board of Directors. (D) The notice of redemption to each holder of Series A Junior Participating Preferred Stock shall specify (a) the number of shares of Series A Junior Participating Preferred Stock of such holder to be redeemed, (b) the date fixed for redemption, (c) the redemption price and (d) the place of payment of the redemption price. (E) If any such notice of redemption shall have been duly given or if the corporation shall have given to the bank or trust company hereinafter referred to irrevocable written authorization promptly to give or complete such notice, and if on or before the redemption date specified therein the funds necessary for such redemption shall have been deposited by the Corporation. with the bank or trust company designated in such notice, doing business in the United States of America and having a capital, surplus and undivided profits aggregating at least $25,000,000 according to its last published statement of condition, in trust for the benefit of the holders of Series A Junior Participating Preferred Stock called for redemption, then, notwithstanding that any certificate for such shares so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit all such shares called for redemption shall no longer be deemed outstanding, all rights with respect to such shares shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith cease and terminate, except the right of the holders thereof to receive from such bank or trust company at any time after the time of such deposit the funds so deposited, without interest, the right to exercise, up to the close of business on the fifth day before the date fixed for redemption, all privileges of conversion or exchange if any. In case less than all the shares represented by any surrendered certificate shall be redeemed, a new certificate shall be issued representing the unredeemed shares Any interest accrued on such funds so deposited shall be paid to the Corporation from time to time. Any funds so deposited and unclaimed at the end of six years from such redemption date shall be repaid to the Corporation, after which the holders of shares of Series A Junior Participating Preferred Stock called for redemption shall look only to the Corporation for payment thereof; provided, however, that any funds so deposited which shall not be required for redemption because of the exercise of any privilege of conversion or exchange subsequent to the date of deposit shall be repaid to the Corporation forthwith. Section 9. Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. Amendment. The Charter of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least a majority of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. RESOLVED, FURTHER, that the proper officers of the Corporation be and they are hereby authorized and directed,jointly and severally, to prepare, execute and file a certificate setting forth a copy of the foregoing resolutions and to execute any and all other documents and take any and all other steps necessary or appropriate in order to comply with the laws of the State of Connecticut and effectuate the purposes of said resolutions. IN WITNESS WHEREOF, HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY has caused this Certificate to be signed in its name by Wilson Wilde, its President, and John J. Kelley, its Corporate Secretary, and its corporate seal to be hereunto affixed, as of this 28th day of November, 1988. THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY [CORPORATE SEAL] /s/ Wilson Wilde Name: Wilson Wilde Title: President Attest: /s/ John J. Kelley Name: John J. Kelley Title: Corporate Secretary STATE OF CONNECTICUT) ) ss,: COUNTY OF HARTFORD ) On this 28th day of November, 1988, before me, , a Notary Public in and for said County and State, residing therein, duly commissioned and sworn, personally appeared Wilson Wilde and John J. Kelley known to me or proved to me on the basis of satisfactory evidence to be the President and the Assistant Secretary, respectively, of THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY, a Connecticut corporation, the Corporation that executed the foregoing Certificate of Designation and Preferences, and upon oath did severally depose and say, each for himself and not for the other, that he is the officer of said Corporation as above designated; that he is acquainted with the seal of said Corporation and that the seal affixed to said instrument is the corporate seal of said Corporation; that the signatures to said instrument were made by said officers of said Corporation as indicated after said signatures; and that the said Corporation executed the said instrument freely and voluntarily and for the uses and purposes therein mentioned. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed my official seal at my office in the County of Hartford, State of Connecticut, on the day and year in this certificate first above written. Notary Public in and for the County of Hartford State of Connecticut (SEAL) My Commission Expires: EXHIBIT B [FORM OF FACE OF DEPOSITARY RECEIPT] DEPOSITARY RECEIPT FOR SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Certificate No ........... Depositary Preferred Shares (Each such share being exchangeable for one two-hundredth of a share of Series A Junior Participating Preferred Stock) This certifies that or registered assigns, is the registered owner of Depositary Preferred Shares, each of which is exchangeable for one two-hundredth of a share of Series A Junior Participating Preferred Stock (the "Preferred Stock") of The Hartford Steam Boiler Inspection and Insurance Company, a Connecticut corporation (the "Company"), upon presentation and surrender of this Depositary Receipt with the Form of Election to Exercise duly executed. Certificates representing the shares of Preferred Stock have been deposited by the Company at the office of The First National Bank of Boston (the "Rights Agent") designated for such purpose. The Depositary Receipts, of which this Depositary Receipt is one ("Depositary Receipts"), are issued upon the terms and conditions set forth in the Rights Agreement, dated as of November 28, 1988 (the "Rights Agreement"), by and between the Company and the Rights Agent. This Depositary Receipt is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Depositary Receipts. Copies of the Rights Agreement are on file at the office of the Company and are also available upon written request to the Company. This Depositary Receipt shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of 19 ATTEST: Secretary Countersigned: THE FIRST NATIONAL BANK OF BOSTON, as Rights Agent By Authorized Signature By Title: [FORM OF REVERSE OF DEPOSITARY RECEIPT] The following summary of certain provisions of the Rights Agreement is subject to the detailed provisions thereof, to which reference is hereby made. 1. Surrender of Depositary Receipts and Withdrawal of Stock. Upon surrender of this Depositary Receipt to the Rights Agent at its office designated for such purpose, and subject to the provisions of the Rights Agreement, the holder hereof is entitled to delivery to him, or upon his order, of the Preferred Stock and any money and other property at the time represented thereby; provided, however, that in the event fractional shares of Preferred Stock would be created, the Rights Agent shall deliver the maximum number of whole shares of Preferred Stock, if any, and a new Depositary Receipt evidencing the Preferred Stock which shall be exchangeable for the Preferred Stock not so withdrawn. Upon the happening of any event referred to in paragraph 10 below and the surrender of this Depositary Receipt to the Rights Agent, the holder hereof is entitled to delivery to him, or upon his order, of the new securities into which the Preferred Stock has been changed or which have been received by the Rights Agent in exchange for the Preferred Stock. 2. Transfers, Split-ups, Combinations. This Depositary Receipt is transferable on the books of the Rights Agent upon surrender of this Depositary Receipt to the Rights Agent, properly endorsed or accompanied by a properly executed instrument of transfer, and upon such transfer the Rights Agent shall sign and deliver a Depositary Receipt to or upon the order of the person entitled thereto, as provided in the Rights Agreement. This Depositary Receipt may be split into other Depositary Receipts or combined with other Depositary Receipts into one Depositary Receipt, representing the same aggregate number of shares of Depositary Preferred Stock as the Depositary Receipt or Depositary Receipts surrendered. 3. Suspension of Delivery, Transfer, etc. The delivery of this Depositary Receipt in exchange for Preferred Stock or the transfer, surrender or exchange of this Depositary Receipt, may be suspended during any period when the register of stockholders of the Company is closed or if any such action is deemed necessary or advisable by the Rights Agent or the Company at any time or from time to time because of any requirement of law or of any government or governmental body or commission or stock exchange, or under any provision of the Rights Agreement. 4. Payment of Taxes or Other Governmental Charges. If any tax or other governmental charge shall become payable by or on behalf of the Rights Agent with respect to this Depositary Receipt, such tax (including transfer taxes, if any) or governmental charge shall be payable by the holder hereof. Transfer of this Depositary Receipt, or any delivery of Preferred Stock exchangeable for this Depositary Receipt, may be refused until such payment is made, and any dividends or other distributions may be withheld, or any part or all of the Preferred Stock exchangeable for this Depositary Receipt and not theretofore sold may be sold for the account of the holder hereof, and such dividends or other distributions or the proceeds of any such sale may be applied in any payment of such tax or other governmental charge holder of this Depositary Receipt remaining liable for any deficiency. 5. Amendment. The form of the Depositary Receipt and any provisions of the Rights Agreement may be amended as provided in the Rights Agreement. 6. Title to Receipts. It is a condition of this Depositary Receipt, and every successive holder hereof by accepting or holding the same consents and agrees, that this Depositary Receipt (and the Depositary Preferred Shares evidenced hereby), when properly endorsed or accompanied by a properly executed instrument of transfer, is transferable by delivery with the same effect as in the case of a negotiable instrument; provided, however, that until this Depositary Receipt shall be transferred on the books of the Rights Agent the Rights Agent may, notwithstanding any notice to the contrary, treat the record holder hereof at such time as the absolute owner hereof for the purpose of determining the person entitled to distribution of dividends or other distributions or to any notice provided for the Rights Agreement, and for all other purposes. 7. Dividends and Distributions. Whenever the Rights Agent receives any cash dividend or other cash distribution on the Preferred Stock, the Rights Agent will, subject to the provisions of the Rights Agreement, make such distribution to the Depositary Receipt holders as nearly as practicable in proportion to the number of shares of Depositary Preferred Stock held by them; provided, however, that the amount distributed will be reduced by any amounts required to be withheld by the Company or the Rights Agent on account of taxes. Other distributions received on the Preferred Stock may be distributed to holders of Depositary Receipts as provided in the Rights Agreement. 8. Fixing of Record Date. Whenever any cash dividend or other cash distribution shall become payable or any distribution other than cash shall be made, or whenever rights, preferences or privileges shall be offered, with respect to the Preferred Stock, or whenever the Rights Agent shall receive notice of any meeting at which holders of Preferred Stock are entitled to vote or of which holders of Preferred Stock are entitled to notice, the Rights Agent shall fix a record date, which shall be the record date fixed by the Company with respect to the Preferred Stock, and, in accordance with the Rights Agreement, shall send notice of such record date to the record holders of Depositary Receipts. 9. Voting Rights. Upon receipt of notice of any meeting at which the holders of Preferred Stock are entitled to vote, the Rights Agent shall include in the notice to the record holders of Depositary Receipts referred to in the immediately preceding paragraph: (a) such information as is contained in the notice of meeting received by the Rights Agent; (b) a statement that the holders of Depositary Receipts at the close of business on the record date specified therein will be entitled, subject to any applicable provisions of law and of the Company's Charter, to instruct the Rights Agent as to the exercise of the voting rights pertaining to the amount of Preferred Stock represented by their respective shares of Depositary Preferred Stock; and (c) a brief statement as to the manner in which such instructions may be given. Upon the written request of a holder of a Depositary Receipt on such record date, the Rights Agent shall endeavor insofar as practicable to vote or cause to be voted the amount of Preferred Stock exchangeable for such Depositary Receipt in accordance with the instructions set forth in such request. In the absence of specific instructions from the holder of a Depositary Receipt, the Rights Agent will abstain from voting to the extent of the Preferred Stock underlying such Depositary Receipt. 10. Changes Affecting Deposited Securities. Upon any change in par or stated value, split-up, consolidation or any other reclassification of the Preferred Stock or upon any recapitalization, reorganization, merger, consolidation or sale of assets affecting the Company or to which it is a party, the Rights Agent shall, with the approval of the Company and in such manner as the Rights Agent may deem equitable, treat any securities into which the Preferred Stock shall be changed or which shall be received by the Rights Agent in exchange for or in conversion of or in respect of the Preferred Stock as new deposited securities under the Rights Agreement, and Depositary Receipts then outstanding shall thenceforth be exchangeable for the new securities into which the Preferred Stock shall be changed or which are so received in exchange or conversion. In any such case, the Rights Agent may in its discretion, with the approval of the Company, execute and deliver additional Depositary Receipts or may call for the surrender of outstanding Depositary Receipts to be exchanged for new Depositary Receipts specifically describing such new deposited securities. FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Depositary Receipt.) FOR VALUE RECEIVED hereby sells, assigns and transfers unto (Please print name and address of transferee) this Depositary Receipt, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint Attorney, to transfer the within Depositary Receipt on the books of the withinnamed Company, with full power of substitution. Date: , 19 Signature Signature Guaranteed: NOTICE The signature to the foregoing Assignment must correspond to the name as written upon the face of this Depositary Receipt in every particular, without alteration or enlargement or any change whatsoever. FORM OF ELECTION TO EXERCISE (To be executed if holder desires to exercise Depositary Preferred Shares represented by the Depositary Receipt.) To: THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY The undersigned hereby irrevocably elects to exercise Depositary Receipts represented by this Depositary Receipt Certificate to receive the shares of Depositary Preferred Stock issuable upon the exercise of the Depositary Receipt (or such other securities of the Company or of any other person which may be issuable upon the exercise of Depositary Receipt) and requests that certificate for such shares be issued in the name of: Please insert social security or other identifying number (Please print name and address If such number of Depositary Receipts shall not be all the Depositary Receipts evidenced by this Depositary Receipt Certificate, a new Depositary Receipt Certificate for the balance of such Depositary Receipts shall be registered in the name of and delivered to: Please insert social security or other identifying number (Please print name and address) Dated: , 19 signature Signature Guaranteed: NOTICE The signature to the foregoing Election to Exercise must correspond to the name as written upon the face of this Depositary Receipt Certificate in every particular, without alteration or enlargement or any change whatsoever. Exhibit C [Form of Rights Certificate] Certificate No. R- Rights NOT EXERCISABLE AFTER NOVEMBER 28, 1998 OR EARLIER IF REDEEMED BY THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN ADVERSE PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN ADVERSE PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON OR AN ADVERSE PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH RIGHTS AGREEMENT.* *The portion of the legend in brackets shall be inserted only if applicable and shall replace the preceding sentence. Rights Certificate THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY This certifies that or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of November 28, 1988 (the "Rights Agreement") between The Hartford Steam Boiler Inspection and Insurance Company, a Connecticut corporation (the "Company"), and The First National Bank of Boston, a national banking association (the "Rights Agent"), to purchase from the Company at any time prior to 5:00 P.M. (Boston time) on November 28, 1998 at the office or offices of the Rights Agent designated for such purpose, or its successors as Rights Agent, one Depositary Receipt (a "Depositary Receipt") which is exchangeable into one two-hundredth of a fully paid, nonassessable share of Series A Junior Participating Preferred Stock, without par value (the "Preferred Stock"), of the Company at a purchase price of $110.00 per Depositary Receipt (the "Purchase Price"), upon presentation and surrender of this Rights Certificate with the Form of Election to Purchase and related Certificate duly executed. The number of Rights evidenced by this Rights Certificate (and the number of Depositary Receipts which may be purchased upon exercise thereof) set forth above, and the Purchase Price per Depositary Receipt set forth above, are the number and Purchase Price as of November 28, 1988. All terms used and not defined herein shall have the meaning set forth in the Rights Agreement. Upon the occurrence of a Section 24(a)(ii) Event if the Rights evidenced by this Rights Certificate are beneficially owned by (i) an Acquiring Person, an Adverse Person or an Affiliate or Associate of any such Person (as such terms are defined in the Rights Agreement), (ii) a transferee of any such Acquiring Person, Adverse Person, Associate or Affiliate or (iii) under certain circumstances specified in the Rights Agreement, a transferee of a person who, after such transfer, became an Acquiring Person, an Adverse Person or an Affiliate or Associate of an Acquiring Person or an Adverse Person, such Rights shall become null and void and no holder hereof shall have any right with respect to such Rights from and after the occurrence of such Section 24(a)(ii) Event. As provided in the Rights Agreement, the Purchase Price and the number and kind of shares of Preferred Stock or other securities which may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification and adjustment upon the happening of certain events, including Triggering Events (as hereinafter defined). This Rights Certificate is subject to all of the terms provisions and conditions of the Rights Agreement, which terms provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates, which limitations of rights include the temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the above-mentioned office of the Rights Agent and are also available upon written request to the Company. This Rights Certificate, with or without other Rights Certificates, upon surrender at the principal office or offices of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Depositary Receipts as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have entitled such holder to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may be redeemed by the Company at its option at a redemption price of $.01 per Right at any time prior to the earlier of the close of business on (i) the tenth Business Day following the Stock Acquisition Date (as such time period may be extended pursuant to the Rights Agreement), and (ii) the Final Expiration Date. After the expiration of the redemption period, the Company's right of redemption may be reinstated if an Acquiring Person reduces his beneficial ownership to 10% or less of the outstanding shares of Common Stock in a transaction or series of transactions not involving the Company. No holder of this Rights Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of Depositary Receipts or shares of Preferred Stock or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or, to receive notice of meetings or other actions affecting shareholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement. This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of , 19 ATTEST: Secretary THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY By Title: Countersigned: THE FIRST NATIONAL BANK OF BOSTON, as Rights Agent By Authorized Signature [Form of Reverse Side of Rights Certificate] FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights Certificate.) FOR VALUE RECEIVED hereby sells, assigns and transfers unto (Please print name and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint Attorney, to transfer the within Rights Certificate on the books of the within-named Company, with full power of substitution. Dated: 19- Signature Signature Guaranteed: Certificate The undersigned hereby certifies by checking the appropriate boxes that: (1) this Rights Certificate [ ] is [ ] is not being sold, assigned and transferred by or on behalf of a Person who is or was an Acquiring Person, an Adverse Person or an Affiliate or Associate of any such Person (as such terms are defined pursuant to the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person, an Adverse Person or an Affiliate or Associate of any such Person. Dated: 19- Signature Signature Guaranteed: NOTICE The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise Rights represented by the Rights Certificate) To: HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY: The undersigned hereby irrevocably elects to exercise Rights represented by this Rights Certificate to purchase the Depositary Receipts issuable upon the exercise of the Rights (or such other securities of the Company or of any other person which may be issuable upon the exercise of the Rights) and requests that certificates for such shares be issued in the name of and delivered to: Please insert social security or other identifying number (Please print name and address) If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number (Please print name and address) Dated: 19- Signature Signature Guaranteed: Certificate The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person, an Adverse Person or an Affiliate or Associate of any such Person (as such terms are defined pursuant to the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or became an Acquiring Person, an Adverse Person or an Affiliate or Associate of any such Person. Dated: 19- Signature Signature Guaranteed: NOTICE The signature to the foregoing Election to Purchase and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. Exhibit D SUMMARY OF SHAREHOLDER RIGHTS PLAN On November 28, 1988, the Board of Directors of The Hartford Steam Boiler Inspection and Insurance Company (the "Company") declared a dividend distribution of one Right for each outstanding share of Company Common Stock to shareholders of record at the close of business on December 8, 1988. Each Right entitles the registered holder to purchase from the Company a Depositary Receipt exercisable for one two-hundredth of a share (a "Unit") of Series A Junior Participating Preferred Stock, without par value (the "Preferred Stock"), at a Purchase Price of $110.00 per Depositary Receipt subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and The First National Bank of Boston, as Rights Agent. Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights Certificates will be distributed. The Rights will separate from the Common Stock and a Distribution Date will occur upon the earliest of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date"), (ii) 10 business days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20% or more of such outstanding shares of Common Stock or (iii) 10 business days after the Board of Directors of the Company determines any person, alone or together with its affiliates and associates has become the Beneficial Owner of an amount of Common Stock which the Board of Directors determines to be substantial (which amount shall in no event be less than 10% of the shares of Common Stock outstanding) and determines after reasonable inquiry and investigation, including consultation with such persons as such directors shall deem appropriate, that (a) such beneficial ownership by such person is intended to cause the Company to repurchase the Common Stock beneficially owned by such person or to cause pressure on the Company to take action or enter into a transaction or series of transactions intended to provide such person with short-term financial gain under circumstances where the Board of Directors determines that the best long-term interests of the Company and its stockholders would not be served by taking such action or entering into such transactions or series of transactions at that time or (b) such beneficial ownership is causing or reasonably likely to cause a material adverse impact (including, but not limited to, by jeopardizing the Company's licenses or authorizations from, or relationships with, state insurance regulators, or by impairing relationships with customers or the Company's ability to maintain its competitive position) on the business or prospects of the Company to the detriment of the Company's shareholders (any such person being referred to herein and in the Rights Agreement as an "Adverse Person"). Until the Distribution Date, (i) the Rights will be evidenced by the Common Stock certificates and will be transferred with and only with such Common Stock certificates, (ii) new Common Stock certificates issued after December 8, 1988 will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. The Rights are not exercisable until the Distribution Date and will expire at the close of business on November 28, 1998, unless earlier redeemed by the Company as described below. As soon as practicable after the Distribution Date, Rights Certificates will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and, thereafter, the separate Rights Certificates alone will represent the Rights. Except as otherwise determined by the Board of Directors, only shares of Common Stock issued prior to the Distribution Date will be issued with Rights. In the event that the Board of Directors determines that a person is an Adverse Person or, at any time following the Distribution Date, a Person becomes the beneficial owner of more than 20% of the then outstanding shares of Common Stock (except pursuant to an offer for all outstanding shares of Common Stock which the independent directors determine to be fair to and otherwise in the best interests of the Company and its shareholders), each holder of a Right will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the Right. Notwithstanding any of the foregoing, following the occurrence of any of the events set forth in this paragraph, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person or Adverse Person will be null and void. However, Rights are not exercisable following the occurrence of either of the events set forth above until such time as the Rights are no longer redeemable by the Company as set forth below. For example, at an exercise price of $110.00 per Right, each Right not owned by an Acquiring Person or an Adverse Person by certain related parties) following an event set forth in the preceding paragraph would entitle its holder to purchase $220.00 worth of Common Stock (or other consideration, as noted above) for $110.00. Assuming that the Common Stock had a per share value of [current market] at such time, the holder of each valid Right would be entitled to purchase shares of Common Stock for $110.00. In the event that, at any time following the Stock Acquisition Date,(i) the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation (other than a merger which follows an offer described in the second preceding paragraph or a merger which follows an offer described in the second preceding paragraph), (ii) the Company engages in a merger or other business combination with another person in which the Company is the surviving corporation, but in which its Common Stock is changed or exchanged, or (iii) 50% or more of the Company's assets, cash flow or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. The events set forth in this paragraph and in the second preceding paragraph are referred to as the "Triggering Events". The Purchase Price payable, and the number of Depositary Receipts or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) if holders of the Preferred Stock are granted certain rights or warrants to subscribe for Preferred Stock or convertible securities at less than the current market price of the Preferred Stock or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above). With certain exceptions no adjustment in the Purchase Price will be required until cumulative adjustments amount to at least 1% of the Purchase Price. No fractional Units will be issued and, in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Stock on the last trading date prior to the date of exercise. In general, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (payable in cash, Common Stock or other consideration deemed appropriate by the Board of Directors), at any time until ten days following the Stock Acquisition Date. The Company may not redeem the Rights if the Board of Directors has previously declared a person to be an Adverse Person. After the redemption period has expired, the Company's right of redemption may be reinstated if an Acquiring Person reduces his beneficial ownership to 10% or less of the outstanding shares of Common Stock in a transaction or series of transactions not involving the Company. Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $.01 redemption price. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to shareholders or to the Company, shareholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for Common Stock (or other consideration) of the Company or for common stock of the acquiring company as set forth above. Other than those provisions relating to the principal economic terms of the Rights, any of the provisions of the Rights Agreement may be amended by the Board of Directors of the Company prior to the Distribution Date. After the Distribution Date, the provisions of the Rights Agreement may be amended by the Board in order to cure any ambiguity, to make changes which do not adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person), or to shorten or lengthen any time period under the Rights Agreement; provided, however, that no amendment to adjust the time period governing redemption shall be made at such time as the Rights are not redeemable. A copy of the Rights Agreement is being filed with the Securities and Exchange Commission as an Exhibit to a Current Report on Form 8-K. A copy of the Rights Agreement is available free of charge from the Rights Agent. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is incorporated herein by reference. EX-10 4 Exhibit (10)(iii)(c) As amended and restated 2/26/96 THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY SHORT-TERM INCENTIVE PLAN 1. Purpose of Plan The purposes of this Plan are: (a) to provide an additional incentive for officers of the Company to make significant contributions to the performance and growth of the Company, and (b) to attract and retain in the employ of the Company employees of exceptional ability. 2. Administration The Plan shall be administered by the Human Resource Committee (the "Committee") of the Board of Directors. The Committee is authorized to interpret the Plan and may from time to time adopt such rules and regulations for carrying out the Plan as it may deem appropriate. Decisions of the Committee will be final, conclusive and binding upon all parties concerned, unless otherwise determined by uninterested members of the Board of Directors. 3. Eligibility Those employees who are Officers of the Company (other than any individual expressly excluded by the Committee) on or prior to December 31 of each Plan Year are eligible to participate in the Plan and receive Incentive Awards pursuant to Section 5 except as provided in Section 7. 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. (Plan years will be based on calendar years.) 4. Basis of Incentive Awards (a) The basis for determining awards will be the actual percentage of Annual Budgeted Net Income Per Share (cited in the Business Plan of the Company) achieved in a given year. ("Net Income" is defined as after-tax income per share, consolidating all subsidiaries, inclusive of realized capital gains and losses.) (b) The Committee reserves the right to modify the basis of the incentive awards for each Plan Year as it deems equitable in recognition of extraordinary or non-recurring events experienced by the Company during the year or in the event of changes in applicable accounting rules, principles or methods employed by the Company. 5. Incentive Awards (a) At the end of each Plan Year the Committee will determine the incentive award percentages for Senior Officers (defined as President, Executive Vice President, Senior Vice President, Corporate Secretary and Treasurer) and Non-Senior Officers for the Incentive Award Pool from the range of awards provided in subsection (b) below. The award percentages selected from within the applicable range for each group will be based upon the performance of the Company for the Plan Year as compared to the performance of the insurance industry and/or other appropriate industries with reference to such performance measures as the Committee deems appropriate. The applicable incentive award percentage for Senior Officers shall be multiplied by the sum of all of the Senior Officers' (with the exception of the President's) Base Earnings and the applicable award percentage for Non-Senior Officers shall be multiplied by the sum of all other eligible participants' Base Earnings and the aggregate of these two amounts will be the Incentive Award Pool. ("Base Earnings" shall mean the base annual salary of the participant in effect on December 31st of the Plan Year for which the award is being determined, and shall not include amounts payable under Company benefit, incentive or bonus plans or overseas premiums.) The Incentive Award Pool will be the maximum amount of awards available under the plan for participants, other than the President, for the Plan Year. Awards shall be payable in cash in accordance with Section 6 hereof. A Senior Officer's, other than the President's, individual award shall be a percentage between 0 and 100% of his or her Base Earnings. An Officer's (other than a Senior Officer's) or any other participant's individual award shall be a percentage between 0 and 60% of his or her Base Earnings. The amount of any award hereunder, other than the President's award, shall be determined by, and shall be entirely within the discretion of, the President and shall be based on the participant's contributions to the Company during the Plan Year. Under no circumstances shall a participant who receives a performance rating that is lower than "Meets Requirements" on his or her last performance appraisal be considered for an award hereunder. The President's award shall be determined by the Committee and shall not exceed 100% of his Base Earnings. (b) For each Plan Year the incentive award percentage to be used for determining the Incentive Award Pool shall be based on the following table: % of Budgeted Net Income per Share Achieved* * (rounded up to the next whole percentage point) 121+ 110-120 100-109% 90-99% 75-89% ------------------------------------------------ Senior Officer Award % 70-100% 60-80% 40-60% 20-40% 0-20% Non-Senior Officer Award % 40-60% 40-60% 30-50% 20-40% 0-20% (c) Any Participant newly elected by the Board of Directors during the Plan Year shall receive an Incentive Award calculated in accordance with Paragraph (a) but such award will be reduced by any bonuses paid to such officer during the Plan Year except for bonuses paid during the Plan Year that relate to services performed during a prior Plan Year. 6. Method and Time of Awards (a) Distributions of incentive awards, net of amounts withheld for income tax or other purposes, will be made in January of the year immediately following the close of the current Plan Year. The withholding and deduction requirements will be determined in accordance with the then applicable practices of the Company as well as reasonable instructions by the participants. (b) Any participant may, with permission of the Committee, elect to defer all or a specified part of each incentive award. The election of the participant must be in writing and submitted to the Secretary of the Company at least one month prior to the beginning of the Plan Year. Payment of the award will be deferred to such future time, not otherwise inconsistent with the Plan, as the participant will have specified in such notice. The election of the participant will be irrevocable. Interest shall be computed on June 30th and December 31st of each year on the balance in each participant's deferred cash account at a rate equal to the rate of interest which is in effect on such dates for 13 week U.S. Treasury Bills. (c) 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 and the President as provided under Section 5 hereof. No award and no rights of ownership thereunder will be transferable otherwise than pursuant to Section 8. 7. Rights on Termination of Employment (a)If a participant in this Plan dies, becomes disabled or retires under a retirement plan of the Company or otherwise terminates his or her employment with the written consent of the Company prior to the end of any Plan Year in respect of which he or she may be eligible for an award, the amount of the award, if any, payable to the participant or his or her beneficiary, shall be at the sole discretion of the President (or the Committee with respect to the President). (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. (c) A participant whose employment terminates within two years following the month within which a "Change in Control" (as defined herein) occurs and prior to the expiration of any Plan Year (i) by dismissal (other than dismissal on account of defalcation) or (ii) by voluntary termination of his or her employment with or without consent of the Company, shall be entitled to receive an award prorated according to the number of full months of employment completed by the participant in such Plan Year and based upon the incentive award percentage selected by the Committee from the table in Section 5(b) times the Base Earnings of the Participant in effect prior to his or her termination. (d) In no event shall an award or a portion thereof, the payment of which has been deferred pursuant to Section 6(b) be subject to forfeiture. 8. Death of a Participant A participant may file with the Secretary of the Company a designation of a beneficiary or beneficiaries on a form to be provided by him or her, which designation may be changed or revoked by the participant's sole action, provided that the change or revocation is filed with the Secretary on a form provided by him or her. 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. 9. Effective Date This Plan will become effective as of January 1, 1982. 10. Change in Control 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 cancelling the award of a participant that has been declared but not received unless consented to in writing by such affected participant. A "Change in Control" as referred to under this Plan shall be deemed to have occurred 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 percent (25%) or more of the combined voting power 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 stockholders 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 the voting securities of the Company (or such surviving entity) outstanding immediately after such merger or consolidation or (ii) a merger or consolidation affected 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's assets. 11. Unfunded Obligations; Trust Agreement 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. 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. 12. 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 beneficiary, spouse, children, other dependents or any of such individuals, in such proportion as the Committee may deem proper. EX-10 5 Exhibit (10)(iii)(h) October 2, 1995 Mr. Saul L. Basch 25 Mcintosh Drive Wilbraham, MA 01095 Dear Mr. Basch: The purpose of this letter agreement is to set out the understanding that you and The Hartford Steam Boiler Inspection and Insurance Company (the "Company") have reached with respect to certain obligations you and the Company may have in the event of your cessation of employment. The agreement to provide the payments described below has been made in order to induce you to enter employment with the Company and in consideration of your entering and remaining in such employment. However, other than satisfaction of the obligations described in this agreement, nothing stated herein shall affect the Company's or your right to terminate your employment at any time. 1. Term of Agreement This Agreement will commence on the date of this letter and will continue for a period of three years and will automatically be extended for successive additional three- year terms on each three year anniversary date, unless 180 days prior to such date, the Company has given you notice of its election not to renew this Agreement. The non-renewal of this Agreement will not in any way affect payments due hereunder which remain outstanding. Notwithstanding the foregoing, this Agreement shall not terminate unless the Company has furnished you with an irrevocable written agreement, on terms reasonably acceptable to you, assuring that if your employment with the Company is terminated at any time prior to your 65th birthday other than on account of i) your death, Disability or Retirement; ii) dismissal by the Company for Cause; or iii) voluntary termination by you other than for Good Reason, you will be entitled to a severance benefit identical in amount and payment terms to that described in Section 3 of this Agreement. If a "Change in Control" (as defined under Section 2(A) of this Agreement) occurs during the original or any renewal term of this Agreement, this Agreement shall continue in effect for a period of forty-eight (48) months beyond the month in which such Change in Control occurred. If you retire, become disabled or die during the term of this Agreement, this Agreement will automatically be terminated as of the date of your Retirement, Disability or death, provided that a Change in Control has not occurred, without any act on the Company's part. 2. Definitions (A) "Cause" shall mean: 1) the willful and continued failure by you to perform your properly assigned duties after a notice of non- performance is delivered to you by the President of the Company, which specifically identifies the manner in which you have failed to perform your duties, and your failure within 10 days after receiving such notice to cure, or to diligently commence reasonable measures to cure if cure within 10 days is not practical, the non- performance specified in such notice. 2) the willful engaging by you in misconduct which is materially injurious to the Company, monetarily or otherwise; or 3) the conviction or plea of guilty or nolo contendere to conduct constituting a felony. (B) A "Change in Control" as referred to under this Agreement shall be deemed to have occurred if: (1) 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 percent (25%) or more of the combined voting power of the Company's then outstanding securities; (2) 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 (3) the stockholders of the Company approve a merger or consolidation 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 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 the voting securities of the Company (or such surviving entity) 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" (as hereinabove defined) becomes the "beneficial owner" (as hereinabove defined) of more than 25% of the combined voting power of the Company's then outstanding securities; or (4) the shareholders of the Company approve (a) a plan of complete liquidation of the Company or (b) the sale or other disposition of all or substantially all the Company assets. (C) "Disability" as referred to in this Agreement shall mean a determination by the Company's Disability Committee that you are totally disabled for the purposes of Long-Term Disability, in accordance with the Employees' Disability Plan, effective 1/1/76, and as amended from time to time thereafter or any successor plan adopted in the future. (D) "Good Reason" shall mean, without your express written consent: 1) a significant change in your position, duties, authority or reporting responsibilities as were in effect prior to such change; 2) the Company's requiring you to maintain your principal office or conduct your principal duties in a location other than the current headquarters of the Company or any future headquarters of the Company provided that it is located within a thirty mile radius of its current location; or 3) a reduction by the Company in your base salary or the discontinuance (without replacing with substantially equivalent plans) of the Company's Long-Term Incentive Plan, Short-Term Incentive Plan or 1995 Stock Option Plan or any modification of such plans which would have the effect of materially reducing your benefits thereunder. (E) "Retirement" as referred to in this Agreement shall mean the date, either the Early Retirement Date or Normal Retirement Date, upon which you begin to receive benefits in accordance with the Employees' Retirement Plan effective 12/15/59, as now and hereafter from time to time amended; or any successor plan adopted in the future. 3. Severance Benefit upon Termination of Employment Other Than Following a Change in Control In the event of termination of your employment during the term of this agreement (and prior to any Change in Control) other than on account of i) your death, Disability, or Retirement; ii) dismissal by the Company for Cause; or iii) voluntary termination by you other than for Good Reason, then the Company shall pay to you a severance benefit of two times your annual salary in effect prior to such termination, payable in 52 bi-weekly payments. Any amounts payable under this Section 3 will be offset by any amounts payable under The Hartford Steam Boiler Inspection and Insurance Company Severance Plan. 4. Termination Following Change in Control (A) In consideration of this Agreement and subject to its terms and conditions, you agree to remain in the employ of the Company for a period of six months subsequent to a Change in Control of the Company. (B) If a Change in Control of the Company has occurred, you will be entitled to the severance payment described in Section 5 at the time specified therein if any of the following events described below occur: (1) if within six months of the Change in Control you are dismissed from the Company for any reason other than Retirement, Disability or for Cause; or (2) if after six months you voluntarily leave or are dismissed from the Company for any reason other than Retirement, Disability, or for Cause. 5. Severance Payment for Termination Following a Change in Control (A) In lieu of any further salary payments to you for periods subsequent to the date of termination of your employment, the Company shall pay as severance pay to you a lump sum severance payment (the "Severance Payment") equal to 2.99 times your "base amount", as defined in section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Such base amount shall be determined in accordance with temporary or final regulations, if any, promulgated under section 280G of the Code and based upon the advice of the tax counsel referred to in paragraph (B) below. (B) The Severance Payment shall be reduced by the amount of any other payment or the value of any benefit received or to be received by you in connection with a Change in Control of the Company or your termination of employment (whether pursuant to the terms of this Agreement or any other plan, agreement or arrangement with the Company, any person whose actions result in a Change of Control, or any person affiliated with the Company or such person) unless: (1) you shall have effectively waived your receipt or enjoyment of such payment or benefit prior to the date of payment of the Severance Payment; (2) in the opinion of tax counsel selected by the Company's independent auditors and acceptable to you, such other payment or benefit does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code; or (3) in the opinion of such tax counsel, the Severance Payment (in its full amount or as partially reduced under this paragraph (B), as the case may be) plus all other payments or benefits which constitute "parachute payments" within the meaning of section 280G(b)(2) of the Code are reasonable compensation for services actually rendered, within the meaning of section 280G(b)(2) of the Code or are otherwise not subject to disallowance as a deduction by reason of Section 280G of the Code. The value of any non-cash benefit or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of section 280G(d)(3) and (4) of the Code. (C) Except to the extent that such payments would result (or, if paid after the Severance Payment, would have resulted) under paragraph (B) above, in a reduction in the Severance Payment, the Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination) or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided in paragraph (D), below, or within five (5) days after your request for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. (D) The payments provided for in paragraphs (A) and (C), above, shall (except as otherwise provided therein) be made not later than the fifth day following the date of termination of your employment, provided, however, that if the amounts of such payments, and the limitations on such payments set forth in paragraph (B) above, cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the date of your termination of employment. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (E) In addition to all other amounts payable to you under this Section 5, you shall be entitled to receive all benefits payable to you under The Hartford Steam Boiler Inspection and Insurance Company Employees' Retirement Plan, Thrift Incentive Plan, Employee Stock Ownership Plan and any other plan or agreement relating to retirement benefits the payments under which are exempt from treatment as "parachute payments" pursuant to Section 280G(b)(6) of the Code. 6. No Duty to Mitigate You shall not be required to mitigate the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for under this Agreement be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Company, or otherwise except as specifically provided under Sections 3, 4 and 5 hereof. 7. Arbitration Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Hartford, Connecticut in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 8. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Successors; Binding Agreement (A) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled to hereunder if any of the events described under Section 3 or Section 4 (B)(1) or (2) had occurred. As used in this Agreement "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (B) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or if there is no such designee, to your estate. 10. Notice For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Corporate Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11. Confidentiality During the term of this Agreement and thereafter, you agree that you will not, without the express written consent of the Company, make use of or divulge to any person, firm or corporation, any trade or business secret or other confidential information which may be disclosed to you by the Company or any of its subsidiaries or as a result of your employment with the Company excepting only such information which shall be made public without any fault on your part and such information as you are obligated to disclose pursuant to legal process. In addition, the foregoing provision shall not impair your ability to exercise your good faith judgment as to disclosures in connection with your duties hereunder. 12. Miscellaneous No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Connecticut. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 3, 4 and 5 shall survive the expiration of the term of this Agreement. 13. Unfunded Obligations; Trust Agreement The Company will pay from its general assets all payments 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. 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 your favor and your rights under this Agreement and under any such arrangement shall be those of a general unsecured creditor of the Company. 14. Assignment and Alienation Benefits under this Agreement 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 you become bankrupt or attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any benefits under this Agreement, such benefit shall, in the discretion of the Company, cease and terminate, in which event the Company may hold or apply the same or any part thereof for your benefit, your beneficiary, your spouse, children, other dependents or any of such individuals, in such manner and in such proportion as the Company may deem proper. If you understand and are in agreement with the aforementioned terms and conditions, please sign and date this Agreement in the spaces indicated and return one copy to the Company. Very truly yours, THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY BY /s/ Gordon W. Kreh Gordon W. Kreh, President Accepted this ____ day of ___________________, 1995 By /s/ Saul L. Basch EX-10 6 Exhibit (10)(iii)(o) EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement, effective as of the Closing under the Contribution Agreement among The Dow Chemical Company, The Hartford Steam Boiler Inspection and Insurance Company, Dow Environmental Inc., and Radian Corporation (the "Effective Date"), is by and between Radian International LLC (the "Company") and Donald M. Carlton (the "Executive"). WHEREAS, the parties desire to enter into this Agreement pertaining to the employment of the Executive by the Company; NOW THEREFORE, the Company and the Executive agree as follows: 1. Term of Employment 1.1 Term of Employment. "Term of Employment" for purposes of this Agreement is the period of time beginning on the Effective Date and ending on the third anniversary of the Effective Date (unless sooner terminated pursuant to this Agreement). 2. Employment 2.1 Offer and Acceptance of Employment. Subject to the terms and conditions of this Agreement, the Company agrees to employ Executive during the Term of Employment and Executive agrees to accept such employment and to provide services during the Term of Employment in accordance with this Agreement. 2.2 Position. At the commencement of the Term of Employment, Executive shall be employed as a senior executive. Executive's position, authority and responsibilities and the type of work Executive is asked to perform, however, shall be determined by the Company in its sole discretion subject to the direction of the Members Committee of the Company (the "Members Committee"); provided that, nothing in this paragraph shall in any way override Executive's right to terminate this Agreement for "Good Reason" as set forth in Paragraph 5.5. 2.3 Performance of Duties. Executive agrees to devote such attention and time to the business and affairs of the Company as is customary for the type of position held by Executive and, to the extent necessary to discharge the responsibilities and duties assigned to Executive under this Agreement, to use Executive's reasonable best efforts to perform such responsibilities faithfully and efficiently. 2.4 Sharing Duties. Nothing in this Agreement shall preclude the Company from designating another person or persons to share the responsibilities and the duties of the Executive and, except as specified by the Company, no such designation shall be considered a termination of the Executive's employment with the Company or a basis for Termination by Executive for Good Reason pursuant to Paragraph 5.5, provided Executive's continuing responsibilities and duties are consistent with senior executive status. 3. Base Compensation and Benefits 3.1 Base Salary. During the Term of Employment, Executive shall receive a base salary at a monthly rate of $30,850. The base salary shall be reviewed at least annually by the Members Committee. Base salary may be adjusted upwardly but shall not be reduced except to the extent that reductions of the same percentage are being made at the same time to the salaries of all other Company officers at or above the vice- president level, and such base salary shall be restored to its prior level when, and to the same extent as, the restoration that applies to the other officers. 3.2 Savings and Retirement Plans. During the Term of Employment, Executive shall be entitled to participate in all savings and retirement plans and programs applicable to other key executives of the Company. 3.3 Employee Welfare Benefit Plans. During the Term of Employment, Executive and/or Executive's family, as the case may be, shall be eligible for participation in, and shall receive all benefits under, welfare benefit plans provided by the Company to its employees. 3.4 Expenses. During the Term of Employment, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses for entertainment, travel, meals, lodging and similar business expenses which are authorized by the Company and actually incurred by the Executive in the performance of his employment by the Company in accordance with the policies and procedures of the Company. 3.5 Vacation. During the Term of Employment, Executive shall be entitled to paid vacation in accordance with the vacation policy of the Company. 4. Other Compensation and Benefits 4.1 Short-Term Incentive. Executive will be eligible to participate in a Company short-term incentive compensation program covering the one year period beginning on the Effective Date ("the 1996 Short-Term Plan"). The maximum amount to be awarded to Executive under the 1996 Short-term Plan is fifty percent of executive's initial annual base salary for 1996. The performance criteria used to determine the actual payout amount shall be determined by the Members Committee. The rules for the 1996 Short-term Plan, regarding Method and Time of Award, Rights on Termination of Employment, and Death of a Participant, shall be the same as the 1995 Radian Officers' Short-Term Incentive Compensation Plan, except that payment, if any, under the 1996 Short-Term Plan will be paid as soon as possible after the first anniversary of the Effective Date. 4.2 Long-Term Incentive. The Members Committee will adopt an incentive compensation plan for the period beginning on the Effective Date and continuing through 1998 ("the Long-term Plan"). Under the Long-term Plan, Executive will receive a minimum payment consisting of a share of a pool of $1,200,000, which will be established by the Company and distributed among Executive, [intentionally deleted], with Executive's share of such pool to be determined by the Members Committee in its sole discretion. Executive will also be eligible to receive an additional payment under the Long-term Plan, contingent upon Company performance. Within three months of the Effective Date, the Members Committee will establish financial/business goals under the Long-term Plan. If the Company achieves the goals set out in the Long-term Plan established by the Members Committee, Executive will receive, in addition to the minimum payment set forth above, a share of a pool of $2,400,000, which will be established by the Company and distributed among Executive, [intentionally deleted], with Executive's share of such pool to be determined by the Members Committee in it sole discretion. Performance results above or below the Long-term Plan goal(s) will increase or reduce the amount of this additional pool, according to the Long-term Plan formula. Payout to Executive under the Long-term Plan will be made in the first quarter of 1999. If Executive dies, becomes totally disabled (as defined in Paragraph 5.2), or retires with the written consent of the Company, on or before December 31, 1998, the payment to Executive or his beneficiary under the Long-term Plan shall be prorated according to the number of months of employment in the period beginning on the Effective Date and ending on December 31, 1998. If Executive's employment with the Company is terminated on or before December 31, 1998, for reasons other than Cause (as defined in Paragraph 5.4) or is terminated on or before December 31, 1998, by Executive for Good Reason (as defined in Paragraph 5.5) unless in either case Executive elects under either Paragraph 5.3 or 5.5, as the case may be, to compete without regard to the Provisions of Paragraph 8. 1, Executive shall be entitled to receive in the first quarter of 1999 a payment under the Long-term Plan as if Executive had remained employed with the Company through December 31, 1998. If Executive is terminated by the Company for Cause on or before December 31, 1998, Executive shall lose any right to receive any payment under the Long-term Plan. If one or more of the participants in the Long-term Plan terminates employment with the Company on or before December 31, 1998, for reasons making them ineligible for any payout under the Long-term Plan or eligible for only a prorated payment under the Long-term Plan, the Members Committee may reduce the size of either or both pools by an amount or amounts to be determined by the Members Committee in its sole discretion. 4.3 Radian Corporation Supplemental Executive Retirement Plan. During the Term of Employment of Executive by the Company, Company shall maintain the Radian Corporation Supplemental Executive Retirement Plan, effective January 1, 1991, as modified and in effect on January 1, 1995, or the substantial equivalent thereof, in effect for the benefit of Executive. 4.4 Salary Continuation Agreement. During the Term of Employment of Executive by the Company, Company shall maintain the Executive's January 1, 1986, and April 4, 1989, Salary Continuation Agreements with Radian, or the substantial equivalent thereof, in effect for the benefit of Executive. 4.5 Post-employment Medical Coverage. In the event of termination of employment of Executive during the Term of Employment for reasons other than death, disability, "Cause" (defined in Paragraph 5.4), or voluntary termination other than for "Good Reason" (defined in Paragraph 5.5), prior to the time Executive is eligible for Medicare benefits, then medical insurance coverage comparable to coverage provided to officers of the Company on the date of Executive's termination shall be provided by Company for Executive, Executive's spouse and dependents, the full cost of which shall be paid by Executive, until Executive is eligible for coverage under Medicare or another group plan. 5. Termination of Employment 5.1 Death. This Agreement shall terminate automatically upon Executive's death during the Term of Employment. In the event of such termination, the Company shall pay to Executive's estate within 60 days after the date of Executive's death, all benefits and compensation accrued under this Agreement prior to the date of Executive's death, but will have no further obligation under this Agreement to pay any additional base salary. 5.2 Disability. This Agreement shall terminate automatically upon Executive's permanent total disability during the Term of Employment. In the event of such termination, the Company shall pay to Executive within 60 days after the date of termination under this Paragraph 5.2 all benefits and compensation accrued hereunder prior to the date of such termination but will have no further obligation under this Agreement to pay any additional base salary. For the purposes of this Agreement, "total disability" means physical or mental incapacity that qualifies Executive to receive disability benefits under the Federal Social Security Act and prevents Executive from engaging in any employment with the Company or in any other employment or occupation for remuneration or profit consistent with Executive's qualifications and experience. 5.3 Termination by the Company without Cause. The Company may terminate this Agreement and Executive's employment under this Agreement without Cause at any time upon written notice to Executive. Company shall pay Executive his base salary accrued through the date of such termination. In the event of termination of Executive's employment pursuant to this Paragraph 5.3, Executive shall be relieved of his obligations under Article 2 of this Agreement, and shall be free to seek other employment and shall have the option either to (i) compete without regard to the provisions of Paragraph 8.1 or (ii) to comply with Paragraph 8.1 and receive from the Company all payments and all benefits under this Agreement which would have been made to him or accrued to him in the absence of termination by the Company without Cause. Executive shall exercise such option by a written notice to the Company within thirty (30) days following termination pursuant to this Paragraph 5.3. If Executive fails to provide written notice to the Company, Executive will be deemed to have elected to compete without regard to the provisions of Paragraph 8. 1. In the event that Executive elects (by notice or by default) to compete without regard to the provisions of Paragraph 8.1, such notice shall be accompanied by any payments made by the Company to Executive which accrued after the date of such termination and the Company will be relieved from any further obligations under this Agreement. 5.4 Termination by the Company for Cause. The Company may terminate Executive's employment for "Cause". For the purpose of this Agreement, "Cause" for termination of Executive means (i) the repetitive failure by the Executive to substantially perform the Executive's duties as requested by the Members Committee provided that the duties requested by the Members Committee are consistent with senior executive status in the Company and with continued residence in Austin, Texas, (ii) any act or failure to act by Executive which constitutes gross negligence or willful misfeasance or malfeasance in the performance of his duties, (iii) the conviction of Executive of a felony, (iv) conduct by the Executive that involves theft, fraud or dishonesty, or (v) the Executive's violation of the provisions of Articles 7 or 8 of this Agreement. "Cause" does not include an isolated, insubstantial and inadvertent action taken, or failure not occurring in bad faith, and which is remedied by Executive promptly after receipt of written notice thereof given by the Company. If Executive's employment is terminated for Cause or if Executive resigns voluntarily, Company shall pay Executive his base salary accrued through the date of such termination or resignation, whereupon Company shall have no further obligations to Executive under this Agreement. 5.5 Termination by Executive for Good Reason. Executive's employment may be terminated by Executive for "Good Reason". For purposes of this Agreement, "Good Reason" means (i) the assignment to Executive of any duties inconsistent in a material respect with senior executive status in the Company; (ii) any material failure by Company to comply with the provisions of Articles 3 and 4 of this Agreement or (iii) any requirement by the Company that Executive relocate to a city other than Austin, Texas, or the assignment of job duties or responsibilities which are inconsistent with Executive's continued residence in Austin, Texas (except for travel reasonably required in the performance of the Executive's job duties or responsibilities). Executive shall not be entitled to terminate for Good Reason by reason of an isolated, insubstantial and inadvertent action taken or failure not occurring in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by Executive. The parties to this Agreement understand that although Company has the right pursuant to Article 2 of this Agreement to change the position, authority, responsibilities and type of work Executive is asked to perform, any material change which is inconsistent with senior executive status shall entitle Executive to exercise the termination right set out in this Paragraph 5.5. Executive shall have a period of thirty (30) days from the date of any event which constitutes "Good Reason" under this Paragraph 5.5 to exercise his termination right under this Paragraph 5.5. At the expiration of the thirty (30) day period, the termination right under this Paragraph 5.5 is waived with respect to that particular change but not with respect to any additional change in position, authority, responsibilities or type of work required by the Company. In the event of termination of Executive's employment by Executive for Good Reason pursuant to this Paragraph 5.5, Executive shall be relieved of his obligations under Article 2 and shall be free to seek other employment and shall have the option either to (i) compete without regard to the provisions of Paragraph 8.1 (in which case Company shall be relieved of all obligations to Executive under this Agreement, including but not limited to the payments under the 1996 Short-term Plan set forth in Paragraph 4.1 and the Long-term Plan set forth in Paragraph 4.2) or (ii) receive benefits hereunder which would have been made to him or accrued to him in the absence of termination of this Agreement by Executive for Good Reason. Executive shall exercise such option by a written notice to the Company within 30 days following termination pursuant to this Paragraph 5.5. If Executive fails to provide written notice to the Company, Executive will be deemed to have elected to compete without regard to the provisions of Paragraph 8.l. If Executive elects (by notice or by default) to compete without regard to the provisions of Paragraph 8.1, such notice shall be accompanied by any payments made by the Company to Executive which accrued after the date of such termination and the Company will be relieved from any further obligations under this Agreement. 6. Set-Off 6.1 Set-Off. The Company shall be entitled to set off against the amounts payable to the Executive under this Agreement, any amounts owed to the Company by the Executive. 7. Confidential Information 7.1 Non-disclosure of Confidential Information. The Executive agrees to hold in a fiduciary capacity for the benefit of the Company all proprietary or confidential information, knowledge or data relating to the Company which shall have been obtained by Executive during Executive's employment by the Company as well as all proprietary and confidential information of a third party to which Executive has access during Executive's employment by the Company, provided the Company is under an obligation of confidence to said third party regarding such information. During and after the end of the Term of Employment, except as may be required by the lawful order of a court or government agency of competent jurisdiction, Executive shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone not bound by an obligation of confidence to the Company, or utilize such information, knowledge or data for any purpose other than for the Company's benefit and, where applicable, not communicate or divulge any third party information without said third party's prior written permission. The Executive's obligations under this Paragraph 7.1 shall continue for five years following Executive's termination of employment. For purposes of this Agreement proprietary or confidential information does not include information which is or becomes public knowledge through no fault of the Company or Executive, or information that is or becomes known to others as a result of disclosure by a person or entity other than Executive who is not in breach of a confidentiality obligation to the Company or, where appropriate, to a third party in making such disclosure. 7.2 Return of Company Property. Upon the termination of Executive's employment or at the Company's earlier request, the Executive will promptly return to the Company any and all records, documents, physical property, information, computer disks or other materials relating to the business of the Company developed or obtained by the Executive during the Executive's course of employment with the Company. 7.3 Inventions. The Executive shall keep the Company informed of, and shall execute such assignments as may be necessary to transfer to the Company the benefits of, any copyrights, inventions, discoveries, improvements, trade secrets, developments, processes, and procedures made by the Executive, in whole or in part, or conceived by the Executive either alone or with others, which result from any work which the Executive may do for or at the request of the Company, whether or not conceived by the Executive while at work, on holiday, on vacation, or off the premises of the Company including such of the foregoing items that are conceived during the course of employment and developed or perfected after the Executive's termination of employment. The Executive shall, without additional compensation, assist the Company or any other person or entity nominated by it, in an effort to obtain copyrights, patents, trademarks and service marks and the Executive agrees to execute all documents and to take all other actions which are necessary or appropriate to secure to the Company the benefits thereof. Such copyrights, patents, trademarks and service marks shall become the property of the Company. The Executive shall deliver to the Company all sketches, drawings, models, figures, plans, outlines, descriptions or other information with respect thereto. 7.4 Disclosure to Court or Agency. To the extent that any court or government agency seeks to have the Executive disclose proprietary or confidential information, the Executive shall promptly inform the Company, and the Executive shall take all reasonable steps to prevent disclosure of confidential information until the Company has been informed of such requested disclosure, and the Company has an opportunity to respond to such court or government agency. To the extent that the Executive obtains information on behalf of the Company that may be subject to attorney-client privilege as to the Company's attorneys, the Executive shall take all reasonable steps to maintain the confidentiality of such information and to preserve such privilege. 8. Covenant Not to Compete 8.1 Covenant Not to Compete. If Executive's employment terminates during the Term of Employment for any reason, then for the longer of one year following termination or the unexpired portion of the Term of Employment, Executive shall not participate in the management of, or act as a consultant for or an employee of, or directly or indirectly perform services (as an employee, manager, consultant, independent contractor, advisor or otherwise) for, or invest in any business operation, enterprise or organization which engages in significant competition with any line of business at the time actively conducted by the Company in any geographic area where such business is then conducted. This Paragraph 8.1 shall not apply if Executive is terminated without Cause under Paragraph 5.3 and provides notice under such paragraph to have this covenant not apply. This Paragraph 8.1 shall not apply if Executive terminates for Good Reason under Paragraph 5.5 and provides notice under such paragraph. 9. Equitable Remedies 9.1 Remedy in the Event of Breach. Executive acknowledges that damages are an inadequate remedy for breach of Articles 7 or 8 because of the difficulty of ascertaining the amount of damages that would be suffered by the Company in the event Articles 7 or 8 are breached, and Executive therefore agrees that the Company may seek injunctive or other equitable relief against any breach of this Agreement without bond or any other security being required. 10. Notices and Communications 10.1 All notices and other communications under this Agreement shall be in writing and shall be effective when hand delivered to the other party or when sent by facsimile or when mailed by registered or certified mail, return receipt requested, postage prepaid, addressed to the parties at the addresses set forth below or such other address as either party shall have furnished to the other in writing in accordance herewith: In the case of the Company: Chairman, Members Committee c/o Radian International LLC 8501 North Mopac Boulevard Austin, Texas 78759 FAX: (517) 636-0278 with a copy to: The Dow Chemical Company Attn.: Human Resources Legal Employee Development Center Midland, Michigan 48674 FAX: (517) 638-9793 In the case of the Executive: Donald M. Carlton c/o Radian International LLC 8501 North Mopac Boulevard Austin, Texas 78759 FAX: (512) 419-6282 11. Miscellaneous 11.1 Non-assignability. The rights and obligations extended by the Company to Executive under this Agreement are personal to Executive and shall not be assignable by Executive without the prior written consent of the Company. 11.2 Withholding. All compensation payable under this Agreement shall be subject to customary withholding taxes and other employment taxes as required with respect to compensation paid by a corporation to an employee and the amount of compensation payable under this Agreement shall be reduced appropriately to reflect the amount of any required withholding. The Company shall have no obligation to make any payments to the Executive or to make the Executive whole for the amount of any required taxes. 11.3 Nonalienation. The interests of the Executive under this Agreement are not subject to the claims of the Executive's creditors, other than the Company, and may not otherwise be voluntarily or involuntarily assigned, alienated or encumbered. 11.4 Waiver of Breach. The waiver by either the Company or the Executive of a breach of any provision of this Agreement shall not operate as or be deemed a waiver of any subsequent breach by either the Company or the Executive. Continuation of payments under this Agreement by the Company following a breach by the Executive of any provision of this Agreement shall not preclude the Company from thereafter terminating said payments based upon the same violation. 11.5 Enforceability . This Agreement shall inure to the benefit of and be enforceable by the parties, and their respective heirs, personal representatives, successors and assigns. 11.6 Applicable Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Delaware. 11.7 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 11.8 Captions. The captions contained in this Agreement are not part of the provisions of this Agreement and shall have no force or effect. 11.9 Amendments. This Agreement may not be amended or modified other than by written agreement executed by the parties, nor may any provision be waived except by a writing signed by the party waiving such provision. 11.10 Execution of Agreement. This Agreement may be executed in duplicate originals. 11.11 Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter of this Agreement. IN WITNESS WHEREOF, Company and Executive have caused this Agreement to be executed. RADIAN INTERNATIONAL LLC EXECUTIVE By: /s/ P.E. Hudson /s/ Donald M. Carlton Name: P. E. Hudson Donald M. Carlton Title: Treasurer (Interim) Date: January 30, 1996 Date: EX-10 7 Exhibit (10)(iii)(n) EXECUTIVE EMPLOYMENT BONUS AGREEMENT This Executive Employment Bonus Agreement, effective as of the 1st day of January, 1996 (the "Effective Date"), is by and between The Hartford Steam Boiler Inspection and Insurance Company ("HSB") and Donald M. Carlton (the "Executive"). WHEREAS, HSB is a party to a Contribution Agreement dated as of January 30, 1996 under which the businesses of Radian Corporation are to be contributed to a newly formed joint venture company, Radian International LLC, owned in part by HSB and in part by The Dow Chemical Company; and WHEREAS, HSB desires that Executive accept employment with Radian International LLC and remain in the employ of Radian International LLC for a period of three (3) years immediately following the date of the Contribution Agreement NOW THEREFORE, HSB and the Executive agree as follows: 1. Term of Employment 1.1 "Term of Employment" for purposes of this Agreement is the period of time beginning on the Effective Date and ending on the third anniversary of the Effective Date. 2. Employment 2.1 Subject to the terms and conditions of this Agreement, Executive agrees to accept employment with Radian International LLC and to remain in the employ of Radian International LLC for the Term of Employment. 3. Employment Bonus 3.1 HSB agrees, upon the occurrence of all of the conditions set forth in 3.1.1 through 3.1.3 below, to pay to Executive an employment bonus of Two Hundred Thousand Dollars ($200,000.00). 3.1.1 Executive accepts employment with Radian International LLC as of the Effective Date under the terms and conditions of an Executive Employment Agreement entered into by Executive with Radian International LLC (the form of which is attached hereto). 3.1.2 Executive remains continuously in the employ of Radian International LLC during the Term of Employment set forth in Paragraph 1.1. 3.1.3 Executive has performed duties and responsibilities in connection with such employment in accordance with the terms and conditions of the aforementioned Executive Employment Agreement. 3.2 In the event that Executive has otherwise met the requirements for payment of the sum set forth in Paragraph 3.1 but Executive's employment is terminated by Radian International LLC "Without Cause" or by Executive "for Good Reason" under terms of the aforementioned Executive Employment Agreement, payment shall be made to Executive under this agreement at such time of payment as would have occurred had Executive remained employed. 3.3 In the event that Executive has otherwise met the requirements for payment of the sum set forth in Paragraph 3.1, but dies during the Term of Employment, such payment shall be made to Executive's estate, in a lump sum, sixty (60) days after Executive's death. The executor of Executive's estate may request such payment be made in a reasonable number of installments over a period not to exceed five (5) years. HSB in its sole discretion may deny this request. 3.4 In the event that Executive has otherwise met the requirement for payment of the sum set forth in Paragraph 3.1, but becomes permanently and totally disabled during the Term of Employment, such payment shall be made to Executive in a lump sum sixty (60) days following permanent total disablement. For purposes of this Agreement, "total disability" means physical or mental incapacity which qualifies Executive to receive disability benefits under the Federal Social Security Act and prevents Executive from engaging in any employment with Radian International LLC, or in any other employment or occupation for remuneration or profit consistent with Executive's qualifications and experience. 4. Notices and Communications 4.1 All notices and other communications hereunder shall be in writing and shall be given when hand delivered to the other party or when mailed by registered or certified mail, return receipt requested, postage prepaid, addressed to the parties at the addresses set forth below or such other address as either party shall have furnished to the other in writing in accordance herewith: In the case of HSB: The Hartford Steam Boiler Inspection and Insurance Co. One State Street, P. O. Box 5024 Hartford, CT 06102-5024 Attention: Robert C. Walker Senior Vice President and General Counsel In the case of the Executive Donald M. Carlton 1355 The High Road Austin, TX 78746 5. Miscellaneous 5.1 Non-assignability. The rights and obligations extended by HSB to Executive under this Agreement are personal to Executive and shall not be assignable by Executive without the prior written consent of HSB. 5.2 Withholding. All compensation payable under this Agreement shall be subject to customary withholding taxes and other employment taxes as required with respect to compensation paid by a corporation to an employee and the amount of compensation payable hereunder shall be reduced appropriately to reflect the amount of any required withholding. HSB shall have no obligation to make any payments to the Executive or to make the Executive whole for the amount of any required taxes. 5.3 Nonalienation. The interests of the Executive under this Agreement are not subject to the claims of the Executive's creditors, other than HSB, and may not otherwise be voluntarily or involuntarily assigned, alienated or encumbered. 5.4 Waiver of Breach. The waiver by either HSB or the Executive of a breach of any provision of this Agreement shall not operate as or be deemed a waiver of any subsequent breach by either HSB or the Executive. Continuation of payments under this Agreement by HSB following a breach by the Executive of any provision of this Agreement shall not preclude HSB from thereafter terminating said payments based upon the same violation. 5.5 Enforceability. This Agreement shall inure to the benefit of and be enforceable by the parties hereto, and their respective heirs, personal representatives, successors and assigns. 5.6 Applicable Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Delaware. 5.7 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 5.8 Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. 5.9 Amendments. This Agreement may not be amended or modified other than by written agreement executed by the parties hereto, nor may any provision hereof be waived except by a writing signed by the party waiving such provision. 5.10 Execution of Agreement. This Agreement may be executed in duplicate originals. 5.11 Entire Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, HSB and Executive have caused this Agreement to be executed as of the date set forth above. THE HARTFORD STEAM BOILER EXECUTIVE INSPECTION AND INSURANCE COMPANY By /s/ Robert C. Walker /s/ Donald M. Carlton Robert C. Walker Donald M. Carlton Senior Vice President and General Counsel EX-21 8 Exhibit (21) LIST OF SUBSIDIARIES OF THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY* STATE/JURISDICTION OF NAME OF COMPANY INCORPORATION/FORMATION The Allen Insurance Company Bermuda The Boiler Inspection and Insurance Company of Canada (wholly owned by HSB Engineering Insurance Limited) Canada EIG Co. Delaware The Hartford Steam Boiler Inspection and Insurance Company of Connecticut Connecticut The Hartford Steam Boiler Inspection and Insurance Company of Texas Texas Hartford Steam Boiler Inspection Technologies California Hartford Steam Boiler International GmbH Germany Hartford Steam Boiler (Singapore) PTE Ltd. Singapore HSB Associates, Inc. New York HSB Club, Inc. Connecticut HSB Engineering Insurance Limited (wholly-owned by EIG Co.) England HSB Investment Corporation Connecticut HSB Professional Loss Control, Inc. Tennessee HSB Reliability Technologies Corp. Florida Hemisphere Consulting Corp. (wholly-owned by HSB Reliability Technologies Corp.) Florida One State Street Intermediaries (wholly-owned by HSB Associates, Inc.) Connecticut The Polytechnic Club, Inc. Connecticut Radian Corporation Texas Ra-Hart Investment Company Texas Radian International LLC Delaware (40% owned by Radian Corporation) * This list omits certain subsidiaries which considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 9 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of The Hartford Steam Boiler Inspection and Insurance Company on Forms S-8 (File Nos. 33-4397 and 33-36519) of our report dated January 22, 1996, on our audits of the consolidated financial statement schedules of The Hartford Steam Boiler Inspection and Insurance Company and its subsidiaries as of December 31, 1995 and 1994, and for the three years in the period ended December 31, 1995, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Hartford, Connecticut March 28, 1996 EX-24 10 POWER OF ATTORNEY Exhibit (24) We, the undersigned directors of The Hartford Steam Boiler Inspection and Insurance Company, hereby individually appoint Robert C. Walker and Roberta A. O'Brien, and each of them singly, with full power of substitution to each, our true and lawful attorneys with full power to them and each of them singly, to sign for us in our names in the capacities stated below the Form 10-K, Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the fiscal year ended December 31, 1995 for The Hartford Steam Boiler Inspection and Insurance Company, and any and all amendments to said Form 10-K, and generally to do all such things in our name and on our behalf in our capacities as directors that will enable the Company to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission, which relate to said Form 10-K and the filing thereof, hereby ratifying and confirming our signatures as they may be signed by our said attorneys or any one of them to said Form 10-K and any and all amendments thereto. Pursuant to the requirements of the Securities Exchange Act of 1934, this Power of Attorney has been signed by the following persons in the capacities and on the date indicated. (Signature) (Title) (Date) /s/ Gordon W. Kreh Gordon W. Kreh President, Chief March 25, 1996 Executive Officer and Director /s/ Joel B. Alvord Joel B. Alvord Director March 25, 1996 /s/ Colin G. Campbell Colin G. Campbell Director March 25, 1996 /s/ Richard G. Dooley Richard G. Dooley Director March 25, 1996 /s/ William B. Ellis William B. Ellis Director March 25, 1996 /s/ E. James Ferland E. James Ferland Director March 25, 1996 /s/ John A. Powers John A. Powers Director March 25, 1996 /s/ Lois Dickson Rice Lois Dickson Rice Director March 25, 1996 /s/ John M. Washburn, Jr. John M. Washburn, Jr. Director March 25, 1996 /s/ Wilson Wilde Director March 25, 1996 Wilson Wilde EX-27 11
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS FILED HEREWITH AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000000 YEAR DEC-31-1995 DEC-31-1995 244 0 0 215 11 0 545 9 48 34 972 191 216 0 0 39 0 0 10 331 972 389 28 3 252 155 78 351 86 24 63 0 0 0 63 3.07 0 0 0 0 0 0 0 0
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