SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) - December 31, 1997
HSB GROUP, INC.
(Exact name of registrant as specified in its charter)
Connecticut 001-13135 06-1475343
(State or other (Commission (IRS Employer
jurisdiction of incorporation) File Number) Identification No.)
One State Street, Hartford, Connecticut 06102-5024
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (860-722-1866)
Item 5. Other Events.
On January 6, 1998 The Hartford Steam Boiler Inspection and Insurance Company
("HSB"), the principal subsidiary of HSB Group, Inc. (the "Company") sold its
interest in Industrial Risk Insurers ("IRI") to Employers Reinsurance
Corporation in accordance with a previously announced purchase and sale
agreement between ERC and IRI's twenty-three member insurers. IRI is an
unincorporated joint underwriting association which underwrites property
insurance on highly protected risks. HSB received gross proceeds of
approximately $50 million, prior to transaction costs, for its 23.5% share in
IRI. Because the sale was structured in part as a reinsurance transaction, a
portion of HSB's gain will be deferred and recognized over the remaining term of
IRI's in-force business as of the date of the closing of the sale.
Contemporaneous with the close of the sale, IRI was reconstituted with ERC (with
a 99.5% share ) and HSB (with a .5% share) as its sole members. Michael L.
Downs, senior vice president of the Company and HSB, will be appointed chairman
and chief executive officer of the reconstituted IRI. HSB will write the
business for the reconstituted IRI using its insurance licenses and will provide
certain other services. It is anticipated that HSB will transfer its domestic
highly protected risk manufacturing book of business to IRI and will retain 85%
of the equipment breakdown business and 15% of the property business of the
combined insurance portfolio.
In a related transaction, a Delaware business trust newly formed by the Company
has sold $300 million of 7% Convertible Capital Securities ("Convertible Capital
Securities") to ERC. The proceeds from the sale were used by the trust to
purchase 7% Convertible Subordinated Deferrable Interest Debentures (the
"Debentures") from the Company pursuant to the terms of an Indenture dated
December 31,1997, issued by the Company to the First National Bank of Chicago,
as Trustee, (the "Indenture") a copy of which is attached as Exhibit 4.2. The
Company contributed $250 million of the proceeds it received upon the sale of
its Debentures to HSB to support the anticipated increase in its direct writings
attributable to the IRI business.
The following represents a pro forma condensed balance sheet of the Company at
September 30, 1997 assuming the Convertible Capital Securities had been issued
as of September 30, 1997.
(in millions except ratios)
Actual ProForma
9/30/97 9/30/97
------- --------
Cash & Invested Assets $713.3 $1,013.3
Insurance Premiums Receivable 126.8 126.8
Prepaid Acquisition Costs 45.5 45.5
Reinsurance Assets 146.4 146.4
Investment in Radian 85.0 85.0
Other 139.7 139.7
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Total Assets $1,256.7 $1,556.7
============== ==============
Unearned Insurance Premiums $295.8 $295.8
Claims & Adjustment Expenses 278.8 278.8
Debt 43.1 43.1
Other Liabilities 189.6 189.6
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Total Liabilities 807.3 807.3
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Convertible Redeemable Preferred Stock 20.0 *
HSB Capital Securities I 108.9 108.9
HSB Capital Securities II 300.0
Shareholders' Equity 320.5 340.5
============== ==============
Total $1,256.7 $1,556.7
============== ==============
*The pro forma condensed balance sheet includes adjustments for (i) the issuance
of $300 million of Convertible Capital Securities; and (ii) the issuance of
398,406 shares of common stock on October 30, 1997 upon conversion of the
convertible redeemable preferred stock.
The following represents a pro forma ratio of earnings to fixed charges assuming
the Convertible Capital Securities had been issued as of January 1, 1997.
Actual ProForma
1/1/97 1/1/97
------ ---------
Ratio of Earnings to
Fixed Charges 5.27 2.42 *
* If pro forma data were adjusted to reflect the potential investment earnings
at a 7% rate on the proceeds from the sale of the $300 million of Convertible
Capital Securities, the ratio would be approximately 2.96%.
The Convertible Capital Securities are callable by the Company at its option (i)
at any time after seven years; (ii) upon the occurrence of a tax event as
defined in the Indenture; (iii) in the event that the Company vetoes a
prospective purchaser of the Convertible Capital Securities; or (iv) in the
event of a change in control of ERC. The Convertible Capital Securities are
mandatorily redeemable on December 31, 2017, and are redeemable at par plus a
redemption premium, at the option of ERC, in the event of a change in control of
the Company within five years following issuance of the securities.
The Convertible Capital Securities are convertible, in whole or in part, at
ERC's option at any time, subject to regulatory approval, into shares of Company
common stock at a conversion price of $85, subject to adjustment. The Company
has provided certain registration rights to ERC in connection with the common
stock into which the Convertible Capital Securities are convertible pursuant to
a Registration Rights Agreement dated December 31, 1997, a copy of which is
attached as Exhibit 4.8.
The foregoing summary of the terms of the Convertible Capital Securities is
qualified by reference to the Trust Agreement dated December 31, 1997 among the
Company, the First National Bank of Chicago, as Property Trustee, First Chicago
Delaware Inc., as Delaware Trustee and the Administrative Trustees named
therein, a copy of which is attached as Exhibit 4.5.
Were ERC to exercise its conversion rights in total, it would hold, on a fully
diluted basis, approximately 15.3% of the Company's common stock. Pursuant to
certain provisions contained in the Purchase Agreement dated December 31, 1997
attached as Exhibit 4.1, ERC has agreed to certain "standstill" arrangements
which for a period of five years will preclude ERC from purchasing any common
stock of the Company, other than by exercise of its conversion rights, and will
limit its ability to take certain other actions with respect to the Company
during that period.
Item 7(c) Exhibits.
Exhibit
4.1 Purchase Agreement dated as of December 31, 1997 among Employers
Reinsurance Corporation, ERC Life Reinsurance Corporation and HSB
Group, Inc.
4.2 Indenture of HSB Group, Inc. relating to the 7.0% Convertible
Subordinated Deferrable Interest Debenture Due December 31, 2017
4.3 Form of Certificate of 7.0% Convertible Subordinated Deferrable
Interest Debentures due December 31, 2017
4.4 Certificate of Trust of HSB Capital II
4.5 Trust Agreement dated as of December 31, 1997 among HSB Group,
Inc., The First National Bank of Chicago, First Chicago Delaware Inc.
and The Administrative Trustees named therein.
4.6 Form of Capital Securities Certificate of HSB Capital II
4.7 Guarantee Agreement between HSB Group, Inc. and The First
National Bank of Chicago dated as of December 31, 1997 relating
to HSB Capital II.
4.8 Registration Rights Agreement dated as of December 31, 1997 among
Employers Reinsurance Corporation, ERC Life Reinsurance Corporation and
HSB Group, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HSB GROUP, INC.
Dated: January 12, 1998 /s/ Saul L. Basch
Saul L. Basch
Senior Vice President, Treasurer and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
4.1 Purchase Agreement dated as of December 31, 1997 among Employers
Reinsurance Corporation, ERC Life Reinsurance Corporation and HSB
Group, Inc.
4.2 Indenture of HSB Group, Inc. relating to the 7.0% Convertible
Subordinated Deferrable Interest Debenture Due December 31, 2017
4.3 Form of Certificate of 7.0% Convertible Subordinated Deferrable
Interest Debentures due December 31, 2017
4.4 Certificate of Trust of HSB Capital II
4.5 Trust Agreement dated as of December 31, 1997 among HSB Group,
Inc., The First National Bank of Chicago, First Chicago Delaware Inc.
and The Administrative Trustees named therein.
4.6 Form of Capital Securities Certificate of HSB Capital II
4.7 Guarantee Agreement between HSB Group, Inc. and The First
National Bank of Chicago dated as of December 31, 1997 relating
to HSB Capital II.
4.8 Registration Rights Agreement dated as of December 31, 1997 among
Employers Reinsurance Corporation, ERC Life Reinsurance Corporation and
HSB Group, Inc.