AIG Agrees to Purchase HSB Group Inc.

American International Group Inc. (AIG) announced it made a definitive agreement to acquire HSB Group Inc. for a price of approximately $1.2 billion.

“We think that the synergies are terrific, and we look forward to this combination,” said AIG Chairman Maurice Greenberg during a conference call on Aug. 18. “We expect this to close sometime toward the end of the year, possibly spill over to the first part of the year. After we get regulatory approval-and most of that’s just pro forma-we see no impediments in that taking place.”

Greenberg added that HSB had been doing business with AIG for a number of years and called HSB the best company in its class. “We expect the combination to be slightly accretive to AIG in the year 2001,” Greenberg said.

HSB is a global provider of specialty insurance products, engineering services and management consulting to industrial and institutional customers. Through its subsidiary, Hartford Steam Boiler Inspection and Insurance Company, it is the largest insurer of machinery and equipment breakdown in the U.S.

Greenberg emphasized that Hartford Steam Boiler would remain a stand-alone operation.

Speaking for HSB, Chairman, President and CEO Richard H. Booth noted that despite HSB’s significant capabilities on a worldwide basis, the company’s relatively smaller size has heretofore proved a hindrance to optimizing those opportunities. Particularly emphasized were the international opportunities the combination provides for HSB.

“The potential that we see in the marketplace is one that we often cannot take advantage of,” Booth said. “In many markets we are faced with large, international competitors with enormous capital positions and economies of scale. Therefore, we have to forgo many opportunities, such as those that are special risk portfolios.

“We are an engineering-driven company,” Booth continued. “Our engineering operations are involved in consulting projects in probably 80 different countries from time to time…[I]n the power generation area, chemical oil and gas, we are associated with some of the top companies in those particular segments. As a result of that association, we see numerous opportunities for product offerings…risk transfer products, insurance in general.”

Under the terms of the agreement, 100 percent of outstanding HSB stock will be acquired by AIG. Most HSB stockholders will receive AIG stock with a value of $41 per share or, at AIG’s option under certain circumstances, a combination of AIG stock and cash. There is a termination fee on the transaction of 3 percent, or approximately $36 million. With regard to federal income taxes, the transaction is expected to qualify as a tax-free reorganization.

With respect to HSB’s client company relationships, Greenberg said he did not believe that AIG’s ownership would create potential conflicts with those client companies. “I think we’ve made it very clear that we will recognize that confidentiality and it will not be breached,” Greenberg said. “It’s going to be a matter of policy. Remember, HSB only has a limited number of insurance company relationships. There are a lot of companies out there that we think continue to be opportunities.”

Despite the fact that prices within the global special risk marketplace served by HSB have been improving, Greenberg said those increases are still not enough. “We continue to be very disciplined in underwriting and so does HSB,” he said. “We share the same viewpoints about underwriting for a profit and not for market share, and that will continue to be the way it’ll be run.”

Following announcement of the acquisition, HSB Group’s “BBB+” counterparty credit and “BBB-” preferred stock ratings were placed on CreditWatch with positive implications by Standard & Poor’s (S&P). Concurrently, S&P affirmed the “A-1+” commercial paper rating on Hartford Steam Boiler Inspection & Insurance Co. All S&P ratings on AIG were affirmed.

In addition, it was reported that on the day of the announcement, shares of HSB rose 3 percent, or $1.25, closing at $39.938 on the New York Stock Exchange. AIG shares fell 56.2, closing at $86.938.

Given that opportunities had existed before, in response to why the transaction had come about now, Greenberg summed it all up by saying, “The moon and stars are in the right orbit.”

Topics AIG