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, 1994
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...X...
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 7, 1995 was $ 863,670,028.
Number of shares of common stock outstanding as of February 7, 1995:
20,416,532.
Documents Incorporated By Reference
Portions of the Proxy Statement dated February 28, 1995 for the Annual
Meeting of Shareholders to be held April 18, 1995 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 $336.6 million for 1994, which accounted for
approximately 56 percent of the Company's revenues.
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 1994 net Engineering Services revenues were $232.1 million, which
accounted for approximately 38 percent of the Company's revenues.
The Company conducts its business in Canada through its wholly-
owned 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 Engineering Insurance Company
Limited (EICL). In December 1994, the Company purchased the
remaining 50% interest in EICL's parent company, Engineering
Insurance Group (EIG) from General Reinsurance Corporation.
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 percent interest in EIG in late
1994. The revenues and net income associated with operations
outside of the United States are less than 10 percent of the
respective consolidated amounts. Assets associated with operations
outside of the United States are approximately 18 percent of the
consolidated amount, primarily resulting from the EIG acquisition.
For additional information on the Company's business segments,
see Notes 1 and 5 to the Consolidated Financial Statements located
in Item 8 of Part II herein. Certain reclassifications have been
made to 1992 and 1993 financial information to conform to the 1994
presentation.
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 has 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 15 percent of net earned
premium in 1994. By far the largest of these other lines is the
UNITECH all risk property insurance product. The UNITECH line is
marketed to accounts with equipment and machinery exposures, such
as electric utilities, where sophisticated engineering services
are important to loss prevention and control. UNITECH 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's HSB BACK.UP
policy provides all risk coverage 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 its engineering subsidiary Radian Corporation,
focuses on researching and developing potential new products and
services, and new markets for current services.
Radian Corporation 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.
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. Based on net earned premiums, the
Company's U.S. market share, at approximately 37 percent, has
remained fairly stable over the past ten years. No other single
company has more than a 10 percent market share. Members of an
affiliated group of insurers have a market share of approximately
25 percent.
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, the weak U.S.
economy has caused insurance customers to select programs with
modest price adjustments but higher deductibles which, 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 single line insurance
company, 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 page 3. 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 has a force of more than 2,500
inspectors, engineers, scientists and technicians 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
During 1994, the Company continued its realignment of its
insurance operations from a functional organization based on
underwriting, marketing and engineering disciplines into one
based on serving its two principal customer groups, commercial
risks and special risks. The Company believes that this
realignment will allow 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. During 1994, of the direct
premiums written in the United States (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,
New York, Pennsylvania and Texas, no state accounted for more
than 5 percent 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 the 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, high-hazard accounts in the U.S. and Canada are
primarily marketed and serviced by account teams comprised of
underwriting, marketing, engineering and claims staff from the
Company's various U.S. and Canadian offices who have specialized
knowledge of particular customer industries. Overseas customers
are serviced by Engineering Insurance Company Limited, the
Company's U.K. subsidiary. The Company's large, high-hazard
accounts generate approximately 32 percent of its net earned
premium.
The Company's reinsurance assumed business (see page 9) 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 Corporation, 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.
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.
The Company derives approximately 10 percent of its revenues
from engineering contracts with various agencies and departments
of the U.S. government.
Engineering services are marketed and serviced primarily by
technical personnel located in the Company's various domestic and
international offices.
E. REGULATION
Insurance
The Company's insurance operations are subject to regulation
throughout the United States and in each foreign jurisdiction in
which it does business. 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 affiliated transactions, including
dividends involving insurers. See Item 5 and Note 6 to the
Consolidated Financial Statements located in Item 8 of Part II
herein for additional information.
The insurance business is generally exempt from federal
anti-trust laws pursuant to the McCarran-Ferguson Act. In recent
years legislation has been proposed which would repeal or modify
this exemption, the effect of which can not be determined at this
time.
The National Association of Insurance Commissioners (NAIC)
has adopted risk based capital (RBC) requirements applicable to
property and casualty insurers effective with reporting for 1994.
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 at December 31, 1994.
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 1994.
The Company's operations are subject to examination by
insurance regulators at regular intervals. The most recent
insurance financial examination was completed for the year ending
December 31, 1990 by the Connecticut Insurance Department, the
Company's domestic regulator. Similar regulatory procedures
govern the Company's U.S. insurance subsidiaries and its foreign
subsidiaries. The Connecticut Insurance Department will be
conducting a financial examination of the year ended December 31,
1994 during 1995.
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.
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. (Proposition 103 was an initiative passed by
California voters in 1988 which required premiums to be rolled
back to 20 percent below November 1987 rates.) The Company
anticipates that it will be meeting with the California Insurance
Department during 1995 to attempt to resolve this obligation.
Given the amount the Company has reserved for this matter, any
settlement reached with the Insurance Department is not expected
to materially affect the Company's future results. See
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations - Summary of Results of
Operations and Developments in Insurance Regulations for
additional information concerning Proposition 103 and other
insurance regulatory matters.
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 feels 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 weighting in 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 UNITECH 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 makes available 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.
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 UNITECH 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, with the
exception of the arrangement with Industrial Risk Insurers
discussed below, 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. The Company
retains the right to decline or restrict coverage in the same
manner as it does for its own business. In summary, the
Company's position as a reinsurer is substantially unchanged from
its normal method of doing business except that insurance
coverage is written on forms issued through the reinsured
company.
The written premium generated through reinsurance assumed
totaled $137.9 million in 1994, representing approximately 41
percent of the Company's net written premium.
By a wide margin, the Company's largest source of accepted
reinsurance is Industrial Risk Insurers (IRI). IRI is a
voluntary joint underwriting association funded by 36 members
(each of which is a property-casualty insurance company). While
the Company provides the largest share of boiler and machinery
reinsurance capacity to IRI, there are other IRI members who
provide the same coverages. In addition, in recent years IRI has
been increasing the amount of boiler and machinery insurance it
retains to its own account. The Company assumed $18.5 million of
boiler and machinery premiums from IRI in 1994 compared to $23.3
million in 1993.
The insurance industry generally has been undergoing a
period of significant consolidation which, depending on the
companies that may be involved in such future activity and other
market factors, may impact the level of reinsurance business the
Company assumes going forward.
Reinsurance Ceded
The Company participates in various facultative, quota share
and excess of loss reinsurance agreements in support of its
insurance operations in order to guard against catastrophic
losses and provide competitive policy limits. The Company
utilizes two primary treaty reinsurance arrangements. Liability
in excess of the Company's retention (which is currently $3
million plus 10 percent of the first $7 million excess of $3
million for most of the Company's business, with limits up to $6
million in certain instances) is first assumed by the Company's
primary reinsurance group, made up of large, well-capitalized
reinsurance companies. Additional liability in excess of the
first reinsurance treaty is covered by an additional reinsurance
facility composed of other U.S., U.K. and international
reinsurance companies and syndicates and within which the Company
maintains a modest retention. In addition, the Company uses
facultative reinsurance on certain high exposure risks and has
catastrophe reinsurance for aggregate losses greater than a $15
million retention. The Company monitors the financial condition
of its reinsurers 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.
Unprecedented levels of catastrophic losses in the last few
years (such as Hurricane Andrew, two California earthquakes and
Midwest floods) have led to a dramatically tightened world-wide
reinsurance market. Combined with the Company's own loss
experience in prior years, this situation has led to much higher
ceded reinsurance costs which has negatively impacted net
insurance premiums. The Company has increased its retention to
lessen the impact of higher reinsurance costs, which increased 54
percent in 1994 over 1993, however, this could negatively affect
future claims levels.
For additional information on reinsurance, see Note 10 to
the Consolidated Financial Statements located in Item 8 of Part
II herein.
Pools and Joint Underwriting Associations
The Company does not participate to any significant degree
in voluntary reinsurance pools of other insurance companies
because the Company 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 6) 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". For
this reason, reserve estimates once established generally are not
adjusted for the effects of inflation. 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 table below provides a reconciliation of the beginning
and ending reserves for net claims and claim adjustment expenses
for the years ended December 31, 1994, 1993 and 1992.
RECONCILIATION OF NET LIABILITY FOR
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1994 1993 1992
(In millions)
Net liability for claims and claim
adjustment expenses at January 1 $171.3 $132.8 $111.4
------ ------ ------
Plus:
Provision for claims and claim adjustment
expenses occurring in the current year 141.7 172.2 146.3
Increase in estimated claims
and claim adjustment expenses arising
in prior years 1.5 26.9 26.1
------ ------ ------
Total incurred claims and
claim adjustment expenses 143.2 199.1 172.4
------ ------ ------
Less:
Payment for claims arising in:
Current year 63.5 60.9 59.8
Prior years 108.7 99.7 91.2
------ ------ ------
Total payments 172.2 160.6 151.0
------ ------ ------
Plus:
Full Consolidation of EIG Co. at
December 31, 1994 19.0 - -
------ ------ ------
Net liability for claims and claim
adjustment expenses at December 31 $161.3 $171.3 $132.8
====== ====== ======
The 1994 loss ratio was 42.5 percent compared to 57.1 percent
and 50.3 percent for 1993 and 1992, respectively. The
improvement in 1994 is largely attributable to the reunderwriting
efforts that began in 1993. In 1993 and 1992, 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, 1994, the amount recoverable from reinsurers on paid and
unpaid claims and adjustment expenses was $44.9 million compared
to $44.5 million in 1993 and $39.9 million in 1992.
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
1994 1993
(In millions)
Net liability for claims and claim $161.3 $171.3
adjustment expenses at December 31
Reinsurance recoverable
on unpaid losses 38.1 43.1
------ ------
Gross liability for claims and claim
adjustment expenses at December 31 $199.4 $214.4
====== ======
The claim and claim expense reserve runoff table on the
following page shows the amounts of the net liability for 1984
through 1994 and the amounts of the gross liability for 1993 and
1994. 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; the cumulative
totals for claims payments for that year-end; and reestimated
liabilities for both the 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 1992 and 1991 were explained on the
previous page. The deficiency in 1990 was attributable to the
same factors that contributed to the 1992 and 1991 deficiencies.
The net 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 1984 1985 1986 1987 1988 1989 1990* 1991* 1992* 1993* 1994
----------------------------------------------------------------------------------------------------------------------------
Net Liability for Unpaid
Claims and Claim $77.5 $99.9 $126.1 $147.5 $157.4 $139.6 $118.2 $115.4 $141.3 $186.7 $161.3
Adjustment Expenses
Cumulative Amount Paid as of:
End of Year - - - - - - - - - - -
One Year Later 45.5 51.1 54.9 57.4 78.8 85.6 89.6 93.7 103.5 115.9 -
Two Years Later 59.3 65.8 73.6 75.9 92.1 104.2 112.9 119.8 140.4 - -
Three Years Later 65.0 70.6 79.5 74.5 95.5 110.3 124.0 131.8 - - -
Four Years Later 67.6 73.3 79.7 75.4 95.4 112.5 131.1 - - - -
Five Years Later 69.0 74.3 80.4 74.5 93.6 118.9 - - - - -
Six Years Later 69.9 74.5 79.0 74.2 100.5 - - - - - -
Seven Years Later 70.1 74.2 78.8 80.4 - - - - - - -
Eight Years Later 69.8 74.0 84.1 - - - - - - - -
Nine Years Later 69.6 79.3 - - - - - - - - -
Ten Years Later 74.9 - - - - - - - - - -
Net Liability Reestimated as of:
End of Year 77.5 99.9 126.1 147.5 157.4 139.6 118.2 115.4 141.3 186.7 161.3
One Year Later 80.9 104.7 126.4 131.9 129.4 129.4 139.2 142.3 167.5 186.5 -
Two Years Later 84.3 101.1 115.8 100.4 108.7 127.4 141.6 145.1 174.3 - -
Three Years Later 85.5 94.7 96.1 86.0 106.8 127.8 140.5 146.4 - - -
Four Years Later 83.3 85.9 88.0 83.7 103.0 125.0 141.5 - - - -
Five Years Later 79.6 80.8 86.9 80.8 102.3 125.8 - - - - -
Six Years Later 76.6 80.9 83.6 82.0 104.0 - - - - - -
Seven Years Later 76.7 80.7 85.7 82.9 - - - - - - -
Eight Years Later 76.5 84.1 86.0 - - - - - - - -
Nine Years Later 79.9 84.5 - - - - - - - - -
Ten Years Later 80.3 - - - - - - - - - -
Cumulative Redundancy
(Deficiency) (2.8) 15.4 40.1 64.6 53.4 13.8 (23.3) (31.0) (33.0) 0.2 -
Gross Reserves
YEAR ENDED 1993 1994
---- ----
Gross Liability for
Unpaid Claims and Claim
Adjustment Expenses $233.3 $199.4
Cumulative Amount Paid as of:
End of Year - -
One Year Later 153.5
Gross Liability Reestimated as of:
End of year 233.3 199.4
One year Later 242.6
Cumulative Redundancy
(Deficiency) (9.3)
*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.
At year-end 1994 the Company had approximately 42 percent of
its invested assets in equity securities and 41 percent in fixed
maturities. This compares to 57 percent of its invested assets
in equity securities and 31 percent in fixed maturities at year
end 1993. With the addition of EIG's investments and reductions
in equity securities, the mix of the portfolio has shifted to a
more even distribution between fixed maturities and equity
securities. See "Investment Operations" in the Management's
Discussion and Analysis of Consolidated Financial Condition and
Results of Operations located in Item 7 and Note 7 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:
Annualized Rate
Net Invest- of Return (2) Investment
Cash and ment Income ------------- Gains (Losses) (3)
Invested Less Before After ------------------
Assets, Less Interest Income Income Change in
Borrowed Money Expense (1) Taxes Taxes Realized Unrealized
-------------- ----------- ----- ------ -------- ----------
(In Millions) (In Millions)
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)
1992 464.0 29.5 6.4 5.7 30.8 (23.6)
(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 1994, the Company, including its subsidiaries,
employed 4,060 people. Of this total, 2,037 were employed by the
Company's wholly-owned subsidiary, Radian Corporation; and 205
were employed by the Company's Canadian affiliate, The Boiler
Inspection and Insurance Company of Canada. 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 foreign locations. The Company considers
the office facilities to be suitable and adequate for its current
and anticipated level of operations.
See Notes 9 and 13 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, 47, 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, 57, Executive Vice President since 4/92;
Director since 7/75; President and Chairman of the Board - Radian
Corporation since 1969.
Michael L. Downs, 45, 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, 49, 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.
T. Skipwith Lewis, 58, Senior Vice President - Engineering since
3/94; Senior Vice President - Engineering and Claims 11/84 -
3/94; Vice President 11/82 - 11/84; Assistant Vice President
10/81 - 11/82.
R. Kevin Price, 48, Senior Vice President and Corporate Secretary
since 2/94; Second Vice President 4/89 - 2/94; Assistant Vice
President 1/84 - 4/89.
Robert C. Walker, 51, 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.
James F. Casey, 38, Vice President and Controller since 1/95;
Second Vice President - Marketing 4/93- 1/95; Assistant Vice
President - Marketing 4/92 - 4/93.
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 7, 1995, the
Company had 5,763 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 1994 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 as
reported to the regulatory agencies calculated as of the December
31st last preceding. The Company expects to be required to
request regulatory approval for the payment of any dividends in
1995. Under statutory accounting practices, $37.9 million of
statutory surplus is available for distribution to shareholders
in 1995 without prior regulatory approval.
Dividends declared for the 1994 and 1993 fiscal years were as
follows:
First Second Third Fourth Year
--------------------------------------------
1994 $.53 $.53 $.55 $.55 $2.16
1993 $.53 $.53 $.53 $.53 $2.12
Quarterly market prices for the registrant's common stock were
as follows for the two most recent fiscal years:
First Second Third Fourth Year
--------------------------------------------
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
1993 High $59 1/2 $58 $54 5/8 $49 5/8 $59 1/2
1993 Low $54 3/8 $52 1/2 $43 3/4 $43 1/4 $43 1/4
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 data(1))
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990
Summary of Statements of Operations
Revenues:
Insurance premiums $ 336.6 $ 349.2 $ 342.9 $ 318.8 $ 296.3
Net engineering services 232.1 231.5 231.0 210.3 174.2
Income from investment operations 34.9 55.4 62.8 70.4 65.5
Total revenues 603.6 636.1 636.7 599.5 536.0
Income before taxes and accounting changes 73.6 16.9 73.4 101.0 110.5
Income taxes 21.7 3.8 17.1 27.1 31.8
Income before accounting changes 51.9 13.1 56.3 73.9 78.7
Income per share before accounting changes 2.54 0.63 2.71 3.53 3.80
Dividends declared per share 2.16 2.12 2.06 1.90 1.75
Summary of Statements of Financial Position
Total assets $ 905.7 $ 877.9 $ 886.4 $ 843.6 $ 784.6
Long-term borrowings and
capital lease obligations 28.4 28.4 28.4 28.5 33.9
Shareholders' equity 299.5 324.7 374.3 402.8 348.7
Per share 14.67 15.80 18.05 19.16 16.74
Return on average equity before
accounting changes 16.9% 3.7% 14.8% 19.5% 23.5%
Stock price per share:
High $ 53.38 $ 59.50 $ 59.25 $ 63.75 $ 62.13
Low 36.13 43.25 45.13 46.25 43.50
Close 39.88 44.50 58.38 57.50 48.75
Common shares outstanding
at end of year (2) 20.4 20.5 20.7 21.0 20.8
Insurance
Underwriting gain (loss) $ 20.7 $ (26.4) $ 1.8 $ 22.9 $ 40.1
Loss ratio 42.5% 57.1% 50.3% 43.6% 37.1%
Expense ratio 50.5% 50.5% 49.2% 49.2% 49.4%
Combined ratio (3) 93.0% 107.6% 99.5% 92.8% 86.5%
Engineering Services
Gross revenues $ 253.6 $ 256.1 $ 264.7 $ 232.1 $ 193.8
Subcontract & equipment resale costs 21.5 24.6 33.7 21.8 19.6
Net revenues 232.1 231.5 231.0 210.3 174.2
Operating gain 18.2 11.8 14.7 14.0 11.4
Gross margin 7.2% 4.6% 5.6% 6.0% 5.9%
Net margin 7.9% 5.1% 6.4% 6.7% 6.5%
Investments
Net investment income $ 26.2 $ 29.3 $ 32.0 $ 36.5 $ 37.9
Realized investment gains 8.7 26.1 30.8 33.9 27.6
Income from investment operations 34.9 55.4 62.8 70.4 65.5
(1) All per share data has been restated to reflect stock splits.
(2) Reflects the repurchase of approximately .1 million shares in
1994, .2 million shares in 1993, and .3 million shares in 1992.
(3) 1994 Combined ratio excludes charge for Proposition 103.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
SUMMARY OF RESULTS OF OPERATIONS
Consolidated Overview (dollar amounts in millions)
For the years ended December 31, 1994 1993 1992
Insurance premium $ 336.6 $ 349.2 $ 342.9
Net engineering services revenues 232.1 231.5 231.0
Net investment income 26.2 29.3 32.0
Realized investment gains 8.7 26.1 30.8
------ ------ ------
Total revenues $ 603.6 $ 636.1 $ 636.7
====== ====== ======
Income before cumulative effects
of changes in accounting $ 51.9 $ 13.1 $ 56.3
Cumulative effects of changes
in accounting -- (3.6) (15.1)
------ ------ ------
Net income $ 51.9 $ 9.5 $ 41.2
====== ====== ======
Net income in 1994 showed significant improvement from the prior two
years. The current year's results 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. Engineering services also showed improvement
as expense reduction initiatives, begun in 1993, were realized.
Overall results in 1993 were negatively impacted by a $20 million
restructuring charge, significant strengthening of claims reserves
and increased costs of reinsurance.
Consolidated revenues in 1994 were down 5.1 percent from 1993.
Marginal growth in gross premiums, due to selective underwriting,
was offset by higher reinsurance costs. Lower net investment income
is principally due to a decline in the level of invested assets. In
1994, the Company modified the mix of its investment portfolio to
increase its holdings in fixed maturities. Realized gains declined
67 percent from the prior year. Revenues in 1993 were essentially
unchanged from 1992.
In November 1988, California voters passed Proposition 103
requiring premium rollbacks on certain policies then in effect to 20
percent below the rates that were in effect in November 1987. Upon
challenge in the courts, the California Supreme Court, in 1989, held
that insurers could not be deprived of a fair and reasonable return
and subsequently, in 1991, emergency regulations were issued by the
regulators which, among other things, defined a "fair and reasonable
rate of return." The Company and a number of other insurers
successfully challenged the regulations in Los Angeles Superior
Court and, in February 1993, the Court issued a decision enjoining
the enforcement of the emergency regulations. The decision was
appealed to the California Supreme Court, which in August 1994,
ruled in favor of the California Insurance Department and upheld the
regulations. The Company continues to maintain its position that the
rollback formula is constitutionally defective and that a fair rate
of return cannot be arbitrarily capped; however, based upon this
most recent ruling, the Company established a reserve in the third
quarter of $2.9 million. It should be noted that the California
Supreme Court decision is the subject of a petition for certiorari
presently pending before the United States Supreme Court.
On December 30, 1994, the Company acquired the remaining 50
percent interest in Engineering Insurance Group (EIG) from General
Reinsurance Corporation (Gen Re). EIG is 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. Concurrent with the acquisition, EIG was
incorporated and the Company received all the common shares
outstanding of EIG, Co. (the newly formed company) while Gen Re
acquired preferred shares with a value of $20 million. The
acquisition was accounted for as a purchase and accordingly, the
results of operations for all periods presented do not include those
of EIG other than for the equity in earnings related to the 50
percent interest previously owned.
The effective tax rate for 1994 was 29 percent compared to 22
and 23 percent for 1993 and 1992, respectively. The difference 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, 1994 1993 1992
Gross earned premium $ 381.7 $ 378.5 $ 362.3
Ceded premium 45.1 29.3 19.4
------ ------ ------
Insurance premium $ 336.6 $ 349.2 $ 342.9
Claims and adjustment expenses 143.2 199.1 172.4
Underwriting, acquisition and
other expenses 172.7 176.5 168.7
------ ------ ------
Underwriting gain (loss) $ 20.7 $ (26.4) $ 1.8
====== ====== ======
Insurance operations include the insurance results of The Hartford
Steam Boiler Inspection and Insurance Company (HSB) and The Boiler
Inspection and Insurance Company of Canada (BI&I).
The marginal growth in gross insurance premiums was largely
attributable to the Company's major reunderwriting program, which
began in early 1993. The goal of that program was to significantly
improve insurance profitability through application of aggressive,
sound underwriting principles to both the existing book of business
and new business opportunities. The Company's focus on improved risk
selectivity and the insistence upon appropriate terms, conditions
and pricing, had the anticipated effect of slowing the growth in
gross insurance premiums, especially in what continued to be a soft
property/casualty market. Overall volume growth was impacted
negatively by the reunderwriting effort and only partially offset by
price increases. 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 over the past several years has been
largely attributable to growth in the reinsurance assumed book of
business. In 1994, 41 percent of the Company's net written premium
was derived from assumed reinsurance, up from 38 percent in 1993 and
36 percent in 1992. HSB assumes business from a number of insurance
companies and associations with no one ceding entity providing more
than 16 percent of the total assumed premium.
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. Unprecedented levels
of catastrophic losses in the last few years (such as Hurricane
Andrew, two California earthquakes and Midwest floods) have led to a
dramatically tightened world-wide reinsurance market. Combined with
HSB's own loss experience in prior years, this situation has led to
much higher reinsurance ceded premiums, which has negatively
impacted net insurance premiums. In 1994, the Company's reinsurance
ceded costs increased 54 percent while gross premiums rose by 1
percent resulting in net insurance premiums decreasing 3.6 percent
from 1993. In addition, in order to mitigate the cost of existing
excess of loss treaties, in 1994, HSB accepted a higher retention
which could affect future claim levels. Facultative reinsurance
costs were also higher for the year.
Claims and adjustment expenses decreased $55.9 million in 1994
compared with an increase of $26.7 million in 1993. Claim costs in
1994 include $4.8 million of losses relating to the California
earthquake. The 1993 claims and adjustment expense includes
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 1992, $15 million of claims and adjustment
expenses related to Hurricane Andrew. The components of claims and
adjustment expenses, net of reinsurance, were as follows:
1994 1993 1992
Provision for claims and adjustment
expenses occurring in the current year $ 141.7 $ 172.2 $ 146.3
Change in estimated claims and adjustment
expenses established in prior years 1.5 26.9 26.1
------ ------ ------
Claims and adjustment expenses $ 143.2 $ 199.1 $ 172.4
====== ====== ======
The 1994 loss ratio was 42.5 percent compared to 57.1 percent and
50.3 percent for 1993 and 1992, respectively. The improvement in
1994 is largely attributable to the reunderwriting efforts which
began in 1993. In 1993 and 1992, 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, 1994, the amount recoverable from reinsurers on paid and unpaid
claims and adjustment expenses was $44.9 million compared to $44.5
million in 1993 and $39.9 million in 1992.
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 are generally settled 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. 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 insurance industry, in general, is undergoing a significant
shake-out and consolidation. Significant merger and acquisition
activity has occurred, more has been announced, and still more is
anticipated in the future. 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.
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.
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.
ENGINEERING SERVICES OPERATIONS
For the years ended December 31, 1994 1993 1992
Net engineering services revenue $ 232.1 $ 231.5 $ 231.0
Net engineering services expenses 213.9 219.7 216.3
------ ------ ------
Operating gain $ 18.2 $ 11.8 $ 14.7
====== ====== ======
Net margin 7.9% 5.1% 6.4%
Engineering services operations include the results of HSB's and
BI&I's engineering services, Radian Corporation, HSB Reliability
Technologies, HSB Professional Loss Control and HSB International.
Consolidated engineering services operating gain was $18.2
million, a 54.2 percent increase over the 1993 gain of $11.8
million. This also compares favorably to the 1992 gain of $14.7
million. The 1994 gain, a record profit for the Company, was
achieved as a result of the cost reduction program which began in
1993, the sales of certain unprofitable business operations and more
focus on higher margin business. Net revenues for 1994 were level
with 1993 and 1992 while margins increased over the three-year
period. Both price and volume remained relatively constant from the
prior year.
Radian Corporation, the Company's environmental services
subsidiary, accounted for the majority of the change in engineering
services results. In 1994, Radian's results improved as they
undertook cost control measures and improved staff utilization.
Radian also reduced expenses through consolidation of international
offices.
INVESTMENT OPERATIONS
For the years ended December 31, 1994 1993 1992
Net investment income $ 26.2 $ 29.3 $ 32.0
Realized investment gains 8.7 26.1 30.8
------ ------ ------
Pretax income from investment operations$ 34.9 $ 55.4 $ 62.8
Total cash and invested assets, ====== ====== ======
at fair value $ 489.7* $ 506.0 $517.0**
Net unrealized gains, pre-tax $ 16.5 $ 59.2 $ 69.5
*Includes $63.1 million resulting from the consolidation of EIG,
Co.
**At December 31, 1992, prior to the adoption of SFAS 115, fixed
maturities were carried at amortized cost.
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. Net investment income
declined 11 percent in 1994 and 8 percent in 1993. The decreases in
both years 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. With the addition of EIG, Co.'s investments and
reductions in equity securities holdings, the mix of the portfolio
has shifted to a more even distribution between fixed maturities and
equity securities.
In 1993, the Company adopted SFAS 115 and determined that all
fixed maturities and equity securities are available for sale and,
consequently, they are carried at estimated fair value. Prior to
1993, fixed maturities were carried at amortized cost and classified
as held to maturity. The Company's investment portfolio continues to
consist of high grade investments. At December 31, 1994, the
Company's fixed maturities portfolio comprised 41 percent of total
invested assets. The credit quality of the Company's bond
investments at December 31, 1994, averaged a AA rating. Excluding
the bonds held by EIG, Co., 85 percent of the bond portfolio was
investment grade (BBB or better). EIG, Co.'s bond holdings consisted
of Euro notes and bank bonds with 60 percent of the portfolio rated
A or better and the remainder nonrated. The Company's portfolio does
not include any bonds in default as to either principal or interest.
Bonds held at December 31, 1994, had an average yield of 7.8 percent
and fair value of $135.0 million. Redeemable preferred stocks
averaged a BBB rating and had a yield of 8.7 percent. The fair value
of these investments was $63.9 million at year end.
The carrying value of the equity securities portfolio
represented 42 percent of total investments at December 31, 1994.
The Company recorded $11.8 million of dividends and $6.7 million of
net realized gains from this portfolio in 1994. Also included in
realized losses in 1994 is $1.5 million in losses on common stocks
arising from declines in the realizable value of investments
considered to be other than temporary. The Company's largest single
holding accounted for less than 1.0 percent of total assets.
LIQUIDITY AND CAPITAL RESOURCES
Balances at December 31, 1994 1993 1992
Total assets $ 905.7* $ 877.9 $ 886.4
Short-term investments 73.8** 53.8 46.8
Cash 12.1 7.3 8.7
Short-term borrowings 50.9*** 42.7 52.2
Shareholders' equity 299.5 324.7 374.3
*Includes $100.9 million resulting from consolidation of EIG, Co.
**Includes $22.6 million resulting from the 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 insurance and engineering 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
liquidity through its short-term commercial paper program. This
program has a limit of $75 million. At December 31, 1994, $26.7
million was outstanding. Commercial paper outstanding is primarily
used to fund engineering services operations. The Company currently
has no significant capital commitments planned for 1995.
Cash provided from operations was $40.3 million in 1994
compared to $53.3 million in 1993 and $63.3 million in 1992. The
decline in cash provided from operations in 1994 is due to lower
premiums received, higher paid claims (which relate primarily to
claims incurred in prior years), and higher expenses paid. Cash
outflows include payments for restructuring initiatives begun late
in 1993.
Cash provided by operating and investing activities was used to
pay dividends, repay short-term borrowings, and repurchase Company
stock. The Company repurchased 147,486; 229,992 and 350,354 shares
of its common stock in 1994, 1993 and 1992, respectively.
Dividends paid by the Company are limited by state insurance
regulations. The current restriction is the greater of 10 percent of
statutory surplus or prior year's net income as reported to the
regulatory agencies. Currently the Company can pay $37.9 million in
dividends in 1995 without requesting regulatory approval. Due to the
Company's strong financial position, regulatory approval was
received for the payment of 1994 dividends.
As part of HSB's strategic planning process the Company will
assess 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 will be 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 are
required to report the results of the formula for the first time in
their 1994 statutory filings. The Company expects to meet RBC
requirements.
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 effective sometime
after 1995.
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 for years beginning after 1995.
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, 1994, 1993 and 1992.
Consolidated Statements of Financial Position
- December 31, 1994 and 1993.
Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1993 and 1992.
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1994, 1993
and 1992.
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 statements of financial
position of The Hartford Steam Boiler Inspection and Insurance
Company and its subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of operations, cash flows
and changes in shareholders' equity for each of the three years
in the period ended December 31, 1994, which financial statements
are listed in the Index to Financial Statements and Financial
Statement Schedules (Index) of this Form 10-K. We have also
audited the financial statement schedules listed in the Index 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, 1994
and 1993, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1994, 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, accounting for investments in debt and
equity securities, and accounting and reporting for reinsurance
during 1993 and its method of accounting for postretirement
benefits other than pensions in 1992.
Coopers & Lybrand
Hartford, Connecticut
January 23, 1995
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, (in millions, except per share
data)
1994 1993 1992
REVENUES:
Insurance premiums $ 336.6 $ 349.2 $ 342.9
Net engineering services 232.1 231.5 231.0
Net investment income 26.2 29.3 32.0
Realized investment gains 8.7 26.1 30.8
------ ------ ------
Total revenues 603.6 636.1 636.7
------ ------ ------
EXPENSES:
Claims and adjustment 143.2 199.1 172.4
Policy acquisition 64.7 64.2 64.9
Underwriting and inspection 105.1 112.3 103.8
Net engineering services 213.9 219.7 216.3
Interest 1.6 1.8 2.5
Restructuring -- 20.0 --
Charge for Proposition 103 2.9 -- --
------ ------ ------
Total expenses 531.4 617.1 559.9
Equity in operations of insurance
association 1.4 (2.1) (3.4)
------ ------ ------
INCOME BEFORE TAXES AND CUMULATIVE
EFFECTS OF CHANGES IN ACCOUNTING 73.6 16.9 73.4
------ ------ ------
INCOME TAXES (BENEFIT):
Current 18.7 6.9 18.7
Deferred 3.0 (3.1) (1.6)
------ ------ ------
Total income taxes 21.7 3.8 17.1
------ ------ ------
INCOME BEFORE CUMULATIVE EFFECTS
OF CHANGES IN ACCOUNTING 51.9 13.1 56.3
Cumulative effect of change in
accounting for postemployment benefits
(net of income tax of $1.9) -- (3.6) --
Cumulative effect of change in
accounting for postretirement benefits
other than pensions (net of income
tax of $7.8) -- -- (15.1)
------ ------ ------
NET INCOME $ 51.9 $ 9.5 $ 41.2
------ ------ ------
PER COMMON SHARE:
Income before accounting changes $ 2.54 $0.63 $ 2.71
Cumulative effects of changes
in accounting -- (0.17) (0.73)
------ ------ ------
Net income $ 2.54 $0.46 $ 1.98
====== ====== ======
Average shares outstanding 20.5 20.7 20.8
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 data)
1994 1993
ASSETS:
Cash $ 12.1 $ 7.3
Short-term investments, at cost 73.8 53.8
Fixed maturities, at fair value
(cost - $205.2; $146.7) 198.9 154.9
Equity securities, at fair value
(cost - $178.7; $236.8) 204.9 290.0
------- -------
Total cash and invested assets 489.7 506.0
Insurance premiums receivable 83.1 68.5
Engineering services receivable 72.1 79.0
Fixed assets 64.2 64.3
Prepaid acquisition costs 35.5 30.0
Capital lease 17.5 18.3
Reinsurance recoverable 44.9 44.5
Other assets 98.7 67.3
------- -------
Total assets $ 905.7 $ 877.9
======= =======
LIABILITIES:
Unearned insurance premiums $ 201.3 $ 169.3
Claims and adjustment expenses 199.4 214.4
Short-term borrowings 50.9 42.7
Long-term borrowings .6 .7
Capital lease 27.8 27.7
Deferred income taxes (4.6) 6.9
Dividends payable 11.2 10.9
Minority interest 20.0 --
Other liabilities 99.6 80.6
------- -------
Total liabilities 606.2 553.2
------- -------
SHAREHOLDERS' EQUITY:
Common stock (stated value; shares
authorized 50.0; shares issued 21.3;
shares outstanding 20.4; 20.5) 10.0 10.0
Additional paid-in capital 34.0 33.9
Unrealized investment gains, net of tax 13.9 44.2
Retained earnings 288.1 280.4
Treasury stock, at cost;
(shares .9; .8) (41.9) (35.7)
Benefit plans (4.6) (8.1)
------- -------
Total shareholders' equity 299.5 324.7
------- -------
Total liabilities and shareholders'
equity $ 905.7 $ 877.9
======= =======
Shareholders' equity per common share $ 14.67 $ 15.80
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)
1994 1993 1992
OPERATING ACTIVITIES:
Net income $ 51.9 $ 9.5 $ 41.2
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 23.6 20.6 19.9
Deferred income taxes 3.0 (3.1) (9.3)
Realized investment gains (8.7) (26.1) (30.8)
Change in:
Insurance premiums receivable (4.3) (6.5) (2.5)
Engineering services receivable 6.9 (7.8) 1.3
Prepaid acquisition costs (2.0) -- (2.1)
Reinsurance recoverable 3.8 (4.6) (39.9)
Unearned insurance premiums 8.5 (1.7) 14.1
Claims and adjustment expenses (37.2) 41.7 61.4
Other (5.2) 31.3 10.0
------ ------ ------
Cash provided by operating activities 40.3 53.3 3.3
------ ------ ------
INVESTING ACTIVITIES:
Fixed asset additions (16.8) (14.3) (26.2)
Investments:
Sale (purchase) of short-term
investments, net 2.5 (7.2) (5.1)
Purchase of fixed maturities (52.3) (29.9) (36.2)
Proceeds from sale of fixed
maturities 13.5 7.1 15.7
Redemption of fixed maturities 20.5 27.5 21.3
Purchase of equity securities (151.1) (488.5) (446.1)
Proceeds from sale of equity
securities 216.6 516.2 476.8
Cash acquired in connection with
EIG acquisition .3 -- --
------ ------ ------
Cash provided by investing
activities 33.2 10.9 0.2
------ ------ ------
FINANCING ACTIVITIES:
Increase (decrease) in short-term
borrowings, net (15.9) (9.5) 5.2
Repayment of long-term debt (.1) (.1) (5.6)
Dividends paid to shareholders (43.9) (43.9) (42.3)
Repayment of employee stock ownership
plan debt (2.1) (1.9) (1.7)
Purchase of treasury stock (6.7) (10.2) (16.4)
------ ------ ------
Cash used in financing activities (68.7) (65.6) (60.8)
------ ------ ------
Net increase (decrease) in cash 4.8 (1.4) 2.7
Cash at beginning of period 7.3 8.7 6.0
------ ------ ------
Cash at end of period $ 12.1 $ 7.3 $ 8.7
====== ====== ======
INTEREST PAID $ 1.6 $ 1.8 $ 2.6
------ ------ ------
FEDERAL INCOME TAX PAID $ 7.5 $ 3.5 $ 25.8
------ ------ ------
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 SHAREHOLDERS' 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, 1991 $ 402.8 $ 10.0 $ 33.0 $ 68.1 $ 316.3 $ (12.7) $ (11.9)
------------------------------------------------------------------------------------------------------------------------
Net income 41.2 -- -- -- 41.2 -- --
Dividends declared (42.7) -- -- -- (42.7) -- --
Change in unrealized investment gains (16.2) -- -- (16.2) -- -- --
Benefit plans 4.0 -- .3 -- -- .7 3.0
Exercise of stock options 1.1 -- .1 -- -- 1.0 --
Purchase of treasury stock (15.9) -- -- -- -- (15.9) --
------------------------------------------------------------------------------------------------------------------------
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 (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 (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)
========================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in millions)
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. Certain amounts from
prior years have been reclassified to conform to the 1994
presentation.
INSURANCE. Insurance premiums are net of reinsurance ceded and are
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
recorded as prepaid premiums and 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 gross of
amounts recoverable from reinsurers and 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 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 such estimated reserves are included in the
results of operations in the period in which the estimates are
changed. See Note 11. The Company records subrogation when
recoverability is probable, such as when a judgment is returned,
liability is admitted to or settlement is reached. In previous
years, the Company had exposure to environmental loss through
participation in certain insurance pools. Those liabilities were
settled in early 1994.
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 $21.5, $24.6 and $33.7 million in 1994,
1993 and 1992, respectively. 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. At December 31, 1993, the Company adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities." The Company
determined that all fixed maturities and equity securities should be
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. The adoption of this statement resulted in an
increase in the carrying value of fixed maturity investments of $8.2
million and an increase in Shareholders' equity of $5.3 million, net
of related deferred taxes at December 31, 1993.
Investment income is net of investment expenses. Realized
investment gains and losses are determined on the basis of specific
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
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 income taxes are provided for unrealized
appreciation on fixed maturities and equity securities available for
sale, prepaid acquisition costs, certain employee benefit
obligations, and other items which are the result of temporary
differences in the treatment of such items for tax and financial
statement purposes. 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.
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
$22.9 and $3.9 million at December 31, 1994 and 1993, respectively.
See Note 3. The Company evaluates the realizability of goodwill
based upon projections of non-discounted cash flows of the related
subsidiary.
2. Changes in Accounting Principles
As discussed in Note 1, the Company adopted SFAS 115 in 1993.
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 $0.17 per share. This charge was
recognized as the cumulative effect of a change in accounting in the
Consolidated Statements of Operations.
In 1993, the Company also adopted Statement of Financial
Accounting Standards No. 113 (SFAS 113), "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts." All
amounts on the Consolidated Statements of Financial Position were
reclassified accordingly. The adoption of SFAS 113 had no impact on
net income.
In 1992, the Company adopted Statement of Financial Accounting
Standards No. 106 (SFAS 106), "Employers Accounting for
Postretirement Benefits Other Than Pensions" with retroactive
application to January 1, 1992. Under SFAS 106 the expense for these
benefits was $2.7, $2.3 and $2.0 million for 1994, 1993 and 1992,
respectively. Prior to 1992 these costs were expensed as claims were
paid. See Note 16.
3. Acquisition
In December 1994, the Company acquired the remaining 50%
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 is 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. 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 will be
amortized over 15 years. The Company's interest in EIG, Co. has been
fully consolidated in the Consolidated Statements of Financial
Position at December 31, 1994. Prior to this acquisition, the
Company's 50% ownership in EIG had been accounted for under the
equity method. Accordingly, the results of operations for all
periods presented have been reflected under the caption, "Equity in
operations of insurance association," in the Consolidated Statements
of Operations.
The unaudited pro forma condensed consolidated results of
operations presented below assume the transaction occurred at the
beginning of each period presented:
1994 1993 1992
Premiums $ 368.6 $ 373.1 $ 357.3
Income before taxes and
cumulative effect of changes
in accounting $ 72.8 $ 12.9 $ 67.8
Income before cumulative
effect of changes in
accounting $ 52.0 $ 9.8 $ 51.7
Income per share before
cumulative effect of changes
in accounting $ 2.54 $ 0.47 $ 2.49
These unaudited pro forma results are not necessarily indicative of
the results of operations that would have occurred had the
acquisition taken place at the beginning of each period, or of
future operations of the combined companies.
Historical results of EIG for the past three years follow:
1994 1993 1992
Premiums $ 32.0 $ 23.9 $ 14.4
Income (loss) before taxes
and cumulative effect of
changes in accounting $ 2.7 $ (4.2) $ (6.9)
4. 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, 1994, $1.5
million of restructuring liability remains on the books requiring
payments through 1996.
5. Segment Information
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 because the allocations would be immaterial.
The Company derives approximately 10 percent of its revenues
from 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,
1994 1993 1992
REVENUES
U.S. $ 561.6 $ 595.6 $ 599.7
Non-U.S. 42.0 40.5 37.0
------ ------ ------
Total revenues $ 603.6 $ 636.1 $ 636.7
====== ====== ======
INCOME BEFORE TAXES AND CUMULATIVE EFFECTS OF
CHANGES IN ACCOUNTING
U.S. $ 69.7 $ 18.2 $ 74.8
Non-U.S. 3.9 (1.3) (1.4)
Total income before taxes ------ ------ ------
and cumulative effects of
changes in accounting $ 73.6 $ 16.9 $ 73.4
====== ====== ======
AT DECEMBER 31,
1994 1993 1992
IDENTIFIABLE ASSETS
U.S. $ 744.0 $ 807.3 $ 815.4
Non-U.S. 161.7* 70.6 71.0
------ ------ ------
Total assets $ 905.7 $ 877.9 $ 886.4
====== ====== ======
* Includes $100.9 million resulting from consolidation of EIG,
Co. See Note 3.
6. Statutory Financial Information
Annual statements for state insurance regulatory authorities
are currently prepared using an accounting method 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 consist primarily of the accounting for prepaid
acquisition costs, deferred income taxes, certain non-insurance
affiliates and employee benefit plans. At year-end 1994 and 1993,
policyholders' surplus on a statutory basis was $238.0 and $259.2
million, respectively. Consolidated statutory net income for 1994,
1993 and 1992 was $38.6, $19.7 and $41.8 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, $37.9 million of statutory surplus is available for
distribution to shareholders in 1995 without prior regulatory
approval.
In December 1993, the NAIC adopted the property and casualty
risk based capital (RBC) formula that will allow 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 assets risk, credit risk
and off-balance sheet risk. Property and casualty insurers are
required to report the results of the formula for the first time in
their l994 statutory filings. The Company expects to meet RBC
requirements.
7. Investments
INCOME FROM INVESTMENT OPERATIONS
1994 1993 1992
Net investment income:
Short-term interest $ 2.0 $ 1.3 $ 1.8
Fixed maturities:
Taxable interest 4.1 3.7 2.3
Tax exempt interest 2.5 2.1 2.1
Redeemable preferred dividends 6.4 6.9 8.3
Equity securities:
Common dividends 6.7 10.5 10.7
Non-redeemable preferred
dividends 5.1 6.3 6.6
Other 2.3 1.0 2.3
------ ------ ------
Total investment income 29.1 31.8 34.1
Investment expenses (2.9) (2.5) (2.1)
------ ------ ------
Net investment income $ 26.2 $ 29.3 $ 32.0
====== ====== ======
Realized investment gains (losses):
Fixed maturities:
Bonds:
Gains $ 1.2 $ 1.0 $ .5
Losses (.7) (.6) (.2)
------ ------ ------
Net gains .5 .4 .3
Redeemable preferred stocks:
Gains 1.7 .6 .6
Losses (.2) (.4) (.6)
------ ------ ------
Net gains 1.5 .2 --
Equity securities:
Common stocks:
Gains 19.3 37.3 35.8
Losses (17.3) (16.0) (12.1)
------ ------ ------
Net gains 2.0 21.3 23.7
Non-redeemable preferred stocks:
Gains 5.0 4.2 6.9
Losses (.3) -- (.1)
------ ------ ------
Net gains 4.7 4.2 6.8
------ ------ ------
Realized investment gains $ 8.7 $ 26.1 $ 30.8
====== ====== ======
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.
1994 1993 1992
UNREALIZED INVESTMENT GAINS,
NET OF TAX
Fixed maturities:
Gains $ 2.4 $ 9.1 n/a*
Losses (8.7) (.9) n/a*
------ ------ ------
Net gains (losses) (6.3) 8.2 n/a*
Equity securities:
Gains 35.8 59.3 $ 75.7
Losses (9.6) (6.1) (4.8)
------ ------ ------
Net gains 26.2 53.2 70.9
Foreign exchange (3.4) (2.2) (1.4)
------ ------ ------
Total unrealized investment
gains 16.5 59.2 69.5
Income taxes (2.6) (15.0) (17.6)
------ ------ ------
Unrealized investment gains,
net of tax $ 13.9 $ 44.2 $ 51.9
====== ====== ======
*The Company adopted SFAS 115 at December 31, 1993. See Notes 1
and 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:
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
====== ====== ===== =====
1993
---------------------------------------
Estimated Gross Gross
Amortized Fair Unrealized Unrealized
Category Cost Value Gains Losses
----------------------------------------------------------------
Redeemable preferred
stocks $ 72.3 $ 76.3 $ 4.6 $ .6
States and municipalities 28.9 31.2 2.5 .2
Foreign governments 26.6 28.4 1.8 --
Corporate and other 18.7 18.8 .2 .1
U.S. Treasury and agencies .2 .2 -- --
------ ------ ------ ------
Total fixed maturities $146.7 $154.9 $ 9.1 $ .9
====== ====== ====== ======
The amortized cost and estimated fair value of fixed maturities at
December 31, 1994 by contractual years-to-maturity follow. Expected
maturities will differ from contractual maturities because borrowers
may have the right to prepay obligations.
1994
---------------------------
Estimated
Amortized Fair
Maturity Cost Value
----------------------------------------------------------------
One year or less $ 36.6 $ 36.6
Over one year through five years 49.1 48.8
Over five years through ten years 47.2 44.8
Over ten years 72.3 68.7
------- -------
Total fixed maturities $ 205.2 $ 198.9
======= =======
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:
1994
---------------------------------------
Estimated Gross Gross
Fair Unrealized Unrealized
Cost 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
====== ====== ====== =====
1993
---------------------------------------
Estimated Gross Gross
Fair Unrealized Unrealized
Cost Value Gains Losses
-----------------------------------------------------------------
Common stocks $ 163.4 $ 205.7 $ 48.0 $ 5.7
Non-redeemable preferred
stocks 73.4 84.3 11.3 .4
------ ------ ------ -----
Total equity securities $ 236.8 $ 290.0 $ 59.3 $ 6.1
====== ====== ====== =====
The Company held no derivative financial instruments in its
investment portfolio at December 31, 1994 and 1993. 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 1994 and 1993,
aggregate premiums received by the Company on covered call options
amounted to $.5 and $.6 million, respectively. Net gains recognized
on sales of underlying instruments amounted to $1.0 and $2.5 million
for 1994 and 1993, respectively. Generally the duration of covered
call options written by the Company does not exceed thirty days.
8. Engineering Services Receivable
Engineering services receivable is summarized as follows:
1994 1993
Amounts billed $ 41.0 $ 47.3
Amounts unbilled 26.0 26.1
Amounts due upon completion of contracts 5.7 6.2
------ ------
72.7 79.6
Less reserve for bad debts (.6) (.6)
------ ------
Engineering services receivable $ 72.1 $ 79.0
====== ======
9. Fixed Assets
Fixed assets are summarized as follows:
1994 1993
Land and buildings $ 7.4 $ 7.4
Furniture, equipment and other 123.1 113.9
------ ------
130.5 121.3
Less accumulated depreciation (66.3) (57.0)
------ ------
Fixed assets $ 64.2 $ 64.3
====== ======
10. Reinsurance
The components of net written and net earned insurance premiums were
as follows:
1994 1993 1992
Written premiums:
Direct $ 251.7 $ 246.1 $ 245.8
Assumed 137.9 131.0 125.1
Ceded (49.3) (32.6) (19.9)
------ ------ ------
Net written insurance premiums $ 340.3 $ 344.5 $ 351.0
====== ====== ======
Earned premiums:
Direct $ 242.6 $ 246.9 $ 245.0
Assumed 139.1 131.6 117.3
Ceded (45.1) (29.3) (19.4)
------ ------ ------
Net earned insurance premiums $ 336.6 $ 349.2 $ 342.9
====== ====== ======
The Company writes direct business through agencies and brokerage
firms. In addition, the Company assumes boiler and machinery
exposures from over 100 insurance companies and several insurance
pools. A significant amount of this assumed book is underwritten by
the Company. 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. 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 which do not
comply with the risk transfer provisions of SFAS 113. The Company
recorded $31.0 and $43.3 million of reinsurance recoveries as a
reduction of its claims and adjustment expenses during the years of
1994 and 1993, respectively. Reinsurance recoverable on paid claims
and adjustment expenses was $6.8 and $1.4 million at December 31,
1994 and 1993, respectively.
11. 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.
1994 1993 1992
Net liability for claims and
adjustment expenses at January 1, $ 171.3 $ 132.8 $ 111.4
------ ------ ------
Plus:
Provision for claims and adjust-
ment expenses occurring in the
current year 141.7 172.2 146.3
Increase in estimated claims
and adjustment expenses arising
in prior years 1.5 26.9 26.1
------ ------ ------
Total incurred claims and
adjustment expenses 143.2 199.1 172.4
------ ------ ------
Less:
Payment for claims arising in:
Current year 63.5 60.9 59.8
Prior years 108.7 99.7 91.2
------ ------ ------
Total payments 172.2 160.6 151.0
------ ------ ------
Plus:
Full consolidation of EIG, Co.
at December 31, 1994 (See Note 3) 19.0 -- --
------ ------ ------
Net liability for claims and
adjustment expenses at
December 31, $ 161.3 $ 171.3 $ 132.8
====== ====== ======
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.
The 1993 and 1992 claims and adjustment expenses included
adverse development of prior years' reserves. The adverse
development of the 1992 and 1991 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. The adverse development of the 1991
year-end reserve was also impacted by two large December losses.
A reconciliation of the net liability to the gross liability
for claims and adjustment expenses is as follows:
1994 1993 1992
Net liability for claims and
adjustment expenses at December 31, $ 161.3 $ 171.3 $ 132.8
Reinsurance recoverable on unpaid
claims and adjustment expenses 38.1 43.1 39.9
Gross liability for claims and ------ ------ ------
adjustment expenses at December 31, $ 199.4 $ 214.4 $ 172.7
====== ====== ======
12. Income Taxes
TAX PROVISION
The tax provision (benefit) consists of the following:
1994 1993 1992
---------------------------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
-----------------------------------------------
Income before taxes $ 73.6 100% $ 16.9 100% $ 73.4 100%
Tax at statutory rates $ 25.8 35% $ 5.9 35% $ 25.0 34%
Income taxed
at foreign rates .2 -- .1 -- .2 --
Dividends received
deduction (4.3) (6) (5.7) (34) (5.6) (8)
Tax exempt interest (.7) (1) (.7) (4) (.7) (1)
Restructuring -- -- 3.5 21 -- --
Tax credits and other .7 1 .7 4 (1.8) (2)
------ --- ------ --- ------ ---
Total income taxes and
effective tax rate $ 21.7 29% $ 3.8 22% $ 17.1 23%
====== === ====== === ====== ===
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, 1994 and 1993 are as follows:
1994 1993
Deferred tax liabilities:
Deferred acquisition costs $ (11.7) $ (10.5)
Accelerated depreciation (3.4) (3.8)
Pension asset (9.9) (7.7)
Unrealized investment gains (6.8) (20.8)
Other - net (6.6) (6.1)
------- -------
Total deferred tax liabilities (38.4) (48.9)
Deferred tax assets:
Benefit plans $ 11.2 $ 10.9
Capital leases 3.8 3.5
Unearned premium reserve 12.2 11.9
Loss reserve discounting 6.8 8.4
Restructuring .5 2.8
Other - net 8.5 4.5
------- -------
Total deferred tax assets 43.0 42.0
------- -------
Net deferred tax assets
(liabilities) $ 4.6 $ (6.9)
======= =======
At December 31, 1994, no valuation allowance was established as
realization of deferred tax assets was determined to be more likely
than not through taxable income from prior years available for
carryback.
OTHER INFORMATION
Deferred income taxes on the Consolidated Statements of Financial
Position include a provision for taxes on net unrealized investment
gains. Federal income tax returns for the years 1993, 1992 and 1991
are open to examination by the Internal Revenue Service. If
examined, no significant tax adjustments are anticipated.
13. 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 $8.6 and $7.8 million at December 31, 1994 and
1993, 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 facility's variable operating expenses. This amounted
to approximately $2.8, $2.9 and $2.9 million for the years ended
1994, 1993 and 1992, 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 $15.1, $14.7 and $14.5
million in 1994, 1993 and 1992, respectively.
At December 31, 1994, minimum rental commitments under
noncancelable leases accounted for as operating leases with initial
or remaining terms of more than one year were as follows:
Years ended December 31,
1995 $ 13.7
1996 13.0
1997 11.3
1998 9.2
1999 7.4
2000 and thereafter 9.8
------
Total $ 64.4
======
14. Short-term and Long-term Borrowings
During 1994, 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, 1994 and 1993 was $26.7
and $42.6 million, respectively. Current maturities of long-term
debt 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 3. This debt matures in 1995 and bears interest at an
average rate of 9.4%. Long-term borrowings mature on or before
December 31, 2001.
15. 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.
The pension expense for the U.S. pension plans was a net credit
to earnings for 1994, 1993 and 1992 due to the over-funded status of
the primary plan. The components of the credit were as follows:
1994 1993 1992
Service cost $ 3.6 $ 3.2 $ 3.4
Interest cost 9.7 9.3 8.6
Return on assets 6.6 (5.2) (5.1)
Net amortization and deferral (22.0) (11.0) (9.5)
------ ------ ------
Net pension credit $(2.1) $(3.7) $(2.6)
====== ====== ======
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
1994 1993 1994 1993
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 81.7 $ 86.1 $ 20.3 $ 19.6
------ ------ ------ ------
Accumulated benefit obligation $ 82.4 $ 86.9 $ 21.6 $ 20.8
------ ------ ------ ------
Projected benefit obligation $ 97.0 $108.2 $ 23.0 $ 23.4
Assets available for plan benefits
(equity securities and fixed income
investments at fair value) 135.5 147.5 -- --
------ ------ ------ ------
Assets in excess of (less than)
projected benefit obligation 38.5 39.3 (23.0) (23.4)
SFAS 87 unamortized net transition
asset (obligation) 14.7 16.9 (1.6) (1.8)
Unrecognized prior service costs (2.7) (2.2) (3.7) (3.3)
Unrecognized net loss (11.6) (8.1) (4.1) (7.0)
------ ------ ------ ------
Unrecognized net asset (liability) .4 6.6 (9.4) (12.1)
Additional liability -- -- (3.2) (5.0)
------ ------ ------ ------
Net pension asset (liability) $ 38.1 $ 32.7 $(16.8) $(16.3)
====== ====== ====== ======
Assumptions used for the primary U.S. plan at years ended were as
follows:
1994 1993 1992
Discount rate 8.5% 7.5% 8.5%
Long-term rate of return on assets 9.5% 9.5% 10.5%
Rate of increase in future compensation
levels 5.0% 5.5% 6.3%
The benefits payable under the Company's pension plans are based on
a combination of years of service and compensation level. Generally,
vesting occurs if a plan participant has at least five years of
service or meets other criteria. Assets available for plan benefits
include approximately $13.4 million of Company stock at December 31,
1994.
16. Postretirement Plans
The Company makes available health care and life insurance benefits
for retired employees of The Hartford Steam Boiler Inspection and
Insurance Company (HSB) and certain subsidiaries.
The Company made contributions to the plans in 1994 as claims
were incurred. Contributions totaled $2.3, $1.8 and $1.4 million for
the years ended December 31, 1994, 1993 and 1992, respectively. At
December 31, 1994, 1993 and 1992 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
-----------------------
1994 1993 1992
Service cost $ .3 $ .2 $ .1
Interest cost 2.2 2.1 1.9
Amortization of unrecognized
obligations .2 -- --
----- ----- -----
Net periodic postretirement
benefit cost $2.7 $2.3 $2.0
===== ===== =====
The following table sets forth the amounts recognized in the
Consolidated Statements of Financial Position at December 31, in
accordance with SFAS 106:
1994 1993
Accumulated postretirement benefit
obligations for:
Retirees $ 23.6 $ 21.6
Other fully eligible plan
participants 1.2 1.5
Other active plan
participants 4.3 4.7
------ ------
Total accumulated postretirement
benefit obligation 29.1 27.8
Unrecognized net loss (4.8) (3.9)
------ ------
Accrued postretirement benefit
liability $ 24.3 $ 23.9
====== ======
The assumptions used to calculate the obligations at December 31,
were as follows:
1994 1993
Weighted average discount rate 8.5% 7.5%
Current year health care cost
trend rate 14.0% 16.0%
Ultimate health care cost trend rate 5.5% 6.0%
Number of years to reach ultimate 7 8
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, 1994
of $29.4 million by approximately $1.9 million and the aggregate of
the service and interest cost for the year ended December 31, 1994
by $.1 million.
17. 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 1994, 1993 and
1992 was $2.2, $3.3 and $4.0 million, respectively. The unamortized
compensation expense related to this plan is included in Benefit
plans as a component of Shareholders' equity. These amounts were
$1.4 and $3.0 million in 1994 and 1993, 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 seven 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, 1991 54,199 554,394 $ 56.07
--------- ------- -------
Authorized 1,000,000 -- --
Options granted (263,600) 263,600 51.58
Options forfeited (exercised) 7,800 (41,011) 36.51
Restricted stock granted (47,051) -- --
--------- ------- -------
Balance, December 31, 1992 751,348 776,983 55.58
--------- ------- -------
Options granted (355,400) 355,400 55.39
Options forfeited (exercised) 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) 84,600 (136,800) 49.21
Restricted stock granted (10,375) -- --
--------- --------- -------
Balance, December 31, 1994 144,503 1,263,550 $ 54.42
========= ========= =======
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 is 20,000 shares of common stock. Under this plan,
1,935, 1,413 and 1,740 shares of restricted stock were granted in
1994, 1993 and 1992, respectively.
18. 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
Trust). In 1985, the Trust borrowed $15 million from commercial
lenders at 9.57 percent and purchased 1,142,856 newly issued shares
of the Company's common stock (adjusted to reflect stock splits
since that date). The loan matures in 1995. The Company guaranteed
the loan, and the shares held in the Trust are pledged as
collateral. At December 31, 1994, the Trust held approximately
200,000 shares of stock not allocated to employees.
The loan is reported as a liability, and the cost of
unallocated shares related to the ESOP is included under Benefit
plans as a component of Shareholders' equity. At December 31, 1994
and 1993, respectively, the ESOP loan was $1.7 and $3.7 million,
respectively. The cost of unallocated shares was $1.1, $2.6 and $4.1
million in 1994, 1993 and 1992, respectively.
Contributions made by the Company, plus the dividends on the
unallocated shares held by the Trust, are used to make principal and
interest payments of approximately $2.4 million per year over the
10-year term. Shares are allocated to the account of each
participant with one or more years of service, based on salary, and
become fully vested after five years of service.
Components of the ESOP expense were as follows:
1994 1993 1992
Amortization of allocated shares $ 2.1 $ 1.9 $ 1.8
Interest expense .3 .5 .6
Dividends paid on unallocated shares (.4) (.7) (.9)
Proceeds from sale of forfeited shares (.1) (.1) (.1)
----- ----- -----
ESOP expense $ 1.9 $ 1.6 $ 1.4
===== ===== =====
19. 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.
20. Consolidated Quarterly Data (Unaudited)
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 0.6 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
First Second Third Fourth
1993 Quarter Quarter Quarter Quarter Year
----------------------------------------------------
Insurance premiums $ 87.7 $ 88.0 $ 86.3 $ 87.2 $ 349.2
Net engineering services 56.8 58.0 59.3 57.4 231.5
Net investment income 7.5 7.8 7.3 6.7 29.3
Realized investment gains 7.8 7.6 6.5 4.2 26.1
--------------------------------------------------
Total revenues $ 159.8 $ 161.4 $ 159.4 $ 155.5 $ 636.1
==================================================
Income (loss) before taxes and accounting change $ 24.0 $ 6.1 $ (29.7) $ 16.5 $ 16.9
Income taxes (benefits) 6.2 .6 (7.1) 4.1 3.8
--------------------------------------------------
Income (loss) before cumulative effect of
change in accounting 17.8 5.5 (22.6) 12.4 13.1
Cumulative effect of change in accounting (3.6) -- -- -- (3.6)
-------------------------------------------------
Net income (loss) $ 14.2 $ 5.5 $ (22.6) $ 12.4 $ 9.5
==================================================
Per common share:
Income (loss) before cumulative effect
of change in accounting $ .86 $ .26 $ (1.09) $ .60 $ .63
Cumulative effect of change
in accounting (.17) -- -- -- (.17)
--------------------------------------------------
Net income (loss) $ .69 $ .26 $ (1.09) $ .60 $ .46
==================================================
Dividends declared $ .53 $ .53 $ .53 $ .53 $ 2.12
Common stock price ranges:
High $ 59 1/2 $ 58 $ 54 5/8 $ 49 5/8 $ 59 1/2
Low 54 3/8 52 1/2 43 3/4 43 1/4 43 1/4
Close 57 1/4 54 5/8 48 1/2 44 1/2 44 1/2
Shareholders at December 31, 5,603
*Certain amounts have been reclassified to reflect treatment of
commissions on reinsurance treaties.
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
--------------------------------------- -------- -------- -------- -------- -------- --------
1994 1993
---------------------------------- ----------------------------------
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 $0.2 $0.2 $0.2 $0.2 $0.2 $0.2
"States, Municipalities and Political"
Subdivisions 49.5 47.8 47.8 28.9 31.2 31.2
Foreign Governments 27.5 26.4 26.4 26.6 28.4 28.4
Convertibles and Bonds with Warrants Attached 0.0 0.0 0.0 0.0 0.0 0.0
All Other Bonds 49.9 49.5 49.5 7.6 7.7 7.7
Mortgage Receivable 11.1 11.1 11.1 11.1 11.1 11.1
Redeemable Preferred Stocks 67.0 63.9 63.9 72.3 76.3 76.3
---------------------------------------------------------------------------
Total Fixed Maturities $205.2 $198.9 $198.9 $146.7 $154.9 $154.9
---------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Public Utilities $16.3 $16.7 $16.7 $47.8 $48.1 $48.1
Banks and Insurance 6.7 6.9 6.9 6.7 8.1 8.1
Industrial and Other 103.4 130.1 130.1 108.9 149.5 149.5
Non-Redeemable Preferred Stocks 52.3 51.2 51.2 73.4 84.3 84.3
---------------------------------------------------------------------------
Total Equity Securities $178.7 $204.9 $204.9 $236.8 $290.0 $290.0
---------------------------------------------------------------------------
Short Term Investments and Cash: $85.9 $85.9 $85.9 $61.1 $61.1 $61.1
---------------------------------------------------------------------------
Total Investments $469.8 $489.7 $489.7 $444.6 $506.0 $506.0
===========================================================================
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
------------------------------------------------------------------------------------------------
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%
1992
Property and
Liability
Insurance $245.0 $19.4 $117.3 $342.9 34.2%
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 Accounts Describe (a) Period
-------------------------------------------------------------------------------------------------------
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
1992
Reserve for Accounts Receivable $1.3 $1.5 $0.0 $0.4 $2.4
(a) Engineering Services Receivable written off as uncollectible.
Allowance for Assumed Reinsurance Accounts Receivable
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 1998" and "Members of the Board of
Directors Continuing in Office" on pages 2-6; and "Security
Ownership of Certain Beneficial Owners and Management" on pages
9-10 of the Company's Proxy Statement dated February 28, 1995 are
incorporated herein by reference. Also see page 19 herein.
Item 11. Executive Compensation.
"Meetings and Remuneration of the Directors" on pages 6-8,
"Human Resources Committee Report on Executive Compensation" on
pages 10-13, "Summary Compensation Table" on pages 16-17, "Stock
Option and Long-Term Incentive Plan Tables" on pages 18-20,
"Retirement Plans" on pages 20-21, "Employment Arrangements" on
pages 21-22, "Compensation Committee Interlocks and Insider
Participation" on page 22, and "Performance Graph" on page 23 of
the Company's Proxy Statement dated February 28, 1995 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 9-10 of the Company's Proxy Statement dated
February 28, 1995 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
"Compensation Committee Interlocks and Insider
Participation" on page 22 of the Company's Proxy Statement dated
February 28, 1995 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
accompanying Index to Financial Statements and Financial
Statement Schedules are filed as part of this report.
(b) Reports on Form 8-K - None filed during the quarter
ended December 31, 1994.
(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 30, 1995
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 Officer
March 30, 1995 and Director
/s/ James F. Casey Vice President and Controller
James F. Casey (Principal Financial Officer and
March 30, 1995 Principal Accounting Officer)
(Joel B Alvord)* Director
(Colin G. Campbell)* Director
(Donald M. Carlton)* Director
(Richard G. Dooley)* Director
(William B. Ellis)* Director
(E. James Ferland)* Director
(John A. Powers)* Director
(Lois Dickson Rice)* Director
(Paul A. Vatter)* Director
(John M. Washburn, Jr.)* Director
(Wilson Wilde)* Director
*By: /s/ Robert C. Walker
Robert C. Walker
(Attorney-in-Fact)
March 30, 1995
INDEX TO EXHIBITS
Exhibit
Number Description
(3)(i) Charter of The Hartford Steam Boiler Inspection and
Insurance Company, incorporated by reference to
Exhibit (3)(a) to registrant's Form 10-K for the year
ended December 31, 1990.
(3)(ii) By-laws of The Hartford Steam Boiler Inspection and
Insurance Company amended April 19, 1988,
incorporated by reference to Exhibit (3)(ii) to
registrant's Form 10-K for the year ended December
31, 1993.
(4) 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) 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.
(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 April 21, 1992;
incorporated by reference to Exhibit
(10)(iii)(b) to registrant's Form 10-K
for the year ended December 31, 1992. *
(c) The Hartford Steam Boiler Inspection and
Insurance Company Short-Term Incentive Plan,
as amended and restated April 21, 1992;
incorporated by reference to Exhibit
(10)(iii)(c) to registrant's Form 10-K for
the year ended December 31, 1992. *
(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) Pre-Retirement Death Benefit and Supplemental
Pension Agreement between the registrant and
various executive officers, as amended February
1, 1994.*
(f) 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.*
(g) 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. *
(h) The Radian Corporation Supplemental Executive
Retirement Plan effective January 1, 1991.*
(i) 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. *
(j) 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. *
(k) 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 - 22, with respect
to executive officers' compensation, which pages
are incorporated by reference to registrant's
Proxy Statement dated February 28, 1995. *
(21) Subsidiaries of the registrant.
(23) Consent of experts and counsel -
consent of Coopers & Lybrand.
(24) Power of attorney.
(27) Financial Data Schedule.
(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 1994.
(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.