SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-13300
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0384680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE STATE STREET, HARTFORD, CONNECTICUT 06102
(Address of principal executive offices) (Zip Code)
(203) 722-1866
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since the last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No
The number of shares outstanding of the registrant's common stock
without par value, as of July 31, 1995: 20,378,348
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
INDEX
PART I FINANCIAL INFORMATION PAGE
Consolidated Statements of Operations for the
Quarters and Six Months Ended June 30, 1995 and
1994 (unaudited)................................. 3
Consolidated Statements of Financial Position as of
June 30, 1995 (unaudited) and December 31, 1994.. 4
Consolidated Statements of Cash Flow for the
Six Months Ended June 30, 1995 and 1994
(unaudited)...................................... 5
Notes to Consolidated Financial Statements....... 6
Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations.................................... 7
PART II OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of
Security Holders................................. 13
Item 6 - Exhibits and Reports on Form 8-K........ 14
SIGNATURES................................................. 15
2
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Operations
Unaudited
(In millions, except per share data)
Quarter Six Months
Ended June 30 Ended June 30
1995 1994 1995 1994
Revenues:
Insurance premiums $ 98.1 $ 84.1 $ 191.7 $ 167.4
Net engineering services 63.4 58.3 124.4 114.5
Net investment income 7.2 6.2 14.0 12.7
Realized investment gains 1.2 2.7 1.5 6.3
---------- ---------- --------- ---------
Total revenues 169.9 151.3 331.6 300.9
---------- ---------- --------- ---------
Expenses:
Claims and adjustment 39.4 36.4 76.8 77.2
Policy acquisition 19.4 15.8 38.2 31.3
Underwriting and inspection 31.1 25.8 60.8 50.0
Net engineering services 57.4 54.0 112.7 106.3
Interest 0.2 0.4 0.8 0.7
---------- ---------- --------- ---------
Total expenses 147.5 132.4 289.3 265.5
---------- ---------- --------- ---------
Equity in operations of insurance
association - 1.1 - 0.7
---------- ---------- --------- ---------
Income before taxes 22.4 20.0 42.3 36.1
Income taxes:
Current 7.9 4.7 13.1 8.9
Deferred (1.2) 1.0 (0.5) 1.0
---------- ---------- --------- ---------
Total income taxes 6.7 5.7 12.6 9.9
Net income $ 15.7 $ 14.3 $ 29.7 $ 26.2
========== ========== ========= =========
Net income per share:
Net income $ 0.77 $ 0.70 $ 1.45 $ 1.28
========== ========== ========= =========
Dividends declared per share $ 0.55 $ 0.53 $ 1.10 $ 1.06
Average shares outstanding 20.4 20.5 20.4 20.5
See Notes to Consolidated Financial Statements.
3
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Financial Position
(In millions, except per share data)
June 30, December 31,
1995 1994
(Unaudited)
--------- -----------
Assets:
Cash $ 10.9 $ 12.1
Short-term investments, at cost 88.1 73.8
Fixed maturities, at fair value
(cost - $225.1; $205.2) 227.9 198.9
Equity securities, at fair value
(cost - $159.2; $178.7) 203.5 204.9
---------- -----------
Total cash and invested assets 530.4 489.7
Insurance premiums receivable 89.7 83.1
Engineering services receivable 72.7 72.1
Fixed assets 62.0 64.2
Prepaid acquisition costs 32.8 35.5
Capital lease 17.2 17.5
Reinsurance recoverable 38.9 44.9
Other assets 103.0 98.7
---------- -----------
Total assets $ 946.7 $ 905.7
========== ===========
Liabilities:
Unearned insurance premiums $ 206.9 $ 201.3
Claims and adjustment expenses 184.8 199.4
Short-term borrowings 36.2 50.9
Long-term borrowings 25.6 0.6
Capital lease 27.8 27.8
Deferred income taxes 6.4 (4.6)
Dividends payable 11.2 11.2
Minority Interest 20.0 20.0
Other liabilities 104.6 99.6
---------- -----------
Total liabilities 623.5 606.2
---------- -----------
Shareholders' equity:
Common Stock (stated value; shares authorized
50.0; shares issued 21.3; shares
outstanding 20.4; 20.4) 10.0 10.0
Additional paid-in capital 33.9 34.0
Unrealized investment gains, net of tax 31.1 13.9
Retained earnings 295.4 288.1
Treasury stock, at cost; (shares .9; .9) (43.4) (41.9)
Benefit plans (3.8) (4.6)
---------- -----------
Total shareholders' equity 323.2 299.5
---------- -----------
Total liabilities and shareholders' equity $ 946.7 $ 905.7
========== ===========
Shareholders' equity per share 15.86 14.67
See Notes to Consolidated Financial Statements.
4
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Cash Flows
Unaudited
(In Millions)
Six Months Ended
June 30,
1995 1994
---------- ----------
Operating Activities:
Net income $ 29.7 $ 26.2
Adjustments to reconcile net income
(loss) to cash provided by
operating activities:
Depreciation and amortization 10.2 9.2
Deferred income taxes (0.5) 1.0
Realized investment gains (1.5) (6.3)
Change in:
Insurance premiums receivable (6.6) (2.1)
Engineering services receivable (0.6) 6.0
Prepaid acquisition costs 2.7 1.1
Reinsurance recoverable 6.0 0.8
Unearned insurance premiums 5.6 (6.0)
Claims and adjustment expenses (14.6) (18.5)
Other 1.9 (0.3)
---------- ----------
Cash provided by operating activities 32.3 11.1
---------- ----------
Investing Activities:
Fixed asset additions (6.2) (6.6)
Investments:
Sale (purchase) of short-term investments,
net (14.3) 18.0
Purchase of fixed maturities (98.9) (33.1)
Proceeds from sale of fixed maturities 72.9 2.3
Redemption of fixed maturities 5.7 8.5
Purchase of equity securities (56.2) (95.0)
Proceeds from sale of equity securities 78.8 135.6
---------- ----------
Cash provied by (used in) investment
activities (18.2) 29.7
---------- ----------
Financing Activities:
Dividends paid to shareholders (22.6) (21.8)
Decrease in short-term borrowings, net (14.7) (6.5)
Increase in long-term debt 25.0 0.0
Repayment of employee stock ownership plan debt (1.0) (1.0)
Purchase of treasury stock (2.0) (4.8)
---------- ----------
Cash used in financing activities (15.3) (34.1)
---------- ----------
Net increase (decrease) in cash (1.2) 6.7
Cash at beginning of period 12.1 7.3
---------- ----------
Cash at end of period $ (10.9) $ 14.0
========== ==========
Interest paid $ 1.8 $ 0.7
---------- ----------
Federal income tax paid $ 6.4 $ 3.0
---------- ----------
See Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited)
1. General
The interim financial statements in this report include
adjustments based on management's best estimates and
judgments, including estimates of future loss payments,
which are necessary to present a fair statement of the
results for the interim periods reported. These adjustments
are of a normal, recurring nature. These financial
statements are prepared on the basis of generally accepted
accounting principles and should be read in conjunction with
the financial statements and related notes in the 1994
Annual Report. Certain prior year amounts have been
reclassified to conform with the 1995 presentation.
2. Engineering Insurance Group Acquisition
The 1994 results include the Company's equity in the
Engineering Insurance Group (EIG) partnership in Other
assets and EIG's results in Equity in operations of
insurance association. In December 1994, the Company
acquired the remaining 50 percent interest in EIG from
General Reinsurance Corporation (Gen Re). Coincident with
the 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
1995 results include EIG, Co. on a fully consolidated basis.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 1995
RESULTS OF OPERATIONS
---------------------
(dollar amounts in millions)
Consolidated Overview
---------------------
Quarter Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
------- ------- ------- -------
Insurance premium $ 98.1 $ 84.1 $ 191.7 $ 167.4
Net engineering services revenues 63.4 58.3 124.4 114.5
Net investment income 7.2 6.2 14.0 12.7
Realized investment gains 1.2 2.7 1.5 6.3
------- ------- ------- -------
Total revenues $ 169.9 $ 151.3 $ 331.6 $ 300.9
------- ------- ------- -------
Net income $ 15.7 $ 14.3 $ 29.7 $ 26.2
======= ======= ======= =======
Net income for the second quarter of 1995 increased 10 percent
over the second quarter of 1994. The increase was driven by
improved underwriting results and higher engineering services
margins. Net income for the first six months of 1995 increased
13 percent over the first six months of 1994 with improvements in
insurance and engineering results being offset, in part, by lower
realized gains.
Consolidated revenues in the second quarter of 1995 were up 12
percent from the same quarter in 1994. Insurance premiums
increased 17 percent in the quarter with the EIG acquisition and
its full consolidation constituting the largest single component
of the increase at $11.0 million. In 1994, EIG, Co. results were
presented on the equity method of accounting and, accordingly,
were not reflected under the revenue captions. Engineering
services revenues increased 9 percent from the second quarter
last year with Radian Corporation accounting for most of the
gain. Net investment income increased 16 percent in the current
quarter while realized gains were lower. Consolidated revenues
for the first six months of 1995 increased 10 percent from the
same period in 1994 with insurance, engineering services and
investments all having positive variances to the prior year.
The effective tax rate for the second quarter and the first six
months of 1995 was 30 percent compared to 29 and 27 percent,
respectively, for the comparable prior year periods. The tax
rate
7
fluctuations resulted from significant improvement in
insurance and engineering services operating results. This
changes the mix of pre-tax income between fully taxable earnings
and tax preferred investment income. The Company continues to
make use of tax advantageous investments to minimize the overall
effective tax rate.
Recent Accounting Developments
------------------------------
In March 1995, the Financial Accounting Standards Board (the
Board) issued Statement of Financial Accounting Standards No. 121
(SFAS 121) "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" effective for
fiscal years beginning after December 31, 1995. SFAS 121
requires that entities review long-lived assets, certain
intangibles and goodwill for possible impairment whenever
circumstances indicate that the carrying amount of an asset may
not be recoverable. The SFAS also requires that long-lived
assets and certain intangibles to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell.
Implementation of SFAS 121 is not expected to have a material
impact on the Company's financial results.
Insurance Operations
--------------------
Insurance operations include the insurance results of The
Hartford Steam Boiler Inspection and Insurance Company, the
Boiler Inspection and Insurance Company of Canada (BI & I) and
EIG, Co. The 1995 results include EIG, Co. on a fully
consolidated basis. The 1994 insurance results do not include
EIG as their net results were recorded as Equity in operations of
insurance association rather than in premium and other income
statement accounts.
Quarter Ended Six Months Ended
June 30 June 30
------------- ----------------
1995 1994 1995 1994
------- ------- ------- -------
Gross earned premium $ 114.3 $ 94.7 $ 223.9 $ 187.5
Ceded premium 16.2 10.6 32.2 20.1
------- ------- ------- -------
Insurance premium 98.1 84.1 191.7 167.4
Claims and adjustment expenses 39.4 36.4 76.8 77.2
Underwriting, acquisition
and other expenses 50.5 41.6 99.0 81.3
------- ------- ------- -------
Underwriting gain $ 8.2 $ 6.1 $ 15.9 $ 8.9
======= ======= ======= =======
8
Insurance premiums in the second quarter of 1995 increased 17
percent from the second quarter of 1994. This increase was
primarily attributable to the acquisition and full consolidation
of EIG, Co. and growth in reinsurance assumed business. EIG,
Co.'s premiums increased 26 percent in the current quarter
compared to the second quarter 1994 and reinsurance assumed
premiums increased 22 percent over the same periods. Insurance
premiums for the first six months of 1995 increased 15 percent
from the comparable 1994 period with EIG, Co. and reinsurance
assumed business accounting for the improvement. Reinsurance
ceded costs increased 53 percent in the current quarter and 60
percent year to date from the comparable periods in 1994. Most
of the additional cost was due to the acquisition and full
consolidation of EIG Co. with higher reinsurance treaty costs
also contributing to the variance.
Claims and adjustment expenses increased 8 percent in the current
quarter compared to the second quarter 1994. This variance was
due to the acquisition and full consolidation of EIG, Co.
Exclusive of EIG, Co., claims and adjustment expenses decreased
11 percent for the first two quarters of 1995 from the same
period in 1994. The loss ratio improved in the current quarter
and on a year to date basis compared to the same periods in 1994
as both frequency and severity of claims continued to improve.
Claims for the first six months of 1994 reflect losses of $4.8
million for the California earthquake while in 1995 there have
been no catastrophic losses to date. Gross claims and adjustment
expenses for the first six months of 1995 and 1994 were $85.9
million and $98.0 million, respectively.
Underwriting, acquisition and other expenses increased
approximately 21 percent in the current quarter and year to date
compared to the same 1994 periods. These increases were
primarily due to the acquisition and full consolidation of EIG,
Co. and the increase in acquisition costs associated with the
assumed book of business.
The components of the combined ratio, were as follows:
Quarter Ended Six Months Ended
June 30 June 30
------------- ----------------
1995 1994* 1995 1994*
------- ------- ------- -------
Loss ratio 40.2% 43.3% 40.1% 46.1%
Expense ratio 51.0% 49.5% 51.1% 48.6%
------- ------- ------- -------
Combined ratio 91.2% 92.8% 91.2% 94.7%
======= ======= ======= =======
* - 1994 ratios do not include the results of EIG.
9
Engineering Services Operations
-------------------------------
Quarter Ended Six Months Ended
June 30 June 30
------------- ----------------
1995 1994 1995 1994
------- ------- ------- -------
Net engineering services revenue $ 63.4 $ 58.3 $ 124.4 $ 114.5
Net engineering services expenses 57.4 54.0 112.7 106.3
------- ------- ------- -------
Operating gain $ 6.0 $ 4.3 $ 11.7 $ 8.2
======= ======= ======= =======
Net margin 9.5% 7.4% 9.4% 7.2%
Engineering services operations include the results of HSB's and
BI&I's engineering services, Radian Corporation, HSB Reliability
Technologies (HSBRT) and the Company's other engineering services
subsidiaries.
Net engineering services revenues continued to show consistent
growth as both the second quarter and the first six months of
1995 were up 9 percent from the same periods in 1994. The growth
in revenues was primarily due to increases generated by Radian
Corporation, the Company's largest engineering and environmental
services subsidiary. Radian's increases were achieved through
market share advances in the defense, petro/chemical and general
manufacturing sectors.
The consolidated engineering services operating gain increased 40
percent in the current quarter and 43 percent on a year to date
basis from the same periods in 1994. The single largest
component contributing to the increase resulted from the
disposition of certain unprofitable operations in late 1994.
Investment Operations
---------------------
Quarter Ended Six Months Ended
June 30 June 30
------------- ----------------
1995 1994 1995 1994
Net investment income $ 7.2 $ 6.2 $ 14.0 $ 12.7
Realized investment gains 1.2 2.7 1.5 6.3
------- ------- ------- -------
Pretax income from
investment operations $ 8.4 $ 8.9 $ 15.5 $ 19.0
======= ======= ======= =======
10
Net investment income increased 16 percent for the second quarter
of 1995 compared to the second quarter of 1994 and 10 percent for
the first six months of 1995 from the first six months of 1994.
The increase was due to the acquisition and full consolidation of
EIG, Co. and from additional cash flow provided from operations.
The Company's investment portfolio, including short term
investments, fixed maturities and equity securities, increased
$41.9 million in the first six months of 1995. Unrealized market
gains accounted for $28.0 million of the increase.
Liquidity and Capital Resources
-------------------------------
Balances at
June 30 December 31
1995 1994
Total assets $ 946.7 $ 905.7
Short-term investments 88.1 73.8
Cash 10.9 12.1
Short-term borrowings 36.2 50.9
Shareholder's equity 323.2 299.5
Liquidity refers to the Company's ability to generate sufficient
funds to meet the cash requirements of its business operations.
Cash provided from operations was $32.3 million in the first six
months of 1995 compared to $11.1 million in the first six months
of 1994. The increase over 1994 was due to improved cash flow
from insurance and engineering services operations. Cash flow
from operations improved primarily through increases in premiums
collected and lower claims paid partially offset by higher paid
expenses. The Company receives a regular inflow of cash from
maturing investments, engineering and insurance operations and
maintains a highly liquid investment portfolio. The Company
manages its cash and short-term investment position to meet its
operating expense and claim payment needs.
Capital resources consist of shareholders' equity and debt
outstanding and represent those funds deployed or available to be
deployed to support business operations.
Shareholders' equity of $323.2 million at June 30, 1995 increased
by $23.7 million since December 31, 1994, representing an
increase in book value per share of $1.19 to $15.86 from $14.67.
The increase in book value per share reflects an increase in
unrealized gains, net of tax, of $17.2 million during the first
six months of 1995, and net income of $29.7 million, offset by
dividends of $22.5 million.
11
At June 30, 1995, the Company had significant short-term and
long-term borrowing capacity. The Company is currently
authorized to issue up to $75 million of commercial paper.
Commercial paper outstanding at June 30, 1995 and December 31,
1994 was $36.1 and $26.7 million, respectively. During the first
six months of 1995, the Company repaid $24.1 million of EIG, Co.
debt. In the second quarter of 1995, EIG, Co. issued $25 million
of senior notes due May 15, 2000 at an interest rate of 6.83
percent. These notes were placed privately and were guaranteed by
HSB. The proceeds of the notes were used to provide additional
capitalization for EIG.
The Company currently has no significant capital commitments
planned for the remainder of 1995 and beyond.
12
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders.
(a) The Registrant's 1995 Annual Meeting of Stockholders
was held on April 18, 1995.
(b) Proxies were solicited by Registrant's management
pursuant to Regulation 14A under the Securities
Exchange Act of 1934; there was no solicitation in
opposition to management's nominees as listed in the
proxy statement; and all of such nominees were elected
for a three-year term.
(c) The following matters were voted upon at the Annual
Meeting with the voting results indicated:
1. Election of Directors
Nominee Votes For Withheld
Colin G. Campbell 16,395,019 631,315
John A. Powers 16,625,698 400,636
John M. Washburn, Jr. 16,662,718 363,617
2. Proposal to Adopt 1995 Stock Option Plan
Votes For Against Abstain No Vote
13,298,904 3,185,199 300,267 241,965
3. Proposal to Amend and Restate Long-Term Incentive Plan
Votes For Against Abstain No Vote
14,981,206 1,483,660 319,503 241,965
4. Appointment of Coopers & Lybrand as Independent Public
Accountants
Votes for Against Abstain
16,843,792 100,213 82,330
5. Stockholder Proposal to Eliminate Classified Board
Votes For Against Abstain No Vote
5,195,378 9,627,820 471,711 1,731,425
The total number of shares of the Registrant's Common Stock
outstanding on February 8, 1995, the record date, was 20,416,532.
13
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits -
(3)(ii): By-laws of The Hartford Steam Boiler
Inspection and Insurance Company as
amended and restated July 24, 1995.
(10)(iii): The Hartford Steam Boiler Inspection and
Insurance Company Long-Term Incentive
Plan as amended and restated April 18,
1995.
The Hartford Steam Boiler Inspection and
Insurance Company 1995 Stock Option Plan
as approved April 18, 1995.
(27): Financial Data Schedule.
(b) Reports on Form 8-K - None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE HARTFORD STEAM BOILER
INSPECTION AND INSURANCE COMPANY
Date: August 11, 1995 By: /s/ James F. Casey
James F. Casey
Vice President and Controller
Date: August 11, 1995 By: /s/ Robert C. Walker
Robert C. Walker
Senior Vice President and
General Counsel
15
INDEX TO EXHIBITS
Exhibit No.
3(ii) By-laws of The Hartford Steam Boiler Inspection
and Insurance Company as amended and restated July
24, 1995.
(10)(iii) The Hartford Steam Boiler Inspection and Insurance
Company Long-Term Incentive Plan as amended and
restated April 18, 1995.
The Hartford Steam Boiler Inspection and Insurance
Company 1995 Stock Option Plan as approved April
18, 1995.
(27) Financial Data Schedule.