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 September 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 X No
The number of shares outstanding of the registrant's common stock
without par value, as of October 31, 1995: 20,334,813
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
INDEX
PART I FINANCIAL INFORMATION PAGE
Consolidated Statements of Operations for the
Quarters and Nine Months Ended September 30, 1995
and 1994 (unaudited)................................. 3
Consolidated Statements of Financial Position as
of September 30, 1995 (unaudited) and December 31,
1994................................................ 4
Consolidated Statements of Cash Flow for the
Nine Months Ended September 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....................................... 8
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K........... 14
SIGNATURES.............................................. 15
2
Part I. Financial Information
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Operations
Unaudited
(In millions, except per share data)
Quarter Nine Months
Ended September 30 Ended September 30
1995 1994 1995 1994
------- ------- ------- -------
Revenues:
Insurance premiums $ 98.3 $ 84.3 $ 290.0 $ 251.7
Net engineering services 65.9 57.5 190.3 172.0
Net investment income 6.5 6.4 20.5 19.1
Realized investment gains 1.0 1.8 2.5 8.2
------- ------- ------- -------
Total revenues 171.7 150.0 503.3 451.0
------- ------- ------- -------
Expenses:
Claims and adjustment 38.0 33.8 114.8 111.0
Policy acquisition 20.3 16.2 58.5 47.5
Underwriting and inspection 29.6 26.8 90.4 76.9
Net engineering services 60.3 52.6 173.0 158.8
Interest 0.4 0.4 1.2 1.2
Charge for Proposition 103 - 2.9 - 2.9
------- ------- ------- -------
Total expenses 148.6 132.7 437.9 398.3
------- ------- ------- -------
Equity in operations of insurance
association - 0.4 - 1.1
------- ------- ------- -------
Income before taxes 23.1 17.7 65.4 53.8
Income taxes:
Current 6.1 3.8 19.2 12.7
Deferred 0.7 1.6 0.2 2.6
------- ------- ------- -------
Total income taxes 6.8 5.4 19.4 15.3
Net income $ 16.3 $ 12.3 $ 46.0 $ 38.5
======= ======= ======= =======
Net income per share $ 0.80 $ 0.60 $ 2.25 $ 1.88
======= ======= ======= =======
Dividends declared per share $ 0.57 $ 0.55 $ 1.67 $ 1.61
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)
September 30, December 31,
1995 1994
(Unaudited)
------------ ------------
Assets:
Cash $ 6.4 $ 12.1
Short-term investments, at cost 112.5 73.8
Fixed maturities, at fair value
(cost - $236.7; $205.2) 240.8 198.9
Equity securities, at fair value
(cost - $151.7; $178.7) 204.5 204.9
----------- -----------
Total cash and invested assets 564.2 489.7
Insurance premiums receivable 78.4 83.1
Engineering services receivable 69.8 72.1
Fixed assets 60.6 64.2
Prepaid acquisition costs 33.3 35.5
Capital lease 17.0 17.5
Reinsurance recoverable 33.5 44.9
Other assets 105.4 98.7
----------- ----------
Total assets $ 962.2 $ 905.7
=========== ==========
Liabilities:
Unearned insurance premiums $ 207.6 $ 201.3
Claims and adjustment expenses 180.8 199.4
Short-term borrowings 42.8 50.9
Long-term borrowings 25.5 0.6
Capital lease 27.8 27.8
Deferred income taxes 9.4 (4.6)
Dividends payable 11.6 11.2
Minority Interest 20.0 20.0
Other liabilities 103.7 99.6
----------- ----------
Total liabilities 629.2 606.2
----------- ----------
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 36.4 13.9
Retained earnings 300.1 288.1
Treasury stock, at cost; (shares 1.0; .9) (44.4) (41.9)
Benefit plans (3.0) (4.6)
----------- ----------
Total shareholders' equity 333.0 299.5
----------- ----------
Total liabilities and shareholders' equity $ 962.2 $ 905.7
============ ==========
Shareholders' equity per share 16.36 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)
Nine Months Ended
September 30,
1995 1994
------------ ----------
Operating Activities:
Net income $ 46.0 $ 38.5
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 14.6 15.8
Deferred income taxes 0.2 2.6
Realized investment gains (2.5) (8.2)
Change in:
Insurance premiums receivable 4.7 5.7
Engineering services receivable 2.3 6.7
Prepaid acquisition costs 2.2 (0.6)
Reinsurance recoverable 11.4 7.1
Unearned insurance premiums 6.3 (3.7)
Claims and adjustment expenses (18.6) (27.3)
Other (1.7) (5.5)
------------ ----------
Cash provided by operating activities 64.9 31.1
------------ ----------
Investing Activities:
Fixed asset additions (8.2) (9.8)
Investments:
Purchase of short-term investments, net (38.6) (13.1)
Purchase of fixed maturities (134.2) (33.1)
Proceeds from sale of fixed maturities 88.2 3.8
Redemption of fixed maturities 13.1 12.4
Purchase of equity securities (77.1) (119.7)
Proceeds from sale of equity securities 107.7 178.6
------------ ---------
Cash provided by (used in) investment
activities (49.1) 19.1
------------ ---------
Financing Activities:
Dividends paid to shareholders (33.7) (32.6)
Decrease in short-term borrowings, net (8.1) (11.6)
Increase in long-term debt 25.0 0.0
Repayment of long-term debt (0.1) (0.1)
Repayment of employee stock ownership plan debt (1.6) (1.5)
Purchase of treasury stock (3.0) (5.0)
------------ --------
Cash used in financing activities (21.5) (50.8)
------------ ---------
Net decrease in cash (5.7) (0.6)
Cash at beginning of period 12.1 7.3
------------ ---------
Cash at end of period $ 6.4 $ 6.7
============ =========
Interest paid $ 3.2 $ 3.0
------------ ---------
Federal income tax paid $ 14.7 $ 4.8
------------ ---------
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. The 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
In December 1994, the Company acquired the remaining
50 percent interest in Engineering Insurance Group (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 1994
Consolidated Statement of Operations includes EIG's results in
Equity in operations of insurance association. The Company's
equity in EIG, Co. was fully consolidated at December 31,1994
in the Consolidated Statement of Financial Position. The 1995
amounts include EIG, Co. on a fully consolidated basis.
3. Radian Corporation Joint Venture
On October 23, 1995, HSB and The Dow Chemical Company (Dow)
announced plans for two of their wholly owned subsidiaries to
form a new company, tentatively named Dow Radian LLC (Limited
Liability Company), which will provide environmental, information
technology, and strategic chemical management services to industries
and government worldwide.
The new company, consisting of assets contributed by Dow
Environmental Inc. (DEI) and Radian Corporation, will be headquartered
in Austin, TX. Dow Radian will integrate the engineering and
environmental strengths of Radian and DEI, and DEI's access to the
chemical industry process technology of Dow to provide a wide range
of process and environmental systems and services to global customers.
According to the terms of the agreement in principle, the
ownership of Dow Radian will be 60 percent Dow and 40 percent HSB,
via the wholly owned subsidiaries of each
6
company. Plans call for the transaction to be completed at or near year
end subject to the completion of due diligence.
4. Industrial Risk Insurers
Effective December 1, 1995 the Company will increase its
participation in Industrial Risk Insurers (IRI) from approximately
0.05 percent to 14 percent. IRI is a voluntary joint underwriting
association providing property insurance for the class of business
known as Highly Protected Risks - larger manufacturing, processing,
and industrial businesses which have invested in protection against
loss through the use of sprinklers and other means. The increased
participation will result in approximately $50 million to $60 million
in additional revenue to HSB in 1996 with minimal impact on earnings
in the near term.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
RESULTS OF OPERATIONS
- ---------------------
(dollar amounts in millions)
Consolidated Overview
- ---------------------
Quarter Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
Insurance premium $ 98.3 $ 84.3 $ 290.0 $ 251.7
Net engineering services revenues 65.9 57.5 190.3 172.0
Net investment income 6.5 6.4 20.5 19.1
Realized investment gains 1.0 1.8 2.5 8.2
-------- -------- -------- --------
Total revenues $ 171.7 $ 150.0 $ 503.3 $ 451.0
-------- -------- -------- --------
Net income $ 16.3 $ 12.3 $ 46.0 $ 38.5
======== ======== ======== ========
Net income for the third quarter of 1995 increased 33 percent
over the third quarter of 1994. The increase was achieved
through improvements in both underwriting and engineering services
results. Net income for the first nine months of 1995 increased
19 percent over the first nine months of 1994 with improvements
in insurance and engineering results being offset, in part, by
lower realized gains. The 1994 results were impacted by a
$2.9 million charge for California proposition 103.
Consolidated revenues in the third quarter of 1995 were up
14 percent from the same quarter in 1994. Insurance premiums
increased 17 percent in the quarter. In 1994, EIG, Co. results were
presented on the equity method of accounting and, accordingly,
were not reflected under the revenue captions. If EIG had been
100 percent owned and fully consolidated in 1994, premiums would
have increased by 6 percent in the current quarter. Engineering
services revenues increased 15 percent from the third quarter
last year with Radian Corporation accounting for most of the gain.
Net investment income increased 2 percent in the current quarter
while realized gains were lower. Consolidated revenues for the
first nine months of 1995 increased 12 percent from the same period
in 1994 with insurance, engineering services and investments all
having positive variances to the prior year. The acquisition and
full consolidation of EIG accounted for more than half of the increase.
8
The effective tax rate for the third quarter and the first nine months
of 1995 was 29 percent and 30 percent, respectively, compared to
31 and 28 percent, respectively, for the comparable prior year periods.
The year to date tax rate fluctuations resulted from 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 manage its use
of tax advantageous investments to maximize after tax investment earnings.
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 or position.
In October 1995, the Financial Accounting Standards Board (the Board)
issued Statement of Financial Accounting Standards No. 123 (SFAS 123)
"Accounting for Stock-Based Compensation" effective for fiscal years
beginning after December 15, 1995. SFAS 123 allows entities to adopt
the fair value based method of accounting for stock compensation or
continue under the provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees. Entities electing to remain with the
accounting in Opinion 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method of
accounting in this Statement had been applied. The Company has not
yet determined which approach under the provisions of SFAS 123 will
be adopted.
9
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 Nine Months Ended
September 30 September 30
--------------- -----------------
1995 1994 1995 1994
------- ------- -------- --------
Gross earned premium $ 116.1 $ 97.1 $ 342.7 $ 286.4
Ceded premium 17.8 12.8 52.7 34.7
------- ------- -------- --------
Insurance premium 98.3 84.3 290.0 251.7
Claims and adjustment expenses 38.0 33.8 114.8 111.0
Underwriting, acquisition
and other expenses 49.9 45.9 148.9 127.3
------- ------- -------- --------
Underwriting gain $ 10.4 $ 4.6 $ 26.3 $ 13.4
======= ======= ======== ========
Insurance premiums in the third quarter of 1995 increased
17 percent from the third quarter of 1994. This increase was
primarily attributable to the acquisition and full consolidation
of EIG, Co. and growth in reinsurance assumed business, offset by
slightly higher reinsurance costs. EIG, Co.'s premiums increased
34 percent in the current quarter compared to the third quarter 1994
and reinsurance assumed premiums increased 12 percent over the same
periods. Insurance premiums for the first nine 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 39 percent in the current quarter
and 52 percent year to date from the comparable periods in 1994.
The acquisition and full consolidation of EIG Co. accounted for
$3.5 million of the third quarter increase and $ 11.7 million of
the year to date increase. Higher reinsurance treaty costs also
contributed to the variance.
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 and adjustment
expenses increased 12 percent in the current quarter compared to the
third quarter 1994 and 3 percent on a year to date basis. These
variances were due to the acquisition and full consolidation of
EIG, Co. Exclusive of EIG, Co., claims and adjustment expenses
decreased 7 percent for the first three quarters of 1995 from the
same period in 1994. Claims for the first nine
10
months of 1994 reflect losses of $4.8 million for the California
earthquake while in 1995 there have been no material catastrophic
losses to date. Gross claims and adjustment expenses for the
first nine months of 1995 and 1994 were $123.4 million and $142.1
million, respectively.
Underwriting, acquisition and other expenses increased approximately
16 percent in the current quarter and 20 percent 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. Exclusive of EIG, Co., insurance operating expenses
increased 6 percent in the first nine months of 1995 compared to
the same period in 1994.
The components of the combined ratio, were as follows:
Quarter Ended Nine Months Ended
September 30 September 30
--------------------- ------------------
1995 1994* 1995 1994*
------ ------ ------ ------
Loss ratio 38.7% 40.1% 39.6% 44.1%
Expense ratio 50.3% 51.0% 50.8% 49.4%
------ ------ ------ ------
Combined ratio 89.0% 91.1% 90.4% 93.5%
====== ====== ====== ======
* - 1994 ratios do not include the results of EIG.
Engineering Services Operations
- -------------------------------
Quarter Ended Nine Months Ended
September 30 September 30
--------------- -----------------
1995 1994 1995 1994
------- ------- -------- --------
Net engineering services revenue $ 65.9 $ 57.5 $ 190.3 $ 172.0
Net engineering services expenses 60.3 52.6 173.0 158.8
------- ------- -------- --------
Operating gain $ 5.6 $ 4.9 $ 17.3 $ 13.2
======= ======= ======== ========
Net margin 8.5% 8.5% 9.1% 7.7%
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.
11
Net engineering services revenues continued to show
consistent growth as the third quarter and the first nine months
of 1995 were up 15 percent and 11 percent, respectively, 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
continues to be effective in increasing market share in the
defense, petroleum/chemicals and general manufacturing sectors.
The consolidated engineering services operating gain increased
14 percent in the current quarter and 31 percent on a year to
date basis from the same periods in 1994. Improvements in operating
margins by HSBRT and the gain on Radian's increased revenue
generated the increases. HSBRT disposed of certain unprofitable
operations in late 1994.
Investment Operations
- ---------------------
Quarter Ended Nine Months Ended
September 30 September 30
------------------ -------------------
1995 1994 1995 1994
------ ------- ------- -------
Net investment income $ 6.5 $ 6.4 $ 20.5 $ 19.1
Realized investment gains 1.0 1.8 2.5 8.2
------ ------- ------- -------
Pretax income from
investment operations $ 7.5 $ 8.2 $ 23.0 $ 27.3
====== ======= ======= =======
Net investment income increased 2 percent for the third quarter of
1995 compared to the third quarter of 1994 and 7 percent for the
first nine months of 1995 from the first nine months of 1994.
The increase was due to the acquisition and full consolidation of
EIG, Co. The Company has continued to shift the mix of its
portfolio to fixed maturities to maximize after tax investment
income. The year to date effective tax rate on investment income
decreased to 15.4 percent in 1995 from 16.2 percent for the first
nine months of 1994. The Company's investment portfolio, including
short term investments, fixed maturities and equity securities,
increased $80.2 million in the first nine months of 1995.
Unrealized market gains accounted for $36.7 million of the increase.
12
Liquidity and Capital Resources
- -------------------------------
Balances at
September 30 December 31
-----------------------------
1995 1994
------- -------
Total assets $ 962.2 $ 905.7
Short-term investments 112.5 73.8
Cash 6.4 12.1
Short-term borrowings 42.8 50.9
Long-term borrowings 25.5 0.6
Shareholder's equity 333.0 299.5
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 $64.9 million in the first
nine months of 1995 compared to $31.1 million in the first nine
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 and engineering services revenue 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 $333.0 million at September 30, 1995 increased
by $33.5 million since December 31, 1994, representing an increase in book
value per share of $1.69 to $16.36 from $14.67. The increase in book
value per share reflects an increase in unrealized gains, net of tax,
of $22.5 million during the first nine months of 1995, and net income
of $46.0 million, offset by dividends of $34.0 million.
At September 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 September 30, 1995 and December 31, 1994 was $42.7 and
$26.7 million, respectively.
The Company does not anticipate any significant capital commitment
associated with the Radian/Dow transaction and currently has no
significant capital commitments planned for the remainder of 1995
and beyond.
13
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits -
(10)(iii): Pre-Retirement Death Benefit and Supplemental Pension
Agreement dated September 18, 1995 between the registrant
and one of its executive officers.
(27): Financial Data Schedule
(b) Reports on Form 8-K - None during the quarterly period ended September
30, 1995.
14
SIGNATURES
Pursuant to the requirements of the Securities and 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: November 14, 1995 By: /s/ Saul A. Basch
Saul A. Basch
Senior Vice President, Treasurer
and Chief Financial Officer
Date: November 14, 1995 By: /s/ Robert C. Walker
Robert C. Walker
Senior Vice President and General
Counsel
15