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, 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.)
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.......
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 6, 1996 was $1,021,493,866.
Number of shares of common stock outstanding as of February 6, 1996:
20,288,661.
Documents Incorporated By Reference
Portions of the Proxy Statement dated February 27, 1996 for the Annual
Meeting of Shareholders to be held April 16, 1996 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 $389.1 million for 1995, which accounted for
approximately 58 percent of the Company's revenues. See Note 11
to the Consolidated Financial Statements located in Item 8 of
Part II herein for information on the Company's net written and
net earned premiums over the last three years.
The Company conducts its business in Canada through its
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 HSB Engineering Insurance
Limited (HSB EIL). In December 1994, the Company purchased the
remaining 50% interest in HSB EIL's parent company, Engineering
Insurance Group (EIG) from General Reinsurance Corporation.
Effective December 1, 1995 the Company increased its
membership participation in Industrial Risk Insurers (IRI) from
.5 percent to 14 percent. IRI is a voluntary joint underwriting
association funded by twenty-three members (each of which is a
property-casualty insurance company) which provides 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 Company increased its
share because it believes that it is important for the U.S.
property and casualty industry to maintain a high-quality, stock-
insurer-based, risk-sharing mechanism for underwriting coverage
on large risks. The Company's increased share will enable the
Company to have a more significant role in helping IRI be an
effective and profitable provider of essential property insurance
and loss prevention services to larger risks. IRI has a fiscal
year ending November 30, and provides reports to its members on a
quarterly basis. As a result, the Company's increased
participation will initially be reflected in the first quarter
financial results for 1996.
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 1995 net Engineering Services
revenues were $252.1 million, which accounted for approximately
38 percent of the Company's revenues.
In January 1996, the Company completed the formation of
Radian International LLC, a joint venture with The Dow Chemical
Company to provide environmental, engineering, information
technology, remediation and strategic chemical management
services to industries and governments world-wide. In connection
with the formation of the new company, the Registrant contributed
substantially all of the assets of Radian Corporation and The Dow
Chemical Company contributed the assets of Dow Environmental,
Inc., its wholly-owned subsidiary, as well as access to certain
of its technologies which are in support of the businesses
expected to be conducted by the new company. Radian
International LLC currently is 40 percent owned by Radian
Corporation and 60 percent owned by Dow Environmental Inc.
The Registrant is a multi-national company operating
primarily in North American, European, and Asian markets.
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% interest in EIG in late 1994.
In 1995 the revenues and pre-tax income associated with
operations outside of the United States were approximately 13.5
percent and 20.5 percent, respectively, an increase of
approximately 100 percent over the respective consolidated
amounts for 1994. Assets associated with operations outside of
the United States are approximately 22% of the consolidated
amount. The growth in the Company's non U.S. operations is
primarily attributable to the EIG acquisition and full
consolidation.
For additional information on the Company's business
segments, see Notes 1 and 7 to the Consolidated Financial
Statements located in Item 8 of Part II herein.
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
historically has had 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 19%
percent of net earned premium in 1995. By far the largest of
these other lines is the Company's all risk property
insurance product. The all risk line is marketed to
customers with equipment and machinery exposures, such as
electric utilities, where sophisticated engineering services
are important to loss prevention and control. These
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 also writes all risk coverage specifically tailored
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 Radian, its engineering affiliate, focuses on
researching and developing potential new products and
services, and new markets for current services.
Radian 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. Radian
International LLC, the joint venture company formed with The
Dow Chemical Company described on page 2, was a significant
step in implementing this strategy, as the new company
integrates the environmental and engineering strengths of
Radian with Dow's access to chemical industry process
technology and environmental remediation capabilities.
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 and is establishing a
presence in the engineering insurance market outside of North
America. Based on gross earned premium, the Company's U.S.
market share, at approximately 40%, has remained fairly
stable over the past ten years. Based on net premiums
written reported in the 1995 edition of Bests Aggregates and
Averages, no other single company has more than a 10% market
share. Members of an affiliated group of insurers, the Factory
Mutual System, have a market share of approximately 22%.
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, economic and
competitive pressures have caused insurance customers to
select programs with higher deductibles to offset price
increases. This, 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 writer of risks which
require engineering expertise, 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 pages 3-4.
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's force of
inspectors, engineers, scientists and technicians is 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
The Company's various functional operations are aligned
to focus on its two principal customer groups, commercial
risks and special risks. The Company believes that this
organizational structure allows 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. In 1995 76% of its
net written premiums related to risks located in the U.S. Of
the direct premiums written in the United States in 1995
(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, Florida,
Illinois, New York, Pennsylvania and Texas, no state
accounted for more than 5% 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 its 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, engineering-intensive U.S. and international
accounts are primarily marketed and serviced by account teams
comprised of underwriting, marketing, engineering and claims
staff who have specialized knowledge of particular customer
industries. U.S. customers are serviced primarily by
Hartford Steam Boiler. Canadian customers are serviced by
The Boiler Inspection and Insurance Company of Canada.
Overseas customers are serviced by HSB Engineering Insurance
Limited, based in London, with additional offices in Hong
Kong, Madrid, Miami and Kuala Lumpur. The Company's large,
engineering intensive accounts generate approximately 36% of
its net earned premium.
The Company's reinsurance assumed business (see page 11)
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, 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.
Engineering services are marketed and serviced primarily
by personnel located in the Company's various domestic and
international offices.
While the primary market for engineering services
continues to be the U.S., 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.
In 1995 the Company derived approximately 13 percent of
its revenues from engineering contracts with various agencies
and departments of the U.S. government.
E. REGULATION
Insurance
The Company's insurance operations are subject to
regulation throughout the United States. 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 transactions between members of a holding company
system, including dividends involving insurers. In general,
such transactions must be on fair and reasonable terms, and
in some cases, prior regulatory approval is required. See
Note 8 to the Consolidated Financial Statements located in
Item 8 of Part II herein for additional information.
The nature and extent of regulations pertaining to the
business the Company writes outside of the U.S. varies
considerably. Regulations cover various financial and
operational areas, including such matters as amount and type
of reserves, currency, policy language, repatriation of
assets and compulsory cessions of reinsurance.
In December 1993, the National Association of Insurance
Commissioners (NAIC) adopted risk based capital (RBC)
requirements applicable to property and casualty insurers.
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 for
1995 and 1994, the first year for which the requirements were
effective.
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 1995.
The Company's operations are subject to examination by
insurance regulators at regular intervals. An insurance
financial examination is currently being concluded for the
year ending December 31, 1994 by the Connecticut Insurance
Department, the Company's domestic regulator. No material
findings are expected to be included in the final report of
the examination. Similar regulatory procedures govern the
Company's U.S. insurance subsidiaries and its foreign
subsidiaries.
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. The Company has recorded its ultimate estimate
of assessments in its financial statements.
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 which had been passed by
California voters in 1988. The Company recently concluded an
administrative hearing with the California Insurance
Department on its rollback obligation, however, no decision
has been rendered to date. Given the amount the Company has
reserved for this matter, any adverse decision resulting from
such hearing is not expected to materially affect the
Company's future results.
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. While it is uncertain
at this time whether the model investment law will be adopted,
the Company does not expect such guidelines in their current
form to have a material effect on its investment practices.
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
sometime after 1996.
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 believes 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 impact on 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 all risk 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 files 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. The Company
currently is in the process of developing and filing boiler
and machinery rates in various states utilizing ISO's loss
cost filing.
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 all
risk 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 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. Traditionally, the Company retains the right
to decline or restrict coverage in the same manner as it does
for its own business, however, the Company does offer some
programs under which it agrees to underwrite an entire book
of business meeting specific underwriting guidelines and
occupancy parameters.
The written premium generated through reinsurance
assumed totaled $182.9 million in 1995, representing
approximately 45% of the Company's net written premium.
The insurance industry, in general is undergoing a
significant shakeout and consolidation. Considerable merger
and acquisition activity has occurred recently and more is
anticipated in the future. 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 affected.
Reinsurance Ceded
The Company participates in various facultative, quota
share and excess of loss reinsurance agreements to limit its
exposure, particularly to catastrophic losses, and to provide
additional capacity to write business. Under the Company's
current treaty reinsurance program, its retention on any one
risk is generally limited to $3 million, with potentially
higher per risk retentions dependent on aggregate losses
experienced by the Company during the reinsurance program
period. In addition, the Company uses facultative
reinsurance on certain high exposure risks and has
catastrophe reinsurance for aggregate losses greater than $15
million. The Company utilizes well-capitalized domestic and
international insurance companies and syndicates for its
reinsurance program and monitors their financial condition 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. The
Company is not party to any contracts that do not comply with
the risk transfer provisions of SFAS 113.
As a result of the Company's acquisitions and global
expansion, combined with loss experience in prior years, the
Company has been incurring much higher ceded reinsurance costs in
recent years. The Company modestly increased its retention in
1995 to lessen the impact of higher reinsurance costs and also
structured its current program in such a way as to give the
Company flexibility and greater control over the program in
future years. In 1995 the Company's reinsurance ceded costs
increased $20.8 million (46%) over 1994 in part because of the
acquisition and full consolidation of Engineering Insurance
Group.
For additional information on reinsurance, see Note 11
to the Consolidated Financial Statements located in Item 8 of
Part II herein.
Pools and Joint Underwriting Associations
With the exception of Industrial Risk Insurers as
described on page 1, the Company does not participate to any
significant degree in voluntary reinsurance pools of other
insurance companies because the Company generally 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 18) 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". 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 following table provides a reconciliation of the
beginning and ending reserves for net claims and claim
adjustment expenses for the years ended December 31, 1995,
1994 and 1993.
RECONCILIATION OF NET LIABILITY FOR
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1995 1994 1993
------ ------ ------
(In millions)
Net liability for claims and claim
adjustment expenses at January 1 $161.3 $171.3 $132.8
------ ------ ------
Plus:
Provision for claims and claim adjustment
expenses occurring in the current year 152.2 141.7 172.2
Increase in estimated claims
and claim adjustment expenses arising
in prior years 2.7 1.5 26.9
------ ------ ------
Total incurred claims and
claim adjustment expenses 154.9 143.2 199.1
------ ------ ------
Less:
Payment for claims arising in:
Current year 58.9 63.5 60.9
Prior years 111.8 108.7 99.7
------ ------ ------
Total payments 170.7 172.2 160.6
------ ------ ------
Plus:
Full Consolidation of EIG Co. at
December 31, 1994 - 19.0 -
------ ------ ------
Net liability for claims and claim
adjustment expenses at December 31 $145.5 $161.3 $171.3
====== ====== ======
The 1995 loss ratio was 39.8 percent compared to 42.5
percent and 57.1 percent for 1994 and 1993, respectively.
The continued improvement in 1995 is largely attributable to
the reunderwriting efforts which began in 1993. In 1993,
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, 1995, the amount
recoverable from reinsurers on paid and unpaid claims and
adjustment expenses was $47.9 million compared to $44.9
million in 1994 and $44.5 million in 1993.
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
1995 1994 1993
------ ------ ------
(In millions)
Net liability for claims and claim $145.5 $161.3 $171.3
adjustment expenses at December 31
Reinsurance recoverable
on unpaid losses 45.4 38.1 43.1
------ ------ ------
Gross liability for claims and claim
adjustment expenses at December 31 $190.9 $199.4 $214.4
====== ====== ======
The claim and claim expense reserve runoff table on the
following pages shows the amounts of the net liability for
1985 through 1995 and the amounts of the gross liability for
1993 through 1995. 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 as well as cumulative totals for
claims payments and re-estimated liabilities for both that
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 1990, 1991 and 1992 were
attributable to the same factors that contributed to the 1993
adverse development of prior year reserves described on the
previous page.
The 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 1985 1986 1987 1988 1989 1990* 1991* 1992* 1993* 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Liability for Unpaid
Claims and Claim $99.9 $126.1 $147.5 $157.4 $139.6 $118.2 $115.4 $141.3 $186.7 $161.3 $145.5
Adjustment Expenses
Cumulative Amount Paid as of:
End of Year - - - - - - - - - - -
One Year Later 51.1 54.9 57.4 78.8 85.6 89.6 93.7 103.5 115.9 111.7 -
Two Years Later 65.8 73.6 75.9 92.1 104.2 112.9 119.8 140.4 161.8 - -
Three Years Later 70.6 79.5 74.5 95.5 110.3 124.0 131.8 162.0 - - -
Four Years Later 73.3 79.7 75.4 95.4 112.5 131.1 142.5 - - - -
Five Years Later 74.3 80.4 74.5 93.6 118.9 136.2 - - - - -
Six Years Later 74.5 79.0 74.2 100.5 123.0 - - - - - -
Seven Years Later 74.2 78.8 80.4 101.5 - - - - - - -
Eight Years Later 74.0 84.1 80.4 - - - - - - - -
Nine Years Later 79.3 84.1 - - - - - - - - -
Ten Years Later 80.2 - - - - - - - - - -
Net Liability Reestimated as of:
End of Year 99.9 126.1 147.5 157.4 139.6 118.2 115.4 141.3 186.7 161.3 145.5
One Year Later 104.7 126.4 131.9 129.4 129.4 139.2 142.3 167.5 186.5 164.0 -
Two Years Later 101.1 115.8 100.4 108.7 127.4 141.6 145.1 174.3 186.4 - -
Three Years Later 94.7 96.1 86.0 106.8 127.8 140.5 146.4 173.4 - - -
Four Years Later 85.9 88.0 83.7 103.0 125.0 141.5 146.9 - - - -
Five Years Later 80.8 86.9 80.8 102.3 125.8 139.2 - - - - -
Six Years Later 80.9 83.6 82.0 104.0 125.5 - - - - - -
Seven Years Later 80.7 85.7 82.9 103.8 - - - - - - -
Eight Years Later 84.1 86.0 82.6 - - - - - - - -
Nine Years Later 84.5 86.4 - - - - - - - - -
Ten Years Later 82.4 - - - - - - - - - -
Cumulative Redundancy
(Deficiency) 17.5 39.7 64.9 53.6 14.1 (21.0) (31.5) (32.1) 0.3 (2.7) -
Gross Reserves
YEAR ENDED 1993* 1994 1995
Gross Liability for ---- ---- ----
Unpaid Claims and Claim
Adjustment Expenses $233.3 $199.4 $190.9
Cumulative Amount Paid as of:
End of Year - - -
One Year Later 153.5 135.2 -
Two Years Later 201.9
Gross Liability Reestimated as of:
End of year 233.3 199.4 190.9
One Year Later 242.6 212.0 -
Two Years Later 242.9 - -
Cumulative Redundancy
(Deficiency) (9.6) (12.6) -
*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.
The mix of the portfolio is managed to respond to anticipated
claim pay-out patterns. The company also maintains a highly
liquid short-term portfolio to provide for immediate cash
needs. Investment strategies are developed based on many
factors including operational results, tax implications,
regulatory requirements, interest rates and market
conditions.
The Company's investment portfolio consists of high
quality equity securities and both domestic and foreign fixed
maturities. The Company held no derivative financial
instruments in its investment portfolio at December 31, 1995
and 1994. At year-end 1995 the Company had approximately 47
percent of its invested assets in fixed maturities as
compared to 41 percent at year-end 1994. See "Investment
Operations" in the Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations
located in Item 7 and Note 9 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:
Net Invest- Annualized Rate
Cash and ment Income of Return (2) Investment
Invested Less Before After Gains (Losses) (3)
Assets, Less Interest Income Income Change in
Borrowed Money Expense (1) Taxes Taxes Realized Unrealized
-------------- ----------- ------ ------ -------- -----------
(In Millions) (In Millions)
1995 $514.8 $26.7 5.8% 4.9% $2.8 $48.9
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)
(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 1995, the Company, including its
subsidiaries, employed 4,400 full and part-time employees.
Of this total, 2,385 were employed by Radian Corporation.
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 other foreign locations. The Company considers the
office facilities to be suitable and adequate for its current
and anticipated level of operations.
See Notes 13 and 15 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, 48, 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, 58, Executive Vice President since 4/92;
Director since 7/75; President and Chief Executive Officer of
Radian International LLC since 1/96; President and Chairman
of the Board - Radian Corporation since 1969.
Saul L. Basch, 49, Senior Vice President, Treasurer and Chief
Financial Officer since 10/95; Partner, Coopers & Lybrand
LLP 9/73 - 10/95; most recently Partner-in-Charge of Coopers
& Lybrand's New York Insurance Industry Practice.
Michael L. Downs, 46, 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, 50, 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.
William A. Kerr, 57, Senior Vice President - Engineering since
9/95; Vice President and General Manager, Pratt & Whitney Turbo
Power and Marine Division, United Technologies Corporation 8/95 -
9/95; Vice President of Aftermarket Operations, Pratt & Whitney
4/92 - 8/95; Vice President of Development Operations and
Materials Engineering, Pratt & Whitney 1989-4/92.
R. Kevin Price, 49, Senior Vice President and Corporate
Secretary since 2/94; Second Vice President 4/89 - 2/94;
Assistant Vice President 1/84 - 4/89.
William Stockdale, 50, Senior Vice President since 9/95; Managing
Director and Chief Executive Officer of HSB Engineering Insurance
Ltd., London, since 9/94; Director of Engineering, Engineering
Insurance Co., Ltd. 9/92-9/94; Managing Director Scottish Power
PLC, Glasgow, Scotland 1/89 - 8/92.
Robert C. Walker, 52, 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.
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 6, 1996,
the Company had 5,854 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 1995 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 (net investment income under the
prior standard) calculated as of the December 31st last
preceding. The Company does not expect to be required to
request regulatory approval for the payment of any dividends
in 1996. Under statutory accounting practices, $65.3 million
of statutory surplus is available for distribution to
shareholders in 1996 without prior regulatory approval.
Dividends declared for the 1995 and 1994 fiscal years were
as follows:
First Second Third Fourth Year
---------------------------------------------
1995...........$.55 $.55 $.57 $.57 $2.24
1994...........$.53 $.53 $.55 $.55 $2.16
Quarterly market prices for the registrant's common stock
were as follows for the two most recent fiscal years:
First Second Third Fourth Year
-----------------------------------------------
1995 High......$43 3/4 $45 7/8 $49 3/8 $50 3/8 $50 3/8
1995 Low.......$39 1/4 $41 5/8 $42 5/8 $45 3/8 $39 1/4
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
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 amounts)
- ------------------------------------------------------------------------------------------------
1995 1994(c) 1993 1992 1991
Summary of Statements of Operations
Revenues:
Insurance premiums $ 389.1 $ 336.6 $ 349.2 $ 342.9 $ 318.8
Net engineering services 252.1 232.1 231.5 231.0 210.3
Income from investment operations 31.0 34.9 55.4 62.8 70.4
Total revenues 672.2 603.6 636.1 636.7 599.5
Income before taxes and accounting changes 86.3 73.6 16.9 73.4 101.0
Income taxes 23.7 21.7 3.8 17.1 27.1
Income before accounting changes 62.6 51.9 13.1 56.3 73.9
Income per share before accounting changes 3.07 2.54 0.63 2.71 3.53
Dividends declared per share 2.24 2.16 2.12 2.06 1.90
Summary of Statements of Financial Position
Total assets $ 971.5 $ 905.7 $ 877.9 $ 886.4 $ 843.6
Long-term borrowings and
capital lease obligations 53.4 28.4 28.4 28.4 28.5
Shareholders' equity 341.1 299.5 324.7 374.3 402.8
Per share 16.81 14.67 15.80 18.05 19.16
Return on average equity before
accounting changes 19.5% 16.9% 3.7% 14.8% 19.5%
Stock price per share:
High $ 50.38 $ 53.38 $ 59.50 $ 59.25 $ 63.75
Low 39.25 36.13 43.25 45.13 46.25
Close 50.00 39.88 44.50 58.38 57.50
Common shares outstanding
at end of year (a) 20.3 20.4 20.5 20.7 21.0
Insurance
Operating gain (loss) $ 34.2 $ 20.7 $ (26.4) $ 1.8 $ 22.9
Loss ratio 39.8% 42.5% 57.1% 50.3% 43.6%
Expense ratio 50.9% 50.5% 50.5% 49.2% 49.2%
Combined ratio (b) 90.7% 93.0% 107.6% 99.5% 92.8%
Engineering Services
Gross revenues $ 280.9 $ 253.6 $ 256.1 $ 264.7 $ 232.1
Subcontract & equipment resale costs 28.8 21.5 24.6 33.7 21.8
Net revenues 252.1 232.1 231.5 231.0 210.3
Operating gain 22.6 18.2 11.8 14.7 14.0
Gross margin 8.0% 7.2% 4.6% 5.6% 6.0%
Net margin 8.9% 7.9% 5.1% 6.4% 6.7%
Investments
Net investment income $ 28.2 $ 26.2 $ 29.3 $ 32.0 $ 36.5
Realized investment gains 2.8 8.7 26.1 30.8 33.9
Income from investment operations 31.0 34.9 55.4 62.8 70.4
(a) Reflects the repurchase of approximately .1 million shares in
1995, .1 million shares in 1994, .2 million shares in 1993 and .3
million shares in 1992.
(b) 1995 excludes minority interest and goodwill related to EIG,
Co. 1994 Combined ratio excludes charge for Proposition 103.
(c) See note 4 to Notes to Consolidated Financial Statements in Item 8
of Part II herein regarding EIG, Co. consolidation.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(Dollar amounts in millions, except per share amounts)
SUMMARY OF RESULTS OF OPERATIONS
For the years ended December 31,
1995 1994 1993
------ ------ ------
Revenues:
Insurance premium $389.1 $336.6 $349.2
Net engineering
services revenues 252.1 232.1 231.5
Net investment income 28.2 26.2 29.3
Realized investment gains 2.8 8.7 26.1
------- ------- -------
Total revenues $672.2 $603.6 $636.1
======= ======= =======
Income before cumulative
effect of change in
accounting $ 62.6 $ 51.9 $ 13.1
Cumulative effect of change
in accounting for post-
employment benefits - - (3.6)
------- ------- -------
Net income $ 62.6 $ 51.9 $ 9.5
======= ======= =======
Net income per share $ 3.07 $ 2.54 $ .46
======= ======= =======
Net income in 1995 increased 21 percent from 1994 reflecting
continued improvement in underwriting results for the insurance
business and higher margins in engineering services operations,
which outpaced the planned reduction in realized capital gains.
Improvement in 1994 results relative to 1993 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. Results in 1993 include a
$20 million restructuring charge, significant strengthening of
claims reserves and increased costs of reinsurance.
Consolidated revenues increased 11 percent in 1995 to $672.2
million, reflecting the impact of the acquisition and full
consolidation of EIG, Co. and growth in both the domestic and
global insurance markets. On December 30, 1994, the Company
acquired the remaining 50 percent interest in EIG from General
Reinsurance Corporation (Gen Re). EIG was 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. (See note 4 in Notes
to Consolidated Financial Statements in Item 8 of Part II herein.)
The consolidated revenues in 1994 were below 1993 as marginal growth in
gross premiums was offset by higher reinsurance costs and a decline in
realized investment gains.
In January 1996, The Hartford Steam Boiler Inspection and
Insurance Company (HSB) and The Dow Chemical Company (Dow) formed
a new company, Radian International LLC (Limited Liability
Company), which will provide environmental, information
technology, and strategic chemical management services to
industries and governments worldwide. According to the terms of
the agreement, the ownership of Radian International LLC will be
initially 60 percent Dow and 40 percent HSB, via the wholly owned
subsidiaries of each company. Income will be subject to a
preference return to HSB in the first two years. In 1996, HSB's
interest in Radian International LLC will be accounted for on the
consolidated financial statements under the equity method of
accounting. (See note 5 in Notes to Consolidated Financial Statements
in Item 8 of Part II herein.)
Effective December 1, 1995 the Company increased its
participation in Industrial Risk Insurers (IRI) from
approximately .5 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. IRI has a fiscal year ending November 30 and
provides quarterly reports to member companies of the
association. As a result, HSB's increased participation will
initially be reflected in the first quarter financial reports for
1996.
The effective tax rate for 1995 was 27 percent compared to 29 and
22 percent for 1994 and 1993, respectively. The change from 1994
is due primarily to the change in the mix of foreign and domestic
business and utilization of related credits. The difference from
1993 to 1994 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,
1995 1994 1993
---- ---- ----
Gross earned premium $455.0 $381.7 $378.5
Ceded premium 65.9 45.1 29.3
------ ------ ------
Insurance premium $389.1 $336.6 $349.2
Claims and adjustment
expenses 154.9 143.2 199.1
Underwriting, acquisition
and other expenses 200.0 172.7 176.5
------ ------ ------
Underwriting gain (loss) $ 34.2 $ 20.7 $(26.4)
====== ====== ======
Insurance operations include the insurance results of HSB, The
Boiler Inspection and Insurance Company of Canada (BI&I) and EIG,
Co.
Insurance premiums in 1995 increased 16 percent from 1994. The
EIG, Co. acquisition and full consolidation accounted for a
significant amount of this increase. Had EIG, Co. been 100
percent owned and fully consolidated throughout 1994, the growth
in gross earned premium would have been approximately 7 percent.
Global operations, which represent 19 percent of the 1995 total,
grew 24 percent with expansion into India, China and other Asian
markets representing our largest contributors to such growth. The
Company sees continued opportunities for growth, particularly in
those countries where infrastructure development is moving to the
private sector. At the same time, softening of the market has
occurred as the number of insurers offering capacity has
expanded.
In the domestic insurance markets a program of more disciplined
underwriting principles, arising from a major reunderwriting
effort begun in 1993, has resulted in improved risk selectivity
while at the same time slowing the growth in gross insurance
premiums. 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 in the past several years has
been largely attributable to growth in the reinsurance assumed
book of business.
The insurance industry, in general, continues to undergo
significant shakeout and consolidation. Considerable merger and
acquisition activity has occurred recently and more is
anticipated in the future. 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. 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.
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. The Company's
reinsurance costs continue to be impacted by loss experience from
prior years. In 1995, the Company's reinsurance ceded costs
increased $20.8 million from 1994. Had EIG, Co. been 100 percent
owned and fully consolidated in 1994, the increase would have
been approximately $10 million. In 1995, the Company centralized
and consolidated its treaty reinsurance ceded program to cover
global operations. This strategy will enable HSB to more closely
manage its costs. In 1994 HSB increased its retention in order to
mitigate the rising cost of reinsurance. This change could result
in higher claim costs in future periods.
The increase in claims and adjustment expenses in 1995 compared
to 1994 is the result of the acquisition and full consolidation
of EIG, Co. Claims and adjustment expenses, exclusive of EIG,
Co., decreased $3.9 million in the current year compared with
1994. Claim costs in 1994 include $4.8 million of losses relating
to the California earthquake. The 1993 claims and adjustment
expenses include 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 1995, there were no
material catastrophic losses experienced by the Company. The
components of claims and adjustment expenses, net of reinsurance,
were as follows:
1995 1994 1993
---- ---- ----
Provision for clams and adjust-
ment expenses occurring
in the current year $152.2 $141.7 $172.2
Increase in estimated claims
and adjustment expenses
arising in prior years 2.7 1.5 26.9
------ ------ ------
Total incurred claims
and adjustment expenses $154.9 $143.2 $199.1
====== ====== ======
Loss ratio 39.8% 42.5% 57.1%
====== ====== ======
The improvement in the loss ratios over both periods is
attributable to the reunderwriting efforts begun in 1993. In
1993, 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.
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 generally settle 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. 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.
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. The Company has recorded its ultimate
estimate of assessments in its financial statements.
ENGINEERING SERVICES OPERATIONS
For the years ended December 31,
1995 1994 1993
----- ------ ------
Net engineering
services revenues $252.1 $232.1 $231.5
Net engineering
services expenses 229.5 213.9 219.7
------ ------ ------
Operating gain $ 22.6 $ 18.2 $ 11.8
====== ====== ======
Net margin 8.9% 7.9% 5.1%
====== ====== ======
Engineering services operations includes the results of HSB's and
BI&I's engineering services, Radian Corporation, HSB Reliability
Technologies (HSBRT), HSB Professional Loss Control and HSB
International.
HSB presents both its engineering services revenues and expenses
net of revenue and expenses for subcontractors. Net engineering
services revenue increased 9 percent over 1994 with Radian
accounting for most of the increase. Radian increased revenues by
10 percent in the current year through increases in market share
in the defense, petroleum/chemical and general manufacturing
sectors.
HSB's consolidated engineering services pretax operating gain
increased 24 percent in 1995 to $22.6 million. The 1995 gain,
another record year for the Company, was achieved through growth
at Radian and improved margins at HSBRT. HSBRT's margin increased
$3.4 million in 1995 over 1994 as certain unprofitable operations
were disposed of in 1994. The increase in operating gain in 1994
over 1993 was achieved through improved margins at Radian as they
undertook cost control measures and improved staff utilization.
INVESTMENT OPERATIONS
For the years ended December 31,
1995 1994 1993
---- ---- ----
Net investment income $ 28.2 $ 26.2 $ 29.3
Realized investment gains 2.8 8.7 26.1
------ ------ ------
Income from
investment operations $ 31.0 $ 34.9 $ 55.4
====== ====== ======
Total cash and invested
assets, at fair value $553.8 $489.7* $506.0
Net unrealized
gains, pretax 65.4 16.5 59.2
*Includes $63.1 million resulting from consolidation of EIG, Co.
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. The
investment portfolio includes a wide variety of high quality
equity securities and both domestic and foreign fixed maturities.
The mix of the portfolio is managed to respond to anticipated
claim pay-out patterns. The Company also maintains a highly
liquid short-term portfolio to provide for immediate cash needs.
Investment strategies are developed based on many factors
including operational results, tax implications, regulatory
requirements, interest rates and market conditions.
Net investment income increased slightly in 1995. The 8 percent
growth was due to the full consolidation of EIG, Co. offset by
lower interest rates. The decrease in 1994 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. The
effective tax rate on investment income was 14.0, 17.9 and 13.5
percent in 1995, 1994 and 1993, respectively. The decrease in
1995 resulted from a shift in the mix of the portfolio to more
holdings in tax preferred securities. In 1993, the portfolio was
heavily weighted to equity securities with the effective rate
reduced by lower taxes on dividend income.
The Company's investment portfolio continues to consist of high
grade domestic and foreign investments. At the end of 1995, the
Company's fixed maturities portfolio comprised 47 percent of the
value of the invested assets. The credit quality of the Company's
bond investments at December 31, 1995, averaged AA rating. The
Company's portfolio does not include any bonds in default as to
either principal or interest. Bonds held at December 31, 1995,
had a fair value of $183.9 million. Redeemable preferred stocks
averaged a BBB rating. Declining yields available on new fixed
maturities relative to higher yields on maturing investments over
the past few years have curtailed any significant investment
income growth.
The carrying value of the equity securities portfolio represented
40 percent of the investments at December 31, 1995. This included
$60.4 million of unrealized investment gains, which increased
$34.2 million from 1994 on a sharp upturn in the stock market in
1995. The Company recorded $8.6 million of dividends and $3.5
million of net pretax realized gains from this portfolio in 1995.
The Company's largest single holding accounted for less than 1
percent of total assets.
LIQUIDITY AND CAPITAL RESOURCES
Balances at December 31,
1995 1994 1993
------ ------ ------
Total assets $971.5 $905.7* $877.9
Short-term investments 73.8 73.8** 53.8
Cash 9.3 12.1 7.3
Short-term borrowings 13.4 50.9*** 42.7
Shareholders' equity 341.1 299.5 324.7
*Includes $100.9 million resulting from consolidation of EIG, Co.
**Includes $22.6 million resulting from 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 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. In addition, the
Company has capacity to generate cash of up to $75 million
through its short-term commercial paper program. At December 31,
1995, $12.0 million was outstanding. Commercial paper outstanding
is primarily used to fund engineering services operations. In
1995, the company repaid $24.1 million of EIG, Co. short-term
debt and EIG, Co. subsequently issued $25.0 million of senior
notes due May, 15, 2000 at an interest rate of 6.83 percent. The
Company does not anticipate any significant capital commitment
associated with the Radian/Dow transaction and currently has no
significant capital commitments planned for 1996. However, the
Company will probably guaranty up to 40 percent of future Radian
International LLC borrowings. Based upon the business plan of
Radian International LLC, the Company's guarantee could range
from $20 to $50 million.
Cash provided from operations was $95.5 million in 1995 compared
to $40.3 million in 1994 and $53.3 million in 1993. In 1995, $17
million is attributable to the full consolidation of EIG, Co.
Additional improvement in 1995 is due to better underwriting and
engineering services results. Excluding the impact of EIG, Co.,
cash flow from insurance operations grew as premiums collected
increased by 6 percent while claim payments decreased by 5
percent from 1994. Engineering services revenue collected also
increased by 7 percent.
Cash provided by operating and investing activities was used to
pay dividends, repay short-term borrowings, and repurchase
Company stock. The Company repurchased 136,943; 147,486; and
229,992 shares of its common stock in 1995, 1994 and 1993,
respectively.
Dividends paid by the Company are limited by state insurance
regulations. The current restriction is the greater of 10 percent
of prior year's statutory surplus or net income as reported to
the regulatory agencies. Currently, the Company can pay $65.3
million in dividends in 1996 without requesting regulatory
approval. Due to the Company's strong financial position,
regulatory approval was received for the payment of 1995
dividends.
Pursuant to the terms of the acquisition agreement for EIG, HSB
has the option to exchange the EIG, Co. preferred stock, which
was issued to Gen Re at the time of the acquisition, for HSB
convertible preferred stock at the end of 1996.
As part of HSB's strategic planning process the Company
periodically assesses 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 is 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 were required to report the results of the
formula for the first time in their 1994 statutory filings. HSB
substantially exceeded the RBC requirements in 1995 and 1994.
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
issued during 1996 for adoption by the states. The Company does
not expect such guidelines to have a material effect on its
investment practices.
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 sometime after 1996.
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, 1995,
1994 and 1993.
Consolidated Statements of Financial
Position - December 31, 1995 and 1994.
Consolidated Statements of Cash Flows
for the years ended December 31, 1995,
1994 and 1993.
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993.
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 financial statements
and the financial statement schedules of The Hartford Steam Boiler
Inspection and Insurance Company and its subsidiaries listed in
item 8 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, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 1995, 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 during 1993.
Coopers & Lybrand
Hartford, Connecticut
January 22, 1996
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, (in millions, except per share amounts)
1995 1994 1993
----- ------ -----
REVENUES:
Insurance premiums $389.1 $336.6 $349.2
Net engineering services 252.1 232.1 231.5
Net investment income 28.2 26.2 29.3
Realized investment gains 2.8 8.7 26.1
------ ------ -------
Total revenues 672.2 603.6 636.1
------ ------ -------
EXPENSES:
Claims and adjustment 154.9 143.2 199.1
Policy acquisition 78.1 64.7 64.2
Underwriting and inspection 121.9 105.1 112.3
Net engineering services 229.5 213.9 219.7
Interest 1.5 1.6 1.8
Restructuring - - 20.0
Charge for Proposition 103 - 2.9 -
------ ------ -------
Total expenses 585.9 531.4 617.1
Equity in operations of
insurance association - 1.4 (2.1)
INCOME BEFORE TAXES AND CUMULATIVE ------ ------ -------
EFFECT OF CHANGE IN ACCOUNTING 86.3 73.6 16.9
------ ------ -------
INCOME TAXES (BENEFIT):
Current 24.3 18.7 6.9
Deferred (.6) 3.0 (3.1)
------ ------ -------
Total income taxes 23.7 21.7 3.8
INCOME BEFORE CUMULATIVE EFFECT ------- ------ -------
OF CHANGE IN ACCOUNTING 62.6 51.9 13.1
Cumulative effect of change in
accounting for postemployment
benefits (net of income tax of $1.9) - - (3.6)
------- ------- -------
NET INCOME $ 62.6 $ 51.9 $ 9.5
======= ======= =======
PER COMMON SHARE:
Income before accounting change $ 3.07 $ 2.54 $ .63
Cumulative effect of change
in accounting - - (.17)
------- ------- -------
Net income $ 3.07 $ 2.54 $ .46
======= ======= =======
Average shares outstanding 20.4 20.5 20.7
======= ======= =======
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 amounts)
1995 1994
-------- --------
ASSETS:
Cash $ 9.3 $ 12.1
Short-term investments, at cost 73.8 73.8
Fixed maturities, at fair value (cost - $247.6; $205.2) 255.3 198.9
Equity securities, at fair value (cost - $155.0; $178.7) 215.4 204.9
------- -------
Total cash and invested assets 553.8 489.7
Insurance premiums receivable 87.2 83.1
Engineering services receivable 68.8 72.1
Fixed assets 62.3 64.2
Prepaid acquisition costs 34.1 35.5
Capital lease 16.8 17.5
Reinsurance recoverable 47.9 44.9
Other assets 100.6 98.7
------- -------
Total assets $971.5 $905.7
======= =======
LIABILITIES:
Unearned insurance premiums $216.2 $201.3
Claims and adjustment expenses 190.9 199.4
Short-term borrowings 13.4 50.9
Long-term borrowings 25.6 .6
Capital lease 27.8 27.8
Deferred income taxes 18.9 (4.6)
Dividends payable 11.6 11.2
Minority interest 20.0 20.0
Other liabilities 106.0 99.6
------- -------
Total liabilities 630.4 606.2
------- -------
SHAREHOLDERS' EQUITY:
Common stock (stated value; shares authorized 50.0;
shares issued 21.3; shares outstanding 20.3; 20.4) 10.0 10.0
Additional paid-in capital 33.9 34.0
Unrealized investment gains, net of tax 43.9 13.9
Retained earnings 305.1 288.1
Treasury stock, at cost (shares 1.0; .9) (47.7) (41.9)
Benefit plans (4.1) (4.6)
------- -------
Total shareholders' equity 341.1 299.5
------- -------
Total liabilities and shareholders' equity $971.5 $905.7
======= =======
Shareholders' equity per common share $ 16.81 $ 14.67
======= =======
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) 1995 1994 1993
------- ------ -------
OPERATING ACTIVITIES:
Net income $ 62.6 $ 51.9 $ 9.5
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 23.1 23.6 20.6
Deferred income taxes (.6) 3.0 (3.1)
Realized investment gains (2.8) (8.7) (26.1)
Change in:
Insurance premiums receivable (4.1) (4.3) (6.5)
Engineering services receivable 3.3 6.9 (7.8)
Prepaid acquisition costs 1.4 (2.0) -
Reinsurance recoverable (3.0) 3.8 (4.6)
Unearned insurance premiums 14.9 8.5 (1.7)
Claims and adjustment expenses (8.5) (37.2) 41.7
Other 9.2 (5.2) 31.3
------- ------- -------
Cash provided by operating activities 95.5 40.3 53.3
------- ------- -------
INVESTING ACTIVITIES:
Fixed asset additions (16.8) (16.8) (14.3)
Investments:
Sale (purchase) of short-term investments, net - 2.5 (7.2)
Purchase of fixed maturities (152.1) (52.3) (29.9)
Proceeds from sale of fixed maturities 91.5 13.5 7.1
Redemption of fixed maturities 17.0 20.5 27.5
Purchase of equity securities (95.0) (151.1) (488.5)
Proceeds from sale of equity securities 122.9 216.6 516.2
Cash acquired in connection with EIG acquisition - .3 -
------ ------- -------
Cash provided by (used in) investment activities (32.5) 33.2 10.9
------ ------- -------
FINANCING ACTIVITIES:
Decrease in short-term borrowings, net (37.5) (15.9) (9.5)
Repayment of long-term debt (.1) (.1) (.1)
Increase of long-term debt 25.1 - -
Dividends paid to shareholders (45.3) (43.9) (43.9)
Repayment of employee stock ownership plan debt (1.7) (2.1) (1.9)
Purchase of treasury stock (6.3) (6.7) (10.2)
------- ------- -------
Cash used in financing activities (65.8) (68.7) (65.6)
------- ------- -------
Net increase (decrease) in cash (2.8) 4.8 (1.4)
Cash at beginning of period 12.1 7.3 8.7
------- ------- -------
Cash at end of period $ 9.3 $ 12.1 $ 7.3
======= ======= =======
INTEREST PAID $ 1.5 $ 1.6 $ 1.8
------- ------- -------
FEDERAL INCOME TAX PAID $ 23.4 $ 8.2 $ 4.3
------- ------- -------
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 SHAREHOLDER'S 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, 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, net of tax (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, net of tax (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)
- ----------------------------------------------------------------------------------------------------------------------
Net income 62.6 - - - 62.6 - -
Dividends declared (45.6) - - - (45.6) - -
Change in unrealized
investment gains, net of tax 30.0 - - 30.0 - - -
Benefit plans .9 - (.1) - - .5 .5
Purchase of treasury stock (6.3) - - - - (6.3) -
- ----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 $ 341.1 $ 10.0 $ 33.9 $ 43.9 $ 305.1 $ (47.7) $ (4.1)
======================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share amounts)
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. The preparation
of financial statements in accordance with GAAP requires the use
of estimates in reporting certain assets and liabilities. Actual
results could differ from those estimates.
Insurance
Insurance premium revenues are net of reinsurance ceded and are
generally 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 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 undiscounted and are gross of amounts recoverable from
reinsurers. Reserves 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, changes in
judicial interpretation of legal liability, policy coverage 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 estimated
reserves are included in the results of operations in the period
in which the estimates are changed. (See note 12.) The Company
records subrogation when recoverability is probable, such as when
a judgment is returned, liability is admitted to or settlement is
reached.
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 $28.8, $21.5 and $24.6 million in 1995, 1994 and 1993,
respectively. Generally, 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. All fixed maturities and equity securities are 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.
Investment income is net of investment expenses. Realized
investment gains and losses are determined on the basis of 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 foreign exchange gains and losses on certain 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 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. Deferred income taxes are provided for
unrealized appreciation on fixed maturities and equity securities
available for sale, prepaid acquisition costs, unearned premiums,
certain employee benefit costs and other items which are the
result of temporary differences in the treatment of such items
for tax and financial statement purposes.
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 $21.5 and $22.9 million at
December 31, 1995 and 1994, respectively. The Company evaluates
the realizability of goodwill based upon projections of
undiscounted cash flows.
2. CHANGE IN ACCOUNTING PRINCIPLE
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 $.17 per share. This charge was
recognized as the cumulative effect of a change in accounting in
the Consolidated Statements of Operations.
3. FUTURE CHANGES IN ACCOUNTING PRINCIPLES
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. SFAS
121 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.
In October 1995, 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 current accounting practice. Entities electing to
remain with current accounting 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 expects to make pro forma disclosure of awards granted in
1995 and future years and has not yet settled on a method of
valuation.
4. ACQUISITION
In December 1994, The Hartford Steam Boiler Inspection and
Insurance Company (HSB) acquired the remaining 50 percent
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 was 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. HSB has the option to exchange the EIG, Co.
preferred stock for HSB convertible preferred stock at the end of
1996. 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 is
being amortized over 15 years. The Company's interest in EIG, Co.
has been fully consolidated in the Consolidated Statements of
Financial Position beginning December 31, 1994, reflecting the
preferred issuance as a minority interest. Prior to this
acquisition, the Company's 50 percent ownership in EIG had been
accounted for under the equity method. Accordingly, the results
of operations for 1994 and 1993 have been reflected under the
caption "Equity in operations of insurance association" in the
Consolidated Statements of Operations, while the 1995 results of
operations for EIG, Co. are fully consolidated.
5. SUBSEQUENT EVENTS
In January 1996, HSB and The Dow Chemical Company (Dow) formed a
new company, Radian International LLC (Limited Liability
Company), which will provide environmental, information
technology, and strategic chemical management services to
industries and governments worldwide. According to the terms of
the agreement, the ownership of Radian International LLC
initially will be 60 percent Dow and 40 percent HSB, via the
wholly owned subsidiaries of each company. Income will be subject
to a preference return to HSB in the first two years. As is
customary in joint ventures, the agreements between HSB and Dow
specify certain circumstances under which the business can be
sold, venture assets and liabilities can be distributed or
partners' interests can be sold subject to certain rights of
first refusal.
In 1996, HSB's interest in Radian International LLC will be
accounted for on the consolidated financial statements under the
equity method of accounting. Had the transaction occurred at the
beginning of 1995 total revenues and total expenses would have
been $470.7 and $399.7 million, respectively, and consolidated
assets and liabilities at December 31, 1995 would have been
$954.1 and $613.0, respectively.
6. 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, 1995, $.5 million of restructuring liability remains.
7. SEGMENT INFORMATION
HSB is a multi-national company operating primarily in North
American, European, and Asian markets. The most significant
business 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. The Company also offers
professional scientific and technical consulting for industry and
government on a worldwide basis. While the principal market for
insurance and engineering services is the United States, the
Company continues to see growth opportunities in overseas
markets. 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.
In 1995, the Company derived approximately 13 percent of its
total revenues from engineering services 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,
---------------------
1995 1994 1993
---------------------
REVENUES
U.S. $581.7 $561.6 $595.6
Non-U.S. 90.5 42.0 40.5
------ ------ ------
Total revenues $672.2 $603.6 $636.1
====== ====== ======
INCOME BEFORE TAXES AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING
U.S $ 68.6 $ 66.9 $ 13.5
Non-U.S. 17.7 6.7 3.4
------ ------- ------
Total income before taxes
and cumulative effect of
change in accounting $ 86.3 $ 73.6 $ 16.9
====== ======= ======
At December 31,
--------------------------
1995 1994 1993
--------------------------
IDENTIFIABLE ASSETS
U.S. $758.2 $744.0 $807.3
Non-U.S. 213.3 161.7* 70.6
------- ------ ------
Total assets $971.5 $905.7 $877.9
======= ====== ======
*Includes $100.9 million resulting from consolidation of EIG, Co.
(See note 4.)
8. STATUTORY FINANCIAL INFORMATION
HSB is a Connecticut domiciled insurance company which is
licensed to conduct business in all 50 states, the District of
Columbia, Puerto Rico and the U.S. Virgin Islands. The annual
statements for state insurance regulatory authorities are
currently prepared using accounting methods 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 are primarily comprised of the accounting for prepaid
acquisition costs, deferred income taxes, fixed maturity
investments, valuation of certain non-insurance affiliates and
employee benefit plans. At year-end 1995 and 1994, policyholders'
surplus on a statutory basis was $280.6 and $238.0 million,
respectively. Statutory net income, adjusted to include the
earnings of all HSB domestic insurance subsidiaries for 1995,
1994 and 1993 was $66.7, $40.1 and $20.1 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, $65.3 million of statutory surplus is available for
distribution to shareholders in 1996 without prior regulatory
approval.
In December 1993, the National Association of Insurance
Commissioners (NAIC) adopted the property and casualty risk based
capital (RBC) formula which allows 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 asset risk, credit
risk and off-balance sheet risk. Property and casualty insurers
were required to report the results of the formula for the first
time in their 1994 statutory filings. HSB substantially exceeded
the RBC requirements in 1995 and 1994.
The NAIC is currently working on a model investment law that
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
issued during 1996 for adoption by the states.
Regulator concerns about the consistency and comparability of SAP
has prompted the NAIC to undertake a codification project that
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 effective
sometime after 1996.
9. INVESTMENTS
1995 1994 1993
---------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income:
Short-term interest $ 6.2 $ 2.0 $ 1.3
Fixed maturities:
Taxable interest 9.0 4.1 3.7
Tax exempt interest 1.9 2.5 2.1
Redeemable preferred dividends 6.3 6.4 6.9
Equity securities:
Common dividends 4.0 6.7 10.5
Non-redeemable preferred dividends 4.6 5.1 6.3
Other 1.2 2.3 1.0
----- ----- -----
Total investment income 33.2 29.1 31.8
Investment expenses (5.0) (2.9) (2.5)
----- ----- -----
Net investment income $28.2 $26.2 $29.3
===== ===== =====
Realized investment gains (losses):
Fixed maturities:
Bonds:
Gains $ .7 $ 1.2 $ 1.0
Losses (1.5) (.7) (.6)
----- ----- -----
Net gains (losses) (.8) .5 .4
Redeemable preferred stocks:
Gains .7 1.7 .6
Losses (.6) (.2) (.4)
----- ----- -----
Net gains .1 1.5 .2
Equity securities:
Common stocks:
Gains 11.4 19.3 37.3
Losses (7.4) (17.3) (16.0)
----- ----- -----
Net gains 4.0 2.0 21.3
Non-redeemable preferred stocks:
Gains .2 5.0 4.2
Losses (.7) (.3) -
----- ----- -----
Net gains (losses) (.5) 4.7 4.2
----- ----- -----
Realized investment gains $ 2.8 $ 8.7 $26.1
===== ===== =====
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. There were no material declines in the realizable
value of investments considered to be other than temporary for
1995.
UNREALIZED INVESTMENT GAINS, NET OF TAX
1995 1994 1993
--------------------
Fixed maturities:
Gains $ 9.3 $ 2.4 $ 9.1
Losses (1.6) (8.7) (.9)
----- ----- -----
Net gains (losses) 7.7 (6.3) 8.2
Equity securities:
Gains 64.2 35.8 59.3
Losses (3.8) (9.6) (6.1)
----- ----- -----
Net gains 60.4 26.2 53.2
Foreign exchange (2.7) (3.4) (2.2)
----- ----- -----
Total unrealized
investment gains 65.4 16.5 59.2
Income taxes (21.5) (2.6) (15.0)
Unrealized investment ----- ----- -----
gains, net of tax $43.9 $13.9 $44.2
===== ===== =====
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:
1995
-------------------------------------------
Estimated Gross Gross
Amortized Fair Unrealized Unrealized
Category Cost Value Gains Losses
- -------- -------------------------------------------
Redeemable preferred stocks $ 70.0 $ 71.4 $ 2.9 $ 1.5
States and municipalities 25.3 27.0 1.8 .1
Foreign governments 45.3 46.7 1.4 -
Corporate and other 106.9 110.1 3.2 -
U.S. Treasury and agencies .1 .1 - -
------ ------ ------ ------
Total fixed maturities $247.6 $255.3 $ 9.3 $ 1.6
====== ====== ====== ======
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
====== ====== ====== ======
The amortized cost and estimated fair value of fixed maturities
at December 31, by contractual years-to-maturity follow. Actual
maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations.
1995
--------------------
Estimated
Amortized Fair
Maturity Cost Value
- -------- --------------------
One year or less $ 15.1 $ 15.4
Over one year through five years 108.4 111.8
Over five years through ten years 80.8 83.4
Over ten years 43.3 44.7
------ ---------
Total fixed maturities $247.6 $255.3
====== =========
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:
1995
--------------------------------------
Estimated Gross Gross
Fair Unrealized Unrealized
Cost Value Gains Losses
--------------------------------------
Common stocks $ 98.2 $153.5 $ 56.7 $ 1.4
Non-redeemable preferred stocks 56.8 61.9 7.5 2.4
------ ------ ------ ------
Total equity securities $155.0 $215.4 $ 64.2 $ 3.8
====== ====== ====== ======
1994
---------------------------------------
Estimated Gross Gross
Cost Fair Unrealized Unrealized
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
====== ====== ====== ======
The Company held no derivative financial instruments in its
investment portfolio at December 31, 1995 and 1994. 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
1995 and 1994, aggregate premiums received by the Company on
covered call options amounted to less than $.l and $.7 million,
respectively. Net gains recognized on sales of underlying
instruments amounted to less than $.l and $.4 million for 1995
and 1994, respectively. Generally the duration of covered call
options written by the Company does not exceed 30 days.
10. ENGINEERING SERVICES RECEIVABLE
Engineering services receivable is summarized as follows:
1995 1994
------ ------
Amounts billed $ 45.9 $ 41.0
Amounts unbilled 18.1 26.0
Amounts due upon completion of contracts 5.5 5.7
------ ------
69.5 72.7
Less allowance for bad debts (.7) (.6)
------ ------
Engineering services receivable $ 68.8 $ 72.1
====== ======
11. REINSURANCE
The components of net written and net earned insurance premiums
were as follows:
1995 1994 1993
------ ------ ------
Written premiums:
Direct $285.3 $251.7 $246.1
Assumed 182.9 137.9 131.0
Ceded (59.9) (49.3) (32.6)
------ ------ ------
Net written insurance premiums $408.3 $340.3 $344.5
====== ====== ======
Earned Premiums:
Direct $279.7 $242.6 $246.9
Assumed 175.3 139.1 131.6
Ceded (65.9) (45.1) (29.3)
------ ------ ------
Net earned insurance premiums $389.1 $336.6 $349.2
====== ====== ======
The Company writes direct business through agencies and brokerage
firms. In addition, the Company assumes boiler and machinery
business through treaty and facultative reinsurance with over 100
insurance companies and several insurance pools. A significant
amount of this assumed book is underwritten by the Company. The
insurance industry, in general, is undergoing a significant
shakeout and consolidation. Considerable merger and acquisition
activity has occurred recently and more is anticipated in the
future. 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.
As a property insurer, the Company is subject to losses that may
arise from catastrophic events. The Company participates in
various facultative, quota share and excess of loss reinsurance
agreements to limit its exposure, particularly to catastrophic
losses, 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 that do not comply with the risk transfer provisions of
SFAS 113. The Company recorded $18.5 and $31.0 million of
reinsurance recoveries as a reduction of its claims and
adjustment expenses during the years 1995 and 1994, respectively.
Reinsurance recoverable on paid claims and adjustment expenses
was $2.5 and $6.8 million at December 31, 1995 and 1994,
respectively.
Effective December 1, 1995 the Company increased its
participation in Industrial Risk Insurers (IRI) from
approximately .5 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. IRI has a fiscal year ending November 30, and
provides quarterly reports to member companies of the
association. As a result, HSB's increased participation will
initially be reflected in the first quarter financial reports for
1996.
12. 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.
1995 1994 1993
------ ------ ------
Net liability for claims and adjustment
expenses at January 1, $161.3 $171.3 $132.8
------ ------ ------
Plus:
Provision for claims and adjustment
expenses occurring in the current year 152.2 141.7 172.2
Increase in estimated claims and
adjustment expenses arising in
prior years 2.7 1.5 26.9
------ ------ ------
Total incurred claims and adjustment
expenses 154.9 143.2 199.1
------ ------ ------
Less:
Payment for claims arising in:
Current year 58.9 63.5 60.9
Prior years 111.8 108.7 99.7
------ ------ ------
Total payments 170.7 172.2 160.6
------ ------ ------
Plus:
Full consolidation of EIG, Co.
at December 31, 1994 (See note 4) - 19.0 -
------ ------ ------
Net liability for claims and
adjustment expenses
at December 31 $145.5 $161.3 $171.3
====== ====== ======
The 1993 claims and adjustment expenses included adverse
development of prior years' reserves. The adverse development of
the 1992 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.
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.
A reconciliation of the net liability to the gross liability for
claims and adjustment expenses is as follows:
1995 1994 1993
-------------------------
Net liability for claims and adjustment expenses
at December 31, $145.5 $161.3 $171.3
Reinsurance recoverable on unpaid claims and
adjustment expenses 45.4 38.1 43.1
------ ------ ------
Gross liability for claims and adjustment expenses
at December 31, $190.9 $199.4 $214.4
====== ====== ======
13. FIXED ASSETS
Fixed assets are summarized as follows:
1995 1994
-----------------
Land and buildings $ 7.4 $ 7.4
Furniture, equipment and other 129.9 123.1
------ ------
137.3 130.5
Less accumulated depreciation (75.0) (66.3)
------- ------
Fixed assets $ 62.3 $ 64.2
======= ======
14. INCOME TAXES
Tax Provision
A reconciliation of income taxes (benefit) at U.S. statutory
rates to the income taxes (benefit) as reported is as follows:
1995 1994 1993
----------------------------------------------
% of % of % of
Pre-Tax Pre-Tax PreTax
Amount Income Amount Income Amount Income
----------------------------------------------
Income before taxes $86.3 100% $73.6 100% $16.9 100%
===== ===== ===== ==== ===== =====
Tax at statutory rates $30.2 35% $25.8 35% $ 5.9 35%
Income taxed at foreign rates .2 - .2 - .1 -
Dividends received deduction (3.9) (5) (4.3) (6) (5.7) (34)
Tax exempt interest (.7) (1) (.7) (1) (.7) (4)
Restructuring - - - - 3.5 21
Tax credits and others (2.1) (2) .7 1 .7 4
----- ----- ----- ---- ----- -----
Total income taxes and
effective tax rate $23.7 27% $21.7 29% $ 3.8 22%
===== ===== ===== ==== ===== =====
Income taxes (benefit) consisted of the following:
1995 1994 1993
----------------------------------
Current provision:
U.S. $16.1 $15.6 $ 4.6
Foreign 8.2 3.1 2.3
------ ------ ------
Current provision 24.3 18.7 6.9
------ ------ ------
Deferred provision:
U.S. .8 2.8 (3.3)
Foreign (1.4) .2 .2
------ ------ ------
Deferred provision (.6) 3.0 (3.1)
------ ------ ------
Total income taxes $23.7 $21.7 $ 3.8
====== ====== ======
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, 1995 and 1994 are as
follows:
1995 1994
---------------------
Deferred tax liabilities:
Prepaid acquisition costs $ (9.8) $(11.7)
Accelerated depreciation (3.8) (3.4)
Pension asset (11.5) (9.9)
Unrealized investment gains (21.5) (2.6)
Other (13.8) (6.6)
------ ------
Total deferred tax liabilities (60.4) (34.2)
------ ------
Deferred tax assets:
Benefit plans 10.8 11.2
Capital lease 3.6 3.8
Unearned insurance premiums 12.4 12.2
Loss reserve discounting 5.9 6.8
Other 8.8 4.8
------ ------
Total deferred tax assets 41.5 38.8
------ ------
Net deferred tax assets
(liabilities) $(18.9) $ 4.6
====== ======
Other Information
Federal income tax returns for the years 1994, 1993 and 1992 are
open to examination by the Internal Revenue Service. If examined,
no significant tax adjustments are anticipated.
15. 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 $9.3 and $8.6 million at December 31, 1995 and
1994, 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 facilities variable operating expenses.
This amounted to approximately $2.8, $2.8 and $2.9 million for
the years ended 1995, 1994 and 1993, 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 $14.3, $15.1 and
$14.7 million in 1995, 1994 and 1993, respectively.
At December 31, 1995, future minimum rental commitments under
noncancelable leases accounted for as operating leases with
initial or remaining terms of more than one year were as follows:
1996 $15.0
1997 13.0
1998 11.1
1999 9.3
2000 5.9
2001 and thereafter 6.4
------
Total $60.7
======
16. SHORT-TERM AND LONG-TERM BORROWINGS
During 1995, 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, 1995 and 1994 was
$12.0 and $26.7 million, respectively. Commercial paper
outstanding at December 31, 1995 and 1994 had maturity dates
through January, 1996 and April, 1995, respectively. Short-term
borrowings 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 4.) This debt was repaid in 1995.
Long-term debt at December 31, 1995 included $25.0 million of
senior notes due May 15, 2000 at an interest rate of 6.83
percent. Long-term borrowings mature on or before December 31,
2001.
17. 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.
Assets available for plan benefits include approximately $16.8
million of Company stock at December 31, 1995.
The pension expense for the U.S. pension plans was a net credit
to earnings for 1995, 1994 and 1993 due to the over funded status
of the primary plan. The components of the credit were as
follows:
1995 1994 1993
----- ------ ------
Service costs $ 2.9 $ 3.6 $ 3.2
Interest costs 10.2 9.7 9.3
Return on assets (30.9) 6.6 (5.2)
Net amortization and deferral 15.3 (22.0) (11.0)
----- ------ ------
Net pension credit $(2.5) $(2.1) $(3.7)
===== ====== ======
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
------------------------------
1995 1994 1995 1994
------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $95.8 $81.7 $24.0 $20.3
==============================
Accumulated benefit obligation $96.5 $82.4 $26.0 $21.6
==============================
Projected benefit obligation 113.8 97.0 $27.8 $23.0
Assets available for plan benefits (equity
securities and fixed income investments
at fair value) 164.8 135.5 - -
------------------------------
Assets in excess of (less than) projected
benefit obligation 51.0 38.5 (27.8) (23.0)
------------------------------
SFAS 87 unamortized net transition
asset (obligation) 12.6 14.7 (1.4) (1.6)
Unrecognized prior service costs (2.3) (2.7) (4.1) (3.7)
Unrecognized net loss (3.4) (11.6) (7.1) (4.1)
------------------------------
Unrecognized net asset (liability) 6.9 .4 (12.6) (9.4)
Additional liability - - (5.5) (3.2)
------------------------------
Net pension asset (liability) $44.1 $38.1 $(20.7) $(16.8)
==============================
Assumptions used for the primary U.S. plan at years ended were as follows:
1995 1994 1993
------------------------------
Discount rate 7.5% 8.5% 7.5%
Long-term rate of return on assets 9.5% 9.5% 9.5%
Rate of increase in future compensation levels 5.0% 5.0% 5.5%
18. POSTRETIREMENT PLANS
The Company makes available health care and life insurance
benefits for retired employees of HSB and certain subsidiaries.
The Company makes contributions to the plans as claims are
incurred. Contributions totaled $2.6, $2.3 and $1.8 million for
1995, 1994 and 1993, respectively. At December 31, 1995, 1994 and
1993 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,
--------------------------
1995 1994 1993
--------------------------
Service cost $ .3 $ .3 $ .2
Interest cost 2.3 2.2 2.1
Amortization of unrecognized obligations - .2 -
--------------------------
Net periodic postretirement benefit cost $ 2.6 $ 2.7 $ 2.3
==========================
The following table sets forth the amounts recognized in the
Consolidated Statements of Financial Position at December 31, in
accordance with SFAS 106:
1995 1994
---------------------
Accumulated postretirement benefit obligations for:
Retirees $ 24.9 $ 23.6
Other fully eligible plan participants 1.5 1.2
Other active plan participants 4.7 4.3
----------------------
Total accumulated postretirement benefit
obligation 31.1 29.1
Unrecognized net loss (6.6) (4.8)
---------------------
Accrued postretirement benefit liability $ 24.5 $ 24.3
=====================
The assumptions used to calculate the obligations at December 31,
were as follows:
1995 1994
---------------------
Weighted average discount rate 7.5% 8.5%
Current year health care cost trend rate 12.0% 14.0%
Ultimate health care cost trend rate 5.0% 5.5%
Number of years to reach ultimate 6 7
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, 1995 of $27.2 million by approximately $1.6 million
and the aggregate of the service and interest cost for the year
ended December 31, 1995 by $.l million.
19. 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 1995, 1994, and 1993 was $1.1, $2.2 and $3.3 million,
respectively. The unamortized compensation expense related to
this plan is included in Benefit plans as a component of
Shareholders' equity. These amounts were $.7 and $1.4 million in
1995 and 1994, 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 ten 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, 1992 751,348 776,983 $ 55.58
---------- --------- ------------
Options granted (355,400) 355,400 55.39
Options forfeited (exercised,
expired or forfeited) 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,
expired or forfeited) 84,600 (136,800) 49.21
Restricted stock granted (10,375) - -
---------- --------- ------------
Balance, December 31, 1994 144,503 1,263,550 54.42
---------- --------- ------------
Authorized 850,000 - -
Options granted (303,500) 303,500 42.54
Options forfeited (exercised,
expired or forfeited) 53,247 (272,550) 58.22
Restricted stock granted (9,350) - -
---------- --------- ------------
Balance, December 31, 1995 734,900 1,294,500 $50.86
========== ========= ============
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 shall be 20,000 shares of common stock.
Under this plan, 2,336; 1,935; and 1,413 shares of restricted
stock were granted in 1995, 1994 and 1993, respectively.
20. 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 final allocation of approximately 86,000 shares will be
distributed to employees before January 31, 1996 in accordance
with the Plan. ESOP expense was $1.5, $1.9 and $1.6 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
21. 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.
22. CONSOLIDATED QUARTERLY DATA (unaudited)
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------
Insurance Premiums $ 93.6 $ 98.1 $ 98.3 $ 99.1 $389.1
Net engineering services 61.0 63.4 65.9 61.8 252.1
Net investment income 6.8 7.2 6.5 7.8 28.2
Realized investment gains .2 1.2 1.0 .3 2.8
---------------------------------------------
Total revenues $161.6 $169.9 $171.7 $169.0 $672.2
=============================================
Income before taxes $ 19.9 $ 22.4 $ 23.1 $ 21.0 $ 86.3
Income taxes 5.9 6.7 6.8 4.4 23.7
---------------------------------------------
Net income $ 14.0 $ 15.7 $ 16.3 $ 16.6 $ 62.6
=============================================
Per common share:
Net income $ .69 $ .77 $ .80 $ .81 $ 3.07
=============================================
Dividends declared $ .55 $ .55 $ .57 $ .57 $ 2.24
Common stock price ranges:
High $43 3/4 $45 7/8 $49 3/8 $50 3/8 $50 3/8
Low 39 1/4 41 5/8 42 5/8 45 3/8 39 1/4
Close 43 44 3/8 48 3/8 50 50
Shareholders at December 31, 5,864
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 .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
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
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
1995 1994
---------------------------------- ---------------------------------
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 $ 0.1 $ 0.1 $ 0.1 $ 0.2 $ 0.2 $ 0.2
States, Municipalities and
Political Subdivisions 25.3 27.0 27.0 49.5 47.8 47.8
Foreign Governments 45.3 46.7 46.7 27.5 26.4 26.4
Convertibles and Bonds with
Warrants Attached 0.0 0.0 0.0 0.0 0.0 0.0
All Other Bonds 95.8 99.0 99.0 49.9 49.5 49.5
Mortgage Receivable 11.1 11.1 11.1 11.1 11.1 11.1
Redeemable Preferred Stocks 70.0 71.4 71.4 67.0 63.9 63.9
---------------------------- --------------------------------
Total Fixed Maturities $247.6 $255.3 $255.3 $205.2 $198.9 $198.9
---------------------------- --------------------------------
Equity Securities:
Common Stocks:
Public Utilities $ 6.3 $ 7.0 $ 7.0 $ 16.3 $ 16.7 $ 16.7
Banks and Insurance 10.6 13.6 13.6 6.7 6.9 6.9
Industrial and Other 81.3 132.9 132.9 103.4 130.1 130.1
Non-Redeemable Preferred 56.8 61.9 61.9 52.3 51.2 51.2
Stocks
---------------------------- --------------------------------
Total Equity Securities $155.0 $215.4 $215.4 $178.7 $204.9 $204.9
---------------------------- --------------------------------
Short Term Investments and Cash: $ 83.1 $ 83.1 $ 83.1 $ 85.9 $ 85.9 $ 85.9
---------------------------- --------------------------------
Total Investments $485.7 $553.8 $553.8 $469.8 $489.7 $489.7
============================ ================================
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
- ----------------------------------------------------------------------------------
1995
Property and
Liability
Insurance $279.7 $65.9 $175.3 $389.1 45.1%
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%
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 Account Describe (a) Period
- ----------------------------------------------------------------------------------------------------
1995
Reserve for Accounts Receivable $3.1 $2.6 $0.0 $2.1 $3.6
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
(a) Engineering Services and Insurance Premium Receivables written-off
as uncollectible.
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 1999" and "Members of the Board
of Directors Continuing in Office" on pages 2-6 of the
Company's Proxy Statement dated February 27, 1996 are
incorporated herein by reference. Also see pages 21-22
herein.
Item 11. Executive Compensation.
"Meetings and Remuneration of the Directors" on pages 6-
8, "Human Resources Committee Report on Executive
Compensation" on pages 10-14, "Summary Compensation Table" on
pages 15-16, "Stock Option and Long-Term Incentive Plan
Tables" on pages 16-17, "Retirement Plans" on pages 18-19,
"Employment Arrangements" on page 19, "Compensation Committee
Interlocks and Insider Participation" on page 20, and
"Performance Graph" on page 20 of the Company's Proxy
Statement dated February 27, 1996 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 8-9 of the Company's Proxy Statement
dated February 27, 1996 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
"Compensation Committee Interlocks and Insider
Participation" on page 20 of the Company's Proxy Statement
dated February 27, 1996 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
Index to Financial Statements and Financial
Statement Schedules on page 34 herein are filed as
part of this report.
(b) Reports on Form 8-K - Form 8-K filed on October 23,
1995 to report Registrant's and The Dow Chemical
Company's announcement of plans for two of
their wholly-owned subsidiaries to form a new
company which will provide environmental,
information technology, and strategic chemical
management services to industries and government
worldwide.
(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 29, 1996
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
March 29, 1996 Officer and Director
/s/ Saul L. Basch Senior Vice President, Treasurer
Saul L. Basch and Chief Financial Officer
March 29, 1996 (Principal Financial Officer and
Principal Accounting Officer)
(Joel B Alvord)* Director
(Colin G. Campbell)* Director
(Richard G. Dooley)* Director
(William B. Ellis)* Director
(E. James Ferland)* Director
(John A. Powers)* Director
(Lois Dickson Rice)* Director
(John M. Washburn, Jr.)* Director
(Wilson Wilde)* Director
*By: /s/ Robert C. Walker
Robert C. Walker
(Attorney-in-Fact)
March 29, 1996
INDEX TO EXHIBITS
Exhibit
Number Description
(3)(i) Charter of The Hartford Steam Boiler Inspection and
Insurance Company, as restated effective April 17, 1990.
(3)(ii) By-laws of The Hartford Steam Boiler Inspection and
Insurance Company amended July 24, 1995; incorporated
by reference to Exhibit (3)(ii) to registrant's Form
10-Q for the quarter ended June 30, 1995.
(4)(i) Rights Agreement dated as of November 28, 1988 between
the registrant and The First National Bank of Boston,
as Rights Agent.
(4)(iii) 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) (a) 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.
(b) Transaction Agreement between registrant and
General Reinsurance Corporation dated December 30,
1994; incorporated by reference to Exhibit 2 to
the registrant's Current Report on Form 8-K. File
No. 0-13300, filed January 17, 1995.
(c) Contribution Agreement among the registrant, The
Dow Chemical Company, Dow Environmental Inc. and
Radian Corporation dated January 30, 1996;
incorporated by reference to Exhibit 99.1 to the
registrant's Current Report on Form 8-K. File No.
0-13300, filed February 14, 1996.
(d) Limited Liability Company Agreement between Radian
Corporation and Dow Environmental Inc. dated
January 30, 1996; incorporated by reference to
Exhibit 99.2 to the registrant's Current Report on
Form 8-K. File No. 0-13300, filed February 14,
1996.
(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 effective January 1,
1994; incorporated by reference to Exhibit
(10)(iii) to registrant's Form 10-Q for the
quarter ended June 30, 1995. *
(c) The Hartford Steam Boiler Inspection and
Insurance Company Short-Term Incentive Plan, as
amended and restated February 26, 1996. *
(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) The Hartford Steam Boiler Inspection and
Insurance Company 1995 Stock Option Plan,
effective April 18, 1995; incorporated by
reference to Exhibit (10)(iii) to registrant's
Form 10-Q for the quarter ended June 30, 1995. *
(f) Pre-Retirement Death Benefit and Supplemental
Pension Agreement between the registrant and
various executive officers, as amended February
1, 1994; incorporated by reference to
registrant's Form 10-K for the year ended
December 31, 1994. *
(g) Pre-Retirement Death Benefit and Supplemental
Pension Agreement between the registrant and
William A. Kerr, dated September 18, 1995;
incorporated by reference to Exhibit (10)(iii) to
registrant's Form 10-Q for the quarter ended
September 30, 1995. *
(h) Employment Agreement between the registrant and Saul
L. Basch, dated October 2, 1996. *
(i) 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. *
(j) 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. *
(k) The Radian Corporation Supplemental Executive
Retirement Plan effective January 1, 1991;
incorporated by reference to Exhibit (10)(iii)(h)
to registrant's Form 10-K for the year ended
December 31, 1994. *
(l) 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. *
(m) 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. *
(n) Executive Employment Bonus Agreement between
the registrant and Donald M. Carlton dated
January 1, 1996. *
(o) Executive Employment Agreement between Radian
International LLC and Donald M. Carlton dated
January 30, 1996. *
(p) 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 - 19, with respect to executive
officer's compensation, which pages are
incorporated by reference to registrant's Proxy
Statement dated February 27, 1996. *
(21) Subsidiaries of the registrant.
(23) Consent of experts and counsel -
consent of Coopers & Lybrand.
(24) Power of attorney.
(27) Financial Data Schedule.
P(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 1995.
(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.