SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ---------- to ----------
Commission File Number 0-13300
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0384680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE STATE STREET, HARTFORD, CONNECTICUT 06102
(Address of principal executive offices) (Zip Code)
(203) 722-1866
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since the last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No
The number of shares outstanding of the registrant's common stock
without par value, as of April 30, 1994: 20,474,570
<PAGE>
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
INDEX
PART I FINANCIAL INFORMATION PAGE
Consolidated Statements of Operations for the
Quarters Ended March 31, 1994 and 1993
(unaudited)...................................... 3
Consolidated Statements of Financial Position as of
March 31, 1994 and December 31, 1993
(unaudited)...................................... 4
Consolidated Statements of Cash Flow for the
Three Months Ended March 31, 1994 and 1993
(unaudited)...................................... 5
Notes to Consolidated Financial Statements....... 6
Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations.................................... 7
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K........ 10
SIGNATURES................................................. 11
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Operations (Unaudited)
(In millions, except per share data)
<CAPTION>
Quarter
Ended March 31
1994 1993
-------- --------
<S> <C> <C>
Revenues:
Insurance premiums $ 84.3 $ 87.7
Net engineering services 56.2 56.8
Net investment income 6.5 7.5
Realized investment gains 3.6 7.8
-------- --------
Total revenues 150.6 159.8
-------- --------
Expenses:
Claims and adjustment 40.8 36.7
Policy acquisition 15.5 16.8
Underwriting and inspection 25.1 25.8
Engineering services 52.2 54.8
Interest 0.4 0.5
-------- --------
Total expenses 134.0 134.6
-------- --------
Equity in operations of insurance association (0.4) (1.2)
-------- --------
Income before taxes and cumulative
effect of changes in accounting principles 16.2 24.0
Income taxes:
Current 4.3 5.5
Deferred 0.0 0.7
-------- --------
Total income taxes 4.3 6.2
Income before cumulative effect of
changes in accounting principles 11.9 17.8
Cumulative effect of change in accounting
principle (net of income taxes of $1.9) - (3.6)*
-------- --------
Net income $ 11.9 $ 14.2
======== ========
Net income per share:
Income before accounting changes $ 0.58 $ 0.86
Cummulative effect of accounting change - (0.17)*
-------- --------
Net income $ 0.58 $ 0.69
======== ========
Dividends declared per share $ 0.53 $ 0.53
Average shares outstanding 20.5 20.7
<FN>
* Reflects adoption of FAS 112.
See Notes to Consolidated Financial Statements.
</TABLE>
3
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<TABLE>
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Financial Position
(In millions, except per share data)
<CAPTION>
March 31, December 31,
1994 1993
-------- --------
<S> <C> <C> <C>
Assets:
Cash $ 8.0 $ 7.3
Short-term investments, at cost 50.0 53.8
Fixed maturities, at fair value
(cost - $167.4; $146.7) 168.8 154.9
Equity securities, at fair value
(cost - $220.3; $236.8) 260.3 290.0
-------- --------
Total cash and invested assets 487.1 506.0
Insurance premiums receivable 55.8 68.5
Engineering services receivable 73.8 79.0
Fixed assets 62.2 64.3
Participation in pools and associations 8.1 8.4
Prepaid acquisition costs 29.2 30.0
Capital lease 18.1 18.3
Reinsurance recoverable 50.8 44.5
Other assets 65.6 58.9
-------- --------
Total assets $ 850.7 $ 877.9
======== ========
Liabilities:
Unearned insurance premiums $ 161.5 $ 169.3
Claims and adjustment expenses 210.5 214.4
Short-term borrowings 42.7 42.7
Long-term borrowings 0.7 0.7
Capital lease 27.8 27.7
Deferred income taxes (3.4) 6.9
Dividends payable 10.9 10.9
Employee stock ownership plan 3.2 3.7
Other liabilities 85.9 76.9
-------- --------
Total liabilities 539.8 553.2
======== ========
Shareholders' equity:
Common Stock (stated value; shares authorized
50.0; shares issued 21.3; shares
outstanding 20.5; 20.5) 10.0 10.0
Additional paid-in capital 34.0 33.9
Unrealized investment gains, net of tax 32.7 44.2
Retained earnings 281.4 280.4
Treasury stock, at cost; (shares .8; .8) (39.5) (35.7)
Benefit plans (7.7) (8.1)
-------- --------
Total shareholders' equity 310.9 324.7
-------- --------
Total liabilities and
shareholders' equity $ 850.7 $ 877.9
======== ========
Shareholders' equity per share $15.18 $15.80
</TABLE>
7
<PAGE>
<TABLE>
The Hartford Steam Boiler Inspection and Insurance Company
Consolidated Statements of Cash Flows
(In Millions)
<CAPTION>
Three Months Ended
March 31,
------------------------
1994 1993
Operating Activities: -------- --------
<S> <C> <C>
Net income $ 11.9 $ 14.2
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4.3 5.4
Deferred income taxes (0.0) (1.1)
Realized investment gains, net of tax (2.3) (5.7)
Change in:
Insurance premiums receivable 12.7 4.5
Engineering services receivable 5.2 (1.5)
Prepaid acquisition costs 0.8 0.7
Reinsurance recoverable (6.3) 3.8
Unearned insurance premiums (7.8) (1.2)
Claims and adjustment expenses (3.9) (7.9)
Other 2.6 6.0
-------- --------
Cash provided by operating activities 17.2 17.2
-------- --------
Investing Activities:
Fixed asset additions (2.3) (2.6)
Investments:
Sale (purchase) of short-term investments, net 3.8 (13.0)
Purchase of fixed maturities (27.2) (6.0)
Proceeds from sale of fixed maturities 1.0 4.8
Redemption of fixed maturities 4.9 6.3
Purchase of equity securities (55.9) (113.1)
Proceeds from sale of equity securities 74.3 121.7
-------- --------
Cash used in investment activities (1.4) (1.9)
-------- --------
Financing Activities:
Dividends paid to shareholders (10.9) (11.0)
Increase (decrease) in short-term borrowings, net (0.0) (0.6)
Repayment of employee stock ownership plan debt (0.5) (0.4)
Issuance (purchase) of treasury stock (3.7) 0.3
-------- --------
Cash used in financing activities (15.1) (11.7)
-------- --------
Net increase in cash 0.7 3.6
Cash at beginning of period 7.3 8.7
-------- --------
Cash at end of period $ 8.0 $ 12.3
======== ========
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The interim financial statements in this report include
adjustments based on management's best estimates and
judgements, including estimates of future loss payments,
which are necessary to present a fair statement of the
results for the interim periods reported. These adjustments
are of a normal, recurring nature. These financial
statements are prepared on the basis of generally accepted
accounting principles and should be read in conjunction with
the financial statements and related notes in the 1993
Annual Report. Certain prior year amounts have been
reclassified to conform with the 1994 presentation.
2. Supplemental disclosure related to Statements of Cash Flows
Interest paid in the first quarter of 1994 was $0.4 million
compared to $0.5 million for the same period in 1993.
Federal income tax paid in the first quarter of 1994 was
$0.3 million compared to $0.0 million in the same period in
1993.
3. Participation in Pools and Associations
Participation in pools and associations includes the
Company's equity in the Engineering Insurance Group ("EIG").
In the third quarter of 1993, the Company changed its method
of presenting its participation in EIG from the proportional
consolidation method to the equity method of accounting.
All prior year amounts have been reclassified accordingly.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED RESULTS OF OPERATIONS
AND FINANCIAL POSITION
MARCH 31, 1994
SUMMARY OF RESULTS OF OPERATIONS
Income after taxes and before accounting changes for the first
quarter of 1994 was $11.9 million or $.58 per share compared to
prior year first quarter earnings of $17.8 million or $.86 per
share. The decline is primarily attributed to a decrease in
insurance operating gains and lower realized investment gains
recognized in the first quarter of 1994 compared to the same
period in the prior year.
Total revenues decreased 5.8 percent to $150.6 million in the
first quarter of 1994 from $159.8 million in the first quarter of
1993. The largest reductions in amounts were in realized
investment gains and insurance premiums. Investment income and
engineering services net revenues were also lower than in the
first quarter of 1993.
Insurance Operations
Insurance premiums decreased 3.9 percent to $84.3 million in the
first quarter of 1994 compared to $87.7 million in the first
quarter of 1993. Premiums were lower primarily due to higher
reinsurance costs. A 6.0 percent reduction in volume was
substantially offset by a 5.8 percent increase in price and
coverage. The net change in insurance premiums due to price,
coverage and volume reflects the impact of a program the Company
implemented in early 1993 to reunderwrite its book of business.
The Company was prepared to lose customers and experience lower
volume to accomplish improved profitability. In the first quarter
of 1994, the Company has continued to experience lower retention
levels with higher price increases for its large account, Special
Risks business.
The insurance operating gain decreased 65.5 percent to $2.9
million in the first quarter of 1994 compared to $8.4 million in
the first quarter of 1993. This decrease was largely
attributable to unfavorable claims experience in the first
quarter of 1994 compared to the first quarter of 1993. First
quarter 1994 results include $4.8 million of losses related to
the January 1994 California earthquake. Underwriting and
inspection expenses of $25.1 million improved slightly from $25.8
million reported in the first quarter of 1993 and substantially
from $30.2 million reported in the fourth quarter of 1993. The
improvements are largely a result of cost reductions implemented
in late 1993 and early 1994 related to the realignment of the
Company's operations. Policy acquisition costs decreased 7.7
percent from the first quarter of 1993.
7
<PAGE>
The loss ratio increased to 48.4 percent for the first quarter of
1994 compared to 41.8 percent for the first quarter of 1993. The
increase in the loss ratio was primarily due to the earthquake
losses previously mentioned and the impact of higher reinsurance
costs on net premiums. The first quarter of 1994 was not impacted
by adverse development of estimated 1993 year-end loss reserves
while first quarter 1993 results included increases in claims and
adjustment expenses of approximately $7.7 million due to the
development of estimated 1992 year-end loss reserves.
The expense ratio of 48.2 percent is slightly improved from the
first quarter 1993 ratio of 48.6 percent and is substantially
improved from the fourth quarter 1993 ratio of 52.8 percent.
Engineering Services Operations
Net engineering services revenues decreased 1.1 percent to $56.2
million for the first quarter of 1994 compared to $56.8 million
for the first quarter of 1993. The reduction in net revenues was
primarily due to lower volume, with no significant change in
prices. Athough net revenues declined slightly, engineering
services operating gain increased 100 percent to $4.0 million
from $2.0 million in the first quarter of 1993. Net engineering
services revenues declined and profit margins improved as the
Company continues to focus on higher margin business and to
reduce expenses.
Investment Operations
The Company's investment strategy continues to be to maximize the
total return on the investment portfolio over the long-term --
through investment income and capital appreciation. Income from
investment operations, combining net investment income and
realized gains, decreased 34.0 percent to $10.1 million for the
first quarter of 1994 compared to $15.3 million for the first
quarter of 1993. Net investment income was $6.5 million for the
first quarter of 1994 compared to $7.5 million for the same
period in the prior year, a decrease of $1.0 million or 13.3
percent. Realized investment gains of $3.6 million in the first
quarter of 1994 were 53.8 percent lower than the $7.8 million in
the first quarter of 1993.
The decrease in net investment income resulted primarily from
declines in rates of return and a decrease in average invested
assets. The decline in average invested assets is largely
attributed to repurchases of the Company's stock during the later
part of 1993 and the first quarter of 1994. The market value of
invested assets at March 31, 1994 decreased $18.9 million to
$487.1 million from $506.0 million at December 31, 1993.
8
<PAGE>
The Company's investment portfolio continues to consist of high
grade investments. Equity securities, including non-redeemable
preferreds, and fixed maturities, including redeemable
preferreds, are carried at fair value and are classified as
available for sale under the accounting provisions of Statement
of Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided from operating activities for the first three
months of 1994 and 1993 remained unchanged at $17.2 million.
Cash used in investment activities of $1.4 million for the first
three months of 1994 did not vary significantly from the $1.9
million reported for the same period in 1993.
Cash used in financing activities was $15.1 million for the first
three months of 1994 compared to $11.7 million for the same
period in 1993. The increase in the use of cash in 1994 compared
to 1993 was primarily attributable to a $4.0 million net increase
in the purchase of treasury stock. The Company is currently
authorized to issue up to $75 million of commercial paper. At the
both March 31, 1994 and December 31, 1993, $42.7 million of
commercial paper was outstanding.
Book value per share was $15.18 as of March 31,1994 compared to
$15.80 at December 31, 1993. The decrease in book value per
share relates primarily to the decrease in net unrealized gains
and the repurchase of shares of Company stock during the first
three months of 1993.
During 1994, approximately $43.0 million of debt of Engineering
Insurance Group will mature. The Company is working with General
Reinsurance Company, its 50 percent joint venture partner in EIG,
to determine a recapitalization strategy for EIG.
9
<PAGE>
PART TWO - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K - Report on Form 8-K dated April
19, 1994 reporting the promotion of Gordon W. Kreh to Chief
Executive Officer of the registrant.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE HARTFORD STEAM BOILER
INSPECTION AND INSURANCE COMPANY
Date: May 13, 1994 By /s/ Robert W. Trainer
Robert W. Trainer
Senior Vice President, Treasurer
and Chief Financial Officer
Date: May 13, 1994 By /s/ R. Kevin Price
R. Kevin Price
Senior Vice President and
Corporate Secretary
11
