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, 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)
(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, 1995: 20,410,624
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
INDEX
PART I FINANCIAL INFORMATION PAGE
Consolidated Statements of Operations for the
Quarters Ended March 31, 1995 and 1994
(unaudited)..................................... 3
Consolidated Statements of Financial Position as
of March 31, 1995 (unaudited) and December 31,
1994............................................ 4
Consolidated Statements of Cash Flow for the
Three Months Ended March 31, 1995 and 1994
(unaudited)...................................... 5
Notes to Consolidated Financial Statements....... 6
Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations.................................... 7
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K........ 12
SIGNATURES................................................. 13
2
<TABLE>
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Operations
(Unaudited)
(In millions, except per share data)
Quarter
Ended March 31
1995 1994
--------- --------
<S> <C> <C>
Revenues:
Insurance premiums $ 93.6 $ 83.3
Net engineering services 61.0 56.2
Net investment income 6.8 6.5
Realized investment gains 0.2 3.6
------- -------
Total revenues 161.6 149.6
------- -------
Expenses:
Claims and adjustment 37.4 40.8
Policy acquisition 18.8 15.4
Underwriting and inspection 29.6 24.2
Net engineering services 55.3 52.2
Interest 0.6 0.4
------- -------
Total expenses 141.7 133.0
------- -------
Equity in operations of insurance association - (0.4)
------- -------
Income before taxes and cumulative
effect of change in accounting principle 19.9 16.2
Income taxes:
Current 5.2 4.3
Deferred 0.7 0.0
------- -------
Total income taxes 5.9 4.3
Net income $ 14.0 $ 11.9
======= =======
Net income per share:
Net income $ 0.69 $ 0.58
Dividends declared per share $ 0.55 $ 0.53
Average shares outstanding 20.4 20.5
See Notes to Consolidated Financial Statements.
</TABLE>
3
<TABLE>
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Financial Position
(In millions, except per share data)
March 31, December 31,
1995 1994
(Unaudited)
----------- ------------
<S> <C> <C>
Assets:
Cash $ 13.1 $ 12.1
Short-term investments, at cost 85.3 73.8
Fixed maturities, at fair value
(cost - $219.9; $205.2) 219.6 198.9
Equity securities, at fair value
(cost - $160.5; $178.7) 195.2 204.9
Total cash and invested assets 513.2 489.7
Insurance premiums receivable 75.8 83.1
Engineering services receivable 72.7 72.1
Fixed assets 62.4 64.2
Prepaid acquisition costs 35.5 35.5
Capital lease 17.4 17.5
Reinsurance recoverable 44.0 44.9
Other assets 93.8 98.7
------- -------
Total assets $ 914.8 $ 905.7
======= =======
Liabilities:
Unearned insurance premiums $ 202.7 $ 201.3
Claims and adjustment expenses 184.8 199.4
Short-term borrowings 56.1 50.9
Long-term borrowings 0.6 0.6
Capital lease 27.8 27.8
Deferred income taxes 2.6 (4.6)
Dividends payable 11.2 11.2
Minority Interest 20.0 20.0
Other liabilities 97.3 99.6
------- -------
Total liabilities 603.1 606.2
======= =======
Shareholders' equity:
Common Stock (stated value; shares authorized
50.0; shares issued 21.3; shares
outstanding 20.4; 20.4) 10.0 10.0
Additional paid-in capital 34.0 34.0
Unrealized investment gains, net of tax 22.8 13.9
Retained earnings 290.9 288.1
Treasury stock, at cost; (shares .9; .9) (42.1) (41.9)
Benefit plans (3.9) (4.6)
------- -------
Total shareholders' equity 311.7 299.5
======= =======
Total liabilities and shareholders' equity $ 914.8 $ 905.7
Shareholders' equity per share $ 15.27 $ 14.67
</TABLE>
See Notes to Consolidated Financial Statements.
4
<TABLE>
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Cash Flows
Unaudited
(In Millions)
Three Months Ended
March 31,
------------------------
1994 1993
-------- --------
<S> <C> <C>
Operating Activities:
Net income $ 14.0 $ 11.9
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 5.0 4.3
Deferred income taxes 0.7 0.0
Realized investment gains (0.2) (3.6)
Change in:
Insurance premiums receivable 7.3 12.7
Engineering services receivable (0.6) 5.2
Prepaid acquisition costs 0.0 0.8
Reinsurance recoverable 0.9 (6.3)
Unearned insurance premiums 1.4 (7.8)
Claims and adjustment expenses (14.6) (3.9)
Other 2.5 2.6
------- -------
Cash provided by operating activities 16.4 15.9
------- -------
Investing Activities:
Fixed asset additions (1.6) (2.3)
Investments:
Sale (purchase) of short-term investments (11.5) 3.8
Purchase of fixed maturities (123.1) (27.2)
Proceeds from sale of fixed maturities 103.9 1.1
Redemption of fixed maturities 4.4 4.9
Purchase of equity securities (35.0) (55.9)
Proceeds from sale of equity securities 54.3 75.5
------- -------
Cash used in investment activities (8.6) (0.1)
------- -------
Financing Activities:
Dividends paid to shareholders (11.2) (10.9)
Increase in short-term borrowings, net 5.2 0.0
Repayment of employee stock ownership plan debt (0.6) (0.5)
Purchase of treasury stock (0.2) (3.7)
------- -------
Cash used in financing activities (6.8) (15.1)
------- -------
Net increase in cash 1.0 0.7
Cash at beginning of period 12.1 7.3
------- -------
Cash at end of period $ 13.1 $ 8.0
======= =======
Interest paid $ 0.4 $ 0.4
------- -------
Federal income tax paid $ 0.5 $ 0.3
------- -------
See Notes to Consolidated Financial Statements.
</TABLE>
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The interim financial statements in this report include
adjustments based on management's best estimates and
judgments, including estimates of future loss payments,
which are necessary to present a fair statement of the
results for the interim periods reported. These adjustments
are of a normal, recurring nature. These financial
statements are prepared on the basis of generally accepted
accounting principles and should be read in conjunction with
the financial statements and related notes in the 1994
Annual Report. Certain prior year amounts have been
reclassified to conform with the 1995 presentation.
2. Engineering Insurance Group Acquisition
The 1994 results include the Company's equity in the
Engineering Insurance Group (EIG) partnership in Other
assets. In December 1994, the Company acquired the
remaining 50 percent interest in EIG from General
Reinsurance Corporation (Gen Re). Coincident with the
acquisition, the partnership was incorporated with the
Company acquiring all outstanding common shares and Gen Re
acquiring preferred shares of the new Company, EIG, Co. The
1995 results include EIG, Co. on a fully consolidated basis.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARCH 31, 1995
RESULTS OF OPERATIONS
- ---------------------
(dollar amounts in millions)
Consolidated Overview
- ---------------------
Quarter Ended
March 31
1995 1994
Insurance premium $ 93.6 $ 83.3
Net engineering services revenues 61.0 56.2
Net investment income 6.8 6.5
Realized investment gains 0.2 3.6
------- -------
Total revenues $ 161.6 $ 149.6
Net income $ 14.0 $ 11.9
======= =======
Net income for the first quarter of 1995 increased 18 percent
over the first quarter of 1994. The current year's results were
generated through improvements in insurance margins with premium
growth and lower claims accounting for the change. First quarter
1994 results included $4.8 million of losses related to the
California earthquake. Engineering services margins also
improved on a 9 percent growth in revenues, mainly from increased
government contract work.
Consolidated revenues in the first quarter of 1995 were up 8
percent from the same quarter in 1994. Insurance premiums
increased 12 percent with the EIG acquisition and its full
consolidation constituting the largest single component.
Premiums continue to be negatively impacted by rising reinsurance
costs. Net investment income increased 5 percent in the current
quarter while realized gains were lower. The acquisition and
full consolidation of EIG, Co. contributed to the increase in
investment income but had no effect on realized gains.
The effective tax rate for the first quarter of 1995 was 30
percent compared to 27 percent for the comparable prior year
period. Tax rate fluctuations in 1995 compared to 1994 resulted
from significant improvement in insurance and engineering
services operating results. This changed the mix of pre-tax
income between fully taxable earnings and tax preferred
investment income.
7
Recent Accounting Developments
- ------------------------------
In March 1995, the Financial Accounting Standards Board (the
Board) issued Statement of Financial Accounting Standards No. 121
(SFAS 121) "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" effective for
fiscal years beginning after December 31, 1995. SFAS 121
requires that entities review long-lived assets, certain
intangibles and goodwill for possible impairment whenever
circumstances indicate that the carrying amount of an asset may
not be recoverable. The SFAS also requires that long-lived
assets and certain intangibles to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell.
Implementation of SFAS 121 is not expected to have a material
impact on the Company's financial results.
Insurance Operations
- --------------------
Insurance operations include the insurance results of The
Hartford Steam Boiler Inspection and Insurance Company, the
Boiler Inspection and Insurance Company of Canada and EIG, Co.
The 1995 results include EIG, Co. on a fully consolidated basis.
The 1994 results include 50 percent of EIG's results recorded as
Equity in operations of insurance association.
Quarter Ended
March 31
1995 1994
------ ------
Gross earned premium $ 109.6 $ 92.8
Ceded premium 16.0 9.5
------ ------
Insurance premium 93.6 83.3
Claims and adjustment expenses 37.4 40.8
Underwriting, acquisition and other expenses 48.4 39.6
------ ------
Underwriting gain $ 7.8 $ 2.9
====== ======
Insurance premiums in the first quarter of 1995 increased $10.3
million from the first quarter of 1994. This 12 percent increase
was attributable to the acquisition and full consolidation of
EIG, Co. and also growth in the reinsurance assumed book of
business. In the first quarter 1995, reinsurance assumed
premiums increased over 7 percent from the comparable period in
1994. While gross earned premiums grew by approximately $17
million, a portion of the gain was offset by higher reinsurance
ceded costs. Reinsurance ceded costs increased $6.5 million in
the first quarter of 1995 compared to the first quarter of 1994
with rising costs and the acquisition and full consolidation of
EIG, Co. accounting for the bulk of the increase. Unprecedented
levels of
8
catastrophic losses experienced by the property/casualty industry
in recent years as well as HSB's own loss experience have resulted
in significantly higher reinsurance ceded costs.
Claims and adjustment expenses decreased $3.4 million or 8
percent in the current quarter compared to the first quarter
1994. The first quarter 1994 results included $4.8 million for
losses related to the California earthquake. The 1995 results
improved as both frequency and severity showed positive variances
to the prior year first quarter. These improvements contributed
to a reduction in the loss ratio in the first quarter 1995
compared to the same period in 1994. Gross claims and adjustment
expenses for the first quarter 1995 and 1994 were $47.3 million
and $58.6 million, respectively.
Underwriting, acquisition and other expenses increased $8.8
million in the current quarter over the first quarter of 1994.
This increase was primarily due to the full consolidation of EIG,
Co., the increase in acquisition costs associated with the
assumed book of business and an increase in employee related
expenses.
The components of the combined ratio, were as follows:
Quarter Ended
March 31
1995 1994
Loss ratio 40.0% 49.0%
Expense ratio 51.1% 47.5%
------ ------
Combined ratio 91.1% 96.5%
====== ======
Engineering Services Operations
- -------------------------------
Quarter Ended
March 31
1995 1994
Net engineering services revenue $ 61.0 $ 56.2
Net engineering services expenses 55.3 52.2
------ ------
Operating gain $ 5.7 $ 4.0
====== ======
Net margin 9.4% 7.1%
9
Engineering services operations include the results of HSB's and
BI&I's engineering services, Radian Corporation, HSB Reliability
Technologies and the Company's other engineering services subsidiaries.
Net engineering services revenues for the first quarter of 1995
increased 9 percent compared to the same period in 1994. The
growth in revenues was primarily due to increases generated by
Radian Corporation, the Company's environmental services
subsidiary, with both the manufacturing sector and government
contract work showing marked improvements from the prior year
first quarter.
The consolidated engineering services operating gain increased 43
percent in the current quarter from the same period in 1994 as
the Company continued to focus on more profitable business. This
led to improvement in the net margin as expenses increased only
$3.1 million with most of this increase attributable to variable
costs associated with the revenue growth.
Investment Operations
- ---------------------
Quarter Ended
March 31
1995 1994
Net investment income $ 6.8 $ 6.5
Realized investment gains 0.2 3.6
------ ------
Pretax income from investment operations $ 7.0 $ 10.1
====== ======
Net investment income increased 5 percent for the first quarter
of 1995 compared to the first quarter of 1994. The increase in
investment income resulted primarily from a larger level of
average invested assets. Invested assets grew as a result of the
acquisition and full consolidation of EIG, Co. and also from cash
provided by operations. The investment portfolio continues to
consist of high grade investments including fixed maturities and
equity securities. The shift in the mix of the portfolio from
equities to fixed maturities continued in the first quarter of
1995.
10
Liquidity and Capital Resources
- -------------------------------
Balances at
March 31 December 31
1995 1994
-------- -----------
Total assets $ 914.8 $ 905.7
Short-term investments 85.3 73.8
Cash 13.1 12.1
Short-term borrowings 56.1 50.9
Shareholder's equity 311.7 299.5
Liquidity refers to the Company's ability to generate sufficient
funds to meet the cash requirements of its business operations.
Cash provided from operations was $16.4 million in the first
quarter 1995 compared to $15.9 million in the first quarter of
1994. The increase was due to improved cash flow from insurance
operations. The Company receives a regular inflow of cash from
maturing investments, engineering and insurance operations and
maintains a highly liquid investment portfolio. The Company
manages its cash and short-term investment position to meet its
operating expense and claim payment needs. Net cash provided
from operations was used to pay dividends and increase the
Company's investment portfolio.
Capital resources consist of shareholders' equity and debt
outstanding and represent those funds deployed or available to be
deployed to support business operations.
Shareholders' equity of $311.7 million at March 31, 1995
increased by $12.2 million since December 31, 1994, representing
an increase in book value per share of $0.60 to $15.27 from
$14.67. The increase in book value per share reflects an
increase in unrealized gains, net of tax, of $8.9 million during
the first three months of 1995, and net income of $14.0 million,
offset by dividends of $11.2 million.
At March 31, 1995, the Company had significant short-term and
long-term borrowing capacity. The Company is currently
authorized to issue up to $75 million of commercial paper.
Commercial paper outstanding at March 31, 1995 and December 31,
1994 was $36.7 and $26.7 million, respectively. During the first
quarter 1995, the Company repaid $5 million of EIG, Co. debt.
The remaining $19 million of EIG, Co. debt, which becomes due in
the second quarter of 1995, will likely be refinanced.
The Company currently has no significant capital commitments
planned for the remainder of 1995 and beyond.
11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27, Financial Data Schedule.
(b) Reports on Form 8-K - Form 8-K filed on January 17, 1995
to report completion of Registrant's purchase from General
Reinsurance Corporation of its 50 percent interest in
Engineering Insurance Group (EIG), a joint partnership
of the Registrant and General Reinsurance Corporation
formed in 1988. Form 8-K/A filed on March 15, 1995 as an
amendment to such Form 8-K reflecting financial statements
of the acquired business.
12
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 15, 1995 By: /s/ James F. Casey
James F. Casey
Vice President and Controller
Date: May 15, 1995 By: /s/ Robert C. Walker
Robert C. Walker
Senior Vice President and
General Counsel
13
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 209
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 195
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<TOTAL-ASSETS> 915
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