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, 1996
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)
(860) 722-1866
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since the last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the registrant's common stock
without par value, as of March 31, 1996: 20,279,825
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
INDEX
PART I FINANCIAL INFORMATION PAGE
Consolidated Statements of Operations for the
Quarters Ended March 31, 1996 and 1995
(unaudited).............................. 3
Consolidated Statements of Financial Position as
of March 31, 1996 (unaudited) and December 31,
1995................................................. 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995
(unaudited).......................................... 5
Notes to Consolidated Financial Statements.. ........ 6
Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations........................................ 8
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K............ 14
SIGNATURES............................................. 15
<TABLE>
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Operations
(Unaudited)
(In millions, except per share data)
Quarter
Ended March 31
1996 1995
--------- --------
<S> <C> <C>
Revenues:
Insurance premiums $ 108.4 $ 93.6
Net engineering services 12.7 61.0
Net investment income 8.0 6.8
Realized investment gains 0.9 0.2
------- -------
Total revenues 130.0 161.6
------- -------
Expenses:
Claims and adjustment 44.9 37.4
Policy acquisition 20.6 18.8
Underwriting and inspection 33.7 29.6
Net engineering services 11.3 55.3
Interest 0.7 0.6
------- -------
Total expenses 111.2 141.7
------- -------
Equity in Radian International LLC 4.9 -
------- -------
Income before taxes 23.7 19.9
Income taxes:
Current 7.1 5.2
Deferred (0.4) 0.7
------- -------
Total income taxes 6.7 5.9
Net income $ 17.0 $ 14.0
======= =======
Net income per share $ 0.84 $ 0.69
======= =======
Dividends declared per share $ 0.57 $ 0.55
Based on average shares 20.4 20.4
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Financial Position
(In millions, except per share data)
March 31, December 31,
1996 1995
(Unaudited)
----------- ------------
<S> <C> <C>
Assets:
Cash $ 9.8 $ 9.3
Short-term investments, at cost 73.1 73.8
Fixed maturities, at fair value
(cost - $233.6; $247.6) 236.2 255.3
Equity securities, at fair value
(cost - $169.1; $155.0) 235.9 215.4
----------- -----------
Total cash and invested assets 555.0 553.8
Insurance premiums receivable 108.0 87.2
Engineering services receivable 9.1 68.8
Fixed assets 38.2 62.3
Prepaid acquisition costs 41.0 34.1
Capital lease 16.6 16.8
Equity in Radian International LLC 71.4 -
Reinsurance recoverable 66.4 47.9
Other assets 87.7 100.6
------- -------
Total assets $ 993.4 $ 971.5
======= =======
Liabilities:
Unearned insurance premiums $ 254.1 $ 216.2
Claims and adjustment expenses 211.2 190.9
Short-term borrowings 12.0 13.4
Long-term borrowings 25.6 25.6
Capital lease 27.8 27.8
Deferred income taxes 19.8 18.9
Dividends payable 11.6 11.6
Minority Interest 20.0 20.0
Other liabilities 64.1 106.0
------- -------
Total liabilities 646.2 630.4
======= =======
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 34.1 33.9
Unrealized investment gains, net of tax 44.7 43.9
Retained earnings 310.6 305.1
Treasury stock, at cost; (shares 1.0; 1.0) (47.7) (47.7)
Benefit plans (4.5) (4.1)
------- -------
Total shareholders' equity 347.2 341.1
======= =======
Total liabilities and shareholders' equity $ 993.4 $ 971.5
Shareholders' equity per share $ 17.04 $ 16.81
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Cash Flows
Unaudited
(In millions)
Quarter Ended
March 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Operating Activities:
Net income $ 17.0 $ 14.0
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 3.2 5.0
Deferred income taxes (0.4) 0.7
Realized investment gains (0.9) (0.2)
Change in:
Insurance premiums receivable (20.8) 7.3
Engineering services receivable (0.1) (0.6)
Prepaid acquisition costs (6.9) -
Reinsurance recoverable (18.5) 0.9
Unearned insurance premiums 37.9 1.4
Claims and adjustment expenses 20.3 (14.6)
Equity in Radian International LLC (3.6) -
Other (10.7) 2.5
------- -------
Cash provided by operating activities 16.5 16.4
------- -------
Investing Activities:
Fixed asset additions (1.2) (1.6)
Investments:
Sale (purchase) of short-term investments, net 0.6 (11.5)
Purchase of fixed maturities (35.4) (123.1)
Proceeds from sale of fixed maturities 49.1 103.9
Redemption of fixed maturities 1.7 4.4
Purchase of equity securities (33.0) (35.0)
Proceeds from sale of equity securities 17.9 54.3
Cash transferred to equity in Radian Int'l LLC (0.8) -
------- -------
Cash used in investment activities (1.1) (8.6)
------- -------
Financing Activities:
Increase (decrease) in short-term borrowings (1.4) 5.2
Dividends paid to shareholders (11.6) (11.2)
Repayment of employee stock ownership plan debt - (0.6)
Purchase of treasury stock (1.2) (0.2)
------- -------
Cash used in financing activities (14.2) (6.8)
------- -------
Net increase in cash 1.2 1.0
Cash at beginning of period 8.6 12.1
------- -------
Cash at end of period $ 9.8 $ 13.1
======= =======
Interest paid $ 0.7 $ 0.4
------- -------
Federal income tax paid $ 2.0 $ 0.5
------- -------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The interim financial statements in this report include
adjustments based on management's best estimates and
judgments, including estimates of future loss payments,
which are necessary to present a fair statement of the
results for the interim periods reported. These adjustments
are of a normal, recurring nature. The financial statements
are prepared on the basis of generally accepted accounting
principles and should be read in conjunction with the
financial statements and related notes in the 1995 Annual
Report.
2. Radian International LLC
Effective January 16,1996, HSB and The Dow Chemical Company
(Dow) formed a new company, Radian International LLC
(Limited Liability Company), which provides environmental,
information technology, and strategic chemical management
services to industries and government worldwide. According
to the terms of the agreement, the ownership of Radian
International LLC is initially 60 percent Dow and 40 percent
HSB, via the wholly owned subsidiaries of each company.
Income to HSB will be subject to a preference return in the
first two years. As is customary in joint ventures, the
agreements between HSB and Dow provide various alternatives
for either party to dissolve the business, distribute assets
and liabilities, or sell their interests subject to certain
rights of first refusal.
In 1996, HSB's interest in Radian International LLC is
accounted for in the consolidated financial statements under
the equity method of accounting. The 1995 results were fully
consolidated. The new company, consisting of assets
contributed by Dow's subsidiary, Dow Environmental Inc.
(DEI) and HSB's subsidiary, Radian Corporation, is
headquartered in Austin, TX. Radian International LLC will
integrate the engineering and environmental strengths of
Radian and DEI, and DEI's access to the chemical industry
process technology of Dow to provide a wide range of process
and environmental systems and services to global customers.
3. Industrial Risk Insurers
Effective December 1, 1995 the Company increased its
participation in Industrial Risk Insurers (IRI) from
approximately 0.5 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 organization. As a result HSB's increased
participation is reflected in the first quarter 1996
results. The additional participation increased revenue and
expenses for the first quarter 1996 as well as several
balance sheet accounts.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARCH 31, 1996
<TABLE>
RESULTS OF OPERATIONS
(dollar amounts in millions)
Consolidated Overview
Quarter Ended
March 31
---------------
1996 1995
----- ------
<S> <C> <C>
Insurance premium $108.4 $ 93.6
Net engineering services revenues 12.7 61.0
Net investment income 8.0 6.8
Realized investment gains 0.9 0.2
------ ------
Total revenues $130.0 $161.6
------ ------
Net income $ 17.0 $ 14.0
====== ======
Net income per share $ 0.84 $ 0.69
====== ======
</TABLE>
Net income for the first quarter of 1996 increased 21 percent
over the first quarter of 1995. The increase was achieved
through improvements in all three business segments. Insurance
premiums grew 16 percent while the combined ratio remained
constant at approximately 91 percent. Engineering services
margin, including the equity in Radian International LLC,
increased 10 percent. Net investment income increased 18 percent
and realized investment gains increased $0.7 million.
Consolidated revenues in the first quarter of 1995 include $49.6
million of revenue from Radian which is now reported as Radian
International LLC using the equity method of accounting. Under
this method the detail revenues and expenses and assets and
liabilities of Radian International LLC are not presented in the
1996 financial statements. Insurance premiums increased 16
percent in the quarter, with the increased participation in IRI
the largest contributing factor. Exclusive of the Radian impact,
engineering services revenue increased 11 percent from the first
quarter last year. Net investment income increased due to an
increase in investable assets.
The effective tax rate for the first quarter of 1996 was 28
percent compared to 30 percent for the comparable prior year
period. The Company continues to manage its use of tax
advantageous investments to maximize after tax earnings.
The additional participation in IRI increased revenue and
expenses for the first quarter of 1996, but there was minimal
impact to net income. The additional participation also impacted
the balance sheet at March 31, 1996. The major balance sheet
increases from December 31, 1995 related to IRI included
insurance premiums receivable ($24.2 million), unearned insurance
premiums ($37.6 million), claims and adjustment expenses ($19.8
million) and reinsurance recoverable ($16.0 million).
With Radian International LLC being accounted for on the equity
basis of accounting in 1996, certain balance sheet accounts at
March 31,1996 have been reduced. The major changes from December
31,1995 included reductions to engineering services receivable
($59.7 million), fixed assets ($22.6 million), other assets
($23.0 million) and other liabilities ($22.0 million).
Recent Accounting Developments
In October 1995, the Financial Accounting Standards Board (the
Board) issued Statement of Financial Accounting Standards No. 123
(SFAS 123) "Accounting for Stock-Based Compensation" effective
for fiscal years beginning after December 15, 1995. SFAS 123
allows entities to adopt the fair value based method of
accounting for stock compensation or continue under the current
accounting practice. Entities electing to remain with the
current accounting practice 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.
Insurance Operations
Insurance operations include the insurance results of The
Hartford Steam Boiler Inspection and Insurance Company and EIG,
Co.
<TABLE>
Quarter Ended
March 31
-------------
1996 1995
------ ------
<S> <C> <C>
Gross earned premium $133.7 $109.6
Ceded premium 25.3 16.0
------ ------
Insurance premium 108.4 93.6
Claims and adjustment expenses 44.9 37.4
Underwriting, acquisition
and other expenses 54.3 48.4
------ ------
Underwriting gain $ 9.2 $ 7.8
====== ======
</TABLE>
Insurance premiums in the first quarter of 1996 increased 16
percent from the first quarter of 1995. This increase was
primarily attributable to the increased participation in IRI,
which contributed $9.6 million and to growth in the global
markets. Insurance premiums representing coverage outside the
U.S. increased 20 percent in the first quarter 1996 compared to
the prior year first quarter. Reinsurance ceded costs increased
58 percent in the current quarter from the comparable period in
1995. This increase was primarily due to the additional
participation in IRI.
The loss ratio increased slightly in the current quarter compared
to the same period in 1995 as frequency of claims was higher.
Claims and adjustment expenses increased 20 percent in the
current quarter compared to the first quarter 1995 with the
increased share in IRI accounting for the majority of the
additional expense. Gross claims and adjustment expenses for the
first quarter 1996 and 1995 were $58.9 million and $47.3 million,
respectively.
Underwriting, acquisition and other expenses increased
approximately 12 percent in the current quarter compared to the
same 1995 period. The increase was primarily due to increased
participation in IRI and additional expenses related to growth in
the global sector. The expense ratio was 49.6 percent in the
first quarter of 1996, down from 51.1 percent in the first
quarter of 1995.
<TABLE>
The components of the combined ratio, were as follows:
Quarter Ended
March 31
----------------
1996 1995
----- -----
<S> <C> <C>
Loss ratio 41.4% 40.0%
Expense ratio 49.6% 51.1%
----- -----
Combined ratio 91.0% 91.1%
===== =====
</TABLE>
<TABLE>
Engineering Services Operations
Quarter Ended
March 31
---------------
1996 1995
------ -----
<S> <C> <C>
Net engineering services revenue $ 12.7 $ 61.0
Net engineering services expenses 11.3 55.3
------ ------
Operating gain $ 1.4 $ 5.7
====== ======
Net margin 11.3% 9.4%
</TABLE>
Engineering services operations include the results of HSB's and
The Boiler Inspection and Insurance Company of Canada's
engineering services, HSB Reliability Technologies (HSBRT) and
the Company's other engineering services subsidiaries. The 1995
results include Radian on a fully consolidated basis. The 1996
engineering services results do not include Radian as HSB's share
of the newly formed joint venture results were recorded as Equity
in Radian International LLC rather than in net engineering
services revenue and other income statement accounts.
Net engineering services revenues decreased $48.3 million in the
first quarter of 1996 compared to the same period in 1995. The
decrease is due to the Radian International LLC transaction.
Exclusive of Radian, engineering services increased approximately
11 percent in the current quarter over the first quarter 1995.
The growth in revenues was primarily due to increases generated
by HSBRT as their revenues were 32 percent higher in the first
quarter of 1996 over the same period in 1995.
The consolidated engineering services operating gain decreased
$4.3 million in the current quarter from the first quarter of
1995. Again, this was caused by the Radian International LLC
transaction. Exclusive of Radian, the engineering services net
margin increased approximately 17 percent in the current quarter
from the same period in 1995. Improvements in operating margins
by HSBRT generated the increase. Radian International LLC
results for the first quarter of 1996 improved slightly over the
first quarter of 1995.
<TABLE>
Investment Operations
Quarter Ended
March 31
---------------
1996 1995
----- -----
<S> <C> <C>
Net investment income $ 8.0 $ 6.8
Realized investment gains 0.9 0.2
----- -----
Pretax income from
investment operations $ 8.9 $ 7.0
===== =====
</TABLE>
Net investment income increased 18 percent for the first quarter
of 1996 compared to the first quarter of 1995. The increase was
primarily due to an increased level of investable assets and
earnings on the receivable generated from the portfolio transfer
of IRI. Invested assets growth was due to significant cash flow
from operations during 1995. Investment income in the global
market also increased in the current quarter over the first
quarter of 1995 as these operations have shown significant growth
over the past year.
The Company's investment strategy continues to be to maximize
total return on the investment portfolio 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 Company continues
to manage its use of tax advantageous investments to maximize
after tax investment earnings.
<TABLE>
Liquidity and Capital Resources
Balances at
March 31 December 31
---------------------------
1996 1995
------- ------
<S> <C> <C>
Total assets $ 993.4 $ 971.5
Short-term investments 73.1 73.8
Cash 9.8 9.3
Short-term borrowings 12.0 13.4
Shareholder's equity 347.2 341.1
</TABLE>
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 engineering services and insurance operations.
The mix of the investment portfolio is managed to respond to
claim pay-out patterns. The Company also maintains a highly
liquid short-term portfolio to provide for immediate cash needs.
Cash provided from operations was $16.5 million in the first
three months of 1996 compared to $16.4 million in the first three
months of 1995. The increase from 1995 was due to increased cash
flow from insurance operations offset by higher taxes paid.
Insurance operations cash flow increased as premiums collected
were up 7 percent in the quarter compared to the first quarter
1995 and claims paid were down 26 percent. These increases were
partially offset by higher paid expenses. The additional
participation in IRI impacted components of the Consolidated
statement of cash flows for the first quarter of 1996 but there
was no impact to cash provided from operations. The Radian
International LLC transaction had minimal impact on cash flow
from operations in the first quarter of 1996.
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
$347.2 million at March 31, 1996 increased by $6.1 million since
December 31, 1995. The increase reflects net income of $17.0
million for the quarter, and an increase in unrealized gains, net
of tax, of $0.8 million, offset by dividends of $11.7 million.
At March 31, 1996, 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, 1996 and December 31,
1995 was $12.0 million.
The Company continually assesses its capital structure to ensure
that appropriate capital is available to grow its core business.
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 February 14,
1996 to report completion of the formation of a new
company, Radian International LLC, by the Registrant
and The Dow Chemical Company.
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 14, 1996
By: /s/ Saul L. Basch
Saul L. Basch
Senior Vice President, Treasurer
and Chief Financial Officer
Date: May 14, 1996
By: /s/ Robert C. Walker
Robert C. Walker
Senior Vice President and
General Counsel
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements filed herewith and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 225
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<EQUITIES> 236
<MORTGAGE> 11
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<TOTAL-INVEST> 545
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</TABLE>
