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, 1997
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 No
The number of shares outstanding of the registrant's common stock without par
value, as of March 31, 1997: 20,043,608
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THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
INDEX
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PART I FINANCIAL INFORMATION PAGE
Consolidated Statements of Operations for the
Quarters Ended March 31, 1997 and 1996 (unaudited)................ 3
Consolidated Statements of Financial Position as
of March 31, 1997 (unaudited) and December 31, 1996............... 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 (unaudited)............ 5
Notes to Consolidated Financial Statements (unaudited)............ 6
Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations..................................................... 11
PART II OTHER INFORMATION
Item 1 - Legal Proceedings......................................... 17
Item 6 - Exhibits and Reports on Form 8-K.......................... 18
SIGNATURES......................................................... 19
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THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Operations
Unaudited
(in millions, except per share data)
Quarter
Ended March 31
Revenues: 1997 1996
----------- -----------
Insurance premiums $ 122.3 $ 108.4
Net engineering services 14.7 12.7
Net investment income 8.0 8.0
Realized investment gains 0.5 0.9
----------- -----------
Total revenues 145.5 130.0
----------- -----------
Expenses:
Claims and adjustment 51.5 44.9
Policy acquisition 23.5 20.6
Underwriting and inspection 35.3 33.7
Net engineering services 13.6 11.3
Interest 0.3 0.7
----------- -----------
Total expenses 124.2 111.2
----------- -----------
Equity in Radian 1.0 4.9
----------- -----------
Income before taxes 22.3 23.7
Income taxes (benefit):
Current 9.7 7.1
Deferred (3.3) (0.4)
----------- -----------
Total income taxes 6.4 6.7
Net income $ 15.9 $ 17.0
=========== ===========
Net income per common share $ 0.78 $ 0.84
=========== ===========
Dividends declared per common share $ 0.57 $ 0.57
Average common shares oustanding
and common stock equivalents 20.5 20.4
See Notes to Consolidated Financial Statements.
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THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Financial Position
(In millions, except per share data)
March 31, December 31,
1997 1996
(Unaudited)
------------ -----------
Assets:
Cash $ 12.6 $ 4.5
Short-term investments, at cost 91.3 97.9
Fixed maturities, at fair value
(cost -$253.1.8; $231.3) 255.2 235.8
Equity securities, at fair value
(cost - $178.0; $182.9 ) 264.0 262.7
------------ -----------
Total cash and invested assets 623.1 600.9
Insurance premiums receivable 108.6 106.4
Engineering services receivable 11.3 11.7
Fixed assets 31.3 31.7
Prepaid acquisition costs 43.9 40.6
Capital lease 15.9 16.1
Investment in Radian 80.5 79.7
Reinsurance assets 136.5 162.9
Other assets 69.1 66.3
------------ -----------
Total assets $ 1,120.2 $ 1,116.3
============ ===========
Liabilities:
Unearned insurance premiums $ 282.3 $ 270.6
Claims and adjustment expenses 286.1 302.9
Short-term borrowings 6.1 3.2
Long-term borrowings 25.1 25.1
Capital lease 27.9 27.9
Deferred income taxes 25.0 23.7
Dividends payable 11.6 11.4
Other liabilities 84.3 85.9
------------ -----------
Total liabilities 748.4 750.7
------------ -----------
Convertible redeemable preferred stock- Series B
(stated and redemption value; shares authorized,
issued and outstanding .002) 20.0 20.0
Shareholders' equity:
Common stock (stated value; shares authorized
50.0; shares issued and
outstanding 20.0; 20.0) 10.0 10.0
Additional paid-in capital (25.0) (25.5)
Unrealized investment gains, net of tax 54.6 52.8
Retained earnings 316.7 312.6
Benefit plans (4.5) (4.3)
------------ -----------
Total shareholders' equity 351.8 345.6
------------ -----------
Total $ 1,120.2 $ 1,116.3
============ ===========
Shareholders' equity
per common share $17.55 $17.25
See Notes to Consolidated Financial Statements.
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THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Consolidated Statements of Cash Flows
Unaudited
(in millions)
Quarter Ended
March 31,
------------------------
1997 1996
--------- ---------
Operating activities:
Net income $ 15.9 $ 17.0
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1.9 2.9
Deferred income taxes (1.0) (0.4)
Realized investment (gains) losses 0.5 (0.9)
Change in:
Insurance premiums receivable (2.2) (20.8)
Engineering services receivable 0.4 (0.1)
Prepaid acquisition costs (3.3) (6.9)
Reinsurance assets 26.4 (27.6)
Unearned insurance premiums 11.7 37.9
Claims and adjustment expenses (16.8) 20.3
Investment in Radian (0.8) (0.6)
Other (3.3) (5.2)
--------- ---------
Cash provided by operating activities 29.4 15.6
--------- ---------
Investing activities:
Fixed asset additions, net (1.3) (1.2)
Investments:
Purchase of short-term investments, net 6.6 0.6
Purchase of fixed maturities (25.8) (35.4)
Proceeds from sale of fixed maturities 2.1 49.1
Redemption of fixed maturities 1.5 1.7
Purchase of equity securities (33.1) (33.0)
Proceeds from sale of equity securities 37.4 17.9
Cash transferred to investment in Radian - (0.8)
--------- ---------
Cash used in investment activities (12.6) (1.1)
--------- ---------
Financing activities:
Increase (decrease) in short-term borrowings 2.9 (1.4)
Dividends paid to shareholders (11.7) (11.6)
Reacquisition of stock - (1.2)
Exercise of stock options 0.1 0.9
--------- ---------
Cash used in financing activities (8.7) (13.3)
--------- ---------
Net increase in cash 8.1 1.2
Cash at beginning of period 4.5 8.6
--------- ---------
Cash at end of period $ 12.6 $ 9.8
========= =========
Interest paid $ 0.3 $ 0.7
--------- ---------
Federal income tax paid $ 3.8 $ 2.0
--------- ---------
See Notes to Consolidated Financial Statements.
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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 1996 Annual Report. Certain amounts for 1996 have
been reclassified to conform with the 1997 presentation.
2. Industrial Risk Insurers
On December 1, 1996 HSB increased its participation in Industrial Risk
Insurers (IRI) from 14% to 23.5%. IRI is an unincorporated, voluntary
property underwriting association currently comprised of twenty-three
property casualty insurance companies. IRI primarily writes policies on
a syndicate basis which specifies to the insured the percentage share
of risk accepted by each member of the association. Each member
company, therefore, operates as a direct insurer or reinsurer on such
policies and participates in the premiums and losses generated
thereunder in proportion to its membership interest.
In essence, the IRI facilitates the proportional sharing of risk under
one policy where each member is essentially considered to be the direct
writer for reporting, premium tax and other regulatory purposes.
Liability on such policies is several and not joint, and therefore,
members are not responsible for policy liabilities of the other
members. An increased participation does not expose the Company to the
effect of adverse loss development on claims incurred prior to the
effective date of the increase.
Other than a nominal deposit, which is refunded if participation
ceases, there is no cost to becoming a member of the IRI. Members can
change or terminate their participation on an annual basis. Typically
participation levels vary based on a member's expectations of future
profits.
3. Shareholders' Equity
The Connecticut Business Corporation Act, which became effective on
January 1, 1997, eliminated the concept of treasury shares. Therefore,
shares reacquired by the Company constitute authorized but unissued
shares. As a result of this change the Company eliminated the caption
Treasury Stock from its balance sheet and reclassified the amounts to
additional paid-in capital. These amounts were $59.1 million as of
March 31, 1997 and $59.5 million as of December 31, 1996.
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On December 30, 1996, the Company issued Convertible Redeemable
Preferred Stock. The Stock is convertible into 398,406 shares of HSB
common stock at a price of $50.20 per share and may be redeemed at the
option of the Company on or after the fifth anniversary of issuance and
by the holder after the eighth anniversary. As a result of the stock's
redemption features, it has been included in the "mezzanine" section of
the balance sheet located between liabilities and shareholders' equity.
Prior year amounts now conform to these presentations.
4. Derivative Instruments
On December 19, 1996, the Company entered into three "zero cost collar
contracts" to mitigate the effects of market risk on its U. S. common
stock portfolio (which, for management purposes, included certain
convertible preferreds). Each contract had a notional value of $50
million and maturity dates ranging from November 1997 to January 1998.
The contracts are European style, which means they only settle upon
maturity. The contracts, which were entered into when the S&P 500 Index
was 744.3, allow the Company to recover from the counterparty if the
index is below 695.2 at the time of maturity, and requires the Company
to reimburse the counterparty if the index is above a range of 811.3 to
818.7 at the time of maturity.
At March 31, 1997, the S&P 500 Index was 757.1, which is within the
bounds of the collar; and therefore, the collar had no intrinsic value
since no recoveries or reimbursements would have been required if the
contracts had reached their expiration dates.
The Company entered into these contracts with the intent to hold such
contracts until maturity. However, based upon price movements in the
S&P 500 Index since December 31, 1996, the contracts do have a current
estimated market value of $(1.4) million, which represents the cost the
Company would incur if it had canceled the contracts at March 31, 1997.
The Company's U.S. common stock portfolio has experienced unrealized
gains of approximately $1.4 million since December 31, 1996; and for
the 90 days prior to March 31, 1997, has had a price movement
correlation with the S&P 500 well in excess of 80%.
At present, the Financial Accounting Standards Board is currently
reviewing the accounting for derivatives. It is not clear whether the
marking to market of contracts such as ours, which do not have
intrinsic value, will need to be recorded through the statement of
income or should, as a fair value hedge, be viewed as an element of
comprehensive income and treated as unrealized gains and losses.
At March 31, 1997, the Company recorded the mark to market valuation of
$1.4 million as a reduction of realized investment gains. At present
such contracts are included in
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other liabilities in the Statement of Financial Position.
The collar subjects the Company to market and counterparty credit risk.
The Company manages this exposure by frequently modeling the effects of
potential future price movements and by entering into contracts with
internationally recognized financial institutions, which are expected
to perform under the terms of the contract, and by evaluating the
credit worthiness of such institutions by taking into account credit
ratings and other factors.
5. Recent Accounting Developments
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share". This statement establishes standards for computing and
presenting earnings per share (EPS). It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income
statement and a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation. The requirements of this statement will be effective
for year end 1997 financial statements and are not expected to have a
material effect on EPS. Had this standard been in effect for first
quarter 1996 and 1997, EPS would have been as follows:
1997 1996
---- ----
Basic $0.78 $0.84
Diluted $0.78 $0.84
As Reported $0.78 $0.84
6. Legal Proceedings
------------------
The Company is involved in three arbitration or litigation proceedings
regarding the extent to which certain explosion events are insured under
boiler and machinery policies of the Company or under the all-risk
property insurance policies issued by other companies. Management
believes the Company's policies do not provide coverage for losses
resulting from the explosion events that are the subject of these
proceedings.
A lower court ruling in one of these cases held that an explosion did
occur, and that the Company was not liable for losses of the insured
resulting from the explosion. In a further action, the court denied the
Company's motion for summary judgment on certain issues, thus leaving
the Company potentially liable for certain unquantified losses resulting
from events prior to the explosion. In the first quarter of 1997 the
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<PAGE>
Company and the property insurer jointly settled the case with the
insured. The Company's ultimate share of the settlement will be
determined in an arbitration proceeding with the property insurer. The
Company carries a gross loss of $30 million and a reinsurance
recoverable of $25 million for its share of the settlement amount.
The Company has accrued $6.5 million with respect to the other two cases
for potential loss adjustment expenses, including legal costs to defend
the Company's position. One case is in the process of pre-trial summary
judgment motions and appeals; the other case is involved in both
arbitration and litigation proceedings. A trial date has not been set
for either case. In the event that the Company is held liable for one or
both of the remaining claims, amounts in excess of the Company's net
maximum aggregate retention of $8.5 million is recoverable from the
Company's reinsurers. Claim amounts potentially recoverable from
reinsurers in the event of a possible adverse outcome in these cases
could range, in the aggregate, from $40 million to $195 million.
The obligations of the Company's reinsurers with respect to these cases
are not in dispute. Therefore, management believes that any adverse
outcomes in these cases will not, in the aggregate, have a material
effect on either the results of operations or financial condition of the
Company. The Company's reinsurance contracts do not require the Company
to reimburse its reinsurers for any losses such reinsurers might incur
should these cases not be decided in the Company's favor. Nevertheless,
reinsurers often quote rates for future coverages based upon their or
other reinsurer's experience on a particular account. Therefore, in the
event the Company's reinsurers pay significant sums pursuant to the
arbitration or litigation proceedings described above, it is likely the
Company's reinsurance rates would increase in future periods. However,
given the insured capacity that exists in reinsurance markets worldwide,
coupled with the Company's ability to negotiate a redesign or
restructuring of its reinsurance program, it does not necessarily mean
that such an increase would be material.
The Company is also involved in various other 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 results of
operations or the financial position of the Company.
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7. Computation of Earnings Per Share
Net Income $15.9 (A)
====
Weighted Average Common
Shares Outstanding 20.0
Common Stock Equivalents
Preferred Stock - assuming
conversion .4
Options .1
20.5 (B)
====
EPS - (A)/(B) $ 0.78
====
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARCH 31, 1997
RESULTS OF OPERATIONS
- ---------------------
(dollar amounts in millions)
Consolidated Overview
- ---------------------
Quarter Ended
March 31
-------------
1997 1996
---- ----
Insurance premium $122.3 $108.4
Net engineering services revenue 14.7 12.7
Net investment income 8.0 8.0
Realized investment gains 0.5 0.9
------ ------
Total revenues $145.5 $130.0
====== ======
Equity in Radian $ 1.0 $ 4.9
====== ======
Net income $ 15.9 $ 17.0
====== ======
Net income per common share $ 0.78 $ 0.84
====== ======
Net income per common share for the first quarter of 1997 decreased 7% percent
from the first quarter of 1996 due to significantly lower earnings at Radian
($0.00 per share in 1997 versus $0.13 per share in 1996) which more than offset
improved insurance earnings. Continued softness in Radian's businesses due to
delays associated with the transition of their client mix to one that is more
commercial based than government based accounted for the decrease. A very high
effective tax rate for the quarter, which included significant foreign taxes,
eliminated any contribution to HSB's earnings. Under the terms of the joint
venture agreement, HSB has the option to sell its interest in the venture to The
Dow Chemical Company during 1998 for approximately $145 million, subject to
certain adjustments for interim cash distributions. In view of the current
business climate for environmental consulting services, the Company will be
evaluating its options with respect to the joint venture during the course of
1997.
Insurance premiums grew 13% percent, with the increased participation in IRI a
contributing factor as well as growth in both the domestic and international
books of business. The first quarter combined ratio improved from 91.0 percent
in 1996 to 90.0 percent in 1997. Net engineering services revenue increased 16
percent for the first quarter.
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The effective tax rate for the first quarter was 29 percent compared to 28
percent for the comparable prior period. Tax rate fluctuations occur as
underwriting and engineering services results change the mix of pre-tax income
between fully taxable earnings and tax preferred earnings. The Company continues
to manage its use of tax advantageous investments to maximize after tax
earnings.
Recent Accounting Developments
- ------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share". This statement
establishes standards for computing and presenting earnings per share (EPS). It
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement and a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. The requirements of this statement will be effective for year end
1997 financial statements and are not expected to have a material effect on EPS.
Had this standard been in effect for first quarter 1996 and 1997, EPS would not
have changed.
Insurance Operations
- --------------------
Insurance operations include the insurance results of The Hartford Steam Boiler
Inspection and Insurance Company, HSB Engineering Insurance Limited (HSB-EIL),
The Boiler Inspection and Insurance Company of Canada (BI&I) and The Allen
Insurance Company, Ltd.
On December 1, 1996 HSB increased its participation in Industrial Risk Insurers
(IRI) from 14% to 23.5%. IRI is an unincorporated, voluntary property
underwriting association currently comprised of twenty-three property casualty
insurance companies. IRI primarily writes policies on a syndicate basis which
specifies to the insured the percentage share of risk accepted by each member of
the association. Each member company, therefore, operates as a direct insurer or
reinsurer on such policies and participates in the premiums and losses generated
thereunder in proportion to its membership interest.
In essence, the IRI facilitates the proportional sharing of risk under one
policy where each member is essentially considered to be the direct writer for
reporting, premium tax and other regulatory purposes. Liability on such policies
is several and not joint, and therefore, members are not responsible for policy
liabilities of the other members. An increased participation does not expose the
Company to the effect of adverse loss development on claims incurred prior to
the effective date of the increase.
Other than a nominal deposit, which is refunded if participation ceases, there
is no cost to becoming a member of the IRI. Members can change or terminate
their participation on an
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annual basis. Typically participation levels vary based on a member's
expectations of future profits.
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 to 23.5
percent has initially been reflected in the first quarter financial results for
1997.
Quarter Ended
March 31
---------------------
1997 1996
------- -------
Gross earned premium $ 155.7 $ 133.7
Ceded premium 33.4 25.3
------- -------
Insurance premium 122.3 108.4
Claims and adjustment expenses 51.5 44.9
Underwriting, acquisition
and other expenses 58.8 54.3
------- -------
Underwriting gain $ 12.0 $ 9.2
======= =======
Loss ratio 42.1% 41.4%
Expense ratio 47.9% 49.6%
------- --------
Combined ratio 90.0% 91.0%
======= ========
Gross earned premiums in the first quarter increased 16 percent from the
comparable period in 1996. This increase was primarily attributable to the
increased participation in IRI ($10.1 million) and to growth in both domestic
and global markets. Gross earned premiums representing coverage outside the U.S.
increased 30 percent in the first quarter from the comparable period in 1996. In
certain areas of our direct domestic business, the market is experiencing price
erosion. HSB will not write business at rates which would lessen our ability to
maintain underwriting profit. Increases in ceded premium of 32 percent in the
current quarter were primarily due to the additional participation in IRI.
The loss ratio increased from 41.4 percent in the first quarter of 1996 to 42.1
percent in the current quarter. Approximately $1.5 million of flood related
losses were reported during the first quarter of 1997, which impacted the loss
ratio by 1.2 percentage points. Gross claims and
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adjustment expenses for the first quarter 1997 and 1996 were $74.9 million and
$58.9 million, respectively.
The expense ratio improved from 49.6% in the first quarter of 1996 to 47.9% in
the first quarter of 1997 as the growth rate in earned premium exceeded the
growth rate in underwriting and inspection expenses. Underwriting, acquisition
and other expenses increased approximately 12 percent in the current quarter
primarily due to increased participation in IRI.
Engineering Services Operations
- -------------------------------
Quarter Ended
March 31
-------------
1997 1996
---- ----
Net engineering services revenue $ 14.7 $ 12.7
Net engineering services expenses 13.6 11.3
------- -------
Operating gain $ 1.1 $ 1.4
======= =======
Net margin 7.1% 11.3%
Engineering services operations include the results of HSB's and BI&I's
engineering services, HSB Reliability Technologies (HSBRT) and the Company's
other engineering services subsidiaries.
Net engineering services revenues increased $2.0 million in the first quarter
compared to the same period in 1996. The growth in revenues was primarily due to
increases generated by HSBRT as their revenues increased 32 percent. The decline
in operating gain from the previous periods reflects slower growth in the
domestic book and Far East operations, and costs incurred to develop new
products.
Investment Operations
- ---------------------
Quarter Ended
March 31
-------------
1997 1996
------ -------
Net investment income $ 8.0 $ 8.0
Realized investment gains 0.5 0.9
------ -------
Pretax income from
investment operations $ 8.5 $ 8.9
====== =======
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Net investment income for the first quarter remained the same in comparison to
the same period in 1996. Although investable assets increased in the first
quarter in comparison to the same period in 1996, net investment income remained
flat due to calls of high yielding preferred stocks and cash collections from
reinsurers that were not received until late in March.
The Company's investment strategy continues to be to maximize total return on
the investment portfolio through investment income and capital appreciation.
Investment strategies for any given year are developed based on many factors
including operational results, tax implications, regulatory requirements,
interest rates, dividends to stockholders and market conditions. 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.
In the fourth quarter of 1996, HSB entered into three zero cost collar contracts
to mitigate the effects of market risk on its domestic common stock portfolio.
The contracts have maturity dates ranging from November 1997 to January 1998.
The contracts, which were entered into when the S&P index was 744.3, allows the
Company to recover from the counterparty if the index is below 695.2 at the time
of maturity and requires the Company to reimburse the counterparty if the index
is above a range of 811.3 to 818.7 at the time of maturity. In addition to
offering downside protection for market declines in excess of approximately 6
percent, the collar permits the Company to receive the dividends on its common
stock investments and retain a certain level of upside appreciation depending on
market movements.
At March 31, 1997 the S&P index was at 757.1. Although there would be no
settlement required had these contracts matured at March 31, 1997, HSB has
adjusted its value of the contracts to an estimated fair value at that date and
reduced realized investment gains by $1.4 million. At the time these contracts
mature, this charge (or any future charges recognized on an interim basis) will
reverse if the S&P 500 Index remains within the collar parameters.
The Company's U.S. common stock portfolio has experienced unrealized gains of
approximately $1.4 million since December 31, 1996; and for the 90 days prior to
March 31, 1997, has had a price movement correlation with the S&P 500 well in
excess of 80%.
Liquidity and Capital Resources
- -------------------------------
Balances at
March 31 December 31
----------------------------
1997 1996
-------- --------
Total assets $ 1,120.2 $ 1,116.3
Short-term investments 91.3 97.9
Cash 12.6 4.5
Short-term borrowings 6.1 3.2
Convertible Redeemable Preferred Stock 20.0 20.0
Common shareholder's equity 351.8 345.6
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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
expected 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 $29.4 million in the first three months of
1997 compared to $15.6 million for the same period in 1996. Insurance operations
cash flow increased as premiums collected were up 7.7 percent year to date
compared to the same period in 1996 while claims paid increased at 57.8 percent.
Collections from reinsurers increased significantly in the current year. The
Company's participation in IRI impacted components of the Consolidated Statement
of Cash Flows for 1997, including a year to date impact of $5.5 million and
$(5.8) million for 1997 and 1996, respectively, to cash provided from
operations.
Capital resources consist of shareholders' equity, convertible redeemable
preferred stock and debt outstanding and represent those funds deployed or
available to be deployed to support business operations. Common shareholders'
equity of $351.8 million at March 31, 1997 increased by $6.2 million since
December 31, 1996. The increase reflects net income of $15.9 million for the
quarter and an increase in unrealized gains, net of tax, of $1.8 million, offset
by dividends of $11.7 million. Treasury stock of $59.1 million was reclassified
to additional paid-in capital during the first quarter of 1997 in accordance
with the Connecticut Business Corporation Act which, effective January 1, 1997,
eliminated the concept of treasury shares.
At March 31, 1997, 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, 1997 and
December 31, 1996 was $6.1 million and $3.2 million, respectively. The Company
has authorized a guaranty of up to 40 percent of Radian International, LLC's $40
million credit facility with The Dow Chemical Company. At March 31, 1997 the
amount guaranteed was $13.1 million.
On January 27, 1997 the Board of Directors renewed the Company's authorization
to repurchase up to one million of its common shares.
The Company is involved in three arbitration or litigation proceedings regarding
the extent to which certain explosion events are insured under boiler and
machinery policies of the Company or under the all-risk property insurance
policies issued by other companies. Management believes the Company's policies
do not provide coverage for losses resulting from the explosion events that are
the subject of these proceedings. More information pertaining to these legal
proceedings may be found under note 6 of the Notes to Consolidated Financial
Statements herein.
-16-
<PAGE>
Forward-Looking Statements
- --------------------------
Certain statements contained in this report are forward-looking and are based on
management's current expectations. Actual results may differ materially from
such expectations depending on the outcome of certain factors described with
such forward-looking statements and other factors including: significant natural
disasters and severe weather conditions; changes in interest rates and the
performance of the financial markets; changes in the availability, cost and
collectibility of reinsurance; changes in domestic and foreign laws, regulations
and taxes; the entry of new or stronger competitors and the intensification of
pricing competition; the loss of current customers or the inability to obtain
new customers; changes in the coverage terms selected by insurance customers,
including higher deductibles and lower limits; the adequacy of loss reserves;
changes in asset valuations; consolidation and restructuring in the insurance
industry; changes in the demand and customer base for engineering and inspection
services offered by the Company and Radian International LLC whether resulting
from changes in the law or otherwise, and other general market conditions.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
The Company is involved in three arbitration or litigation proceedings regarding
the extent to which certain explosion events are insured under boiler and
machinery policies of the Company or under the all-risk property insurance
policies issued by other companies. Management believes the Company's policies
do not provide coverage for losses resulting from the explosion events that are
the subject of these proceedings.
A lower court ruling in one of these cases held that an explosion did occur, and
that the Company was not liable for losses of the insured resulting from the
explosion. In a further action, the court denied the Company's motion for
summary judgment on certain issues, thus leaving the Company potentially liable
for certain unquantified losses resulting from events prior to the explosion. In
the first quarter of 1997 the Company and the property insurer jointly settled
the case with the insured. The Company's ultimate share of the settlement will
be determined in an arbitration proceeding with the property insurer. The
Company carries a gross loss of $30 million and a reinsurance recoverable of $25
million for its share of the settlement amount.
The Company has accrued $6.5 million with respect to the other two cases for
potential loss adjustment expenses, including legal costs to defend the
Company's position. One case is in the process of pre-trial summary judgment
motions and appeals; the other case is involved in both arbitration and
litigation proceedings. A trial date has not been set for either case. In the
event that the Company is held liable for one or both of the remaining claims,
amounts in excess of the Company's net maximum aggregate retention of $8.5
million is recoverable from the Company's reinsurers. Claim amounts potentially
-17-
<PAGE>
recoverable from reinsurers in the event of a possible adverse outcome in these
cases could range, in the aggregate, from $40 million to $195 million.
The obligations of the Company's reinsurers with respect to these cases are not
in dispute. Therefore, management believes that any adverse outcomes in these
cases will not, in the aggregate, have a material effect on either the results
of operations or financial condition of the Company. The Company's reinsurance
contracts do not require the Company to reimburse its reinsurers for any losses
such reinsurers might incur should these cases not be decided in the Company's
favor. Nevertheless, reinsurers often quote rates for future coverages based
upon their or other reinsurer's experience on a particular account. Therefore,
in the event the Company's reinsurers pay significant sums pursuant to the
arbitration or litigation proceedings described above, it is likely the
Company's reinsurance rates would increase in future periods. However, given the
insured capacity that exists in reinsurance markets worldwide, coupled with the
Company's ability to negotiate a redesign or restructuring of its reinsurance
program, it does not necessarily mean that such an increase would be material.
The Company is also involved in various other 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 results of operations or the financial position of the
Company.
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 dated February 24, 1997 to
announce the election of Simon W. Leathes as a director of the
Registrant.
-18-
<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 12, 1997 By: /s/ Saul L. Basch
Saul L. Basch
Senior Vice President, Treasurer
and Chief Financial Officer
Date: May 12, 1997 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-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 346
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<TOTAL-ASSETS> 1120
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<UNEARNED-PREMIUMS> 282
<POLICY-OTHER> 0
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<NOTES-PAYABLE> 31
0
20<F1>
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122
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<FN>
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</TABLE>
