SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
Registrant's telephone number, including area code: (860) 722-1866
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common stock, without par value New York Stock Exchange, Inc.
Rights to Purchase Depositary Receipts New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes...X..., No.......
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.....X.......
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 13, 1997 was $908,818,577.
Number of shares of common stock outstanding as of February 13, 1997:
20,041,678.
Documents Incorporated By Reference
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Portions of the Proxy Statement dated March 26, 1997 for the Annual Meeting of
Shareholders to be held April 24, 1997 are incorporated by reference in Parts
III and IV herein.
<PAGE>
EXPLANATORY NOTE
This Annual Report on Form 10-K/A is being filed as an amendment to the
Registrant's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 31, 1997 for the purpose of amending Items 1 and 3 of Part I
and Items 6, 7 and 8 of Part II of the Registrant's Form 10-K.
PART I
Item 1. Business.
A. GENERAL DEVELOPMENT OF BUSINESS
The Hartford Steam Boiler Inspection and Insurance Company (together with
its subsidiaries referred to as the "Company" hereinafter) was chartered under
the laws of the State of Connecticut in 1866. The Company's operations are
divided into three industry segments - insurance, engineering services and
investments. The most significant business of the Company is providing insurance
against losses from accidents to boilers, pressure vessels, and a wide variety
of mechanical and electrical machinery and equipment along with a high level of
inspection services aimed at loss prevention. Earned premiums for the Company's
insurance products were $448.6 million for 1996, which accounted for
approximately 81.7 percent of the Company's revenues. See Note 8 to the
Consolidated Financial Statements located in Item 8 of Part II herein for
information on the Company's net written and net earned premiums over the last
three years.
The Company conducts its business in Canada through its subsidiary, The
Boiler Inspection and Insurance Company of Canada. Insurance for risks located
in countries other than the United States and Canada is written by HSB
Engineering Insurance Limited (HSB EIL). In December 1994, the Company purchased
the remaining 50% interest in HSB EIL's parent company, Engineering Insurance
Group (EIG) from General Reinsurance Corporation.
Effective December 1, 1996 the Company increased its membership
participation in Industrial Risk Insurers (IRI) from 14 percent to 23.5 percent.
Prior to December 1, 1995, the Company's participation was .5 percent. IRI is a
voluntary, unincorporated joint underwriting association, comprised of property
casualty insurance members, which provides property insurance for the class of
business known as "highly protected risks" -- larger manufacturing, processing,
and industrial businesses which have invested in protection against loss through
the use of sprinklers and other means. The Company has increased its share over
the last two years because it believes that participation in the IRI represents
an opportunity to apply the Company's underwriting, engineering and reinsurance
skill sets to a large block of business and to potentially provide a quick
turnaround of IRI's underwriting results with only a limited capital outlay of
Company funds. The Company's increased share will enable the Company to have a
more significant role in helping IRI be an effective and profitable provider of
essential property insurance and loss prevention services to larger risks. IRI
has a fiscal year ending November 30, and provides reports to its members on a
quarterly basis. As a result, the Company's increased participation to 23.5
percent will initially be reflected in the first quarter financial results for
1997. Also during the third quarter of 1996, the Company assumed IRI's electric
utility book of business (gross written premium of $8.6 million) in term in
order to strengthen the Company's position in the power generation industry and
its coordination with IRI.
The Company also offers professional scientific and technical consulting
services for industry and government on a world-wide basis through its
Engineering Department and its engineering subsidiaries. In 1996 net engineering
services revenues were $55.8 million, which accounted for approximately 10.2
percent of the Company's revenues.
In January 1996, the Company completed the formation of Radian
International LLC ("Radian International"), a joint venture with The Dow
Chemical Company to provide environmental, engineering, information technology,
remediation and strategic chemical management services to industries and
governments world-wide. In connection
<PAGE>
with the formation of the new company, the Company contributed substantially all
of the assets of its wholly-owned subsidiary, Radian Corporation, and The Dow
Chemical Company contributed the assets of Dow Environmental, Inc., its
wholly-owned subsidiary, as well as access to certain of its technologies which
help support the businesses expected to be conducted by the joint venture
company. Radian International currently is 40 percent owned by Radian
Corporation and 60 percent owned by Dow Environmental Inc. Prior to 1996, Radian
Corporation's results were included with the Company's on a fully consolidated
basis. In 1996, the Company's share of the joint venture's results are recorded
as equity in Radian rather than in net engineering services revenue and other
income statement accounts. Radian International's contribution to pre-tax
earnings declined by approximately $15.7 million during 1996 largely due to
delays in the transition of Radian International's business to one that is more
economically driven and less government regulatory driven.
The Company is a multi-national company operating primarily in North
American, European, and Asian markets. Currently, the Company's principal market
for its insurance and engineering services is the United States. However, the
Company does desire to become a stronger competitor in the international
machinery breakdown insurance and related engineering services markets as it
believes that there is significant opportunity for profitable growth overseas.
In 1996 the revenues and pre-tax income associated with operations outside of
the United States were approximately 18.9 percent and 28.3 percent,
respectively. Identifiable assets associated with operations outside of the
United States are approximately 23.1 percent of the consolidated amount.
Below is a summary of the identifiable assets by business segments at
year-end 1996 and 1995. Certain assets have not been allocated.
<TABLE>
1996
(In millions)
Total Insurance Investment Engineering Other
----- --------- ---------- ----------- -----
<CAPTION>
Asset Category
<S> <C> <C> <C> <C> <C>
Cash and Invested Assets ...... $ 600.9 -- $600.9 -- --
Insurance Premiums Receivable . 106.4 $106.4 -- -- --
Engineering Services Receivable 11.7 -- -- $ 11.7 --
Fixed Assets .................. 31.7 -- -- -- $ 31.7
Prepaid Acquisition Costs ..... 40.6 40.6 -- -- --
Capital Lease ................. 16.1 -- -- -- 16.1
Investment in Radian .......... 79.7 -- -- 79.7 --
Reinsurance Assets ............ 162.9 162.9 -- -- --
Other Assets .................. 66.3 -- -- -- 66.3
------- ------ ------ ----- ------
Total ...................... $1,116.3 $309.9 $600.9 $ 91.4 $ 114.1
% of Total 100% 27.8% 53.8% 8.2% 10.2%
</TABLE>
<PAGE>
<TABLE>
1995
(In millions)
<CAPTION>
Total Insurance Investment Engineering Other
----- --------- ---------- ----------- -----
Asset Category
- --------------
<S> <C> <C> <C> <C> <C>
Cash and Invested Assets $ 553.8 --- $553.8 --- ---
Insurance Premiums Receivable 87.2 $ 87.2 --- --- ---
Engineering Services Receivable 68.8 --- --- $ 68.8 ---
Fixed Assets 62.3 --- --- 22.6 $ 39.7
Prepaid Acquisition Costs 34.1 34.1 --- --- ---
Capital Lease 16.8 --- --- --- 16.8
Reinsurance Assets 59.5 59.5 --- --- ---
Other Assets 89.0 --- --- 23.0 66.0
-------- -------- ------- ------- -------
Total $ 971.5 $ 180.8 $553.8 $114.4 $122.5
% of Total 100% 18.6% 57.0% 11.8% 12.6%
</TABLE>
For additional information on the Company's business segments, see Notes 1
and 3 to the Consolidated Financial Statements located in Item 8 of Part II
herein.
B. PRODUCTS AND SERVICES
Insurance
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Equipment breakdown insurance provides for the indemnification of the
policyholder for financial loss resulting from destruction or damage to an
insured boiler, pressure vessel, or other item of machinery or equipment caused
by an accident. This financial loss can include the cost to repair or replace
the damaged equipment (property damage), and product spoilage, lost profits and
expenses to avert lost profits (business interruption) stemming from an
accident.
The Company distinguishes itself from other insurance suppliers by
providing a high level of loss prevention, failure analysis and other
engineering services with the insurance product. This heavy emphasis on loss
prevention historically has had the dual effect of increasing underwriting and
inspection expenses, while reducing loss and loss adjustment expenses.
An important ancillary benefit for the policyholder is that the inspection
performed by the Company's inspector on a boiler, pressure vessel, or other
piece of equipment, as part of the insurance process, is normally accepted by
state and other regulatory jurisdictions for their certification purposes.
Without a certificate of inspection by the insurance carrier or another
inspection agency, policyholders cannot legally operate many types of equipment.
The Company also writes all risk property insurance for risks with
significant machinery and equipment exposures, in addition to its more
traditional boiler and machinery products. The all risk line is marketed to
customers with equipment and machinery exposures, such as electric utilities,
where sophisticated engineering services are important to loss prevention and
control. These customers are offered technical services such as computerized
evaluation of fire protection systems in addition to fire inspections and boiler
and machinery inspections. The Company also writes all risk coverage
specifically tailored for data processing systems.
<PAGE>
Engineering Services
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Separate divisions of the Company's Engineering Department provide quality
assurance services, training for nondestructive testing, inspections to code
standards of the American Society of Mechanical Engineers (ASME), ISO
certification services and other specialized consulting and inspection services
related to the design and applications of boilers, pressure vessels, and many
other types of equipment for domestic and foreign equipment manufacturers and
their customers. Hartford Steam Boiler is the largest Authorized Inspection
Agency for ASME codes in the world. In addition, the Company's Engineering
Department, often in conjunction with Radian International, its engineering
affiliate jointly owned with The Dow Chemical Company (Dow), focuses on
researching and developing potential new products and services, and new markets
for current services.
Radian International is an international engineering and technical services
firm that provides a wide range of environmental based consulting services to
industries and governments around the world. Currently its customer base is
almost equally divided between the government and private sector, although it is
moving towards a client mix that is more commercial based. Industries served in
the private sector include chemical and petroleum producers, manufacturers and
utilities. Radian's areas of expertise include environmental, engineering,
health and safety services, materials and mechanical technologies, specialty
chemicals, and information technologies. Its strategy is to provide its
customers with the full range of environmental technical services required to
conduct their businesses on a global basis. The formation of Radian
International by the Company and The Dow Chemical Company ("Dow") as described
on page 2, was a significant step in implementing this strategy, as the new
company integrates the environmental and engineering strengths of Radian
Corporation with Dow's access to chemical industry process technology and
environmental remediation capabilities. Radian International recognizes revenues
from contracts as costs are incurred and includes estimated earned fees in the
proportion of cost incurred to date to total estimated cost.
Other engineering subsidiaries include HSB Reliability Technologies Corp.
(HSB RT) and HSB Professional Loss Control Inc. (HSB PLC). HSB RT maintains an
extensive database on equipment maintenance and reliability and provides
preventive maintenance consulting services and programs to a wide range of
businesses and industries. Such services and programs are designed to increase
production, reduce maintenance, energy and spare parts inventory costs, and
extend equipment life. HSB PLC is a fire protection consulting and engineering
firm. Its services include inspections, hazards analysis and risk assessment,
engineering design, code consulting, research and testing, and training.
C. COMPETITION
Insurance
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The Company is the largest writer of equipment breakdown insurance in North
America and is establishing a significant presence in the engineering insurance
market outside of North America. Based on gross earned premium, the Company's
U.S. market share, at approximately 40 percent, has remained fairly stable over
the past ten years. Based on net premiums written reported in the 1996 edition
of Best's Aggregates and Averages, no other single company has more than a 10
percent market share. Members of an affiliated group of insurers, the Factory
Mutual System, have a market share of approximately 22 percent.
<PAGE>
In general, the insurance market is influenced by the total insurance
capacity available based on policyholder surplus. Over the last few years,
global capacity has grown as new insurers enter the property casualty market. In
addition to available capacity, competition in the equipment breakdown insurance
market is based on price and service to the insured. Service includes
maintaining customer relationships, engineering and loss prevention activities,
and claims settlement. The Company prices its product competitively in the
marketplace, but primarily competes by offering a high level of service, not by
offering the lowest-priced product.
Competition in the equipment breakdown insurance market, as well as the
property casualty market in general, has intensified in recent years as a result
of continuing restructuring and consolidation in the insurance industry.
However, because the Company primarily underwrites risks which require
engineering expertise and jurisdictionally mandated inspections, it believes
that it is well-positioned to manage such competition since it maintains the
largest force of inspectors and engineers in the industry.
Engineering Services
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The Company provides a wide range of engineering, consulting and inspection
services as described on page 4. For most of these services it has numerous
competitors, some of whom are much larger and have greater financial resources
than the Company.
Competition in these areas is based on price and on the qualifications,
experience and availability of the individuals who perform the work. The
Company's force of inspectors, engineers, and technicians is spread throughout
the world. Ongoing training programs ensure that the Company's inspectors,
engineers, and technicians are kept up-to-date on the latest engineering and
technical developments.
D. MARKETING
Insurance
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The Company's various functional operations are aligned to focus on its two
principal customer groups, commercial risks and special risks. The Company
believes that this organizational structure allows it to service its customers
more effectively and efficiently and at the same time to be a more aggressive
and flexible competitor.
Currently, the Company's principal market for its insurance business is the
United States. In 1996 68.2 percent of its net written premiums (exclusive of
IRI) related to risks located in the United States. Of the direct premiums
written in the United States in 1996 (gross premiums less return premiums and
cancellations, excluding reinsurance assumed and before deducting reinsurance
ceded), less than 10 percent was written in any one state, and with the
exception of California, Florida, New York, Pennsylvania and Texas, no state
accounted for more than 5 percent of such premiums. No insurance customer
accounted for more than 10 percent of the consolidated revenues in 1996.
The Company has contracts with independent insurance agencies in all fifty
states, the District of Columbia, Puerto Rico and Canada. These agencies market
the Company's direct insurance to its small and medium commercial accounts.
Personal contact with these independent insurance agents is accomplished through
the Company's field sales force which operates out of various branch offices
across the country and in Canada. It is the Company's policy in appointing
agents to be selective, seeking to maintain and strengthen
<PAGE>
its existing relationships and to develop relationships with new agents whom the
Company believes will become a continuing source of profitable business. The
Company periodically reviews its agency contracts and selectively reduces them
in order to retain only those agents who consistently produce certain minimum
levels of business for the Company.
Large, engineering-intensive U.S. and international accounts are primarily
marketed and serviced by account teams comprised of underwriting, marketing,
engineering and claims staff who have specialized knowledge of particular
customer industries. U.S. customers are serviced primarily by Hartford Steam
Boiler. Canadian customers are serviced by The Boiler Inspection and Insurance
Company of Canada. Overseas customers are serviced by HSB Engineering Insurance
Limited, based in London, with additional offices in Hong Kong, Kuala Lumpur,
Madrid and Miami.
Additionally, the Company markets its insurance products through the
distribution channels of the companies which it reinsures.
IRI markets its products primarily through large brokers.
Engineering Services
- --------------------
The Company's engineering services are marketed in a variety of ways.
Customized services related to loss prevention, failure analysis, and equipment
testing are generally sold in conjunction with the insurance contract but are
also available separately. Most other engineering services, including those
performed by Radian International, are marketed on a bid or proposal basis.
While such business is usually price sensitive, the exacting standards and
requirements set by industry and government for most of the services offered by
the Company tend to diminish that effect.
Engineering services are marketed and serviced primarily by personnel
located in the Company's various domestic and international offices.
While the primary market for engineering services continues to be the U.S.,
the Company has been focusing on expanding its international business, primarily
in Europe and the Pacific Rim as demand for engineering services, particularly
environmental consulting services, is expected to grow at a faster rate in these
developing regions than in the U.S.
No engineering services customer (including Radian International customers)
accounts for more than 10 percent of the Company's consolidated revenues.
E. REGULATION
Insurance
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The Company's insurance operations are subject to regulation throughout the
United States. Various aspects of the insurance operations are regulated,
including the type and amount of business that can be written, the price that
can be charged for particular forms of coverage, policy forms, trade and claim
settlement practices, reserve requirements and agency appointments. Regulations
also extend to the form and content of financial statements filed with such
regulatory authorities, the type and concentration of permitted investments for
insurers, and the extent and nature of transactions between members of a holding
company
<PAGE>
system, including dividends involving insurers. In general, such transactions
must be on fair and reasonable terms, and in some cases, prior regulatory
approval is required.
The nature and extent of regulations pertaining to the business the Company
writes outside of the U.S. varies considerably. Regulations cover various
financial and operational areas, including such matters as amount and type of
reserves, currency, policy language, repatriation of assets and compulsory
cessions of reinsurance.
In December 1993, the National Association of Insurance Commissioners
(NAIC) adopted risk based capital (RBC) requirements applicable to property and
casualty insurers. The RBC formula establishes a required statutory surplus
level for an insurer based on the risks inherent in its overall operations which
are identified as underwriting risk, invested asset risk, credit risk and
off-balance sheet risk. The law provides for regulatory responses ranging from
requiring a plan of corrective action to placing the insurer under regulatory
control for insurers whose surplus is below the prescribed RBC target. The
Company's adjusted capital significantly exceeded the authorized control level
RBC for 1996.
NAIC Insurance Regulatory Information System (IRIS) Ratios are part of the
solvency impairment early warning system of the NAIC. They consist of twelve
categories of financial data with defined acceptable ranges for each. Companies
with ratios outside of the acceptable ranges are selected for closer review by
regulators. The Company's IRIS ratios were within acceptable ranges for 1996.
The Company's operations are subject to examination by insurance regulators
at regular intervals. The most recently concluded insurance examination for the
Company was conducted for the year ended December 31, 1994 by the Connecticut
Insurance Department, the Company's domestic regulator. No material findings
were included in the final report of the examination. Similar regulatory
procedures govern the Company's U.S. insurance subsidiaries and its foreign
subsidiaries.
Insurance guaranty fund laws exist in all states which subject insurers to
assessments up to prescribed limits for certain obligations of insolvent
insurers to their policyholders and claimants. The increase in insolvencies in
recent years has resulted in higher assessments against the Company. The Company
is permitted to recover a portion of these assessments, none of which have been
material, through premium tax offsets and policy surcharges. The Company has
recorded its ultimate estimate of assessments in its financial statements.
See Note 4 to the Consolidated Financial Statements located in Item 8 of
Part II herein for additional information on statutory reporting.
As discussed earlier, the Company's insureds receive, in addition to the
insurance product, inspections which meet state, county or municipally mandated
requirements. In order for the Company's inspectors to perform these mandated
inspections, they must be commissioned. Commissioning is conducted by the
National Board of Boiler and Pressure Vessel Inspectors and the various state
jurisdictional authorities. The majority of the Company's inspectors are
commissioned, and the Company believes that it has an adequate number of
commissioned inspectors to conduct its business affairs.
<PAGE>
Engineering Services
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A portion of the Company's engineering services revenue comes from
certifying that boilers and pressure vessels are being constructed according to
standards adopted by the American Society of Mechanical Engineers (ASME). The
commission that authorizes inspectors to conduct insurance inspections also
authorizes them to perform ASME Code inspections.
Customers of Radian International, and to a much lesser extent Radian
International itself, are subject to various state and federal environmental
laws in connection with their ongoing business operations. Although the
liabilities imposed by these laws more directly relate to the business
operations of Radian International's customers, in the course of providing
services, and in particular environmental consulting services, which may involve
the handling or disposal of hazardous materials of such customers, Radian
International could become subject to liabilities under such laws.
The Company believes that it is unlikely that the nature of such operations
will give rise to liabilities under such laws and regulations which will have a
material adverse impact on its consolidated results of operations or financial
condition.
Other
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The Company and members of its professional and technical staff are subject
to a variety of other state, local and foreign licensing and permit requirements
and other laws generally applicable to corporations and businesses.
F. INSURANCE OPERATIONS
Policies
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Pricing for the Company's insurance policies is based upon the rates the
Company has developed for use with its various products. In many jurisdictions
in which the Company does business, such rates, as well as the policy forms
themselves, must be approved by the jurisdiction's insurance regulator. Rates
for the Company's products are developed based upon estimated claim costs,
expenses related to the acquisition and servicing of the business, engineering
expenses and a profit component.
Coverages for unique risks are judgment-rated, taking into account
deductibles, the condition of the insured's equipment, loss prevention and
maintenance programs of the insured, and other factors.
Policies are normally written for a term of one year. Most of the Company's
policies provide coverage for property damage and business interruption to
insured property (including buildings and structures under the Company's all
risk policy) resulting from covered perils. Property insured under the Company's
equipment breakdown policies includes such equipment as steam boilers, hot water
boilers, pressure vessels, refrigerating and air conditioning systems, motors,
generators, compressors, pumps, engines, fans, blowers, gear sets, turbines,
transformers, electrical switch gear, data processing and business equipment and
a wide variety of production and processing equipment.
The Company's underwriting policy is to manage its risks to probable
maximum losses not in excess of $50 million and maximum foreseeable losses not
in excess of $100 million. The Company's current reinsurance
<PAGE>
program generally limits the Company's retention on any one loss to $3 million,
with potentially higher per risk retentions dependent on aggregate losses
experienced by the Company during the reinsurance period.
Reinsurance Assumed
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The predominant practice in the insurance industry is to combine several
types of insurance coverages into one policy referred to as a package policy.
The Company has reinsurance agreements with over 100 multi-line insurance
companies to reach the small to mid-size customers that purchase such package
policies. This business primarily focuses on small and mid-sized commercial
customers and it offers a significant opportunity for growth by the Company
since, the Company estimates, equipment breakdown coverage is only provided
currently to less than 5 percent of the over 10 million insured companies and
institutions in the United States. (See "Reinsurance Ceded" below.)
Under the reinsurance agreements, the Company's reinsured companies may
include equipment breakdown exposures in their multi-peril policies, and such
risks will be assumed by the Company under the terms of the agreement. These
plans generally provide that the Company will assume 100 percent of each boiler
and machinery risk, subject to the capacity specified in the agreement, and will
receive the entire equipment breakdown premium except for a ceding commission
which will be retained by the reinsured company for commissions to agents and
brokers, premium taxes and handling expenses.
Although the Company assumes the role of reinsurer, it continues to have
selling and underwriting responsibilities as well as involvement in inspecting
and claims adjusting. In effect, the Company becomes the equipment breakdown
insurance department of the reinsured company and provides all equipment
breakdown underwriting (that is, the examination and evaluation of the risk
based on its engineering judgments), claims and engineering services as if it
were part of that organization. Traditionally, as part of the underwriting
process, the Company retains the right to decline or restrict coverage in the
same manner as it does for its own business. In 1996 the Company began to write
a simplified program (referred to as ReSource) under which a reinsured company
agrees to include equipment breakdown insurance on an entire portfolio of
accounts meeting specific underwriting guidelines and occupancy parameters,
which the Company agrees to reinsure for equipment breakdown losses.
The insurance industry, in general, is undergoing a significant shakeout
and consolidation. Considerable merger and acquisition activity has occurred
recently and more is anticipated in the future. Depending on the specific
companies involved in these activities and other market factors, the level of
reinsured business the Company assumes in the future under the arrangements
described above could be affected.
The Company also assumes reinsurance primarily on a facultative basis for
certain large risks and several insurance pools.
The written premium generated through reinsurance assumed totaled $232.6
million in 1996, representing approximately 41 percent of the Company's gross
written premium.
Reinsurance Ceded
- -----------------
The Company participates in various facultative, quota share and excess of
loss reinsurance agreements to limit its exposure, particularly to catastrophic
losses and high risk lines, and to provide additional capacity to
<PAGE>
write business. Under the Company's current treaty reinsurance program (and not
taking into account its participation in IRI), its retention on any one risk is
generally limited to $3 million, with potentially higher per risk retentions
depending on aggregate losses experienced by the Company during the reinsurance
program period. In addition, the Company uses facultative reinsurance on certain
high exposure risks and has catastrophe reinsurance for aggregate net losses
greater than $15 million.
As a result of the Company's growth and global expansion, combined with
loss experience in prior years, the Company has been incurring higher ceded
reinsurance costs in recent years. In 1995 the Company centralized and
consolidated its global ceded reinsurance operations to more closely manage its
reinsurance costs. In 1994 and continuing through 1996 the Company increased its
non-IRI retentions by adding a $5 million aggregate deductible to its
reinsurance program to lessen the impact of higher reinsurance costs. Of the
four losses in the July 1994 -July 1995 treaty year that exceeded $3 million,
the Company retained an additional $1.4 million in 1994 and $1.2 million in 1995
due to the inclusion of the $5 million annual aggregate deductible. Reinsurance
costs were reduced approximately $2.9 million for both 1994 and 1995. In 1996
the Company's reinsurance ceded costs increased $42 million over 1995 which was
almost entirely attributable to its increased participation in IRI.
The Company utilizes well-capitalized domestic and international
reinsurance companies and syndicates for its reinsurance program and monitors
their financial condition on an ongoing basis. For reinsurers that are not
accredited in their state of domicile, the Company requires collateral for
reinsurance recoverable from such carriers. In the unlikely event that the
Company's reinsurers are unable to meet their obligations, the Company would
continue to have primary liability to policyholders for losses incurred.
Uncollectible reinsurance recoverables have not had, and are not expected by
management to have in the future, a material adverse effect on the consolidated
results of operations or financial position of the Company. The Company is not
party to any contracts that do not comply with the risk transfer provisions of
SFAS 113.
The following table displays information concerning the primary
participants in the Company's current reinsurance program as of December 31,
1996.
<TABLE>
(In Millions)
<CAPTION>
Reinsurer Ceded Premium Reinsurance Recoverable 1996 A.M. Best's Rating
- --------- ------------- ----------------------- -----------------------
<S> <C> <C> <C>
General Reinsurance Corp. $33.4 $54.9 A+ + (Superior)
American Re-insurance $ 6.9 $13.8 A+ (Superior)
Company
Munich Re $ 2.1 $10.6 A+ (Superior)
</TABLE>
As of year-end 1996 no other reinsurance recoverable of the Company from
any single reinsurer exceeded 3 percent of shareholders' equity. Certain Lloyds
syndicates participate in the excess of loss reinsurance program, primarily in
the excess layers. The highest aggregate percentage participation of such
syndicates, at 50.3 percent, is in the $50 million excess of $100 million layer.
No individual syndicate has more than an 8 percent participation in any of the
excess layers. The Company's reinsurance recoverables in the aggregate from all
Lloyd's syndicates is less than 2 percent of shareholders' equity at December
31, 1996.
For additional information on reinsurance, see Note 8 to the Consolidated
Financial Statements located in Item 8 of Part II herein.
<PAGE>
Pools and Joint Underwriting Associations
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With the exception of Industrial Risk Insurers (IRI) as described on page 1
and discussed below, the Company does not participate to any significant degree
in voluntary reinsurance pools of other insurance companies because the Company
generally chooses to insure only those risks which it has inspected or has the
right to inspect. The Company is required to participate in certain joint
underwriting associations which provide insurance for particular classes of
insureds when insurance in the voluntary market is unavailable. Generally, the
Company's policy with respect to assessments made by state guaranty funds or
joint underwriting associations which require payouts over a multi-year period,
such as in the case of the assessment in connection with Hurricane Andrew in
Florida, is to establish an accrual for the full anticipated amount. The
unprecedented level of catastrophes in recent years has required the Company to
pay higher assessments to such associations. However, such assessments have not
been material in any of the years presented in the 1996 Financial Statements.
Participation in Industrial Risk Insurers
- -----------------------------------------
Industrial Risk Insurers (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. The Company's membership
interest is currently 23.5 percent. In 1996 and 1995 its membership shares were
14 percent and .5 percent, respectively.
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 doesn't 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.
The primary business risk the Company faces as a result of its
participation in IRI relates to the frequency and severity of claims. The
Company has attempted to mitigate and manage the risk through its active
participation since December 1, 1995 in the governance of IRI, specifically in
the area of underwriting guidelines, reinsurance program design and engineering
standards. Additionally, the Company maintains reinsurance for its own account
that would help to mitigate any adverse loss experience.
IRI's underwriting policy is to manage its risks to probable maximum losses
(PML) not to exceed $125 million and maximum foreseeable losses (MFL) not to
exceed $400 million. On a per risk basis IRI retains the first $75 million of
loss and has in place excess of loss reinsurance of $325 million excess of $75
million. Should an MFL event take place, the Company's proportionate share, net
of IRI reinsurance, would be $25.6 million. The Company maintains other
reinsurance programs for its own account which could absorb up to 50 percent of
this amount. IRI maintains reinsurance coverage of $100 million in excess of its
MFL.
<PAGE>
The Company also reinsures IRI on certain facultative placements. The ceded
premium for such placements was $1.5 million for 1996.
Claims and Claim Adjustment
- ---------------------------
Essentially all claims under the Company's policies of insurance are
handled by the Company's own claims handlers. Management believes that the
Company's handlers are better able to make the connection between loss
prevention and loss control. The Company employs claims handlers in its various
offices throughout the country, Canada and the U.K. Claims handlers, in many
cases, are assigned to particular customer groups in order to apply specialized
industry knowledge to the adjustment of claims.
Claims and adjustment expense reserves comprise one of the largest
liabilities of the Company. Reserves are established to reflect the Company's
estimates of total losses and loss adjustment expenses that will ultimately be
paid under direct and assumed insurance contracts. Loss reserves include claims
and adjustment expenses on claims that have been reported but not settled and
those that have been incurred but not yet reported to the Company. The Company's
loss reserve estimates reflect such variables as past loss experience and
inflation. In addition, due to the nature of much of the Company's coverages,
complex engineering judgments are involved. Subjective judgments are an integral
component of the loss reserving process, due to the nature of the variables
involved. Previously established loss reserves are regularly adjusted as loss
experience develops and new information becomes available. Adjustments to
previously established reserves are reflected in the financial statements in the
period in which the estimates are changed.
The normal turnaround time in paying small claims is less than six months.
The vast majority of claims are settled within one year and very few remain
unsettled two years after the loss occurs. This pattern is somewhat skewed in
terms of claim dollars (as noted in the schedule on page 17) as it is the larger
claims that often take longer to adjust. Compared to the property casualty
industry as a whole, the Company has a very "short-tail". The Company's claims
expenses are based on estimates of the current costs of replacing productive
capacity. The Company does not employ discounting techniques in establishing
liabilities for claims and claim adjustment expenses.
For those relatively few claims involving litigation, the Company uses both
its in-house law department and outside counsel, depending on the issues, costs,
and staffing requirements.
<PAGE>
The following table provides a reconciliation of the beginning and ending
reserves for net claims and claim adjustment expenses for the years ended
December 31, 1996, 1995 and 1994.
RECONCILIATION OF NET LIABILITY FOR
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1996 1995 1994
------ ------ ------
(In millions)
Net liability for claims and
adjustment expenses at January 1 $145.5 $161.3 $171.3
------ ------ ------
Plus:
Provision for claims and adjustment
expenses occurring in the current year 214.2 152.2 141.7
Increase (decrease) in estimated claims
and adjustment expenses arising
in prior years (9.8) 2.7 1.5
------ ------ ------
Total incurred claims and
adjustment expenses 204.4 154.9 143.2
------ ------ ------
Less:
Payment for claims arising in:
Current year 91.4 58.9 63.5
Prior years 80.7 111.8 108.7
------ ------ ------
Total payments 172.1 170.7 172.2
------ ------ ------
Plus:
Full Consolidation of EIG Co. at
December 31, 1994 - - 19.0
------ ------ ------
Net liability for claims and
adjustment expenses at December 31 $177.8 $145.5 $161.3
====== ====== ======
The 1996 loss ratio was 45.6 percent compared to 39.8 percent and 42.5
percent for 1995 and 1994, respectively. The increase in loss ratio in 1996 is
primarily the result of losses from unusually severe weather conditions (2.0
percent) and the increased share in IRI (1.7 percent). In 1996, the decrease in
claims arising from prior periods includes $4.9 million of subrogation
recoveries, and favorable development of certain large claims
<PAGE>
in the Company's international operations. The improvement in the loss ratio in
1995 is largely attributable to the reunderwriting efforts which began in 1993.
The following table shows a reconciliation of the net liability to the
gross liability for claims and claim adjustment expenses based on reinsurance
recoverable on unpaid losses.
RECONCILIATION OF NET LIABILITY TO GROSS LIABILITY
FOR CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1996 1995 1994
------ ------ ------
(In millions)
Net liability for claims and $177.8 $145.5 $161.3
adjustment expenses at December 31
Reinsurance recoverable on unpaid claims
and adjustment expenses 125.1 45.4 38.1
------ ------ ------
Gross liability for claims and
adjustment expenses at December 31 $302.9 $190.9 $199.4
====== ====== ======
<PAGE>
RECONCILIATION OF GROSS LIABILITY FOR CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1996 1995 1994
------ ------ ------
(In millions)
Gross liability for claims and claim
adjustment expenses at January 1
$190.9 $199.4 $214.4
Plus:
Provision for claims and claim
adjustment expenses
occurring in the current year 313.3 183.3 159.1
Increase in estimated claims and
claim adjustment expenses arising
in prior years 16.1 12.6 9.9
------ ------ ------
Total incurred claims and claim
adjustment expenses $329.4 $195.9 $169.0
------ ------ ------
Less:
Payment for claims arising in:
Current year $103.3 $ 65.1 $ 62.0
Prior years 114.1 139.3 144.2
------ ------ ------
Total payments $217.4 $204.4 $206.2
------ ------ ------
Plus:
Full consolidation of EIG, Co.
at December 31, 1994 -- -- 22.3
------ ------ ------
Gross liability for claims and claim
adjustment expenses at December 31 $302.9 $190.9 $199.5
====== ====== ======
The claim and claim expense reserve runoff table on the following pages
shows the amounts of the net liability for 1985 through 1995 and the amounts of
the gross liability for 1993 through 1995. The ten-year development table for
gross liabilities will be constructed progressively, with 1993 as the base year.
Within the tables for net and gross liabilities, each column shows the reserve
established at each calendar year-end as well as cumulative totals for claims
payments and re-estimated liabilities for both that accident year and all
previous years that combined make up that year-end reserve. The redundancy
(deficiency) shown on a gross and net basis is a cumulative number for that year
and all previous years.
The net deficiencies in 1990, 1991 and 1992 were attributable to the
settlement of certain large losses for which the Company initially determined it
would not have liability; the settlement of some outstanding claims for more
than was originally anticipated; unusually late notice of loss provided by the
insured for several large losses; and reserves established for losses on which
the coverage was being contested.
<PAGE>
The redundancies shown for 1985 through 1988 were attributed to the
difficulty in estimating claims due to inflationary impacts and business
interruption, which became a larger component of claims. The claim reserves
established in those years have been favorably settled, adjusted or closed based
on the results of claim audits, technical loss analysis, subrogation, settlement
with property carriers and the latest available information. The net impact of
those favorable settlements was to decrease claims expenses as reported by $10.2
million in 1990 and $28.0 million in 1989.
<PAGE>
<TABLE>
RECONCILIATION OF BEGINNING AND ENDING CLAIMS RESERVES
AND EXHIBIT OF REDUNDANCIES (DEFICIENCIES)
(In Millions)
Net Reserves
<CAPTION>
YEAR ENDED 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995* 1996**
- ---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for
Unpaid Claims and $126.1 $147.5 $157.4 $139.6 $115.7 $111.4 $132.8 $171.3 $161.3 $145.5 $177.8
Claim Adjustment
Expenses
Cumulative Amount Paid as of:
End of Year - - - - - - - - - - -
One Year Later 54.9 57.4 78.8 85.6 86.7 91.2 99.7 108.8 111.7 80.6 -
Two Years Later 73.6 75.9 92.1 104.2 109.7 115.5 134.0 152.1 126.9 - -
Three Years Later 79.5 74.5 95.5 110.3 120.6 127.0 154.4 153.4 - - -
Four Years Later 79.7 75.4 95.4 112.5 127.6 137.7 151.1 - - - -
Five Years Later 80.4 74.5 93.6 118.9 132.7 135.7 - - - - -
Six Years Later 79.0 74.2 100.5 123.0 131.4 - - - - - -
Seven Years Later 78.8 80.4 101.5 121.4 - - - - - - -
Eight Years Later 84.1 80.4 100.1 - - - - - - - -
Nine Years Later 84.1 79.6 - - - - - - - - -
Ten Years Later 83.5 - - - - - - - - - -
Net Liability Reestimated as of:
End of Year 126.1 147.5 157.4 139.6 115.7 111.4 132.8 171.3 161.3 145.5 177.8
One Year Late 126.4 131.9 129.4 129.4 135.4 137.5 159.7 172.7 163.9 135.7 -
Two Years Later 115.8 100.4 108.7 127.4 138.0 139.7 166.6 173.9 157.3 - -
Three Years Later 96.1 86.0 106.8 127.8 136.9 141.1 165.2 170.6 - - -
Four Years Later 88.0 83.7 103.0 125.0 137.9 142.0 163.0 - - - -
Five Years Later 86.9 80.8 102.3 125.8 135.7 141.4 - - - - -
Six Years Later 83.6 82.0 104.0 125.5 136.0 - - - - - -
Seven Years Later 85.7 82.9 103.8 125.8 - - - - - - -
Eight Years Later 86.0 82.6 104.2 - - - - - - - -
Nine Years Later 86.4 83.6 - - - - - - - - -
Ten Years Later 87.3 - - - - - - - - - -
Cumulative Redundancy
(Deficiency) 38.8 63.9 53.2 13.8 (20.3) (30.0) (30.2) 0.7 4.0 9.8 -
</TABLE>
The above table includes information related to the Company's participation in
the IRI.
* The Company carried reserves in the amount of $3.2 million at December 31,
1995 related to its .5 percent participation in IRI.
**For 1996, incurred claims and claims adjustment expenses include $22.8 million
related to the Company's 14 percent participation in IRI effective December 1,
1995, and .5 percent for prior years, of which $23.2 million relates to the 1996
accident year and ($.4 million) relates to prior accident years. The Company
carried net reserves in the amount of $11.6 million related to its participation
in IRI at December 31, 1996.
<TABLE>
Gross Reserves
YEAR ENDED 1993 1994 1995 1996
- ---------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Liability for
Unpaid Claims and Claim
Adjustment Expenses $214.4 $199.4 $190.9 $302.9
Cumulative Amount Paid as of:
End of Year - - - -
One Year Later 144.2 135.2 108.9 -
Two Years Later 189.9 164.1 - -
Three Years Later 200.2 - - -
Gross Liability Reestimated as of:
End of year 214.4 199.4 190.9 302.9
One Year Later 224.3 212.0 205.5 -
Two Years Later 227.0 228.3 - -
Three Years Later 243.4 - - -
Cumulative Redundancy
(Deficiency) (29.0) (28.9) (14.6) -
</TABLE>
<PAGE>
G. INVESTMENTS
Income from the Company's investment portfolio contributes significantly to
earnings. Each year there is a significant net inflow of cash from insurance,
engineering services and investment operations into the Company's investment
portfolio. In addition, cash flow is affected by the normal maturity of fixed
income investments, and the purchase and sale of equity securities.
<TABLE>
(in millions)
1996 1995 1994 1993 1992 1991
------ ------ ------ ----- ------ -----
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net Investment Income $ 32.3 $ 28.2 $ 26.2 $ 29.3 $ 32.0 $ 36.5
Realized Investment Gains 12.1 2.8 8.7 26.1 30.8 33.9
----- ------ ------ ----- ----- -----
Income from Investment Operations $ 44.4 $ 31.0 $ 34.9 $ 55.4 $ 62.8 $ 70.4
Net Unrealized Gains $ 81.4 $ 65.4 $ 16.5 $ 59.2 $ 69.5 $ 93.1
Statutory Surplus $292.4 $280.6 $ 238.0 $259.2 $307.6 $362.6
</TABLE>
The fluctuations in income from investment operations is largely driven by
the amount of realized gains generated in any given year. The Company's strategy
continues to be maximization of total return on the investment portfolio over
the long term 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. In 1994 the stock market
experienced a significant decline which impacted both the Company's realized and
unrealized gains. In 1995 the Company curtailed its realized gains in order to
take advantage of a strongly performing market and to build statutory surplus.
In 1996 the Company continued to build statutory surplus, however, high
valuations towards the end of the year caused the Company to realize gains.
Net investment income reached its lowest level during 1994 as a result of a
lower average investment portfolio as holdings were liquidated to pay dividends,
repay debt, and purchase fixed assets and treasury stock. The increase in 1995
resulted from the full consolidation of EIG, Co. offset by a lower interest rate
environment.
The Company's investment portfolio consists of high quality equity
securities and both domestic and foreign fixed maturities. The mix of the
portfolio is managed to respond to anticipated claim pay-out patterns. The
Company also maintains a highly liquid short-term portfolio to provide for
immediate cash needs. The Company held no derivative financial instruments in
its investment portfolio at December 31, 1995. In December 1996 the Company
entered into three "zero cost collar" contracts to mitigate the effects of
market risk on its common stock portfolio. At December 31, 1996 the Company had
approximately 40 percent of its invested assets in fixed maturities as compared
to 47 percent at year-end 1995. In the period 1991-1996 the Company gradually
reduced its investments in common stocks as part of its overall capital
management strategy. This has resulted in common stocks now representing 28.0
percent of invested assets at year-end 1996, as compared to 45.5 percent five
years ago.
The Company does not engage in cash-flow underwriting; it seeks to have
underwriting profit each year. None of the Company's claim reserves are
discounted as most claims settle, on average, within one year. Therefore, the
Company does not use duration measurements in managing its interest rate
exposure. Instead, the Company manages its portfolio by laddering its maturities
such that the average maturity is generally
<PAGE>
maintained between 5-10 years. This technique provides the Company with a
predictable cash flow each year and enables it to respond to the previously
discussed parameters that impact its investment strategy.
See "Investment Operations" in the Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations located in Item 7 and
Note 5 to Consolidated Financial Statements in Item 8 of Part II herein for
additional information.
The following table summarizes the investment results of the Company's
investment portfolio:
Net Invest- Annualized Rate
Cash and ment Income of Return (2) Investment
Invested Less Before After Gains (Losses) (3)
Assets, Less Interest Income Income Change in
Borrowed Money Expense (1) Taxes Taxes Realized Unrealized
----------------------------- ----- ----- -------------------
(In Millions) (In Millions)
1996 $572.6 $31.3 5.9% 5.4% $12.1 $16.0
1995 514.8 26.7 5.8 4.9 2.8 48.9
1994 438.2 24.6 5.6 4.6 8.7 (42.7)
(1) Net investment income excludes realized investment gains and is reduced by
investment expenses, but is before the deduction for income taxes.
(2) The rates of return on investments shown above have been determined in
accordance with rules prescribed by the National Association of Insurance
Commissioners. These rates have been determined by the following formula:
2I
----
A + B - I
I is equal to net investment income, before taxes, earned on investment assets.
A+B is equal to the sum of the beginning and end of the year amounts shown under
"Cash and Invested Assets, Less Borrowed Money". The after tax rates of return
are computed in the same manner, but net investment income is reduced by income
taxes.
(3) Realized and unrealized investment gains (losses) are before income taxes.
<PAGE>
H. EMPLOYEES
At year-end 1996, the Company, including its wholly-owned subsidiaries, had
2,027 full and part-time employees. Management believes that its relations with
its employees are satisfactory.
I. FORWARD-LOOKING STATEMENTS
For a summary of factors that may materially affect the Company's future
business, see "Forward- Looking Statements" in the Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations in Item
7.
Item 3. 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.
In the fourth quarter of 1996, 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. The Company has estimated and recorded a gross
loss of $30 million and a reinsurance recoverable of $25 million for potential
losses under the policy issued by the Company in this case. These amounts
represent the Company's best estimate of the cost of the settlement of its
liabilities under the rulings currently pending in this case.
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
<PAGE>
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.
PART II
Item 6. Selected Financial Data.
- ---------------------------------
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes included
elsewhere herein.
<TABLE>
(in millions, except per share amounts)
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Consolidated Statements of Operations
Revenues:
Insurance premiums $448.6 $389.1 $336.6 $349.2 $342.9
Net engineering services 55.8 252.1 232.1 231.5 231.0
Income from investment operations 44.4 31.0 34.9 55.4 62.8
Total revenues (1) 548.8 672.2 603.6 636.1 636.7
Income before taxes and accounting changes 71.3 86.3 73.6 16.9 73.4
Income taxes 17.9 23.7 21.7 3.8 17.1
Income before accounting changes 53.4 62.6 51.9 13.1 56.3
Income per common share before accounting changes 2.65 3.07 2.54 .63 2.71
Dividends paid per common share 2.28 2.22 2.14 2.12 2.03
- --------------------------------------------------------------------------------------------------------------------
Summary of Consolidated Statements of Financial Position
Total assets $1,116.3 $971.5 $905.7 $877.9 $886.4
Long-term borrowings and
capital lease obligations 53.0 53.4 28.4 28.4 28.4
Convertible redeemable preferred 20.0 -- -- -- --
Common 345.6 341.1 299.5 324.7 374.3
Per common share 17.25 16.81 14.67 15.80 18.05
High $52.50 $50.38 $53.38 $59.50 $59.25
Low 42.75 39.25 36.13 43.25 45.13
Close 46.38 50.00 39.88 44.50 58.38
Common shares outstanding
at end of year(2) 20.0 20.3 20.4 20.5 20.7
Insurance
Operating gain (loss) $21.8 $ 34.2 $ 20.7 $ (26.4) $ 1.8
Loss ratio 45.6% 39.8% 42.5% 57.1% 50.3%
Expense ratio 49.1% 50.9% 50.5% 50.5% 49.2%
Combined ratio 94.7% 90.7% 93.0%(3) 107.6% 99.5%
Engineering Services (1)
Gross revenues $ 55.8 $280.9 $253.6 $256.1 $264.7
Subcontract & equipment resale costs -- 28.8 21.5 24.6 33.7
Net revenues 55.8 252.1 232.1 231.5 231.0
Operating gain 7.3 22.6 18.2 11.8 14.7
Gross margin 13.2% 8.0% 7.2% 4.6% 5.6%
Net margin 13.2% 8.9% 7.9% 5.1% 6.4%
- ---------------------------------------------------------------------------------------------------------------------
Investments
Net investment income $ 32.3 $ 28.2 $ 26.2 $ 29.3 $ 32.0
Realized investment gains 12.1 2.8 8.7 26.1 30.8
Income from investment operations 44.4 31.0 34.9 55.4 62.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes revenues from investments accounted for under the equity method.
(2) Reflects the repurchase of approximately .3 million shares in 1996, .1
million shares in 1995, .1 million shares in 1994, .2 million shares in
1993, .3 million shares in 1992 and 1 million shares in 1987.
(3) Excludes charge for Proposition 103. Had the $2.9 million charge been
included, the expense ratio would have been 51.3 % and the combined ratio
would have been 93.8%.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
(dollar amounts in millions, except per share amounts)
Summary of Results of Operations
For the years ended December 31, 1996 1995 1994
- -----------------------------------------------------------
Revenues:
Insurance premium $448.6 $389.1 $336.6
Net engineering
services revenues 55.8 252.1 232.1
Net investment income 32.3 28.2 26.2
Realized investment gains 12.1 2.8 8.7
- ----------------------------------------------------------
Total revenues $548.8 $672.2 $603.6
Pro forma, exclusive of Radian:
Total revenues $548.8 $470.0 $419.5
Percent change 16.8% 12.0%
Net income $ 53.4 $ 62.6 $ 51.9
Net income per
common share $ 2.65 $ 3.07 $ 2.54
- ----------------------------------------------------------
Net income in 1996 declined 14.7 percent from 1995. In our domestic
insurance operations, catastrophe losses from unusually severe weather
conditions depressed underwriting results. Despite this, HSB continues to
produce combined ratios under 100 percent due to the Company's emphasis on
disciplined underwriting. The reduction in pretax underwriting results of $12.4
million was essentially offset by a $13.4 million increase in income from
investment operations.
While HSB experienced growth in most of its engineering businesses, results
for the Radian International LLC joint venture (owned 60 percent by Dow Chemical
and 40 percent by HSB), were disappointing, largely due to delays associated
with the transition of Radian's client mix to one that is more commercial based
than government based. Radian's contribution to pretax earnings declined by
approximately $15.7 million during 1996, which compares to the decline in
consolidated pretax profits of $15.0 million. Revenue shortfalls caused the
venture to reduce its work force during the year by about 10 percent, resulting
in a charge of $3.5 million. Increases in 1995 consolidated earnings relative to
1994 were a result of continued improvement in underwriting results for the
insurance business and higher margins in engineering services operations, which
outpaced the planned reduction in realized capital gains.
Consolidated revenues decreased 18.4 percent in 1996 to $548.8 million
largely due to a change in the method of reporting results of Radian (see note
2). Effective January 1996, HSB's interest in Radian is accounted for on the
consolidated financial statements under the equity method of accounting. Under
this method, detailed revenues and expenses and assets and liabilities of Radian
are not presented in the 1996 financial statements. Exclusive of Radian, pro
forma consolidated revenues increased 16.8 percent over 1995, with increased
participation in Industrial Risk Insurers (IRI) and growth in international
business operations the largest contributing factors. 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. Effective December 1, 1995 the Company
increased its participation from .5 to 14 percent, and from 14 to 23.5 percent
on December 1, 1996. The 1995 change in participation level generated an
increase in earned premium of $33.2 million in 1996. IRI has a fiscal year
ending November 30 and provides quarterly reports to member companies of the
association. As a result, HSB's increased participation is reflected in the
first
<PAGE>
quarter of the year subsequent to the change in membership participation. This
additional participation increased revenue and expenses for 1996 as well as
several balance sheet accounts.
Consolidated revenues in 1995 were greater than 1994 due to the impact of
the acquisition and full consolidation of EIG, Co. and growth in both the
domestic and global insurance markets. On December 30, 1994, the Company
acquired the remaining 50 percent interest in EIG, a partnership which was
jointly formed with General Reinsurance Corporation (Gen Re) in 1988. EIG was
the parent of Engineering Insurance Company Limited, a London based insurer
which offers machinery breakdown coverage to business and industry outside the
United States and Canada (see note 2). At the time of the acquisition, EIG was
incorporated with the Company acquiring all of the common shares and Gen Re
acquiring all of the preferred shares of the new Company, EIG, Co. Effective
December 30, 1996 HSB opted to exchange the EIG, Co. preferred stock for HSB
convertible redeemable preferred stock.
The effective tax rate for 1996 was 25.1 percent compared to 27.5 and 29.5
percent for 1995 and 1994, respectively. The change from 1995 is due primarily
to reduced underwriting profit, the loss at Radian, and increased realized
gains, the combination of which affected the mix of pretax income between fully
taxable earnings and tax-preferred investment income. The difference from 1995
to 1994 is due primarily to the change in the mix of foreign and domestic
business and utilization of related credits.
Insurance Operations
For the years ended December 31,1996 1995 1994
- ----------------------------------------------------------
Gross earned premium $556.5 $455.0 $381.7
Ceded premium 107.9 65.9 45.1
- ----------------------------------------------------------
Insurance premium $448.6 $389.1 $336.6
Claims and adjustment
expenses 204.4 154.9 143.2
Underwriting, acquisition
and other expenses 222.4 200.0 172.7
- ----------------------------------------------------------
Underwriting gain $ 21.8 $ 34.2 $ 20.7
Loss ratio 45.6% 39.8% 42.5%
Expense ratio 49.1% 50.9% 50.5%
Combined ratio 94.7% 90.7% 93.0%
- ----------------------------------------------------------
Insurance operations include the underwriting results of HSB, HSB
Engineering Insurance Limited (EIL), The Boiler Inspection and Insurance Company
of Canada (BI&I), The Allen Insurance Company, Ltd. and HSB's participation in
IRI and various other pools.
Insurance premiums in 1996 increased 15.3 percent from 1995. This increase
is primarily attributable to the increased participation in IRI ($33.2 million)
and to growth in the global markets. The significant increase in 1995 was
primarily attributable to the acquisition and full consolidation of EIL.
Insurance premiums representing coverage outside the U.S. increased 18.8
percent to $87.1 million from $73.3 million in 1995. The Company continues to
see opportunities for growth, particularly in those countries where
infrastructure development is moving to the private sector. At the same time,
softening of the pricing in this market has occurred globally as the number of
insurers offering capacity has expanded.
Domestically, exclusive of IRI, premiums increased approximately $12.3
million, or 3.9 percent. This increase was a combination of 19.2 percent growth
in written premiums from our recurring client companies, and the addition of new
client companies, offset by a loss of business as a result of industry
consolidation. The insurance industry, in general, continues to undergo
significant restructuring and consolidation. Considerable merger and acquisition
activity has occurred recently and more is possible in the future. Depending on
the specific companies involved in these activities and other market factors,
the level of reinsured business the Company assumes in the future could be
<PAGE>
impacted. HSB is positioned to benefit from these changes over the long term due
to its strong market position and reinsurance relationships with more than 100
multiline carriers; while over the shorter term there is both opportunity and
challenge.
The Company participates in various facultative, quota share and excess of
loss reinsurance agreements to limit its exposure, particularly to catastrophic
losses and high risk lines, and to provide additional capacity to write
business. The Company re-evaluates its exposures and reinsurance needs annually
to implement a program which corresponds with the level of exposure the Company
is willing to retain. Because HSB has primary responsibility to its insureds,
the Company carefully evaluates the financial strength of those reinsurers it
cedes business to. The Company's reinsurance costs continue to be impacted by
its prior loss experience and business growth. In 1996, the Company's
reinsurance ceded costs increased $42 million from 1995, which was almost
entirely attributable to its increased participation in IRI.
In 1995, the Company centralized and consolidated its treaty reinsurance
ceded program to cover global operations. This strategy will enable HSB to more
closely manage its reinsurance costs. In 1994 and continuing through 1996, HSB
increased its non-IRI retentions in order to mitigate the rising cost of
reinsurance.
For the years ended December 31, 1996 1995 1994
- ---------------------------------------------------------
Provision for claims and
adjustment expenses
occurring in the
current year $214.2 $152.2 $141.7
Increase (decrease) in
estimated claims and
adjustment expenses
arising in prior years (9.8)* 2.7 1.5
- ---------------------------------------------------------
Total incurred claims and
adjustment expenses $204.4 $154.9 $143.2
Loss ratio 45.6% 39.8% 42.5%
- ---------------------------------------------------------
* Includes $4.9 million of subrogation recoveries.
The loss ratio increased by 5.8 percent in 1996 as compared to 1995. The
increase is primarily the result of losses from unusually severe weather
conditions (2.0 percent) and the increased share in IRI (1.7 percent). 1995
claims and adjustment expenses reflect the acquisition and full consolidation of
EIG, Co. Claims and adjustment expenses, exclusive of EIG, Co., decreased $3.9
million in 1995 compared with 1994. Claim costs in 1994 include $4.8 million of
losses related to the California earthquake. The components of claims and
adjustment expenses, net of reinsurance, are displayed above.
Claims and adjustment expense reserves comprise one of the largest
liabilities on the Company's Statements of Financial Position. Reserves are
established to reflect the Company's estimates of total losses and loss
adjustment expenses that will ultimately be paid under direct and assumed
insurance contracts. Loss reserves include claims and adjustment expenses on
claims that have been reported but not settled and those that have been incurred
but not yet reported to the Company. The length of time that reserves are
carried on the Statements of Financial Position is a function of the pay-out
patterns associated with the types of coverages involved. The majority of risks
the Company insures are short-tailed in nature, relative to the
property/casualty industry as a whole, meaning they generally settle shortly
after claims are reported. The Company's loss reserve estimates reflect such
variables as past loss experience and inflation. In addition, due to the nature
of much of the Company's coverages, complex engineering judgments are involved.
Previously established loss reserves are regularly adjusted as loss experience
develops and new information becomes available. Adjustments to previously
established reserves are reflected in the financial statements in the period in
which the estimates are changed.
<PAGE>
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 9 of the Notes to Consolidated Financial
Statements herein.
Various state laws require the Company to participate in guaranty
associations, which pay policyholders' claims in the event of an insurer's
insolvency, and certain joint underwriting associations, which provide insurance
for particular classes of insureds when insurance in the voluntary market is
unavailable. Insurance company insolvencies and the unprecedented level of
catastrophes in recent years have resulted in higher assessments against the
Company from the associations in which it participates. The Company has recorded
its ultimate estimate of assessments in its financial statements. Such
assessments have not been material in any of the years presented.
Engineering Services Operations
As Reported
For the years ended December 31, 1996 1995 1994
- ---------------------------------------------------------
Net engineering
services revenues $55.8 $252.1 $232.1
Net engineering
services expenses 48.5 229.5 213.9
- ---------------------------------------------------------
Operating gain $ 7.3 $ 22.6 $ 18.2
Net margin 13.2% 8.9% 7.9%
- ---------------------------------------------------------
Pro Forma*
For the years ended December 31, 1996 1995 1994
- ---------------------------------------------------------
Net engineering
services revenues $55.8 $49.9 $48.0
Net engineering
services expenses 48.5 43.2 43.7
- ----------------------------------------------------------
Operating gain $ 7.3 $ 6.7 $ 4.3
Net margin 13.2% 13.3% 9.0%
- ----------------------------------------------------------
* Excludes Radian in 1995 and 1994. In 1996 Radian has been reported using the
equity method.
Engineering services operations include the results of HSB's and BI&I's
engineering services, HSB Reliability Technologies (HSB RT), HSB Professional
Loss Control and HSB International. The 1995 and 1994 results include Radian
Corporation on a fully consolidated basis. The 1996 engineering services results
do not include Radian, as HSB's share of the joint venture results were recorded
as equity in Radian rather than in net engineering services revenue and other
income statement accounts.
Net engineering services pro forma revenues increased 11.9 percent in
comparison to 1995. The growth in revenues was primarily due to increases
generated by HSB RT as their revenues were $4.8 million (35 percent) higher in
1996 compared to 1995, almost entirely attributable to increases in volume. Pro
forma net engineering services revenue
<PAGE>
increased 3.9 percent in 1995 compared to 1994. Increased profitability resulted
from the disposition of certain unprofitable HSB RT operations in 1994.
Investment Operations
For the years ended December 31, 1996 1995 1994
- ---------------------------------------------------------
Net investment income $ 32.3 $ 28.2 $ 26.2
Realized investment gains 12.1 2.8 8.7
- ---------------------------------------------------------
Income from investment
operations $ 44.4 $ 31.0 $ 34.9
- ---------------------------------------------------------
Total cash and invested
assets, at fair value $600.9 $553.8 $489.7
Unrealized gains, pretax $ 81.4 $ 65.4 $ 16.5
- ---------------------------------------------------------
The Company's investment strategy continues to be to maximize total return
on the investment portfolio over the long term through investment income and
capital appreciation. On December 19, 1996, the Company entered into three "zero
cost collar" contracts to mitigate the effects on its common stock investments
and its capital of any severe declines in the common equities market. 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 upon market movements. The investment portfolio includes
a wide variety of high quality equity securities and both domestic and foreign
fixed maturities. The mix of the portfolio is managed to respond to anticipated
claim pay-out patterns. The Company also maintains a highly liquid short-term
portfolio to provide for immediate cash needs. Investment strategies are
developed based on many factors including operational results, tax implications,
regulatory requirements, interest rates, dividends to stockholders and market
conditions.
Net investment income increased 14.5 percent in 1996 due to an increased
level of investable assets and to a lesser extent by dividend increases on the
Company's common stock investments. Invested assets growth was due to
significant cash flow from operations during 1995 as well as the portfolio
transfer arising from the increased participation in IRI during 1996. Investment
income in the global market also increased as these operations have shown
significant growth over the past year.
The increase in 1995 was due to the full consolidation of EIG, Co. offset
by lower interest rates. In 1996 and 1995, the portfolio mix was shifted to more
holdings in tax preferred securities, which tend to moderate growth in pretax
investment income.
The Company's investment portfolio continues to consist of high grade
domestic and foreign investments. Excluding short term investments, the
Company's investments are primarily comprised of publicly traded, highly liquid
securities. At the end of 1996, the Company's fixed maturities portfolio
comprised 39.5 percent of the value of the invested assets. The credit quality
of the Company's bond investments at December 31, 1996, averaged a AA rating.
The Company's portfolio does not include any bonds in default as to either
principal or interest. Bonds held at December 31, 1996, had a fair value of
$134.2 million. Redeemable preferred stocks averaged a BBB rating. Declining
yields available on new fixed maturities relative to higher yields on maturing
investments over the past few years have also moderated investment income
growth.
The carrying value of the equity securities portfolio represented 44.0
percent of the investments at December 31, 1996. This included $79.8 million of
unrealized investment gains, which had a net increase of $19.4 million from 1995
on a sharp upturn in the stock market in 1996. The Company also recorded $10.5
million of dividends and $11.5 million of net pretax realized gains from this
portfolio in 1996. The Company's largest single holding accounted for less than
1 percent of total consolidated assets. Realized investment gains increased
significantly over 1995 as the
<PAGE>
Company managed its portfolio to respond to changing market conditions and tax
planning opportunities. The redemption of callable securities generated $1.4
million of gains.
Liquidity and Capital Resources
Balances at December 31, 1996 1995 1994
- --------------------------------------------------------
Total assets $1,116.3 $971.5 $905.7
Short-term investments 97.9 73.8 73.8
Cash 4.5 9.3 12.1
Short-term borrowings 3.2 13.4 50.9
Convertible Redeemable
Preferred 20.0 - -
Common Shareholders' equity 345.6 341.1 299.5
- --------------------------------------------------------
Liquidity refers to the Company's ability to generate sufficient funds to
meet the cash requirements of its business operations. The Company receives a
regular inflow of cash from maturing investments and its engineering and
insurance operations, and maintains a highly liquid investment portfolio. The
Company manages its cash and short-term investment position to meet its
operating expense and claim payment needs. In addition, the Company has capacity
to generate cash of up to $75 million through its short-term commercial paper
program. At December 31, 1996, $3.2 million was outstanding. In 1995, the
Company repaid $24.1 million of EIG, Co. short-term debt, and EIG, Co.
subsequently issued $25.0 million of senior notes due May 15, 2000 at an
interest rate of 6.83 percent. The Company does not anticipate any significant
capital commitment associated with Radian International LLC and currently has no
significant capital commitments planned for 1997. The Company has authorized a
guaranty of up to $16 million of Radian International LLC borrowings. At
December 31, 1996, the Company has guaranteed $7.6 million of Radian
International LLC debt. Based upon Radian's business plan, it is possible the
Company's guarantee could increase to $50 million subject to insurance
regulatory approval.
Cash provided from operations was $92.2 million in 1996 compared to $95.5
million in 1995 and $40.3 million in 1994. Insurance operations cash flow
increased in 1996 as premiums collected were up 6.7 percent while claim payments
increased at 1.7 percent. The additional participation in IRI impacted
components of the Company's Statements of Cash Flows for 1996, including a $.3
million contribution to cash provided from operations. The Radian International
LLC transaction had minimal impact on cash flow from operations. In 1995, $17
million of cash flow from operations was attributable to the full consolidation
of EIG, Co. Additional improvement in 1995 cash flow was due to better
underwriting and engineering services results. Excluding the impact of EIG, Co.,
in 1995, cash flow from insurance operations grew as premiums collected
increased by 6 percent while claim payments decreased by 5 percent from 1994.
Engineering services revenue collected also increased by 7 percent.
Cash provided by operating and investing activities was used to pay
dividends, repay short-term borrowings and repurchase Company stock. The Company
repurchased 279,200; 136,943; and 147,486 shares of its common stock in 1996,
1995 and 1994, respectively.
Dividends paid by the Company are limited by state insurance regulations.
The current restriction is the greater of 10 percent of prior year's statutory
surplus or net income as reported to the regulatory agencies. Currently, the
Company estimates it can pay approximately $31 million in dividends in 1997
without requesting regulatory approval. In granting such approval the insurance
regulators evaluate the adequacy and reasonableness of the Company's surplus and
other factors bearing on the financial condition of the Company. Based on the
Company's current financial condition, approval of its regular dividend is
expected to be received for 1997.
As previously noted, in December 1996, HSB exchanged EIG, Co. preferred
stock of $20 million for HSB convertible redeemable preferred stock.
As part of HSB's strategic planning process, the Company periodically
assesses its capital structure to ensure that appropriate capital is available
for redeployment to support its growth. In conjunction with this process, the
Company
<PAGE>
will be requesting that its shareholders approve the formation of a revised
holding company structure at a special meeting in 1997.
Statutory Financial Information
- -------------------------------
During 1996 the NAIC issued a model investment law which is available for
adoption by the states. The model investment law, known as the "defined limits"
version, provides guidelines for insurers in structuring their investment
portfolios. These guidelines are intended to preserve principal, assure
diversification as to investment, issuer and credit quality, and promote prudent
investment management strategies to ensure companies are positioned to cover
reasonably foreseeable contingencies. The impact on HSB's investment practices
is expected to be minimal.
Regulator concerns about the consistency and comparability of Statutory
Accounting Principles (SAP) has prompted the NAIC to undertake a codification
project that will replace prescribed or permitted SAP as the regulatory basis of
accounting for insurance companies. Conversion to new statutory accounting
standards is expected to be effective sometime after 1998.
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.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page No.
--------
Report of Independent Accountants
Financial Statements
Consolidated Statements of Operations
for the years ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Financial
Position - December 31, 1996 and 1995.
Consolidated Statements of Cash Flows
for the years ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements
Schedule I - Summary of Investments-
Other than Investments in Related Parties
Schedule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations
No other schedules are required to be filed herewith pursuant to Article 7 of
Regulation S-X.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of The Hartford Steam Boiler
Inspection and Insurance Company:
We have audited the consolidated financial statements and the financial
statement schedules of The Hartford Steam Boiler Inspection and Insurance
Company and its subsidiaries listed in Item 8 of this Form 10-K/A. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Hartford Steam
Boiler Inspection and Insurance Company and its subsidiaries as of December 31,
1996 and 1995, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Hartford, Connecticut
May 8, 1997
<PAGE>
FINANCIAL STATEMENTS
Consolidated Statements of Operations
For the years ended December 31, (in millions, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Insurance premiums $448.6 $389.1 $336.6
Net engineering services 55.8 252.1 232.1
Net investment income 32.3 28.2 26.2
Realized investment gains 12.1 2.8 8.7
- --------------------------------------------------------------------------------------------
Total revenues 548.8 672.2 603.6
- --------------------------------------------------------------------------------------------
Expenses:
Claims and adjustment 204.4 154.9 143.2
Policy acquisition 86.0 78.1 64.7
Underwriting and inspection 136.4 121.9 108.0
Net engineering services 48.5 229.5 213.9
Interest 1.0 1.5 1.6
- --------------------------------------------------------------------------------------------
Total expenses 476.3 585.9 531.4
- --------------------------------------------------------------------------------------------
Equity in operations of insurance association -- -- 1.4
Equity in Radian (1.2) -- --
- --------------------------------------------------------------------------------------------
Income before taxes 71.3 86.3 73.6
- --------------------------------------------------------------------------------------------
Income taxes (benefit):
Current 26.3 24.3 18.7
Deferred (8.4) (.6) 3.0
- --------------------------------------------------------------------------------------------
Total income taxes 17.9 23.7 21.7
- --------------------------------------------------------------------------------------------
Net income $ 53.4 $ 62.6 $ 51.9
- --------------------------------------------------------------------------------------------
Net income per common share $ 2.65 $ 3.07 $ 2.54
- --------------------------------------------------------------------------------------------
Average common shares outstanding and
common stock equivalents 20.2 20.4 20.5
============================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
Consolidated Statements of Financial Position
At December 31, (in millions, except per share amounts)
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 4.5 $ 9.3
Short-term investments, at cost 97.9 73.8
Fixed maturities, at fair value (cost - $231.3; $247.6) 235.8 255.3
Equity securities, at fair value (cost - $182.9; $155.0) 262.7 215.4
- -------------------------------------------------------------------------------------------
Total cash and invested assets 600.9 553.8
Insurance premiums receivable 106.4 87.2
Engineering services receivable 11.7 68.8
Fixed assets 31.7 62.3
Prepaid acquisition costs 40.6 34.1
Capital lease 16.1 16.8
Investment in Radian 79.7 --
Reinsurance assets 162.9 59.5
Other assets 66.3 89.0
- -------------------------------------------------------------------------------------------
Total assets $1,116.3 $971.5
- -------------------------------------------------------------------------------------------
Liabilities:
Unearned insurance premiums $ 270.6 $216.2
Claims and adjustment expenses 302.9 190.9
Short-term borrowings 3.2 13.4
Long-term borrowings 25.1 25.6
Capital lease 27.9 27.8
Deferred income taxes 23.7 18.9
Dividends payable 11.4 11.6
Minority interest -- 20.0
Other liabilities 85.9 106.0
- -------------------------------------------------------------------------------------------
Total liabilities 750.7 630.4
- -------------------------------------------------------------------------------------------
Convertible redeemable preferred stock--Series B (stated and
redemption value; shares authorized, issued and outstanding
0.002) 20.0 --
Shareholders' equity:
Common stock (stated value; shares authorized 50.0;
shares issued 21.3; shares outstanding 20.0; 20.3) 10.0 10.0
Additional paid-in capital 34.0 33.9
Unrealized investment gains, net of tax 52.8 43.9
Retained earnings 312.6 305.1
Treasury stock, at cost (shares 1.3; 1.0) (59.5) (47.7)
Benefit plans (4.3) (4.1)
- -------------------------------------------------------------------------------------------
Total shareholders' equity 345.6 341.1
- -------------------------------------------------------------------------------------------
Total $1,116.3 $971.5
- -------------------------------------------------------------------------------------------
Common shareholders' equity per share $ 17.25 $16.81
===========================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
For the years ended December 31, (in millions)
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net Income $ 53.4 $62.6 $51.9
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 9.8 19.4 19.3
Deferred income taxes (10.0) (.6) 3.0
Realized investment gains (12.1) (2.8) (8.7)
Change in:
Insurance premiums receivable (19.2) (4.1) (4.3)
Engineering services receivable (2.7) 3.3 6.9
Prepaid acquisition costs (6.5) 1.4 (2.0)
Reinsurance assets (103.4) (.8) (4.8)
Unearned insurance premiums 54.4 14.9 8.5
Claims and adjustment expenses 112.0 (8.5) (37.2)
Investment in Radian 12.9 -- --
Other 3.6 10.7 7.7
- ----------------------------------------------------------------------------------------------------
Cash provided by operating activities 92.2 95.5 40.3
- ----------------------------------------------------------------------------------------------------
Investing activities:
Fixed asset additions (1.0) (16.8) (16.8)
Investments:
Sale (purchase) of short-term investments, net (24.1) -- 2.5
Purchase of fixed maturities (89.0) (152.1) (52.3)
Proceeds from sale of fixed maturities 93.1 91.5 13.5
Redemption of fixed maturities 11.5 17.0 20.5
Purchase of equity securities (149.3) (95.0) (151.1)
Proceeds from sale of equity securities 131.2 122.9 216.6
Cash acquired in connection with EIG acquisition -- -- .3
Cash transferred to Investment in Radian (.7) -- --
- ----------------------------------------------------------------------------------------------------
Cash provided by (used in) investment activities (28.3) (32.5) 33.2
- ----------------------------------------------------------------------------------------------------
Financing activities:
Decrease in short-term borrowings, net (10.2) (37.5) (15.9)
Repayment of long-term debt (.5) (.1) (.1)
Increase in long-term debt -- 25.1 --
Dividends paid to shareholders (46.1) (45.3) (43.9)
Repayment of employee stock ownership plan debt -- (1.7) (2.1)
Purchase of treasury stock (13.0) (6.3) (6.8)
Exercise of stock options 1.1 -- .1
- ----------------------------------------------------------------------------------------------------
Cash used in financing activities (68.7) (65.8) (68.7)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (4.8) (2.8) 4.8
Cash at beginning of period 9.3 12.1 7.3
- ----------------------------------------------------------------------------------------------------
Cash at end of period $ 4.5 $ 9.3 $ 12.1
- ----------------------------------------------------------------------------------------------------
Interest paid $ 1.0 $ 1.5 $ 1.6
- ----------------------------------------------------------------------------------------------------
Federal income tax paid $ 25.7 $23.4 $ 8.2
====================================================================================================
</TABLE>
Non-cash investing and financing activities: Issuance of HSB convertible
redeemable preferred stock in exchange for EIG, Co. preferred stock in 1996 (See
note 2). Acquisition of EIG through issuance of EIG, Co. preferred stock of $20
million in 1994.
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, (in millions)
<CAPTION>
Net
Total Unrealized
Share- Additional Investment
holders' Common Paid-in Gains Retained Treasury Benefit
Equity Stock Capital (Losses) Earnings Stock Plans
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $324.7 $10.0 $33.9 $44.2 $280.4 $(35.7) $(8.1)
- ------------------------------------------------------------------------------------------------------------
Net income 51.9 -- -- -- 51.9 -- --
Dividends declared (44.2) -- -- -- (44.2) -- --
Change in unrealized investment
gains, net of tax (30.3) -- -- (30.3) -- -- --
Benefit plans 4.0 -- -- -- -- .5 3.5
Exercise of stock options .1 -- .1 -- -- -- --
Purchase of treasury stock (6.7) -- -- -- -- (6.7) --
- ------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 $299.5 $10.0 $34.0 $13.9 $288.1 $(41.9) $(4.6)
- ------------------------------------------------------------------------------------------------------------
Net income 62.6 -- -- -- 62.6 -- --
Dividends declared (45.6) -- -- -- (45.6) -- --
Change in unrealized investment
gains, net of tax 30.0 -- -- 30.0 -- -- --
Benefit plans .9 -- (.1) -- -- .5 .5
Purchase of treasury stock (6.3) -- -- -- -- (6.3) --
- -----------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 $341.1 $10.0 $33.9 $43.9 $305.1 $(47.7) $(4.1)
- -----------------------------------------------------------------------------------------------------------
Net income 53.4 -- -- -- 53.4 -- --
Dividends declared (45.9) -- -- -- (45.9) -- --
Change in unrealized investment
gains, net of tax 8.9 -- -- 8.9 -- -- --
Benefit plans -- -- -- -- -- .2 (.2)
Exercise of stock options 1.1 -- .1 -- -- 1.0 --
Purchase of treasury stock (13.0) -- -- -- -- (13.0) --
- ------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $345.6 $10.0 $34.0 $52.8 $312.6 $(59.5) $(4.3)
============================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(in millions, except per share amounts)
1. Accounting Policies
Consolidation
- -------------
The accompanying financial statements present the consolidated accounts of The
Hartford Steam Boiler Inspection and Insurance Company and its subsidiaries
(collectively, the Company) and are prepared in accordance with generally
accepted accounting principles (GAAP). Significant intercompany transactions and
balances have been eliminated in consolidation. The preparation of financial
statements in accordance with GAAP requires the use of estimates in reporting
certain assets and liabilities. Actual results could differ from those
estimates. Certain amounts for 1995 and 1994 have been reclassified to conform
with the 1996 presentation.
Insurance
- ---------
Insurance premium revenues are net of reinsurance ceded and are generally earned
on a pro rata basis over the contract period, which could range from one to
three years. The portion of gross insurance premiums not earned at the end of
the period is recorded as unearned insurance premiums on the Consolidated
Statements of Financial Position.
Prepaid acquisition costs, consisting of commissions and premium taxes, are
amortized as the related insurance premiums are earned. All other acquisition
costs are charged to operations as incurred.
Liabilities for claims and adjustment expenses for boiler and machinery,
property and other coverages represent estimated reserves on claims and
adjustment expenses reported but not yet settled and the cost of claims and
adjustment expenses incurred but not yet reported. Reserves for claims and
adjustment expenses are undiscounted and are gross of amounts recoverable from
reinsurers. Reserves are reduced for estimated amounts of salvage and
subrogation, and deductibles recoverable from customers. The Company records
subrogation when recoverability is probable, such as when a judgment is
returned, liability is admitted to or settlement is reached. The length of time
that reserves for claims and adjustment expenses are carried on the Consolidated
Statements of Financial Position is a function of the pay-out patterns
associated with the types of coverages involved. Estimates for these reserves
reflect such variables as past loss experience, changes in judicial
interpretation of legal liability, and contract terms, policy coverage and
inflation. The establishment of reserves frequently require complex engineering
judgments. Due to the nature of the variables involved in the reserving process,
subjective judgments are an integral component. Previously estimated reserves
are regularly adjusted as loss experience develops and new information becomes
available. Since reserves are based on estimates, the ultimate liability may be
more or less than such reserves. The effects of changes in estimated reserves
are included in the results of operations in the period in which the estimates
are changed. (See note 9.)
Reinsurance assets represent amounts due from reinsurers for paid and unpaid
claims, paid and unpaid loss adjustment expenses and the unearned portion of
premiums ceded through reinsurance agreements.
Engineering Services
- --------------------
The Company recognizes the majority of engineering services contract revenues as
services are provided. Costs on such contracts are included in operations as
incurred. Provisions are made for losses on contracts at the time such losses
become known. In 1995, when Radian was a fully consolidated subsidiary, revenues
were presented net of related subcontract costs. (See note 2.)
Investments
- -----------
Short-term investments have a maturity of one year or less and are carried at
cost which, together with accrued interest thereon, approximates fair value.
Fixed maturities include bonds, notes and redeemable preferred stocks. Equity
<PAGE>
securities include common and non-redeemable preferred stocks. All fixed
maturities and equity securities are classified as available for sale.
Accordingly, these investments are carried at estimated fair value. Estimated
fair values of securities classified as available for sale are based principally
upon quoted market prices. Unrealized gains and losses on investments classified
as available for sale and foreign exchange gains and losses on certain
investments in foreign operations are included net of income tax in
shareholders' equity.
Investment income is net of investment expenses. Realized investment gains and
losses are determined on the basis of costs related to those investments sold
and are recorded on the trade date. Also, included in realized investment gains
and losses are losses arising from declines in the realizable value of
investments considered to be other than temporary.
The carrying values of short-term investments, investment income accrued and
securities transactions in the course of settlement approximate their fair value
because of the relatively short period of time between origination of the
instruments and their expected realization.
Financial instruments which qualify for hedge accounting are recorded at market
with gains and losses reflected in shareholders' equity. To the extent such
instruments do not qualify for hedge accounting related gains and losses are
reflected in results of operations.
Income Taxes
- ------------
Deferred tax assets and liabilities are generally determined based on the
difference between financial statement and tax bases for certain assets and
liabilities using tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets are allowed if future realization is
more likely than not. Deferred income taxes are provided for unrealized
appreciation/depreciation on fixed maturities and equity securities available
for sale, prepaid acquisition costs, loss reserve discounting, unearned
premiums, certain employee benefit costs and other items which are the result of
temporary differences in the treatment of such items for tax and financial
statement purposes.
Fixed Assets
- ------------
Fixed assets are carried at cost less accumulated depreciation. Depreciation is
calculated on the basis of estimated useful lives using straight-line and
accelerated methods. Upon retirement or replacement, any gain or loss is
included in operations.
Goodwill and Other Intangible Assets
- ------------------------------------
Goodwill represents the excess of the cost of acquiring a company over the fair
value of its net assets. Goodwill is generally amortized over 15 years and other
intangible assets over their estimated useful lives. These assets are included
in other assets on the Consolidated Statements of Financial Position and
amounted to $12.1 and $21.5 million at December 31, 1996 and 1995, respectively.
The Company evaluates the realizability of goodwill based upon projections of
undiscounted cash flows.
2. Corporate Investment Activity
In December 1994, The Hartford Steam Boiler Inspection and Insurance Company
(HSB) acquired the remaining 50 percent interest in Engineering Insurance Group
(EIG), a partnership which was jointly formed by the Company and General
Reinsurance Corporation (Gen Re) in 1988. The partnership was the parent of
Engineering Insurance Company Limited, a London-based insurer formed in 1989
principally to offer machinery breakdown coverage to business and industry
outside the United States and Canada. Coincident with the December 1994
acquisition, the partnership was incorporated with the Company acquiring all
outstanding common shares and Gen Re acquiring all preferred shares of the new
company, EIG, Co.
The Company has accounted for this transaction as a purchase resulting in the
recording of assets and liabilities acquired at fair value, and goodwill of
$15.9 million, which is being amortized over 15 years. The Company's interest in
EIG, Co. has been fully consolidated in the Consolidated Statements of Financial
Position. Prior to this acquisition,
<PAGE>
the Company's 50 percent ownership in EIG had been accounted for under the
equity method. Accordingly, the results of operations for 1994 have been
reflected under the caption "Equity in operations of insurance association" in
the Consolidated Statements of Operations, while the 1996 and 1995 results of
operations for EIG, Co. are fully consolidated.
HSB had the option to request Gen Re to exchange the EIG, Co. preferred stock
for HSB convertible redeemable preferred stock at the end of 1996. This option
was exercised on December 30, 1996 resulting in the issuance of 2,000 shares of
HSB convertible redeemable preferred stock. (See note 12).
In January 1996, HSB and The Dow Chemical Company (Dow) formed a new company,
Radian International LLC (Limited Liability Company). Radian International LLC
provides environmental, information technology and strategic chemical management
services to industries and governments worldwide. According to the terms of the
agreement, the ownership of Radian International LLC is initially 60 percent Dow
and 40 percent HSB, via the wholly-owned subsidiaries of each company. Income is
subject to a preference return to HSB in the first two years. At the date of the
transaction, HSB transferred virtually all of the assets and liabilities of
Radian Corporation at historical cost to Radian International LLC. No gain was
recognized on the transfer.
As is customary in joint ventures, the agreements between HSB and Dow specify
certain circumstances under which the business can be sold, venture assets and
liabilities can be distributed or partners' interests can be sold subject to
certain rights of first refusal.
The agreement provides that during 1998, HSB has the right to put its share of
Radian International LLC to Dow for net proceeds of approximately $145 million.
In 1996, HSB's interest in Radian International LLC of $79.7 million was
accounted for in the consolidated financial statements under the equity method
of accounting. Had the formation of the joint venture occurred at the beginning
of 1995 total revenues and total expenses would have been $470.7 and $398.5
million, respectively, and consolidated assets and liabilities at December 31,
1995 would have been $954.1 and $613.0, respectively.
Summarized financial data for Radian follows:
1996* 1995 1994
- --------------------------------------------------------
Assets $156.3 $108.6 $115.2
Liabilities $ 62.1 $ 37.1 $ 56.2
Revenues $229.6 $202.2 $184.1
Expenses $233.6 $188.1 $171.8
*100 percent
- --------------------------------------------------------
3. Segment Information
HSB is a multi-national company operating primarily in North American, European,
and Asian markets. The Company operates three principal businesses - insurance,
engineering services and investments. Revenues, expenses and all significant
segment specific assets and liabilities are reported in the Company's financial
statements. The Company does not allocate all assets between business segments.
The Company primarily offers coverage for machinery intensive risks and provides
insurance against losses from accidents to boilers, pressure vessels, and a wide
variety of mechanical and electrical machinery and equipment, along with a high
level of inspection services aimed at loss prevention. The Company also offers
professional scientific and technical consulting for industry and government on
a worldwide basis. While the principal market for insurance and engineering
services is the United States, the Company continues to see growth opportunities
in overseas markets.
<PAGE>
The following presents financial data of the Company based on geographic
location:
For the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
Revenues
U.S. $ 444.9 $581.7 $561.6
Non-U.S. 103.9 90.5 42.0
- ------------------------------------------------------------------------------
Total revenues $ 548.8 $672.2 $603.6
- ------------------------------------------------------------------------------
Income before taxes
U.S. $ 51.1 $ 68.6 $ 66.9
Non-U.S. 20.2 17.7 6.7
- ------------------------------------------------------------------------------
Total income $ 71.3 $ 86.3 $ 73.6
==============================================================================
For the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
Identifiable assets
U.S. $ 858.3 $758.2 $744.0
Non-U.S. 258.0 213.3 161.7
- ------------------------------------------------------------------------------
Total assets $1,116.3 $971.5 $905.7
==============================================================================
HSB's foreign operations (primarily insurance) are widely dispersed such that no
country or logical aggregation of countries in a geographic area comprise a
significant concentration with respect to either revenues or identifiable
assets. Export sales from HSB's domestic operations are minimal due to the
existence of the Company's foreign subsidiaries which are responsible for
virtually all of the Company's foreign sales.
The following presents financial data of the Company based on industry segments:
For the years ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Revenues
Net Earned Premium $448.6 $389.1 $336.6
Net Engineering Services Revenue 55.8* 252.1 232.1
Net Investment Income and Realized
Investment Gains 44.4 31.0 34.9
- -------------------------------------------------------------------------------
Total Revenues $548.8 $672.2 $603.6
- -------------------------------------------------------------------------------
Operating Profit before Taxes
Insurance--Underwriting Gain $ 21.8 $ 34.2 $ 20.7
Engineering--Operating Gain $ 7.3* $ 22.6 $ 18.2
Investment $ 44.4 $ 31.0 $ 34.9
- -------------------------------------------------------------------------------
Total $ 73.5 $ 87.8 $ 73.8
- -------------------------------------------------------------------------------
Identifiable Assets
Insurance $309.9 $180.8 $179.0
Engineering 91.4 114.4 116.5
Investment 600.9 553.8 489.7
Other 114.1 122.5 120.5
- -------------------------------------------------------------------------------
Total Assets $1,116.3 $971.5 $905.7
- -------------------------------------------------------------------------------
*Excludes Radian in 1996 as it is reported using the equity method beginning
January 1, 1996.
4. Statutory Financial Information
HSB is a Connecticut domiciled insurance company which is licensed to conduct
business in all 50 states, the District of Columbia, Puerto Rico and the U.S.
Virgin Islands. The annual statements for state insurance regulatory authorities
are currently prepared using accounting methods prescribed or permitted by such
authorities (statutory basis) and are not consolidated. Statutory accounting
practices (SAP) also differ in certain other respects from GAAP. With respect to
the Company's financial statements, these differences are primarily comprised of
the accounting for prepaid acquisition costs, deferred income taxes, fixed
maturity investments, valuation of certain non-insurance affiliates, employee
benefit plans and convertible redeemable preferred stock. At year-end 1996 and
1995, policyholders' surplus on a statutory basis was $292.4 and $280.6 million,
respectively. Statutory net income, adjusted to include the earnings of all HSB
domestic insurance subsidiaries for 1996, 1995 and 1994 was $32.1, $66.7, and
$40.1 million, respectively.
The Company is currently subject to various regulations that limit the maximum
amount of dividends available to shareholders without prior approval of
insurance regulatory authorities. Under SAP, $30.9 million of statutory surplus
is available for distribution to shareholders in 1997 without prior regulatory
approval.
During 1996 the NAIC issued a model investment law which is available for
adoption by the states. The model investment law, known as the "defined limits"
version, provides guidelines for insurers in structuring their investment
portfolios. These guidelines are intended to preserve principal, assure
diversification as to investment, issuer and credit quality, and promote prudent
investment management strategies to ensure companies are positioned to cover
reasonably foreseeable contingencies. The impact on HSB's investment practices
is expected to be minimal.
Regulator concerns about the consistency and comparability of SAP have prompted
the NAIC to undertake a codification project that will replace prescribed or
permitted SAP as the regulatory basis of accounting for insurance companies.
Conversion to new statutory accounting standards is expected to be effective
sometime after 1998.
<PAGE>
5. Investments
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from Investment Operations
Net investment income:
Short-term interest $ 4.8 $ 6.2 $ 2.0
Fixed maturities:
Taxable interest 9.8 9.0 4.1
Tax exempt interest 1.8 1.9 2.5
Redeemable preferred dividends 7.9 6.3 6.4
Equity securities:
Common dividends 4.6 4.0 6.7
Non-redeemable preferred dividends 5.9 4.6 5.1
Other 1.0 1.2 2.3
- --------------------------------------------------------------------------------------------
Total investment income 35.8 33.2 29.1
Investment expenses (3.5) (5.0) (2.9)
- --------------------------------------------------------------------------------------------
Net investment income $ 32.3 $ 28.2 $ 26.2
Realized investment gains (losses):
Fixed maturities:
Bonds:
Gains $ 2.0 $ .7 $ 1.2
Losses (.2) (1.5) (.7)
- ---------------------------------------------------------------------------------------------
Net gains (losses) 1.8 (.8) .5
Redeemable preferred stocks:
Gains .3 .7 1.7
Losses (1.5) (.6) (.2)
- ---------------------------------------------------------------------------------------------
Net gains (losses) (1.2) .1 1.5
Equity securities:
Common stocks:
Gains 14.6 11.4 19.3
Losses (3.3) (7.4) (17.3)
- ---------------------------------------------------------------------------------------------
Net gains 11.3 4.0 2.0
Non-redeemable preferred stocks:
Gains 4.2 .2 5.0
Losses (4.0) (.7) (.3)
- ---------------------------------------------------------------------------------------------
Net gains (losses) .2 (.5) 4.7
- ---------------------------------------------------------------------------------------------
Realized investment gains $ 12.1 $ 2.8 $ 8.7
=============================================================================================
</TABLE>
<PAGE>
Realized investment gains and losses for 1996 included $.8 million of losses on
non-redeemable preferred stocks arising from declines in the realizable value of
investments considered to be other than temporary. There were no material
declines in the realizable value of investments considered to be other than
temporary for 1995, and in 1994 other than temporary losses were $1.5 million on
common stock holdings.
1996 1995 1994
- ---------------------------------------------------------------------------
Unrealized Investment Gains, Net of Tax
Fixed maturities:
Gains $ 6.1 $ 9.3 $ 2.4
Losses (1.6) (1.6) (8.7)
- ----------------------------------------------------------------------------
Net gains (losses) 4.5 7.7 (6.3)
Equity securities:
Gains 82.0 64.2 35.8
Losses (2.2) (3.8) (9.6)
- ----------------------------------------------------------------------------
Net gains 79.8 60.4 26.2
Foreign exchange (2.9) (2.7) (3.4)
- ----------------------------------------------------------------------------
Total unrealized investment gains 81.4 65.4 16.5
Income taxes (28.6) (21.5) (2.6)
- ----------------------------------------------------------------------------
Unrealized investment gains, net of tax $52.8 $43.9 $13.9
============================================================================
<PAGE>
Fixed Maturities
The amortized cost, estimated fair values (based principally upon quoted market
prices) and gross unrealized gains and losses of fixed maturities at December
31, were as follows:
<TABLE>
1996
- -------------------------------------------------------------------------------------------------
<CAPTION>
Estimated Gross Gross
Amortized Fair Unrealized Unrealized
Category Cost Value Gains Losses
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Redeemable preferred stocks $ 99.6 $101.6 $3.1 $1.1
States and municipalities 39.4 40.7 1.6 .3
Foreign governments 30.1 30.5 .5 .1
Corporate and other 62.2 63.0 .9 .1
US Treasury and agencies -- -- -- --
- ------------------------------------------------------------------------------------------------
Total fixed maturities $231.3 $235.8 $6.1 $1.6
================================================================================================
1995
- ------------------------------------------------------------------------------------------------
Estimated Gross Gross
Amortized Fair Unrealized Unrealized
Category Cost Value Gains Losses
- ------------------------------------------------------------------------------------------------
Redeemable preferred stocks $ 70.0 $ 71.4 $2.9 $1.5
States and municipalities 25.3 27.0 1.8 .1
Foreign governments 45.3 46.7 1.4 --
Corporate and other 106.9 110.1 3.2 --
US Treasury and agencies .1 .1 -- --
- --------------------------------------------------------------------------------------------------
Total fixed maturities $ 247.6 $ 255.3 $9.3 $1.6
==================================================================================================
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December 31,
by contractual years-to-maturity follow. Actual maturities will differ from
contractual maturities because borrowers may have the right to prepay
obligations.
1996
- ---------------------------------------------------------------------------
Estimated
Amortized Fair
Maturity Cost Value
- ---------------------------------------------------------------------------
One year or less $ 18.2 $ 18.1
Over one year through five years 105.0 107.3
Over five years through ten years 48.0 48.6
Over ten years 60.1 61.8
- ---------------------------------------------------------------------------
Total fixed maturities $231.3 $235.8
===========================================================================
<PAGE>
Equity Securities
The cost, estimated fair values (based principally upon quoted market prices)
and gross unrealized gains and losses of equity securities at December 31, were
as follows:
1996
- ------------------------------------------------------------------------------
Estimated Gross Gross
Fair Unrealized Unrealized
Cost Value Gains Losses
- -------------------------------------------------------------------------------
Common stocks $ 95.7 $168.3 $73.6 $ 1.0
Non-redeemable preferred stocks 87.2 94.4 8.4 1.2
- -------------------------------------------------------------------------------
Total equity securities $182.9 $262.7 $82.0 $ 2.2
===============================================================================
1995
- -------------------------------------------------------------------------------
Estimated Gross Gross
Fair Unrealized Unrealized
Cost Value Gains Losses
- -------------------------------------------------------------------------------
Common stocks $ 98.2 $153.5 $56.7 $ 1.4
Non-redeemable preferred stocks 56.8 61.9 7.5 2.4
- -------------------------------------------------------------------------------
Total equity securities $155.0 $215.4 $64.2 $ 3.8
===============================================================================
On December 19, 1996 the Company entered into three "zero cost collar" contracts
to mitigate the effects of market risk on its common stock portfolio. Each
contract has a notional amount of $50.0 million and maturity dates ranging from
November 1997 to January 1998. The fair value of the contracts at December 31,
1996 is estimated to be $(.1) million based upon quotes obtained from the
counterparties to the contract. The contracts, which were entered into when the
S&P index was 744.3, allow the Company to recover from the counterparty if the
index is below 695.20 at the time of maturity and require the Company to
reimburse the counterparty if the index is above a range of 811.287 to 818.730
at the time of maturity. The collar subjects the Company to off balance-sheet
risk which includes market and counterparty credit risk. The Company manages
this exposure by entering into contracts with internationally recognized
financial institutions, which are expected to perform under the terms of the
contract, and evaluating the creditworthiness of such institutions by taking
into account credit ratings and other factors.
The Company held no derivative financial instruments in its investment portfolio
at December 31, 1995. The Company sells covered call options, at times, to
protect against adverse changes in market values. Premiums received on options
written are deferred and recognized as a component of gross realized gains when
option contracts are exercised or expire. During 1995, aggregate premiums
received by the Company on covered call options amounted to less than $.1
million. Net gains recognized on sales of underlying instruments amounted to
less than $.1 million for 1995. Generally the duration of covered call options
written by the Company does not exceed thirty days.
<PAGE>
6. Engineering Services
Engineering services receivable is summarized as follows:
1996 1995
- ------------------------------------------------------------------------------
Amounts billed $10.9 $45.9
Amounts unbilled 1.0 18.1
Amounts due upon completion of contracts -- 5.5
- ------------------------------------------------------------------------------
11.9 69.5
Less allowance for bad debts (.2) (.7)
- ------------------------------------------------------------------------------
Engineering services receivable $11.7 $68.8
==============================================================================
At December 31, 1995, engineering services receivable included $59.7 million
related to Radian Corporation.
Net engineering services revenues have been reduced by subcontract costs of
$28.8 and $21.5 million for 1995 and 1994, respectively.
7. Fixed Assets
Fixed assets are summarized as follows:
1996 1995
- ----------------------------------------------------------------------
Land and buildings $ 7.3 $ 7.4
Furniture, equipment and other 65.7 129.9
- ----------------------------------------------------------------------
73.0 137.3
Less accumulated depreciation (41.3) (75.0)
- ----------------------------------------------------------------------
Fixed assets $31.7 $ 62.3
======================================================================
At December 31, 1995, fixed assets, net of accumulated depreciation, included
$22.6 million related to Radian Corporation.
8. Reinsurance
The components of net written and net earned insurance premiums were as follows:
1996 1995 1994
- ------------------------------------------------------------------------------
Written premiums:
Direct $338.6 $285.3 $251.7
Assumed 232.6 182.9 137.9
Ceded (116.8) (59.9) (49.3)
- ------------------------------------------------------------------------------
Net written insurance premiums $454.4 $408.3 $340.3
- ------------------------------------------------------------------------------
Earned premiums:
Direct $343.4 $279.7 $242.6
Assumed 213.1 175.3 139.1
Ceded (107.9) (65.9) (45.1)
- ------------------------------------------------------------------------------
Net earned insurance premiums $448.6 $ 389.1 $336.6
==============================================================================
The Company writes direct business through agencies and brokerage firms. In
addition, the Company assumes boiler and machinery exposures from over 100
insurance companies and several insurance pools. A significant amount of
<PAGE>
this assumed book is underwritten by the Company. The insurance industry, in
general, is undergoing restructuring and consolidation. A significant amount of
merger and acquisition activity has occurred recently and may continue in the
future. Depending on the specific companies involved in these activities and
other market factors, the level of reinsured business the Company assumes in the
future could be impacted.
As a property insurer, the Company is subject to losses that may arise from
catastrophic events. The Company participates in various facultative, quota
share and excess of loss reinsurance agreements to limit its exposure,
particularly to catastrophic losses, and to provide additional capacity to write
business. In the unlikely event that ceded reinsurers are unable to meet their
obligations, the Company would continue to have primary liability to
policyholders for losses incurred. Reinsurance recoverable on unpaid claims and
the unearned portion of ceded reinsurance premiums are reported as reinsurance
assets, rather than netted against the related liability accounts. The Company
is not party to any contracts which do not comply with the risk transfer
provisions of Statement of Financial Accounting Standards (SFAS) No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts". The Company recorded $113.9, $28.5 and $31.0 million of reinsurance
recoveries as a reduction of its claims and adjustment expenses for the years
ended December 31, 1996, 1995 and 1994, respectively. Reinsurance recoverable on
paid claims and adjustment expenses was $8.0 and $2.5 million at December 31,
1996 and 1995, respectively.
Effective December 1, 1996 and 1995, HSB increased its participation in
Industrial Risk Insurers (IRI) to 23.5 and 14 percent, respectively. Prior to
the December 1, 1995 increase in participation, HSB's interest in IRI was .5
percent. The 1995 increase in interest resulted in the Company assuming
approximately $27.9 million net unearned premium reserves which have not been
reflected in written premiums. IRI is a voluntary joint underwriting association
providing property insurance for the class of business known as Highly Protected
Risks - larger manufacturing, processing and industrial businesses which have
invested in protection against loss through the use of sprinklers and other
means. IRI has a fiscal year ending November 30 and provides quarterly reports
to member companies of the association. As a result, HSB's December 1, 1996
increase in participation will initially be reflected in the first quarter
financial reports for 1997.
9. Reconciliation of Net Liability for Claims and Adjustment Expenses
The following table provides a reconciliation of the beginning and ending
reserves for claims and adjustment expenses, net of reinsurance recoverables.
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net liability for claims and adjustment expenses at January 1, $145.5 $161.3 $171.3
- ----------------------------------------------------------------------------------------------------
Plus:
Provision for claims and adjustment expenses
occurring in the current year 214.2 152.2 141.7
Increase (decrease) in estimated claims and
adjustment expenses arising in prior years (9.8) 2.7 1.5
- ----------------------------------------------------------------------------------------------------
Total incurred claims and adjustment expenses 204.4 154.9 143.2
- ----------------------------------------------------------------------------------------------------
Less:
Payment for claims arising in:
Current year 91.4 58.9 63.5
Prior years 80.7 111.8 108.7
- ----------------------------------------------------------------------------------------------------
Total payments 172.1 170.7 172.2
- ----------------------------------------------------------------------------------------------------
Plus:
Full consolidation of EIG, Co.
at December 31, 1994 (See note 2) -- -- 19.0
- ----------------------------------------------------------------------------------------------------
Net liability for claims and adjustment expenses
at December 31, $177.8 $145.5 $161.3
====================================================================================================
</TABLE>
<PAGE>
1996 claims and adjustment expenses incurred have been reduced by subrogation
recoveries of approximately $4.9 million relating to accident years 1995 and
prior. Subrogation recoveries included in 1995 and 1994 incurred claims and
adjustment expenses are immaterial.
A reconciliation of the net liability to the gross liability for claims and
adjustment expenses is as follows:
1996 1995 1994
- -------------------------------------------------------------------------------
Net liability for claims and adjustment expenses
at December 31, $177.8 $145.5 $161.3
Reinsurance recoverable on unpaid claims and
adjustment expenses 125.1 45.4 38.1
- -------------------------------------------------------------------------------
Gross liability for claims and adjustment expenses
at December 31, $302.9 $190.9 $199.4
===============================================================================
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.
In the fourth quarter of 1996, 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. The Company has estimated and recorded a gross
loss of $30 million and a reinsurance recoverable of $25 million for potential
losses under the policy issued by the Company in this case. These amounts
represent the Company's best estimate of the cost of the settlement of its
liabilities under the rulings currently pending in this case.
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.
<PAGE>
10. Income Taxes
Tax Provision
A reconciliation of income taxes at U.S. statutory rates to the income taxes as
reported is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $71.3 100% $86.3 100% $73.6 100%
- ---------------------------------------------------------------------------------------------------------------------
Tax at statutory rates $25.0 35% $30.2 35% $25.8 35%
Income taxed at foreign rates .5 -- .2 -- .2 --
Dividends received deduction (4.5) (6) (3.9) (5) (4.3) (6)
Tax exempt interest (.6) (1) (.7) (1) (.7) (1)
Tax credits and others (2.5) (3) (2.1) (2) .7 1
- ---------------------------------------------------------------------------------------------------------------------
Total income taxes and effective tax rate $17.9 25% $23.7 27% $21.7 29%
=====================================================================================================================
</TABLE>
Income taxes (benefit) consisted of the following:
1996 1995 1994
- ------------------------------------------------------------------------------
Current provision:
U.S. $18.9 $16.1 $15.6
Foreign 7.4 8.2 3.1
- ------------------------------------------------------------------------------
Total current provision 26.3 24.3 18.7
- ------------------------------------------------------------------------------
Deferred provision:
U.S. (8.0) .8 2.8
Foreign (.4) (1.4) .2
- ------------------------------------------------------------------------------
Total deferred provision (8.4) (.6) 3.0
- ------------------------------------------------------------------------------
Total income taxes $17.9 $23.7 $21.7
==============================================================================
<PAGE>
Deferred Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's deferred tax liabilities and assets as of December 31, 1996 and 1995
are as follows:
1996 1995
- ----------------------------------------------------------------------
Deferred tax liabilities:
Prepaid acquisition costs $(11.8) $ (9.8)
Accelerated depreciation (2.0) (3.8)
Pension asset (11.9) (11.5)
Unrealized investment gains (28.6) (21.5)
Other (12.7) (13.8)
- ----------------------------------------------------------------------
Total deferred tax liabilities (67.0) (60.4)
- ----------------------------------------------------------------------
Deferred tax assets:
Benefit plans 9.6 10.8
Capital lease 4.1 3.6
Unearned insurance premiums 14.0 12.4
Loss reserve discounting 6.5 5.9
Other 9.1 8.8
- ----------------------------------------------------------------------
Total deferred tax assets 43.3 41.5
- ----------------------------------------------------------------------
Net deferred tax liabilities $(23.7) $(18.9)
======================================================================
Other Information
Federal income tax returns for the years 1995, 1994 and 1993 are open to
examination by the Internal Revenue Service. If examined, no significant tax
adjustments impacting the consolidated financial statements are anticipated.
11. Leases
The Company leases its home office facility at One State Street under a
long-term capital lease with the One State Street Limited Partnership. The lease
obligation of $26.1 million was recorded at July 1, 1983 at an interest rate of
15 percent. Accumulated amortization was $10.1 and $9.3 million at December 31,
1996 and 1995, respectively. Terms of the lease require annual payments of
approximately $4 million a year through June 30, 2018. In addition, the Company
is required to pay over the lease term a proportional share of the facility's
variable operating expenses. This amounted to approximately $2.8 million for
each of the years ended December 31, 1996, 1995 and 1994.
HSB owns the One State Street land and leases it to the One State Street Limited
Partnership. The Company receives a base rental for the land and a participation
in the cash flow of the Partnership, and has a right of first refusal should the
Partnership decide to sell the facility. If the Company does not exercise its
right of first refusal, it will receive 65 percent of the net sale proceeds.
In addition to its home office facility, the Company leases facilities,
automobiles and certain equipment which are accounted for as operating leases.
Lease expenses amounted to $5.7, $14.3 and $15.1 million in 1996, 1995 and 1994,
respectively.
<PAGE>
At December 31, 1996, future minimum rental commitments under noncancelable
leases accounted for as operating leases with initial or remaining terms of more
than one year were as follows:
- -----------------------------------------------------
1997 $ 4.9
1998 4.2
1999 3.1
2000 1.8
2001 1.2
2002 and thereafter 1.0
- -----------------------------------------------------
Total $16.2
- -----------------------------------------------------
12. Capital Structure
The Company's capital structure is as follows:
1996 1995
- --------------------------------------------------------------------------
Short-term borrowings $ 3.2 $ 13.4
Long-term borrowings* 25.1 25.6
Convertible redeemable preferred stock 20.0 --
Common shareholders' equity 345.6 341.1
*Excludes capital lease. See note 11.
- --------------------------------------------------------------------------
Short-term and Long-term Borrowings
The Company has a commercial paper program with a limit of $75 million.
Commercial paper outstanding at December 31, 1996 and 1995 was $3.2 million and
$12.0 million, respectively. Commercial paper outstanding at year end 1996
matures on January 23, 1997. Long-term debt consists of $25.1 million of senior
notes due May 15, 2000 at an interest rate of 6.83 percent. Such amount
approximates market at December 31, 1996.
Convertible Redeemable Preferred Stock
On December 30, 1996, the Company exercised its right to exchange 2,000 shares
of EIG, Co. preferred stock, which was issued at the time HSB acquired the
remaining 50 percent interest in EIG, Co. from Gen Re, for 2,000 shares of HSB
convertible redeemable preferred stock. The stock has no par value, but has
voting rights and carries a quarterly dividend of $162.50 per share. Dividends
are cumulative and have senior standing prior to declaration of dividends on
common 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 Gen Re after the eighth
anniversary.
Financial Guarantees
The Company has guaranteed 40 percent of Radian International, LLC's loan
outstanding with Dow Chemical Company. At December 31, 1996, the amount
guaranteed was $7.6 million.
13. Pension Plans
The Company maintains various types of pension plans covering employees of HSB
and certain subsidiaries. The plans are non-contributory and benefits are based
upon an employee's years of service and final average pay based upon the highest
three out of five years. Vesting occurs after five years of service in
compliance with the provisions of the Tax Reform Act of 1986. As a result of the
plan's investment returns, the Company made no contribution to the plan in 1996,
1995 or 1994. Assets available for plan benefits include approximately $16.6
million of Company stock at December 31, 1996.
<PAGE>
The pension expense for the U.S. pension plans was a net credit to earnings for
1996, 1995 and 1994 due to the over funded status of the primary plan. The
components of the credit were as follows:
1996 1995 1994
- ----------------------------------------------------------------------------
Service costs $ 3.6 $ 2.9 $ 3.6
Interest costs 10.2 10.2 9.7
Return on assets (20.1) (30.9) 6.6
Net amortization and deferral 4.0 15.3 (22.0)
- ----------------------------------------------------------------------------
Net pension credit $(2.3) $(2.5) $(2.1)
============================================================================
The following table represents a reconciliation of the U.S. plans' funded status
and the amounts recognized in the Company's Statements of Financial Position at
December 31:
<TABLE>
<CAPTION>
Funded Unfunded
- ----------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 99.4 $ 95.8 $ 20.3 $ 24.0
- ----------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $100.0 $ 96.5 $ 20.9 $ 26.0
- ----------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $115.7 $113.8 $ 24.3 $ 27.8
Assets available for plan benefits (equity securities
and fixed income investments at fair value) 178.0 164.8 -- --
- ----------------------------------------------------------------------------------------------------------------------
Assets in excess of (less than) projected benefit obligation 62.3 51.0 (24.3) (27.8)
- ----------------------------------------------------------------------------------------------------------------------
SFAS 87 unamortized net transition asset (obligation) 10.5 12.6 (2.2) (1.4)
Unrecognized prior service costs (1.9) (2.3) (1.1) (4.1)
Unrecognized net gain (loss) 3.9 (3.4) (7.1) (7.1)
- ----------------------------------------------------------------------------------------------------------------------
Unrecognized net asset (liability) 12.5 6.9 (10.4) (12.6)
Additional liability -- -- (4.6) (5.5)
- ----------------------------------------------------------------------------------------------------------------------
Net pension asset (liability) $ 49.8 $ 44.1 $(18.5) $(20.7)
======================================================================================================================
</TABLE>
Assumptions used for the primary U.S. plan at years ended were as follows:
1996 1995 1994
- ----------------------------------------------------------------------------
Discount rate 7.5% 7.5% 8.5%
Long-term rate of return on assets 9.5% 9.5% 9.5%
Rate of increase in future compensation levels 4.5% 5.0% 5.0%
- ----------------------------------------------------------------------------
14. Postretirement Plans
The Company makes available health care and life insurance benefits for retired
employees of The Hartford Steam Boiler Inspection and Insurance Company (HSB)
and certain subsidiaries.
The Company makes contributions to the plans as claims are incurred.
Contributions totaled $2.4, $2.6 and $2.3 million for 1996, 1995 and 1994,
respectively. At December 31, 1996, 1995 and 1994 these plans were unfunded.
Retirees' contributions to these plans vary, based upon retiree's age, years of
service and coverage elected. The Company periodically amends the plan changing
the contribution rate of retirees, and amounts and terms of coverage.
<PAGE>
Components of net periodic postretirement benefit cost were:
Years Ended December 31,
- ----------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------
Service cost $ .3 $ .3 $ .3
Interest cost 2.0 2.3 2.2
Amortization of unrecognized obligations -- -- .2
- ----------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 2.3 $ 2.6 $ 2.7
============================================================================
The following table sets forth the amounts recognized in the Consolidated
Statements of Financial Position at December 31, in accordance with SFAS 106
"Employers Accounting for Postretirement Benefits Other Than Pensions."
1996 1995
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligations for:
Retirees $22.0 $24.9
Other fully eligible plan participants 1.0 1.5
Other active plan participants 3.8 4.7
- ------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 26.8 31.1
Unrecognized net loss (3.0) (6.6)
- ------------------------------------------------------------------------------
Accrued postretirement benefit liability $23.8 $24.5
==============================================================================
The assumptions used to calculate the obligations at December 31, were as
follows:
1996 1995
- ----------------------------------------------------------------------------
Weighted average discount rate 7.5% 7.5%
Current year health care cost trend rate 8.0% 10.0%
Ultimate health care cost trend rate 4.5% 5.0%
- ----------------------------------------------------------------------------
For measurement purposes, the annual rate of increase in the per capita cost of
covered health care benefits ranges from 8 percent in 1996 decreasing gradually
to 4.5 percent by the year 2001 and remaining at that level thereafter. In the
prior year, the range was from 10 percent in 1995 decreasing gradually to 5
percent by the year 2001 and remaining at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amount reported. To illustrate, increasing the assumed health care cost trend
rates by 1 percent each year would increase the accumulated postretirement
benefit obligation as of January 1, 1996 of $27.4 million by approximately $1.5
million and the aggregate of the service and interest cost for the year ended
December 31, 1996 by $.1 million.
15. Stock Compensation Plan
The Company has a Stock Option Plan under which key employees of the Company and
its subsidiaries may be granted restricted stock and stock options.
The Company's restricted stock is an award of common shares that may not be sold
or transferred during the restriction period, usually three years, from the date
on which the award is granted. During the restriction period, the employee is
the registered owner, receives dividends and may vote the restricted shares.
Compensation expense is based on the market value of the Company's common stock
at the date of grant and is recognized over the period of the restriction.
Compensation expense for this plan in 1996, 1995 and 1994 was $.6, $1.1 and $2.2
million, respectively. The
<PAGE>
unamortized compensation expense related to this plan is included in benefit
plans as a component of shareholders' equity. These amounts were $.7 million in
both 1996 and 1995. A summary of grants follow:
1996 1995 1994
- ---------------------------------------------------------------------------
Restricted shares awarded 13,250 9,350 10,375
Weighted-average fair value of shares on
grant date $48.85 $42.78 $46.29
- ---------------------------------------------------------------------------
A stock option award under the Company's stock option plan allows for the
purchase of the Company's common stock at no less than the market price on the
date of grant. Options granted to date are exercisable no earlier than one year
after the grant date and expire no more than ten years from the date of grant.
A summary of the status of the Company's stock options at December 31, 1996,
1995 and 1994 and changes during the years ended on those dates is presented
below:
<TABLE>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Shares Average Shares Average Shares Average
Exercise Price Exercise Price Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,300,000 $50.86 1,263,550 $54.42 1,095,100 $56.03
Granted 394,000 49.81 303,500 42.54 305,250 46.31
Exercised (24,250) 46.26 -- -- (52,200) 41.12
Forfeited (350,100) 58.29 (267,050) 58.39 (84,600) 54.19
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,319,650 48.67 1,300,000 $50.83 1,263,550 $54.42
- -----------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 949,650 $48.23 1,003,500 $53.32 983,300 $56.73
Weighted-average fair value of options
granted during the year $ 7.05 $ 7.42
- --------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------
Weighted-
Range of Average Weighted- Weighted-
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$41 - $45 282,500 8.9 $42.22 270,500 $42.15
$46 - $50 709,000 7.0 48.53 331,000 46.84
$51 - $55 154,200 2.3 51.66 174,200 51.48
$56 - $60 173,950 3.3 57.06 173,950 57.06
- ---------------------------------------------------------------------------------------------
1,319,650 949,650
=============================================================================================
</TABLE>
The Company's Long-Term Incentive Plan grants senior management awards
contingent upon the Company's achievement of specified performance objectives
over a three-year period which may be paid out in cash or shares of common stock
(which may be restricted shares). The number of shares subject to grant under
this plan cannot exceed 150,000.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock Based Compensation" was issued in October 1995 for implementation by year
end 1996. SFAS No. 123 allows the use of a fair value based method of accounting
for an employee stock option or similar equity instruments or the intrinsic
value based method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" with pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied. The
Company has elected to continue using the intrinsic value based method. Had the
Company elected to recognize compensation cost using the fair value based
method, compensation would have been measured at date of grant and recognized
over the service
<PAGE>
period. Pro forma net income and earnings per common share would have been
reduced as follows for 1996 and 1995:
1996 1995
- ---------------------------------------------------------------------------
Net income As Reported $53.4 $62.6
Pro Forma 51.4 61.7
Primary earnings per common share As Reported $2.65 $3.07
Pro Forma 2.55 3.02
- ---------------------------------------------------------------------------
These pro forma disclosure amounts derived by the use of SFAS No. 123 are not
indicative of future amounts. SFAS No. 123 is not applicable to options granted
prior to 1995, and additional options may be granted in future years.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for 1996 and
1995, respectively: risk-free interest rates of 6.1 percent in 1996; and 6.9
percent and 5.9 percent in 1995; dividend yield of 5 percent for both years;
expected lives of 6 years; and volatility of 16.8 percent in 1996; and 19.5
percent and 18.9 percent in 1995.
16. Stock Purchase Rights
On November 28, 1988, the Board of Directors created and authorized 250,000
shares of Series A Junior Participating Preferred Stock at no par value and
declared a dividend distribution of one right for each outstanding share of
common stock to shareholders of record on December 8, 1988.
The rights will separate from the common stock and become exercisable if a
person or group acquires ownership of 20 percent or more of the outstanding
common stock of the Company, commences a tender or exchange offer to acquire 20
percent or more of the outstanding shares, or if any person or group has become
the beneficial owner of an amount of common stock which the Board determines to
be substantial and not in the best interest of the shareholders.
The rights entitle holders to purchase preferred shares at an exercise price of
$110 per share. If an acquirer obtains 20 percent or more of the Company's
common stock and the Board of Directors determines that such acquisition is not
in the best interest of the shareholders, the rights will entitle holders to
purchase common shares of the Company at a discount. If the Company is involved
in a merger or other transactions in which shares are exchanged, the rights will
entitle holders to purchase common shares of the acquirer at a discount.
The rights expire on November 28, 1998 and may be redeemed by the Company for
$.01 per right any time until the tenth business day following public
announcement that a 20 percent position has been acquired.
<PAGE>
17. Consolidated Quarterly Data (unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter Year
- ---- ------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Insurance premiums $108.4 $112.9 $113.8 $113.5 $448.6
Net engineering services 12.7 14.1 14.0 15.0 55.8
Net investment income 8.0 7.9 7.6 8.8 32.3
Realized investment gains .9 5.1 2.5 3.6 12.1
-- --- --- --- ----
Total revenues* $130.0 $140.0 $137.9 $140.9 $548.8
====== ====== ====== ====== ======
Income before taxes $ 23.7 $ 17.7 $ 15.1 $ 14.8 $ 71.3
Income taxes 6.7 4.3 3.5 3.4 17.9
--- --- --- --- ----
Net income $ 17.0 $ 13.4 $ 11.6 $ 11.4 $ 53.4
====== ====== ====== ====== ======
Per common share:
Net income $ .84 $ .66 $ .58 $ .57 $ 2.65
======= ======= ======= ======= =======
Dividends declared $ .57 $ .57 $ .57 $ .57 $ 2.28
Common stock price ranges:
High 52 1/2 50 3/4 49 47 1/8 52 1/2
Low 48 46 43 1/4 42 3/4 42 3/4
Close 50 5/8 49 1/8 44 3/4 46 3/8 46 3/8
Common shareholders at December 31, 5,644
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter Year
- ---- ------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Insurance premiums $ 93.6 $ 98.1 $ 98.3 $ 99.1 $389.1
Net engineering services 61.0 63.4 65.9 61.8 252.1
Net investment income 6.8 7.2 6.5 7.8 28.2
Realized investment gains .2 1.2 1.0 .3 2.8
-- --- --- -- ---
Total revenues* $161.6 $169.9 $171.7 $169.0 $672.2
====== ====== ====== ====== ======
Income before taxes $ 19.9 $ 22.4 $ 23.1 $ 21.0 $ 86.3
Income taxes 5.9 6.7 6.8 4.4 23.7
--- --- --- --- ----
Net income $ 14.0 $ 15.7 $ 16.3 $ 16.6 $ 62.6
====== ====== ====== ====== ======
Per common share:
Net income $ .69 $ .77 $ .80 $ .81 $ 3.07
======= ======= ======= ======= =======
Dividends declared $ .55 $ .55 $ .57 $ .57 $ 2.24
Common stock price ranges:
High 43 3/4 45 7/8 49 3/8 50 3/8 50 3/8
Low 39 1/4 41 5/8 42 5/8 45 3/8 39 1/4
Close 43 44 3/8 48 3/8 50 50
Common shareholders at December 31, 5,864
</TABLE>
*Total revenues exclude revenues for investments accounted for under the
equity method.
<PAGE>
<TABLE>
Schedule I
The Hartford Steam Boiler Inspection and Insurance Company
Summary of Investments - Other Than Investments in Related Parties
(in millions)
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G
- ---------------------------------------------------- ------------------------------------------------------------------------------
1996 1995
--------------------------------------- -------------------------------------
Amount Amount
Shown Shown
In The In The
Market Balance Market Balance
Type of Investment Cost Value Sheet Cost Value Sheet
- ---------------------------------------------------- ----------- ------------ ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Bonds:
U.S. Government and Government Agencies
and Authorities $0.0 $0.0 $0.0 $ 0.1 $ 0.1 $ 0.1
States, Municipalities and Political
Subdivisions 39.4 40.7 40.7 $25.3 $27.0 $27.0
Foreign Governments 30.1 30.5 30.5 45.3 46.7 46.7
Convertibles and Bonds with Warrants Attached 0.0 0.0 0.0 0.0 0.0 0.0
All Other Bonds 51.1 51.9 51.9 95.8 99.0 99.0
Mortgage Receivable 11.1 11.1 11.1 11.1 11.1 11.1
Redeemable Preferred Stocks 99.6 101.6 101.6 70.0 71.4 71.4
----------------------------------- --------------------------------------
Total Fixed Maturities $231.3 $235.8 $235.8 $247.6 $255.3 $255.3
Equity Securities:
Common Stocks:
Public Utilities 15.3 16.6 16.6 $6.3 $7.0 $7.0
Banks and Insurance 12.0 20.0 20.0 10.6 13.6 13.6
Industrial and Other 68.4 131.7 131.7 81.3 132.9 132.9
Non-Redeemable Preferred Stocks 87.2 94.4 94.4 56.8 61.9 61.9
----------------------------------- --------------------------------------
Total Equity Securities $182.9 $262.7 $262.7 $155.0 $215.4 $215.4
Short-term Investments and Cash: $102.4 $102.4 $102.4 $83.1 $83.1 $83.1
----------------------------------- --------------------------------------
Total Investments $516.6 $600.9 $600.9 $485.7 $553.8 $553.8
=================================== ======================================
</TABLE>
<PAGE>
<TABLE>
Schedule IV
The Hartford Steam Boiler Inspection and Insurance Company
Reinsurance
(in millions)
<CAPTION>
Column A Column B Column C Column D Column E Column F
Insurance Gross Ceded to Assumed Net Percentage of
Premiums Amount Other From Other Amount Amount
Companies Companies Assumed to Net
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Property and
Liability
Insurance $343.4 $107.9 $213.1 $448.6 47.5%
1995
Property and
Liability
Insurance $279.7 $65.9 $175.3 $389.1 45.1%
1994
Property and
Liability
Insurance $242.6 $45.1 $139.1 $336.6 41.3%
</TABLE>
<PAGE>
<TABLE>
SCHEDULE V
THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
Valuation and Qualifying Accounts
(in millions)
<CAPTION>
Column A Column B Column C Column D Column E Column F
- ------------- ------------ ----------- ----------- ----------- -----------
Description Balance at Charged to Charged to Balance
Beginning of Costs and Other Deductions At End of
Period Expenses Accounts Describe (a) Period
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Reserve for Accounts Receivable $3.3(b) $1.4 $0.0 $1.7 $3.0
1995
Reserve for Accounts Receivable $3.1 $2.6 $0.0 $2.1 $3.6(b)
1994
Reserve for Accounts Receivable $2.1 $2.2 $0.0 $1.2 $3.1
</TABLE>
(a) Engineering Services and Insurance Premium Receivables written off as
uncollectible.
(b) Radian International LLC, an affiliate of Hartford Steam Boiler, was
accounted for under the consolidation method of accounting in 1995 and the
equity method of accounting for 1996. As such, $0.3 million of receivables
is included in the 1995 balance but included on a different line in the
1996 financial statements (not included above).
<PAGE>
<TABLE>
Schedule VI
The Hartford Steam Boiler Inspection and Insurance Company
Supplemental Information Concerning Property-Casualty Insurance Operations
For Years Ended December 31, 1996, 1995, and 1994
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Affiliation Reserves Discount, Unearned Earned Net Claims and Claim Amortization Paid claims Premiums
with Prepaid for if any premium premiums investment Adjustment of prepaid and claim written
Registrant Acquisition unpaid deducted income expenses policy adjustment
(Consolidated Costs claims in incurred acquisition expenses
property- and claim Column C related to costs
casualty adjustment Current Prior
entities) expenses Year Years
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 40.6 302.9 - 270.6 448.6 32.3 214.2 -9.8 86.0 172.1 454.4
1995 34.1 190.9 - 216.2 389.1 28.2 152.2 2.7 78.1 170.7 408.3
1994 35.5 199.4 - 201.3 336.6 26.2 141.7 1.5 64.7 172.2 340.3
<PAGE>
PART III
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a) The financial statements and schedules listed in the Index to
Financial Statements and Financial Statement Schedules on page 31
herein are filed as part of this report.
(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.
(c) The exhibits listed in the accompanying Index to Exhibits are filed as
part of this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE HARTFORD STEAM BOILER
INSPECTION AND INSURANCE COMPANY
(Registrant)
By: /s/ Gordon W. Kreh
Gordon W. Kreh
President and Chief
Executive Officer
May 8, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
(Signature) (Title)
By:/s/ Gordon W. Kreh
Gordon W. Kreh President, Chief Executive Officer
May 8, 1997 and Director
/s/ Saul L. Basch Senior Vice President, Treasurer
Saul L. Basch and Chief Financial Officer
May 8, 1997 (Principal Financial Officer and
Principal Accounting Officer)
/s/ Robert C. Walker Senior Vice President and General Counsel
Robert C. Walker
May 8, 1997
(Joel B Alvord)* Director
(Colin G. Campbell)* Director
(Richard G. Dooley)* Director
(William B. Ellis)* Director
(E. James Ferland)* Director
(John A. Powers)* Director
<PAGE>
(Lois Dickson Rice)* Director
(John M. Washburn, Jr.)* Director
(Wilson Wilde)* Director
*By: /s/ Robert C. Walker
Robert C. Walker
(Attorney-in-Fact)
May 8, 1997
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
**(3)(i) Charter of The Hartford Steam Boiler Inspection and
Insurance Company, as amended effective December 30, 1996.
**(3)(ii) By-laws of The Hartford Steam Boiler Inspection and Insurance Company
amended July 24, 1995; incorporated by reference to Exhibit (3)(ii)
to Registrant's Form 10-Q for the quarter ended June 30, 1995.
**(4)(i) Rights Agreement dated November 28, 1988 between
Registrant and The First National Bank of Boston, as
Rights Agent; incorporated by reference to Exhibit 4(i) to
registrant's Form 10-K for the year ended December 31, 1995 .
**(4)(iii) Instruments defining the rights of holders of long-
term debt of the Registrant are not being filed since
the total amount of securities authorized under each
such instrument does not exceed ten percent of the
total assets of the Registrant and its subsidiaries on
a consolidated basis. The Registrant shall furnish
copies of such instruments to the Securities and
Exchange Commission upon request.
**(10)(i) (a) Lease Agreement with One State Street Limited
Partnership; incorporated by reference to Exhibit
(10)(i) to Registrant's Form 10. File No. 0-13300,
filed March 18, 1985.
(b) Transaction Agreement between Registrant and
General Reinsurance Corporation dated December 30,
1994; incorporated by reference to Exhibit 2 to
the registrant's Current Report on Form 8-K. File
No. 0-13300, filed January 17, 1995.
(c) Contribution Agreement among the Registrant, The
Dow Chemical Company, Dow Environmental Inc. and
Radian Corporation dated January 30, 1996;
incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K. File No.
0-13300, filed February 14, 1996.
(d) Limited Liability Company Agreement between Radian
Corporation and Dow Environmental Inc. dated
<PAGE>
January 30, 1996; incorporated by reference to
Exhibit 99.2 to the Registrant's Current Report on
Form 8-K. File No. 0-13300, filed February 14,
1996.
**(10)(iii)(a) Employment Agreement dated February 3, 1997
between the Registrant and various executive
officers.*
(b) The Hartford Steam Boiler Inspection and
Insurance Company Long-Term Incentive Plan, as
amended and restated effective December 23, 1996.*
(c) The Hartford Steam Boiler Inspection and
Insurance Company Short-Term Incentive Plan, as
amended and restated December 23, 1996. *
(d) The Hartford Steam Boiler Inspection and
Insurance Company 1985 Stock Option Plan, as
amended and restated December 23, 1996. *
(e) The Hartford Steam Boiler Inspection and
Insurance Company 1995 Stock Option Plan,
amended and restated effective December 23, 1996. *
(f) Pre-Retirement Death Benefit and Supplemental
Pension Agreement between the Registrant and
various executive officers, as amended and
restated effective March 14, 1997. *
(g) Pre-Retirement Death Benefit and Supplemental
Pension Agreement between the Registrant and
William A. Kerr, dated March 14, 1997. *
(h) Pre-Retirement Death Benefit and Supplemental
Pension Agreement between the Registrant and
Robert C. Walker, dated March 14, 1997.*
(i) Retirement Plan for Outside Directors, as amended
and restated October 24, 1988; incorporated by
reference to Exhibit (10)(iii)(e) to Registrant's
Form 10-K for the year ended December 31, 1993. *
(j) The Hartford Steam Boiler Inspection and Insurance Company
Directors Stock and Deferred Compensation Plan*
(k) Description of certain arrangements not set forth in any formal
documents, as described on pages
<PAGE>
6 - 7 , with respect to directors' compensation, and on pages 9
-16, with respect to executive officer's compensation, which
pages are incorporated by reference to Registrant's Proxy
Statement dated March 26, 1997. *
**(21)Subsidiaries of the Registrant.
(23) Consent of experts and counsel -
consent of Coopers & Lybrand.
(24) Power of attorney.
(27) Financial Data Schedule.
* Management contract, compensatory plan or arrangement required to be filed as
an exhibit pursuant to Item 14(c) of this report.
**Previously filed.
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
The Hartford Steam Boiler Inspection and Insurance Company on Forms S-8 (File
Nos. 33-4397 and 33-36519) of our report dated January 27, 1997, on our audits
of the consolidated financial statements and financial statement schedules of
The Hartford Steam Boiler Inspection and Insurance company and its subsidiaries
as of December 31, 1996 and 1995, and for the three years in the period ended
December 31, 1996, which report is included in this Annual Report on Form
10-K/A.
/s/ Coopers & Lybrand
Hartford, Connecticut
May 8, 1997
POWER OF ATTORNEY Exhibit (24)
We, the undersigned directors of The Hartford Steam Boiler Inspection and
Insurance Company, hereby individually appoint Robert C. Walker and Roberta A.
O'Brien, and each of them singly, with full power of substitution to each, our
true and lawful attorneys with full power to them and each of them singly, to
sign for us in our names in the capacities stated below the Form 10-K, Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
for the fiscal year ended December 31, 1996 for The Hartford Steam Boiler
Inspection and Insurance Company, and any and all amendments to said Form 10-K,
and generally to do all such things in our name and on our behalf in our
capacities as directors that will enable the Company to comply with the
provisions of the Securities Exchange Act of 1934, as amended, and all
requirements of the Securities and Exchange Commission, which relate to said
Form 10-K and the filing thereof, hereby ratifying and confirming our signatures
as they may be signed by our said attorneys or any one of them to said Form 10-K
and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Power
of Attorney has been signed by the following persons in the capacities and on
the date indicated.
(Signature) (Title) (Date)
/s/ Gordon W. Kreh President, Chief March 24, 1997
Gordon W. Kreh Executive Officer
and Director
/s/ Joel B. Alvord
Joel B. Alvord Director March 24, 1997
/s/ Richard H. Booth
Richard H. Booth Director March 24, 1997
/s/ Colin G. Campbell
Colin G. Campbell Director March 24, 1997
/s/ Richard G. Dooley
Richard G. Dooley Director March 24, 1997
<PAGE>
(Signature) (Title) (Date)
/s/ William B. Ellis
William B. Ellis Director March 24, 1997
/s/ E. James Ferland
E. James Ferland Director March 24, 1997
/s/ John A. Powers
John A. Powers Director March 24, 1997
/s/ Lois Dickson Rice
Lois Dickson Rice Director March 24, 1997
/s/ John M. Washburn, Jr.
John M. Washburn, Jr. Director March 24, 1997
/s/ Wilson Wilde
Wilson Wilde Director March 24, 1997
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 225
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 263
<MORTGAGE> 11
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<TOTAL-INVEST> 596
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<RECOVER-REINSURE> 163
<DEFERRED-ACQUISITION> 41
<TOTAL-ASSETS> 1116
<POLICY-LOSSES> 303
<UNEARNED-PREMIUMS> 271
<POLICY-OTHER> 0
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0
20
<COMMON> 10
<OTHER-SE> 336
<TOTAL-LIABILITY-AND-EQUITY> 1116
449
<INVESTMENT-INCOME> 32
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</TABLE>