-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HxpEh+0VjAebElHr6YPxXej34CMQDweVGmNM7gCerp4kZmNt6Po/i1XzU7YG8PJY wTsQMFn+hSSvlhRmkjuxiA== 0000310823-96-000013.txt : 19960517 0000310823-96-000013.hdr.sgml : 19960517 ACCESSION NUMBER: 0000310823-96-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARTFORD STEAM BOILER INSPECTION & INSURANCE CO CENTRAL INDEX KEY: 0000310823 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 060384680 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10527 FILM NUMBER: 96565400 BUSINESS ADDRESS: STREET 1: ONE STATE ST CITY: HARTFORD STATE: CT ZIP: 06102 BUSINESS PHONE: 2037221866 MAIL ADDRESS: STREET 1: ONE STATE STREET STREET 2: P.O. BOX 5024 CITY: HARTFORD STATE: CT ZIP: 06102-5024 10-Q 1 10-Q DOCUMENT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-13300 THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY (Exact name of registrant as specified in its charter) CONNECTICUT 06-0384680 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. BOX 5024, ONE STATE STREET, HARTFORD, CONNECTICUT 06102-5024 (Address of principal executive offices) (Zip Code) (860) 722-1866 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since the last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the registrant's common stock without par value, as of March 31, 1996: 20,279,825 THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY INDEX PART I FINANCIAL INFORMATION PAGE Consolidated Statements of Operations for the Quarters Ended March 31, 1996 and 1995 (unaudited).............................. 3 Consolidated Statements of Financial Position as of March 31, 1996 (unaudited) and December 31, 1995................................................. 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995 (unaudited).......................................... 5 Notes to Consolidated Financial Statements.. ........ 6 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations........................................ 8 PART II OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K............ 14 SIGNATURES............................................. 15 THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Consolidated Statements of Operations (Unaudited) (In millions, except per share data) Quarter Ended March 31 1996 1995 --------- -------- Revenues: Insurance premiums $ 108.4 $ 93.6 Net engineering services 12.7 61.0 Net investment income 8.0 6.8 Realized investment gains 0.9 0.2 ------- ------- Total revenues 130.0 161.6 ------- ------- Expenses: Claims and adjustment 44.9 37.4 Policy acquisition 20.6 18.8 Underwriting and inspection 33.7 29.6 Net engineering services 11.3 55.3 Interest 0.7 0.6 ------- ------- Total expenses 111.2 141.7 ------- ------- Equity in Radian International LLC 4.9 - ------- ------- Income before taxes 23.7 19.9 Income taxes: Current 7.1 5.2 Deferred (0.4) 0.7 ------- ------- Total income taxes 6.7 5.9 Net income $ 17.0 $ 14.0 ======= ======= Net income per share $ 0.84 $ 0.69 ======= ======= Dividends declared per share $ 0.57 $ 0.55 Based on average shares 20.4 20.4
See Notes to Consolidated Financial Statements. THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Consolidated Statements of Financial Position (In millions, except per share data) March 31, December 31, 1996 1995 (Unaudited) ----------- ------------ Assets: Cash $ 9.8 $ 9.3 Short-term investments, at cost 73.1 73.8 Fixed maturities, at fair value (cost - $233.6; $247.6) 236.2 255.3 Equity securities, at fair value (cost - $169.1; $155.0) 235.9 215.4 ----------- ----------- Total cash and invested assets 555.0 553.8 Insurance premiums receivable 108.0 87.2 Engineering services receivable 9.1 68.8 Fixed assets 38.2 62.3 Prepaid acquisition costs 41.0 34.1 Capital lease 16.6 16.8 Equity in Radian International LLC 71.4 - Reinsurance recoverable 66.4 47.9 Other assets 87.7 100.6 ------- ------- Total assets $ 993.4 $ 971.5 ======= ======= Liabilities: Unearned insurance premiums $ 254.1 $ 216.2 Claims and adjustment expenses 211.2 190.9 Short-term borrowings 12.0 13.4 Long-term borrowings 25.6 25.6 Capital lease 27.8 27.8 Deferred income taxes 19.8 18.9 Dividends payable 11.6 11.6 Minority Interest 20.0 20.0 Other liabilities 64.1 106.0 ------- ------- Total liabilities 646.2 630.4 ======= ======= Shareholders' equity: Common Stock (stated value; shares authorized 50.0; shares issued 21.3; shares outstanding 20.4; 20.4) 10.0 10.0 Additional paid-in capital 34.1 33.9 Unrealized investment gains, net of tax 44.7 43.9 Retained earnings 310.6 305.1 Treasury stock, at cost; (shares 1.0; 1.0) (47.7) (47.7) Benefit plans (4.5) (4.1) ------- ------- Total shareholders' equity 347.2 341.1 ======= ======= Total liabilities and shareholders' equity $ 993.4 $ 971.5 Shareholders' equity per share $ 17.04 $ 16.81
See Notes to Consolidated Financial Statements. THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Consolidated Statements of Cash Flows Unaudited (In millions) Quarter Ended March 31, ------------------------ 1996 1995 -------- -------- Operating Activities: Net income $ 17.0 $ 14.0 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 3.2 5.0 Deferred income taxes (0.4) 0.7 Realized investment gains (0.9) (0.2) Change in: Insurance premiums receivable (20.8) 7.3 Engineering services receivable (0.1) (0.6) Prepaid acquisition costs (6.9) - Reinsurance recoverable (18.5) 0.9 Unearned insurance premiums 37.9 1.4 Claims and adjustment expenses 20.3 (14.6) Equity in Radian International LLC (3.6) - Other (10.7) 2.5 ------- ------- Cash provided by operating activities 16.5 16.4 ------- ------- Investing Activities: Fixed asset additions (1.2) (1.6) Investments: Sale (purchase) of short-term investments, net 0.6 (11.5) Purchase of fixed maturities (35.4) (123.1) Proceeds from sale of fixed maturities 49.1 103.9 Redemption of fixed maturities 1.7 4.4 Purchase of equity securities (33.0) (35.0) Proceeds from sale of equity securities 17.9 54.3 Cash transferred to equity in Radian Int'l LLC (0.8) - ------- ------- Cash used in investment activities (1.1) (8.6) ------- ------- Financing Activities: Increase (decrease) in short-term borrowings (1.4) 5.2 Dividends paid to shareholders (11.6) (11.2) Repayment of employee stock ownership plan debt - (0.6) Purchase of treasury stock (1.2) (0.2) ------- ------- Cash used in financing activities (14.2) (6.8) ------- ------- Net increase in cash 1.2 1.0 Cash at beginning of period 8.6 12.1 ------- ------- Cash at end of period $ 9.8 $ 13.1 ======= ======= Interest paid $ 0.7 $ 0.4 ------- ------- Federal income tax paid $ 2.0 $ 0.5 ------- -------
See Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General The interim financial statements in this report include adjustments based on management's best estimates and judgments, including estimates of future loss payments, which are necessary to present a fair statement of the results for the interim periods reported. These adjustments are of a normal, recurring nature. The financial statements are prepared on the basis of generally accepted accounting principles and should be read in conjunction with the financial statements and related notes in the 1995 Annual Report. 2. Radian International LLC Effective January 16,1996, HSB and The Dow Chemical Company (Dow) formed a new company, Radian International LLC (Limited Liability Company), which provides environmental, information technology, and strategic chemical management services to industries and government worldwide. According to the terms of the agreement, the ownership of Radian International LLC is initially 60 percent Dow and 40 percent HSB, via the wholly owned subsidiaries of each company. Income to HSB will be subject to a preference return in the first two years. As is customary in joint ventures, the agreements between HSB and Dow provide various alternatives for either party to dissolve the business, distribute assets and liabilities, or sell their interests subject to certain rights of first refusal. In 1996, HSB's interest in Radian International LLC is accounted for in the consolidated financial statements under the equity method of accounting. The 1995 results were fully consolidated. The new company, consisting of assets contributed by Dow's subsidiary, Dow Environmental Inc. (DEI) and HSB's subsidiary, Radian Corporation, is headquartered in Austin, TX. Radian International LLC will integrate the engineering and environmental strengths of Radian and DEI, and DEI's access to the chemical industry process technology of Dow to provide a wide range of process and environmental systems and services to global customers. 3. Industrial Risk Insurers Effective December 1, 1995 the Company increased its participation in Industrial Risk Insurers (IRI) from approximately 0.5 percent to 14 percent. IRI is a voluntary joint underwriting association providing property insurance for the class of business known as Highly Protected Risks - larger manufacturing, processing, and industrial businesses which have invested in protection against loss through the use of sprinklers and other means. IRI has a fiscal year ending November 30 and provides quarterly reports to member companies of the organization. As a result HSB's increased participation is reflected in the first quarter 1996 results. The additional participation increased revenue and expenses for the first quarter 1996 as well as several balance sheet accounts. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 1996 RESULTS OF OPERATIONS (dollar amounts in millions) Consolidated Overview Quarter Ended March 31 --------------- 1996 1995 ----- ------ Insurance premium $108.4 $ 93.6 Net engineering services revenues 12.7 61.0 Net investment income 8.0 6.8 Realized investment gains 0.9 0.2 ------ ------ Total revenues $130.0 $161.6 ------ ------ Net income $ 17.0 $ 14.0 ====== ====== Net income per share $ 0.84 $ 0.69 ====== ======
Net income for the first quarter of 1996 increased 21 percent over the first quarter of 1995. The increase was achieved through improvements in all three business segments. Insurance premiums grew 16 percent while the combined ratio remained constant at approximately 91 percent. Engineering services margin, including the equity in Radian International LLC, increased 10 percent. Net investment income increased 18 percent and realized investment gains increased $0.7 million. Consolidated revenues in the first quarter of 1995 include $49.6 million of revenue from Radian which is now reported as Radian International LLC using the equity method of accounting. Under this method the detail revenues and expenses and assets and liabilities of Radian International LLC are not presented in the 1996 financial statements. Insurance premiums increased 16 percent in the quarter, with the increased participation in IRI the largest contributing factor. Exclusive of the Radian impact, engineering services revenue increased 11 percent from the first quarter last year. Net investment income increased due to an increase in investable assets. The effective tax rate for the first quarter of 1996 was 28 percent compared to 30 percent for the comparable prior year period. The Company continues to manage its use of tax advantageous investments to maximize after tax earnings. The additional participation in IRI increased revenue and expenses for the first quarter of 1996, but there was minimal impact to net income. The additional participation also impacted the balance sheet at March 31, 1996. The major balance sheet increases from December 31, 1995 related to IRI included insurance premiums receivable ($24.2 million), unearned insurance premiums ($37.6 million), claims and adjustment expenses ($19.8 million) and reinsurance recoverable ($16.0 million). With Radian International LLC being accounted for on the equity basis of accounting in 1996, certain balance sheet accounts at March 31,1996 have been reduced. The major changes from December 31,1995 included reductions to engineering services receivable ($59.7 million), fixed assets ($22.6 million), other assets ($23.0 million) and other liabilities ($22.0 million). Recent Accounting Developments In October 1995, the Financial Accounting Standards Board (the Board) issued Statement of Financial Accounting Standards No. 123 (SFAS 123) "Accounting for Stock-Based Compensation" effective for fiscal years beginning after December 15, 1995. SFAS 123 allows entities to adopt the fair value based method of accounting for stock compensation or continue under the current accounting practice. Entities electing to remain with the current accounting practice must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting in this Statement had been applied. The Company expects to make pro forma disclosure of awards granted in 1995 and future years and has not yet settled on a method of valuation. Insurance Operations Insurance operations include the insurance results of The Hartford Steam Boiler Inspection and Insurance Company and EIG, Co. Quarter Ended March 31 ------------- 1996 1995 ------ ------ Gross earned premium $133.7 $109.6 Ceded premium 25.3 16.0 ------ ------ Insurance premium 108.4 93.6 Claims and adjustment expenses 44.9 37.4 Underwriting, acquisition and other expenses 54.3 48.4 ------ ------ Underwriting gain $ 9.2 $ 7.8 ====== ======
Insurance premiums in the first quarter of 1996 increased 16 percent from the first quarter of 1995. This increase was primarily attributable to the increased participation in IRI, which contributed $9.6 million and to growth in the global markets. Insurance premiums representing coverage outside the U.S. increased 20 percent in the first quarter 1996 compared to the prior year first quarter. Reinsurance ceded costs increased 58 percent in the current quarter from the comparable period in 1995. This increase was primarily due to the additional participation in IRI. The loss ratio increased slightly in the current quarter compared to the same period in 1995 as frequency of claims was higher. Claims and adjustment expenses increased 20 percent in the current quarter compared to the first quarter 1995 with the increased share in IRI accounting for the majority of the additional expense. Gross claims and adjustment expenses for the first quarter 1996 and 1995 were $58.9 million and $47.3 million, respectively. Underwriting, acquisition and other expenses increased approximately 12 percent in the current quarter compared to the same 1995 period. The increase was primarily due to increased participation in IRI and additional expenses related to growth in the global sector. The expense ratio was 49.6 percent in the first quarter of 1996, down from 51.1 percent in the first quarter of 1995. The components of the combined ratio, were as follows: Quarter Ended March 31 ---------------- 1996 1995 ----- ----- Loss ratio 41.4% 40.0% Expense ratio 49.6% 51.1% ----- ----- Combined ratio 91.0% 91.1% ===== =====
Engineering Services Operations Quarter Ended March 31 --------------- 1996 1995 ------ ----- Net engineering services revenue $ 12.7 $ 61.0 Net engineering services expenses 11.3 55.3 ------ ------ Operating gain $ 1.4 $ 5.7 ====== ====== Net margin 11.3% 9.4%
Engineering services operations include the results of HSB's and The Boiler Inspection and Insurance Company of Canada's engineering services, HSB Reliability Technologies (HSBRT) and the Company's other engineering services subsidiaries. The 1995 results include Radian on a fully consolidated basis. The 1996 engineering services results do not include Radian as HSB's share of the newly formed joint venture results were recorded as Equity in Radian International LLC rather than in net engineering services revenue and other income statement accounts. Net engineering services revenues decreased $48.3 million in the first quarter of 1996 compared to the same period in 1995. The decrease is due to the Radian International LLC transaction. Exclusive of Radian, engineering services increased approximately 11 percent in the current quarter over the first quarter 1995. The growth in revenues was primarily due to increases generated by HSBRT as their revenues were 32 percent higher in the first quarter of 1996 over the same period in 1995. The consolidated engineering services operating gain decreased $4.3 million in the current quarter from the first quarter of 1995. Again, this was caused by the Radian International LLC transaction. Exclusive of Radian, the engineering services net margin increased approximately 17 percent in the current quarter from the same period in 1995. Improvements in operating margins by HSBRT generated the increase. Radian International LLC results for the first quarter of 1996 improved slightly over the first quarter of 1995. Investment Operations Quarter Ended March 31 --------------- 1996 1995 ----- ----- Net investment income $ 8.0 $ 6.8 Realized investment gains 0.9 0.2 ----- ----- Pretax income from investment operations $ 8.9 $ 7.0 ===== =====
Net investment income increased 18 percent for the first quarter of 1996 compared to the first quarter of 1995. The increase was primarily due to an increased level of investable assets and earnings on the receivable generated from the portfolio transfer of IRI. Invested assets growth was due to significant cash flow from operations during 1995. Investment income in the global market also increased in the current quarter over the first quarter of 1995 as these operations have shown significant growth over the past year. The Company's investment strategy continues to be to maximize total return on the investment portfolio through investment income and capital appreciation. The investment portfolio includes a wide variety of high quality equity securities and both domestic and foreign fixed maturities. The Company continues to manage its use of tax advantageous investments to maximize after tax investment earnings. Liquidity and Capital Resources Balances at March 31 December 31 --------------------------- 1996 1995 ------- ------ Total assets $ 993.4 $ 971.5 Short-term investments 73.1 73.8 Cash 9.8 9.3 Short-term borrowings 12.0 13.4 Shareholder's equity 347.2 341.1
Liquidity refers to the Company's ability to generate sufficient funds to meet the cash requirements of its business operations. The Company receives a regular inflow of cash from maturing investments and engineering services and insurance operations. The mix of the investment portfolio is managed to respond to claim pay-out patterns. The Company also maintains a highly liquid short-term portfolio to provide for immediate cash needs. Cash provided from operations was $16.5 million in the first three months of 1996 compared to $16.4 million in the first three months of 1995. The increase from 1995 was due to increased cash flow from insurance operations offset by higher taxes paid. Insurance operations cash flow increased as premiums collected were up 7 percent in the quarter compared to the first quarter 1995 and claims paid were down 26 percent. These increases were partially offset by higher paid expenses. The additional participation in IRI impacted components of the Consolidated statement of cash flows for the first quarter of 1996 but there was no impact to cash provided from operations. The Radian International LLC transaction had minimal impact on cash flow from operations in the first quarter of 1996. Capital resources consist of shareholders' equity and debt outstanding and represent those funds deployed or available to be deployed to support business operations. Shareholders' equity of $347.2 million at March 31, 1996 increased by $6.1 million since December 31, 1995. The increase reflects net income of $17.0 million for the quarter, and an increase in unrealized gains, net of tax, of $0.8 million, offset by dividends of $11.7 million. At March 31, 1996, the Company had significant short-term and long-term borrowing capacity. The Company is currently authorized to issue up to $75 million of commercial paper. Commercial paper outstanding at March 31, 1996 and December 31, 1995 was $12.0 million. The Company continually assesses its capital structure to ensure that appropriate capital is available to grow its core business. PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits - Exhibit 27, Financial Data Schedule. (b) Reports on Form 8-K - Form 8-K filed on February 14, 1996 to report completion of the formation of a new company, Radian International LLC, by the Registrant and The Dow Chemical Company. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Date: May 14, 1996 By: /s/ Saul L. Basch Saul L. Basch Senior Vice President, Treasurer and Chief Financial Officer Date: May 14, 1996 By: /s/ Robert C. Walker Robert C. Walker Senior Vice President and General Counsel EX-27 2
7 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. 1,000,000 3-MOS DEC-31-1996 MAR-31-1996 225 0 0 236 11 0 545 10 66 41 993 211 254 0 0 38 0 0 10 337 993 108 8 1 13 45 21 45 24 7 17 0 0 0 17 .84 0 0 0 0 0 0 0 0
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