In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which requires items that comprise comprehensive income be reported in a financial statement display with the same prominence as other financial statements. This will include a presentation of items such as market value adjustments of securities, foreign currency translation, and certain adjustments made for benefit plans. This accounting standard will be effective beginning in 1998 with presentation of prior periods required.
The carrying value of the equity securities portfolio represented 34 percent of the investments at December 31, 1997. This included $92.5 million of unrealized investment gains, which had a net increase of $12.7 million from 1996 on a sharp upturn in the stock market in 1997. HSB also recorded $13 million of dividends and $43 million of net pre-tax realized gains from this portfolio in 1997. The Company's largest single holding accounted for less than 1 percent of total consolidated assets. Realized investment gains increased in 1997 over 1996 (and in 1996 in comparison to 1995) as HSB managed its portfolio to respond to changing market conditions and tax planning opportunities.
Consolidated Statements of Financial Position - December 31, 1997 and 1996. 44
The accompanying financial statements present the consolidated accounts of HSB Group, Inc. and its subsidiaries (collectively, HSB or the Company) (See note 3) 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 may differ from estimates. Certain amounts for 1996 and 1995 have been reclassified to conform with the 1997 presentation.
The securities were issued through HSB Capital II (Trust II), a Delaware business trust created by HSB at a 7 percent coupon, payable semi-annually. The Convertible Capital Securities rank pari passu with the capital securities issued July 1997. Holders of the Convertible Capital Securities will be entitled to receive preferential cumulative cash
HSB's restricted stock is an award of common shares that may not be sold or transferred during the restriction period, usually three years under the stock option plan and five years under the long-term incentive plan, 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 benefit was $0.6 million in 1997 and 1996 and $1.1 million in 1995. The unamortized compensation expense related to this plan is included in benefit plans as a component of shareholders' equity. These amounts were $1.2 and $0.7 million in 1997 and 1996, respectively. A summary of grants follow:
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 1997 and 1996, respectively: risk-free interest rates of 6.3 percent in 1997 and 6.1 percent in 1996; dividend yield of 5 percent for both years; expected lives of 6 years; and volatility of 15.8 percent in 1997 and 16.8 percent in 1996.
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.
For the period from June 23, 1997 through December 31, 1997 (In millions)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF HSB GROUP, INC. CONDENSED STATEMENT OF CASH FLOWS INFORMATION For the period from June 23, 1997 through December 31, 1997 (In millions)