(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.
Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations. - --------------
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
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 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.
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.
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
The Company is involved in three arbitration or litigation proceedings primarily with other insurers regarding significant loss events that occurred in the late 1980s and early 1990s. The areas of dispute concern questions as to whether the Company or the property insurer has responsibility for coverage of certain property damage and business interruption losses sustained by the insureds. It is management's position that the Company's insurance contract terms exclude such losses, whereas the property insurers contend the policy language is broad enough to extend coverage. The ultimate responsibility for such losses will be determined through arbitration or the legal system. While the timing of the resolution of these cases is unclear, management is of the opinion that an adverse outcome will not have a material effect on the results of operations or the financial position of the Company due to reinsurance contracts in place for those years. Nevertheless, in the event the Company's reinsurers are obliged to pay significant sums pursuant to the arbitration or legal proceedings, it is likely the Company's reinsurance rates would increase in future periods.
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.
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 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
* 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.
increased 3.9 percent in 1995 compared to 1994. Increased profitability resulted from the disposition of certain unprofitable HSB RT operations in 1994.
For the years ended December 31, 1996 1995 1994 - ---------------------------------------------------------
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.
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 Shareholders' equity 365.6 341.1 299.5
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.
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.
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.
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.
Consolidated Statements of Financial Position - December 31, 1996 and 1995. 34
Schedule I - Summary of Investments- Other than Investments in Related Parties 56
Consolidated Statements of Operations For the years ended December 31, (in millions, except per share amounts)
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 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.
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.)
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
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.
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.
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 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.
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,
HSB had the option to request Gen Re to exchange the EIG, Co. preferred stock for HSB convertible 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 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.
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 - --------------------------------------------------------
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.
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 and employee benefit plans. 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.
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.
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.
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 ===============================================================================
Net engineering services revenues have been reduced by subcontract costs of $28.8 and $21.5 million for 1995 and 1994, respectively.
At December 31, 1995, fixed assets, net of accumulated depreciation, included $22.6 million related to Radian Corporation.
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.
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 primarily with other insurers regarding significant loss events that occurred in the late 1980s and early 1990s. The areas of dispute concern questions as to whether the Company or the property insurer has responsibility for coverage of certain property damage and business interruption losses sustained by the insureds. It is management's position that the Company's insurance contract terms exclude such losses, whereas the property insurers contend the language is broad enough to extend coverage. The ultimate responsibility for such losses will be determined through arbitration or the legal system. While the timing of the resolution of these cases is unclear, management is of the opinion that an adverse outcome will not have a material effect on the results of operations or the financial position of the Company due to reinsurance contracts in place for those years. Nevertheless, in the event the Company's reinsurers are obliged to pay significant sums pursuant to the arbitration or legal proceedings, it is likely the Company's reinsurance rates would increase in future periods.
A reconciliation of income taxes at U.S. statutory rates to the income taxes as reported is as follows:
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 ==============================================================================
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) ======================================================================
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.
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.
- ----------------------------------------------------- 1997 $ 4.9 1998 4.2 1999 3.1 2000 1.8 2001 1.2 2002 and thereafter 1.0 - ----------------------------------------------------- Total $16.2 - -----------------------------------------------------
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.
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:
Assumptions used for the primary U.S. plan at years ended were as follows:
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%
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.
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."
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
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:
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 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:
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
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.
*Total revenues exclude revenues for investments accounted for under the equity method.