The Hartford Steam Boiler Inspection and Insurance Company leases approximately 233,145 square feet for its home office at One State Street, Hartford, Connecticut under a long-term capital lease with One State Street Limited Partnership. In addition to its home office facility, the Company leases facilities for its branch offices and subsidiaries throughout the United States, and in a small number of other foreign locations. The Company considers the office facilities to be suitable and adequate for its current and anticipated level of operations.
See Notes 13 and 15 to Consolidated Financial Statements located in Item 8 of Part II herein for additional information.
(a) Reflects the repurchase of approximately .1 million shares in 1995, .1 million shares in 1994, .2 million shares in 1993 and .3 million shares in 1992.
Management's Discussion and Analysis of Financial 	 Condition and Results of Operations.
Net income in 1995 increased 21 percent from 1994 reflecting 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. Improvement in 1994 results relative to 1993 were driven by higher margins in insurance operations, resulting in part from the Company's program of reunderwriting its book of business and focusing on more profitable contracts. Results in 1993 include a $20 million restructuring charge, significant strengthening of claims reserves and increased costs of reinsurance.
Consolidated revenues increased 11 percent in 1995 to $672.2 million, reflecting 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 from General Reinsurance Corporation (Gen Re). 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 4 in Notes to Consolidated Financial Statements in
Consolidated Statements of Financial Position - December 31, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993.
Schedule I - Summary of Investments- 	 Other than Investments in Related 	 Parties
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. 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.
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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for postemployment benefits during 1993.
NON-CASH INVESTING AND FINANCING ACTIVITIES: 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.
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 on fixed maturities and equity securities available for sale, prepaid acquisition costs, 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.
In March 1995, the Financial Accounting Standards Board (the Board) issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective for fiscal years beginning after December 31, 1995. SFAS 121 requires that entities review long-lived assets, certain intangibles and goodwill for possible impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 also requires that long-lived assets and certain intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Implementation of SFAS 121 is not expected to have a material impact on the Company's financial results.
In October 1995, 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 current accounting practice. Entities electing to remain with current accounting 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.
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 preferred shares of the new company, EIG, Co. HSB has the option to exchange the EIG, Co. preferred stock for HSB convertible preferred stock at the end of 1996. 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 beginning December 31, 1994, reflecting the preferred issuance as a minority interest. Prior to this acquisition, the Company's 50 percent ownership in EIG had been accounted for under the equity method. Accordingly, the results of operations for 1994 and 1993 have been reflected under the caption "Equity in operations of insurance association" in the Consolidated Statements of Operations, while the 1995 results of operations for EIG, Co. are fully consolidated.
In September of 1993, the Company recorded a $20 million charge for the cost of restructuring its insurance and engineering services businesses. Restructuring costs include severance and other costs related to planned staff reductions and charges related to a realignment of the Company's operations. At December 31, 1995, $.5 million of restructuring liability remains.
HSB is a multi-national company operating primarily in North American, European, and Asian markets. The most significant business is boiler and machinery insurance, which 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. The Company operates three principal businesses - insurance, engineering services and investments. Revenues, expenses and receivables are shown for these segments in the Company's financial statements. The Company does not allocate assets between business segments.
In December 1993, the National Association of Insurance Commissioners (NAIC) adopted the property and casualty risk based capital (RBC) formula which allows regulators to more closely monitor insurers with weak or deteriorating financial positions and take regulatory action under certain conditions. The RBC formula for property and casualty companies monitors elements of risk defined as underwriting risk, invested asset risk, credit risk and off-balance sheet risk. Property and casualty insurers were required to report the results of the formula for the first time in their 1994 statutory filings. HSB substantially exceeded the RBC requirements in 1995 and 1994.
The Company held no derivative financial instruments in its investment portfolio at December 31, 1995 and 1994. 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 the option contracts are exercised or expire. During 1995 and 1994, aggregate premiums received by the Company on covered call options amounted to less than $.l and $.7 million, respectively. Net gains recognized on sales of underlying instruments amounted to less than $.l and $.4 million for 1995 and 1994, respectively. Generally the duration of covered call options written by the Company does not exceed 30 days.
Federal income tax returns for the years 1994, 1993 and 1992 are open to examination by the Internal Revenue Service. If examined, no significant tax adjustments are anticipated.
In addition to its home office facility, the Company leases facilities and certain equipment which are accounted for as operating leases. Lease expenses amounted to $14.3, $15.1 and $14.7 million in 1995, 1994 and 1993, respectively.
At December 31, 1995, 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:
During 1995, the Company borrowed on a short-term basis through its commercial paper program which has a limit of $75 million. Commercial paper outstanding at December 31, 1995 and 1994 was $12.0 and $26.7 million, respectively. Commercial paper outstanding at December 31, 1995 and 1994 had maturity dates through January, 1996 and April, 1995, respectively. Short-term borrowings at December 31, 1994 included $24.1 million recorded as a result of The Company's acquisition of the remaining interest in EIG. (See note 4.) This debt was repaid in 1995.
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:
The Company makes available health care and life insurance benefits for retired employees of HSB and certain subsidiaries.
The Company makes contributions to the plans as claims are incurred. Contributions totaled $2.6, $2.3 and $1.8 million for 1995, 1994 and 1993, respectively. At December 31, 1995, 1994 and 1993 these plans were unfunded. Retirees' contributions to these plans vary, based upon retiree's age, years of service and coverage elected.
SCHEDULE I THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Summary of Investments - Other Than Investments in Related Parties (in millions)
SCHEDULE V THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY Valuation and Qualifying Accounts (in millions)