The Hartford Steam Boiler Inspection and Insurance Company leases approximately 221,516 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 Canada, and in a small number of other foreign locations. The Company considers the office facilities and other operating resources to be suitable and adequate for its current and anticipated level of operations.
(1)Prior year information has been restated to reflect Radian LLC as a discontinued operation. (2)All per share and share data has been restated to reflect stock splits. (3)Excludes revenues from investments accounted for under the equity method. (4)Reflects the repurchase of approximately 1.2, 1.5, 0.4, 0.2 and 0.2 million shares in 1998, 1997, 1996, 1995 and 1994, respectively. (5)Includes gain on sale of IRI and discontinued operations of Radian. (6)Excludes charge for Proposition 103.
For the years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Revenues: Gross earned premiums $770.5 $609.3 $556.5 Ceded premiums 374.4 118.1 107.9 ----------------------------------------------- Insurance premiums $396.1 $491.2 $448.6 Engineering services 93.5 61.3 55.8 Net investment income 64.2 36.8 32.3 Realized investment gains 25.4 14.1 12.1 ----------------------------------------------- Total revenues $579.2 $603.4 $548.8 Gain on sale of IRI $ 36.6 $ -- $ -- Income from continuing operations $104.1 $ 66.3 $ 54.6 Discontinued operations 30.3 -- (1.2) Net income $134.4 $ 66.3 $ 53.4 Earnings per share*: Income from continuing operations: Basic $ 3.55 $ 2.21 $ 1.81 Assuming dilution $ 3.35 $ 2.20 $ 1.81 Net income: Basic $ 4.59 $ 2.21 $ 1.77 Assuming dilution $ 4.21 $ 2.20 $ 1.77 - --------------------------------------------------------------------------------
Net income and income from continuing operations per common share on a diluted basis increased 24.2 percent and 21.4 percent, respectively, in 1997 from 1996 due to significantly higher underwriting gains in the Company's insurance operations.
On January 2, 1998, the Company exercised its option to put its 40 percent share in Radian LLC to Dow, for approximately $129 million, net of expenses. Radian LLC was formed in January 1996 as a joint venture with Dow to provide environmental, engineering, information technology, remediation and strategic chemical management services to industries and governments worldwide. In connection with the formation of the new company, the Company contributed substantially all of the assets of its wholly owned subsidiary, Radian Corporation to Radian LLC. The results of Radian LLC were classified as discontinued operations following ratification in July 1997 by HSB's Board of Directors of management's decision to exercise its
put. The after-tax gain of $30.3 million recognized in 1998 is net of deferred losses previously noted. In 1996 and prior to July 1997, the Company's share of the joint venture's results was recorded as equity in Radian.
On January 6, 1998, the Company sold its interest in IRI to Employers Reinsurance Corporation (ERC) in accordance with a previously announced purchase and sale agreement between ERC and IRI's twenty-three member insurers. The Hartford Steam Boiler Inspection and Insurance Company (HSBIIC) received gross proceeds of $49.1 million, prior to transaction costs, for its 23.5 percent share in IRI. The gain on the sale of IRI was $36.6 million pre-tax and $23.8 million after-tax. Because the sale was structured in part as a reinsurance transaction, a portion of HSBIIC's gross proceeds was utilized to reinsure in-force policies with ERC.
In essence, 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 does not expose HSBIIC to the effect of adverse loss development on claims incurred prior to the effective date of the increase; conversely a decrease in participation does not release HSBIIC from the effect of adverse development.
Contemporaneous with the close of the sale, IRI was reconstituted with ERC (with a 99.5 percent share) and HSBIIC (with a 0.5 percent share) as the sole members. The new association has been renamed HSB Industrial Risk Insurers. HSBIIC writes the business for HSB Industrial Risk Insurers using its insurance licenses and provides certain other services. In addition, through various quota share reinsurance agreements with ERC and HSB Industrial Risk Insurers, HSBIIC transferred its manufacturing book of business to HSB Industrial Risk Insurers and retains 85 percent of the equipment breakdown insurance and 15 percent of the property insurance of the combined insurance portfolio. This arrangement is the largest contributing factor in the growth of both gross earned premium and ceded premium. As a result, the unearned insurance premiums, reinsurance assets and the ceded reinsurance payables reflected in the Consolidated Statements of Financial Position have increased significantly. The agreements are of indefinite duration, but ERC has an option to purchase HSB's interest in the business in the event of a 50 percent or more change in control of HSB.
The combined ratio for the Company improved to 89.4 percent in 1998 from 91.7 percent in 1997. In 1996 the combined ratio was 94.7 percent.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and that such instruments be measured at fair value. In addition, all hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. This statement is effective for fiscal years beginning after June 15, 1999. The Company anticipates that the adoption of the provisions of SFAS No. 133 will not have a material impact on results of operations, financial condition or cash flows.
In March 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement specifies the types of costs that must be capitalized and amortized over the software's expected useful life and the types of costs which must be immediately
recognized as expense. For purposes of this SOP, internal-use software is software acquired, internally developed or modified solely to meet the entity's internal needs for which no substantive plan exists or is being developed to market the software externally during the software's development or modification. Certain internal and external costs incurred to develop internal-use computer software that relate to system design, software configuration and interfaces, coding, testing and installation to hardware should generally be capitalized. This statement is effective for fiscal years beginning after December 15, 1998. The Company's current policy is to capitalize such costs and therefore anticipates that the adoption of the provisions of SOP 98-1 will not have a material impact on results of operations, financial condition or cash flows.
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This statement requires the costs of start-up activities and organization costs be expensed as incurred. Start-up costs are defined broadly as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer, initiating a new process in an existing facility, or commencing some new operation. Start-up costs include activities related to organizing a new entity (commonly referred to as organization costs). This SOP applies to development stage entities as well as established entities. This statement is effective for fiscal years beginning after December 15, 1998 and initial application should be reported as a cumulative effect of a change in accounting principle. The Company does not expect the application of SOP 98-5 will have a material impact on results of operations, financial condition or cash flows.
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." The SOP identifies several methods of deposit accounting and provides guidance on the application of each method. This statement classifies insurance and reinsurance contracts for which the deposit method is appropriate as contracts that (i) transfer only significant timing risk, (ii) transfer only significant underwriting risk, (iii) transfer neither significant timing nor underwriting risk, and (iv) have an indeterminate risk. This SOP is effective for financial statements for fiscal years beginning after June 15, 1999. Restatement of previously issued financial statements is not permitted. The effect of initially adopting SOP 98-7 should be reported as a cumulative effect of a change in accounting principle. Currently the Company is not party to any contracts which do not comply with the risk transfer provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," and, therefore, does not anticipate the adoption of SOP 98-7 will have a material impact on results of operations, financial condition or cash flows.
At a special meeting of HSBIIC on June 23, 1997, shareholders voted to approve a proposal which enabled the formation of a new holding company, HSB Group, Inc. Shareholders of HSBIIC's common and convertible redeemable preferred stock became holders of HSB Group, Inc. common and convertible redeemable preferred stock, respectively, through a share exchange approved by the shareholders. Certificates representing HSBIIC's common and convertible redeemable preferred stock automatically represent the corresponding shares of HSB Group, Inc. common and convertible redeemable preferred stock. The holding company was formed in order to achieve greater operating and financial flexibility in connection with certain investments, business operations and financing activities.
On April 21, 1998, the Board of Directors approved a three-for-two stock split for shares held of record on May 1, 1998. Additional shares resulting from the split were distributed on May 22, 1998. In accordance with SFAS No. 128, "Earnings per Share," all earnings per share presentations have been adjusted to reflect the impact of the stock split, including retroactive restatement of prior periods.
On July 1, 1998, HSB purchased Kemper's ASME inspection services business that certifies boiler and pressure vessel compliance with the codes and standards of the American Society of Mechanical Engineers.
For the years ended December 31, 1998 1997 1996 - ------------------------------ ----------------------------------------------
Gross earned premiums $770.5 $609.3 $556.5 Ceded premiums 374.4 118.1 107.9 ----------------------------------------------
Insurance operations include the underwriting results of HSBIIC, HSB Engineering Insurance Limited (EIL), The Boiler Inspection and Insurance Company of Canada (BI&I), The Allen Insurance Company, Ltd., The Hartford Steam Boiler Inspection and Insurance Company of Connecticut, The Hartford Steam Boiler Inspection and Insurance Company of Texas and HSBIIC's participation in HSB Industrial Risk Insurers and various other pools.
The loss ratio decreased 0.2 percentage points in 1998 from 1997. Current year results were impacted by severe ice storms that affected over 30 percent of Canada in January, as well as a few significant losses in our other international business. The loss ratio decreased 1.2 percentage points in 1997 as compared to 1996 primarily as a result of fewer weather-related losses. Adverse development in 1998 and 1997 added 2.8 and 1.7 percentage points to the respective loss ratio. Positive development in 1996 reduced the loss ratio by 2.2 percentage points. The components of claims and adjustment expenses, net of reinsurance, are displayed above.
The expense ratio improved to 45.2 percent in 1998 from 47.3 percent in 1997. The new quota share reinsurance agreements and the HSB Industrial Risk Insurers arrangement with ERC, both of which result in ceding commissions to HSBIIC have positively impacted our expense ratio by approximately 11.0 percentage points. A portion of such ceding commission is intended to reimburse HSB for the additional costs of managing HSB Industrial Risk Insurers and offset the reduction in net earned premiums. The rate of decline in the expense ratio since 1996 may not continue in 1999 and beyond.
The following information summarizes key financial results by reportable insurance segment:
Global Special Risks net earned premiums declined $133.5 million in 1998 primarily due to the increased use of reinsurance and the arrangement with HSB Industrial Risk Insurers. The business does not set revenue goals as such but rather continues to seek to increase underwriting profits. As part of the arrangement with HSB Industrial Risk Insurers, HSB writes all direct policies for HSB Industrial Risk Insurers and then cedes back these risks 100 percent to HSB Industrial Risk Insurers. HSB then reinsures ERC's 99.5 percent share of the business resulting in the assumption of 85 percent of the equipment breakdown business and 15 percent of the property business. In 1998, the international businesses have been impacted by adverse claims experience as compared to 1997. In 1996, claims experience was positive. In 1998, income taxes as a percentage of net income increased as a result of a decreased use of foreign tax credits.
HSBIIC has filed a motion in Connecticut Superior Court to confirm the arbitration award.The other insurers have contested the award. In the event the award is not confirmed, subsequent proceedings could result in additional amounts on the order of $100 million potentially becoming recoverable from HSBIIC's reinsurers.
HSBIIC was involved in another litigation regarding an explosion event and the extent of HSBIIC's coverage in that matter. The 7th Circuit Court of Appeals recently ruled in HSBIIC's favor and remanded the case for a judgment of no liability to be entered for HSBIIC.
For the years ended December 31, 1998 1997 1996 - ------------------------------------- ---------- ----------- ------------------ Engineering services revenues $93.5 $61.3 $55.8 Engineering services expenses 86.2 57.0 48.5 ---------- ----------- ------------------ Operating gain $ 7.3 $ 4.3 $ 7.3 Operating margin 7.8% 7.1% 13.2% - ------------------------------------- ---------- ----------- ------------------
Engineering services operations include the results of HSBIIC's, EIL's and BI&I's engineering services, HSB Reliability Technologies (HSBRT), HSB Professional Loss Control, HSB International, SAI and the Company's interest in Integrated Process Technologies, LLC.
The Company continues to focus on identifying and evaluating acquisition candidates in the niche engineering management consulting service business, primarily in process industries, in order to expand or complement its engineering service capabilities.
Income from investment operations $ 89.6 $ 50.9 $ 44.4 Total cash and invested assets, at fair value $1,094.8 $996.7 $600.9
Unrealized gains, pre-tax $ 113.1 $ 95.3 $ 81.4 - --------------------------------------------------------------------------------
In 1997 realized gains were reduced by $30.7 million to reflect the estimated fair value of three "zero cost collar contracts" entered into at the end of 1996. These collars were closed out by year-end 1997. Net investment income for 1997 increased $4.5 million in comparison to 1996 as the Company invested the proceeds from its July 1997 Capital Securities offerings. Net investment income was impacted early in 1997 by calls of high yielding preferred stocks. Net investment income increases in 1997 also reflected more investable funds, which were invested during a period of declining rates in comparison to our portfolio averages, and a modest change in the mix of the portfolio from tax preferred investments to more taxable investments with higher pre-tax yields. In 1997 higher interest costs resulted from a larger amount of commercial paper outstanding.
Through its U.K. subsidiary, EIL, the Company writes business in Malaysia and up through December 31, 1997 was required to maintain approximately 50 million ringgit denominated investments ($12.8 million) on deposit in that country. At December 31, 1998 the Company's deposits in that currency was 29 million ringgit, which equated to $7.7 million. Due to the recent fluctuations of currencies in southeast Asia, realized investment gains increased by $0.1 million in 1998 and were reduced by $7.4 million during 1997.
The carrying value of the equity securities portfolio represented 40.6 percent of the investments at December 31, 1998. This included $110.8 million of unrealized investment gains, which had a net increase of $18.3 million from 1997 as a result of strong performance of certain S&P 500 "large cap" stocks. HSB also recorded $20.4 million of dividends and $20.7 million of net pre-tax realized gains from this portfolio in 1998. The Company's largest single holding accounted for less than 1 percent of total consolidated assets. Realized investment gains increased in 1998 over 1997 (and in 1997 over 1996) as HSB managed its portfolio to respond to changing market conditions and tax planning opportunities.
Market risk generally encompasses systemic risks or risks associated with macro factors relating to economic losses due to adverse changes in the fair value of a financial instrument. Market risk relates to the variability of market prices and/or cash flows associated with changes in interest rates, securities prices, market indices, yield curves or currency exchange rates and is inherent to all financial instruments. The Company's investment strategy is to maximize total return on the investment portfolio through investment income and capital appreciation and is based on such factors as operational results, tax implications, regulatory requirements, interest rates, dividends to stockholders, servicing requirements of capital securities and market conditions.
The focus of this disclosure is on one element of market risk - price risk. For the Company, price risk relates to changes in the level of prices of financial instruments due to changes in interest rates, equity prices or foreign exchange rates. The primary price risk exposures of the Company relate to interest rate and equity price risk.
Interest rate risk is the major price risk facing the Company's fixed income portfolio. Such exposure can subject the Company to economic losses due to changes in the level or volatility of interest rates. Bond prices change inversely with the direction of interest rates. Generally, as interest rates rise prices for fixed
Equity market risk is defined as the chance that market influences will affect the expected returns of all equities. Returns are influenced not only by the fundamental attributes of investment securities, but by the price movements of the general marketplace. Much of this depends on the sensitivity to the overall market of the individual issue. The Company attempts to reduce this risk through diversification and a focus on high quality, blue chip investments.
The sensitivity analysis assumes an instantaneous shift in market interest rates, with scenarios of interest rates increasing and decreasing 100 and 150 basis points from their levels at December 31, 1998 with all other variables held constant. The analysis assumes the yield to worst methodology. A 100 and 150 basis point increase in the market interest rates would result in a pre-tax decrease in the net financial instrument position of $38.2 million and $55.1 million, respectively. Similarly, a 100 and 150 basis point decrease in market interest rates would result in a pre-tax increase in the net financial instrument position of $38.2 million and $55.1 million, respectively.
The sensitivity analysis also assumes an instantaneous 10 percent and 20 percent change in the foreign currency exchange rates versus the U.S. dollar from their levels at December 31, 1998 with all other variables held constant. A 10 percent and 20 percent strengthening of the U.S. dollar would result in decreases of $6.4 million and $12.4 million, respectively, in the net financial instrument position. Weakening of the U.S. dollar versus all other currencies would result in like increases in the net financial instrument position.
Market Interest Currency Equity At December 31, 1998 Value Rate Risk Risk Risk - -------------------------------------------------------------------------------- Fixed maturity securities $ 577.1 $(27.1) $(2.1) $ -- Equity securities 437.1 (10.2) (1.9) (24.9) Short term investments 62.3 (0.9) (2.4) -- -------- -------- ------- -------- Total all securities $1,076.5 $(38.2) $(6.4) $(24.9)
Market Interest Currency Equity At December 31, 1998 Value Rate Risk Risk Risk - --------------------------------------------------------------------------------
Fixed maturity securities $ 577.1 $(39.4) $ (4.2) $ -- Equity securities 437.1 (14.4) (3.7) (62.4) Short-term investments 62.3 (1.3) (4.5) -- --------------------------------------------------
In addition to the impact of HSB's results of operations, the Consolidated Statements of Comprehensive Income displays the effects of price movements on HSB's invested assets. As a result of the market corrections and subsequent rebounds, 1998 cumulative holding gains, net of taxes, increased $28.1 million as compared to the increase in 1997 of $21.3 million and $16.7 million in 1996.
Total assets $2,144.0 $1,537.2 Short-term investments 62.3 131.3 Cash and cash equivalents 18.3 293.2 Short-term borrowings 21.0 42.4 Capital securities of subsidiary Trust I 108.9 108.9 Capital securities of subsidiary Trust II 300.0 300.0 Common shareholders' equity 419.3 345.3 - ---------------------------------------------- ---------------- --------------
On July 15, 1997, HSB sold $110 million of 30 year Global Floating Rate Capital Securities (Capital Securities) in a private placement. The securities are generally non-callable for ten years, but may be called earlier by HSB upon the occurrence of certain tax events including loss of deductibility of interest on the securities. The securities were issued through HSB Capital I (Trust I), a Delaware business trust created by HSB, at a floating rate equal to 90 day LIBOR plus 0.91 percent. The current coupon is 6.3 percent. Holders of the Capital Securities will be entitled to receive preferential cumulative cash distributions accumulating from the date of original issuance and payable quarterly in arrears. HSB has the right to defer payment of distributions on the securities at any time or from time to time for a period not exceeding 20 consecutive quarterly periods with respect to each deferral period. During an extension period, interest will continue to accrue and the amount of distributions to which holders of the Capital Securities are entitled will accumulate, and the Company will be prohibited from paying any cash dividends on its common stock. The
Company has irrevocably and unconditionally guaranteed all of Trust I's obligations under the Capital Securities. The Company has used or may use the proceeds for general corporate purposes, including the repurchase of HSB common stock; funding investments in, or extensions of credit to subsidiaries; repayment of maturing debt; and financing possible future acquisitions. HSB subsequently filed a registration statement covering securities with terms identical in all material respects and offered to exchange registered securities for the original Capital Securities. The exchange was completed on December 11, 1997. The floating rate Capital Securities are currently rated BBB by Standard & Poor's and BBB+ by Duff & Phelps credit rating agencies.
On December 31, 1997, HSB Group, Inc. sold $300 million of 20 year Convertible Capital Securities in a private placement to ERC. The Convertible Capital Securities are callable by the Company at its option (i) at any time after seven years; (ii) upon the occurrence of certain tax events including loss of deductibility of the interest on the securities; (iii) in the event that HSB vetoes a prospective purchaser of the Convertible Capital Securities; or (iv) in the event of a change in control of ERC. The Convertible Capital Securities are mandatorily redeemable on December 31, 2017, and are redeemable at par plus a redemption premium, at the option of ERC, in the event of a change in control of HSB within five years following issuance of the securities.
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 distributions accumulating from the date of original issuance and payable semi-annually in arrears. HSB has the right to defer payment of interest at any time or from time to time for a period not exceeding 10 consecutive semi-annual periods with respect to each deferral period. During an extension period, interest will continue to accrue and the amount of distributions to which holders of the Convertible Capital Securities are entitled will accumulate, and HSB will be prohibited from paying any cash dividends on its common stock. HSB has irrevocably and unconditionally guaranteed all of Trust II's obligations under the Convertible Capital Securities.
Capital resources consist of shareholders' equity, capital securities and debt outstanding, and represent those funds deployed, or available to be deployed, to support business operations. Common shareholders' equity of $419.3 million at December 31, 1998 increased $74.0 million since December 31, 1997. The increase reflects net income of $134.4 million and an increase in unrealized gains, net of tax, of $11.0 million, offset by dividends of $47.9 million and $22.2 million net share repurchases. On October 30, 1997, the sole holder
At December 31, 1998, HSBIIC had significant short-term borrowing capacity. HSBIIC is currently authorized to issue up to $75 million of commercial paper. Commercial paper outstanding at December 31, 1998 and 1997 was $20.0 million and $42.3 million, respectively. In 1998, Standard & Poor's and Duff & Phelps credit rating services reaffirmed their highest ratings for the commercial paper.
As a part of this effort, the Company established a Year 2000 Program to address four key areas: (i) applications software, primarily consisting of the Company's policy management, claims, financial recording and reporting, human resource systems, and engineering databases and systems; (ii) infrastructures, such as mainframe and corporate servers, workstations and networking components; (iii) embedded technology in facilities in which the Company conducts its operations and in testing equipment used by the Company's engineering staff; and (iv) key business partners and suppliers. In addition, the Company is evaluating potential coverage exposures arising out of the Year 2000 and its impact on insured equipment. The Company's Year 2000 Program consists of six partially overlapping stages for the key areas listed above: (i) assessment and analysis; (ii) development, renovation and replacement; (iii) implementation; (iv) testing and certification; (v) contingency planning; and (vi) audit and review. The Company is using members of its internal information technology staff as well as external consultants and programmers to complete various tasks in connection with its Year 2000 Program and is currently on schedule.
all of these applications as of December 31, 1998 with the exception of human resource and certain non-critical financial reporting and engineering systems which are expected to be compliant by mid-1999.
In the area of embedded chip technology, the Company's principal exposure relates to the prevalence of such technology in office buildings in which the Company leases space for conducting its business operations. The Company has sent questionnaires to the leasing vendors for all of its principal facilities with respect to Year 2000 readiness and has received assurances of readiness from most of its vendors.
The Company is currently in the process of identifying and contacting key suppliers of services and business partners, such as client companies, agents and brokers, with whom the Company has significant business relations and who may either electronically provide to, or receive from, the Company certain financial and other information. The Company expects to compile the assessment of the potential impact on the Company of such parties' Year 2000 state of readiness and remediation plans by the end of the first quarter of 1999 and conduct renovations and/or replacement and compliance testing, as appropriate.
The Company is relying upon Year 2000 readiness statements of other entities and has not independently verified the accuracy of such statements.
It is currently estimated that the Company's aggregate spending in connection with the Year 2000 Program will be in the range of $26 million of which approximately $19.7 million has been expended through December 31, 1998. Certain of these costs are being expensed as they are incurred and are being funded through operating cash flow. The Company has expensed $5.1 million, $1.5 million and $0.2 million in 1998, 1997 and 1996, respectively. It is estimated that expenditures of $5.2 million for 1999 will be expensed as incurred. The remainder of the $26 million estimate relates to systems that the Company anticipated replacing in the normal course of information technology development but the timetable for which was accelerated in contemplation of the Year 2000 event. Costs of replacement and renovation of information systems and infrastructure that would have occurred in the normal course of business without the advent of the Year 2000 event are excluded from these amounts. The current estimate also does not include any costs associated with the implementation of contingency plans that are in the process of being developed.
As an insurance company, the Company maintains a significant portfolio of investments in cash, short-term fixed income, and equity securities. Inasmuch as the advent of the Year 2000 may cause events, business interruptions and altered economic facts and circumstances, the value of the Company's investments may be affected favorably or unfavorably. The Company is selectively monitoring the Year 2000 compliant status of the corporate issuers of the securities in its investment portfolio primarily through reviewing public disclosure documents. State government and municipal bonds held by the Company are general obligations and/or are credit-enhanced and therefore the Company does not perceive there to be a significant credit risk with these securities in the absence of a severe Year 2000 disruption affecting governments and businesses generally. An immaterial portion of the Company's portfolio is invested in non-public issues where public disclosure documents are unavailable. Due to the difficulty in estimating the scope and duration of such events, the Company is unable to determine at this time whether the consequences of such developments will have a material impact on the Company's investment portfolio and therefore, on the Company's results of operations, liquidity or financial condition.
Schedule I - Summary of Investments- Other than Investments in Related Parties 79
Schedule II - Condensed Financial Information of HSB Group, Inc. 80-82
To the Shareholders and Board of Directors of HSB Group, Inc.:
In our opinion, the consolidated financial statements and the financial statement schedules of HSB Group, Inc. and its subsidiaries listed in Item 8 of this Form 10-K present fairly, in all material respects, the consolidated financial position of HSB Group, Inc. and its subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These consolidated financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these consolidated statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Gross earned premiums $770.5 $609.3 $556.5 Ceded premiums 374.4 118.1 107.9 ------------------------------------ Insurance premiums 396.1 491.2 448.6 Engineering services 93.5 61.3 55.8 Net investment income 64.2 36.8 32.3 Realized investment gains 25.4 14.1 12.1 ------------------------------------ Total revenues 579.2 603.4 548.8 ------------------------------------
Distributions on capital securities of subsidiary trusts, net of income taxes of $9.9; $1.2; and $- 18.4 2.3 -- ------------------------------------ Income from continuing operations 104.1 66.3 54.6 ------------------------------------
Loss from operations, net of income tax benefits of $3.2; $0.1; $0.4 (6.6) -- (1.2) Gain on disposal, net of income taxes of $23.7; $-; and $- 36.9 -- -- ------------------------------------ Total discontinued operations 30.3 -- (1.2) ------------------------------------ Net income $134.4 $ 66.3 $ 53.4 ------------------------------------
1998 1997 - ------------------------------------------------------------------- ------------ Assets: Cash and cash equivalents $ 18.3 $ 293.2 Short-term investments, at cost 62.3 131.3 Fixed maturities, at fair value (cost-$568.5; $241.1) 577.1 248.4 Equity securities, at fair value (cost-$326.3; $231.3) 437.1 323.8 --------------------------------- Total cash and invested assets 1,094.8 996.7 Reinsurance assets 630.4 124.5 Insurance premiums receivable 146.7 138.0 Engineering services receivable 26.1 12.2 Fixed assets 54.9 36.4 Prepaid acquisition costs 46.6 42.5 Capital lease 14.6 15.3 Investment in Radian 0.0 83.4 Other assets 129.9 88.2 --------------------------------- Total assets $2,144.0 $1,537.2 ---------------------------------
1997 amounts restated to reflect 1998 stock split. - ------------------------------------------------------------------- ------------
The accompanying financial statements present the consolidated accounts of HSB Group, Inc. and its subsidiaries (collectively, HSB or 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 1997 and 1996 have been reclassified to conform with the 1998 presentation.
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 from customers. HSB 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, policy coverage and inflation. The establishment of such reserves frequently requires 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 11).
Goodwill represents the cost of acquiring a business which is in excess of the fair value of its net assets. Goodwill is generally amortized over 7 to 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 $57.7 and $20.7 million at December 31, 1998 and 1997, respectively. HSB evaluates the reliability of goodwill based upon projections of undiscounted cash flows.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes
Assets $159.7 $156.3 Liabilities 88.4 62.1 Revenues 288.0 229.6 Expenses 314.0 233.6 - ------------------------------- ------------------ ----------------
Presented at 100 percent - HSBIIC's interest in Radian during these periods was 40 percent.
In December 1994, HSBIIC acquired the remaining 50 percent interest in Engineering Insurance Group (EIG), a partnership which was jointly formed by HSBIIC 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 HSBIIC acquiring all outstanding common shares and Gen Re acquiring preferred shares of the new company, EIG, Co. HSBIIC had the option to request Gen Re to exchange the EIG, Co. preferred stock for HSBIIC 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 HSBIIC convertible redeemable preferred stock. On October 30, 1997, these shares were converted into 597,609 shares of common stock of HSB, restated to reflect the May 22,1998 three-for-two stock split discussed in Other Activities below (formerly 398,406 shares).
In April 1998, HSB acquired Solomon Associates, Inc. (SAI) based in Dallas, Texas. SAI is an engineering management consulting firm that provides comparative performance benchmarking consulting to the refining, petro-chemical and power generation industries. SAI establishes efficiency and productivity benchmarks for 80 percent of the worldwide petroleum refining industry.
representing HSBIIC's common and convertible redeemable preferred stock automatically represent the corresponding shares of HSB Group, Inc. common and convertible redeemable preferred stock. HSBIIC remains the principal subsidiary of HSB.
On April 21, 1998, the Board of Directors approved a three-for-two stock split for shares held of record on May 1, 1998. Additional shares of HSB's stock resulting from the split were distributed on May 22, 1998. In accordance with SFAS No. 128 "Earnings per Share"(see note 4), all earnings per share presentations have been adjusted to reflect the impact of the stock split, including retroactive restatement of prior periods. Shares have also been restated for comparative purposes.
Pursuant to the provisions of SFAS No. 128, all EPS presentations have been adjusted to reflect the impact of the stock split (see note 3). Previously, the Company reported basic EPS from continuing operations of $3.32 and $2.71 per share and assuming dilution EPS of $3.29 and $2.71 per share for the years ended 1997 and 1996, respectively.
The following table presents a reconciliation of the numerator and denominator of the calculation of basic and diluted EPS for income from continuing operations:
(2)Average shares reflect the repurchase of approximately 1.2, 1.5 and 0.4 million in 1998, 1997 and 1996, respectively.
(3)Includes the dilutive effect of stock options computed using the treasury stock method and shares issuable under deferred stock awards (see note 15).
(4)Represents income applicable to common stock divided by weighted-average common shares outstanding.
For the years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Revenues from continuing operations: U.S. $ 491.0 $ 483.1 $ 437.4 Non-U.S. 88.2 120.3 111.4 -------------- ------------- ----------- Total $ 579.2 $ 603.4 $ 548.8
At December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Identifiable assets: U.S. $1,769.2 $1,244.7 $ 854.3 Non-U.S. 374.8 292.5 258.0 ---------------------------------------- Total $2,144.0 $1,537.2 $1,112.3 - --------------------------------------------------------------------------------
For the years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Revenues from continuing operations: Insurance premiums: Commercial $306.3 $269.0 $253.1 Global Special Risks 83.6 217.1 187.7 Engineering services 93.5 61.3 55.8 Net investment income and realized investment gains 89.6 50.9 44.4 ------------------------------------------- Total revenues from reportable segments 573.0 598.3 541.0 Other segments 6.2 5.1 7.8 ------------------------------------------- Total revenues $579.2 $603.4 $548.8 Net income (loss): Commercial $ 14.8 $ 13.4 $ 11.8 Global Special Risks 9.8 10.7 (3.0) Engineering services 4.6 3.0 4.0 Investments 65.1 37.7 36.3 ------------------------------------------- Total net income from reportable segments 94.3 64.8 49.1 Other segments (0.3) (1.3) 0.4 Corporate account 4.7 5.1 5.1 Distributions on capital securities (18.4) (2.3) -- Discontinued operations 30.3 -- (1.2) Gain on sale of IRI, net of income taxes 23.8 -- -- ------------------------------------------- Net income $134.4 $ 66.3 $ 53.4 - --------------------------------------------------------------------------------
HSBIIC 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 HSBIIC, 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 1998 and 1997, policyholders' surplus on a statutory basis was $612.6 and $550.8 million, respectively. Statutory net income, adjusted to include the earnings of all HSBIIC domestic insurance subsidiaries for 1998, 1997 and 1996 was $202.5, $42.9 and $32.1 million, respectively.
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:
One year or less $ 18.8 $ 18.9 Over one year through five years 93.3 96.4 Over five years through ten years 47.3 48.9 Over ten years 409.1 412.9 --------------------------------------------
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: - -------------------------------------------------------------------------------- Estimated Gross Gross Fair Unrealized Unrealized Cost Value Gains Losses - --------------------------------------------------------------------------------
Total equity securities $326.3 $437.1 $122.9 $ 12.1 - -------------------------------------------------------------------- -----------
- -------------------------------------------------------------------------------- Estimated Gross Gross Fair Unrealized Unrealized Cost Value Gains Losses - --------------------------------------------------------------------------------
Common stocks $ 97.5 $179.0 $ 82.2 $ 0.7 Non-redeemable preferred stocks 133.8 144.8 12.1 1.1 -----------------------------------------------
Land and buildings $ 5.1 $ 5.0 Furniture, equipment, leasehold improvements, and other 68.0 57.1 Systems development costs 23.9 6.6 --------------------------------------
The Company has a policy of capitalizing certain systems development costs. Systems development costs are amortized over estimated useful lives of 3 to 10 years. In 1998, approximately $6.5 million of systems development costs relates to the allocation of purchase price for SAI.
The Company leases its home office facility at One State Street under a long-term capital lease with the One State Street Limited Partnership (Partnership). The lease obligation of $26.1 million was recorded at July 1, 1983 at an interest rate of 15 percent. An asset of $26.1 million was also recorded in 1983. Accumulated amortization on the asset was $11.6 and $10.8 million at December 31, 1998 and 1997, 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
At December 31, 1998, 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:
For the years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Written premiums: Direct $ 478.2 $ 361.4 $ 338.6 Assumed 318.5 257.1 232.6 Ceded (444.1) (120.0) (116.8) -------------------------------------------------- Net written premiums $ 352.6 $ 498.5 $ 454.4
The Company writes direct business, which in 1998 includes HSB Industrial Risk Insurers business, through agencies and brokerage firms. In addition, the Company assumes boiler and machinery exposures from over 100 insurance companies and several insurance pools. 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 agreements 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.
Recently there has been significant consolidation in the international brokerage business, including the merger of Marsh & McLennan and Johnson & Higgins during 1997, and the subsequent merger with Sedgwick Group. For 1998, approximately 35 percent of the Company's gross written premium generated by its Global Special Risk business, which includes HSB Industrial Risk Insurers, was produced by J&HMarsh & McLennan and Sedgwick Group.
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 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 SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." The Company recorded $436.4, $45.2 and $113.9 million of reinsurance recoveries as a reduction of its claims and adjustment expenses for the years ended December 31, 1998, 1997 and 1996, respectively. Reinsurance recoverable on paid claims and adjustment expenses was $14.6 and $8.0 million at December 31, 1998 and 1997, respectively.
1998 1997 1996 - -------------------------------------------------------------------------------- Gross liability for claims and adjustment expenses at January 1, $276.7 $302.9 $190.9 Plus: Provision for claims and adjustment expenses occurring in the current year 564.8 263.3 313.3 Increase (decrease) in estimated claims and adjustment expenses arising in prior years(1) 46.9 (0.2) 16.1 -----------------------------------------
(1)The 1998 increase primarily resulted from the decision rendered under an arbitration proceeding and adverse claims experience in international operations.
1998 1997 1996 At December 31, - -------------------------------------------------------------------------------- Net liability for claims and adjustment expenses at December 31, $169.7 $190.8 $177.8 Reinsurance recoverable on unpaid claims and adjustment expenses 380.6 85.9 125.1 ---------------------------------------- Gross liability for claims and adjustment expenses at December 31, $550.3 $276.7 $302.9 - --------------------------------------------------------------------------------
Reinsurer Ceded Written Reinsurance 1998 A.M. Premium Asset Best's Rating - --------------------------------------------------------------------------------
HSBIIC is currently involved in a claim-related dispute concerning the extent to which a certain explosion event is insured under the boiler and machinery coverage of HSBIIC or under coverages of other insurers. A final decision in an
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, 1998 and 1997 are as follows:
On July 15, 1997, HSB sold $110 million of 30 year Global Floating Rate Capital Securities (Capital Securities) in a private placement. The securities are generally non-callable for ten years but may be called earlier by HSB upon the occurrence of certain tax events including loss of deductibility of interest on the securities. The securities were issued through HSB Capital I (Trust I), a Delaware business trust created by HSB, at a floating rate tied to 90 day LIBOR. The current coupon is approximately 6.3 percent. Holders of the Capital Securities will be entitled to receive preferential cumulative cash distributions accumulating from the date of original issuance and payable quarterly in arrears. HSB has the right to defer payment of distributions on the securities at any time or from time to time for a period not exceeding 20 consecutive quarterly periods with respect to each deferral period. During an extension period, interest will continue to accrue and the amount of distributions to which holders of the Capital Securities are entitled will accumulate, and HSB will be prohibited from paying any cash dividends on its common stock. HSB has irrevocably and unconditionally guaranteed all of Trust I's obligations under the Capital Securities. The Company has used or may use the proceeds for general corporate purposes, including the repurchase of HSB common stock; funding investments in, or extensions of credit to, subsidiaries; repayment of maturing debt; and financing possible future acquisitions. HSB subsequently filed a registration statement covering securities with terms identical in all material respects and offered to exchange registered securities for the original Capital Securities. The exchange was completed on December 11, 1997.
The securities were issued through HSB Capital II (Trust II), a Delaware business trust created by HSB Group, Inc., 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 distributions accumulating from the date of original issuance and payable semi-annually in arrears. HSB has the right to defer payment of interest at any time or from time to time for a period not exceeding 10 consecutive semi-annual periods with respect to each deferral period. During an extension period, interest will continue to accrue and the amount of distributions to which holders of the Convertible Capital Securities are entitled will accumulate, and HSB will be prohibited from paying any cash dividends on its common stock. HSB has irrevocably and unconditionally guaranteed all of Trust II's obligations under the Convertible Capital Securities.
The estimated fair value of the Capital Securities issued by Trust I is equal to their carrying value. The estimated fair value of the Capital Securities issued by Trust II is $311.1 million and is calculated without giving any effect to the relationship of the conversion price to the current market price of HSB Group, Inc. common stock.
Additional paid-in capital $ 5.5 $ 2.8 Retained earnings 107.3 83.1 -------------------------------
2,000 shares of HSBIIC's convertible redeemable preferred stock held by Gen Re were converted into 597,609 shares of HSB common stock on October 30,1997 at a price of $33.47 per share, restated to reflect the May 22, 1998 three-for-two stock split (formerly 398,406 shares at $50.20 per share)(see note 3).
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosure about Pension and Other Postretirement Benefits" which standardizes the disclosure requirements for pensions and other postretirement benefits. While it does not change the measurement or recognition of the plans, it does require additional information on changes in the benefit obligation and fair value of plan assets. The statement is effective for fiscal years beginning after December 15, 1997 and requires restatement of prior periods. Pursuant to the requirements of this statement, the Company has combined the pension and postretirement benefit disclosures and restated 1997 and 1996 disclosures to conform to current year presentation.
The following chart summarizes the cost components associated with the pension and postretirement medical benefit plans:
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets were $36.6, $29.7 and $3.2 million, respectively, as of December 31, 1998 and $27.9 million, $23.8 million and $0, respectively, as of December 31, 1997.
The Company's acquisition of SAI in April 1998, resulted in the increase of the pension benefit obligation by $4.2 million and pension plan assets by $3.5 million.
Effect on total of service and interest cost components $0.1 $(0.1) Effect on postretirement benefit obligation 1.3 (1.2)
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 $1.0 million in 1998 and $0.6 million in 1997 and 1996. The unamortized compensation expense related to this plan is included in benefit plans as a component of shareholders' equity. These amounts were $2.2 and $1.0 million in 1998 and 1997, respectively.
Weighted-average fair value of shares on grant date $39.86 $31.93 $32.57 - --------------------------------------------------------------------------------
A stock option award under the HSB's Stock Option Plan allows for the purchase of HSB 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.
The following table summarizes information about stock options outstanding as of December 31, 1998:
1998 1997 - -------------------------------------------------------------------------------- Net Income As reported $ 134.4 $ 66.3 Pro forma 131.4 64.5 Earnings per common share-basic As reported $ 4.59 $ 2.21 Pro forma 4.49 2.15 Earnings per common share-assuming dilution As reported $ 4.21 $ 2.20 Pro forma 4.12 2.13
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 1998 and 1997, respectively: risk-free interest rates of 4.9 percent in 1998 and 6.3 percent in 1997; dividend yield of 4.7 percent in 1998 and 5.0 percent in 1997; expected lives of 6 years; and volatility of 15.7 percent in 1998 and 15.8 percent in 1997.
On September 21, 1998, the Board of Directors approved the adoption of a new shareholder rights plan to replace the plan that was set to expire on November 28, 1998. Pursuant to the new plan, which is substantially similar to the expiring plan, the Board declared a dividend of one right for each outstanding share of common stock to shareholders of record on November 28, 1998.
Each right entitles a holder to purchase one two-hundredth of a share of Series A Junior Participating Preferred Stock, without par value at an exercise price of $162.00 per share, subject to adjustment. If an acquirer obtains 15 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 of shareholders other than the acquiror will entitle the holder to purchase common shares of the Company (or, under certain circumstances, of the acquiror) at a 50 percent discount. Under the plan ERC will not be deemed an acquiror in the event of the conversion of the Convertible Capital Securities it holds into common stock of the Company unless it acquires 1 percent or more additional shares.
HSB GROUP, INC. (Registrant) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF HSB GROUP, INC. BALANCE SHEET INFORMATION December 31, (In millions)
Assets Cash $ 0.1 $ 0.7 Short-term investments, at cost 2.1 60.5 Investment in subsidiaries 780.2 657.0 Fixed maturities, at fair value (cost-$47.9; $11.7) 47.2 11.8 Equity securities, at fair value (cost-$45.2; $27.0) 43.4 27.2 Other assets 2.9 23.9 -----------------------------------
Liabilities Dividends and distributions on capital securities $ 23.2 $ 13.3 Other liabilities 24.5 13.6 -----------------------------------
Income before income taxes and distributions 7.4 1.4 on capital securities
Distribution on capital securities of 18.4 2.3 subsidiary trusts, net of income taxes of $9.9 and $1.2. --------------------------------
* For the period from June 23, 1997 through December 31, 1997.
HSB GROUP, INC. (Registrant) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF HSB GROUP, INC. CONDENSED STATEMENTS OF CASH FLOWS INFORMATION For the periods ended December 31, (In millions)
Operating Activities: Net income $134.4 $ 34.0 Undistributed earnings of subsidiaries** (91.8) (21.2) Distributions on capital securities 28.3 3.5 Realized investment gains (1.0) - Decrease (increase) in other assets 9.2 (26.2) Increase in other liabilities 22.2 10.8
Investing Activities: Sale (purchase) of short-term investments, net 58.4 (60.5) Purchase of fixed maturities (48.0) (11.8) Proceeds from sale of fixed maturities 12.3 - Purchase of equity securities (26.6) (27.0) Proceeds from sale of equity securities 8.7 - Purchase of Solomon Associates, Inc., net of cash acquired (2.1) - Contribution to subsidiaries - (279.5)
SCHEDULE V HSB Group, Inc. Valuation and Qualifying Accounts (in millions)
Schedule VI HSB Group, Inc. Supplemental Information Concerning Property-Casualty Insurance Operations