HSB Group, Inc. Reports Third Quarter Results
24 October 2000
HSB Group, Inc. Reports Third Quarter Results
HARTFORD, Conn.--Oct. 24, 2000--HSB Group, Inc. today reported a net loss for the third quarter of $18.0 million or $.62 per share, compared to net income of $18.8 million or $.64 per share, for the third quarter of 1999.Results for the third quarter include an extraordinary charge of $.34 per share associated with the early extinguishment of debt. The results also include a charge of $20.7 million pretax or $.58 per share with respect to the special risk insurance business generated by the company's London-based affiliate, Engineering Insurance Limited. This charge includes provisions for future claims and certain other expenses as well as a non-tax-deductible write-down with respect to the goodwill impairment of that business.
Chairman, President and Chief Executive Officer Richard H. Booth said: "While our domestic commercial equipment breakdown insurance business continues to perform very well, the Global Special Risk business has been adversely affected by a challenging environment. The actions we are taking position our special risk business appropriately while we work to achieve improved pricing, terms and conditions."
Also contributing $.53 per share to the loss for the quarter was adverse loss experience in the company's Global Special Risk segment. The claims associated with this experience occurred after July 1, 2000, and totaled $23.2 million after reinsurance recoveries of $24.5 million. The majority of the gross loss experience related to international risks. The insurance combined ratio for the quarter was 121.5 percent excluding the $20.7 million pretax charge.
Net Engineering Services revenues for the quarter increased 26.5 percent over the third quarter of 1999. The Engineering Services margin was 6.5 percent compared to 3.6 percent in 1999. On September 29, 2000, HSB Group, Inc sold its 51 percent interest in Integrated Process Technologies (IPT) to Enron Energy Services Operations, Inc. In a related transaction, HSB completed the sale of a call option the company held on an additional 29 percent interest in IPT to the other 49 percent holder in IPT. HSB recognized a pretax gain of $9.8 million or $.22 per share from these transactions.
Income from investment operations was $31.3 million compared to $30.0 million in the third quarter of 1999. Realized gains for the quarter were $.35 per share in 2000 and $.30 per share in 1999.
On August 18, 2000, American International Group, Inc. and HSB Group, Inc. announced that they had entered into a definitive agreement whereby AIG would acquire 100 percent of the outstanding stock of HSB Group, Inc. The proposed transaction with AIG is progressing as expected. A special meeting of HSB Group, Inc. shareholders to consider and vote on the proposed transaction will be held on Monday, November 6, 2000. At the request of AIG, a public hearing on the matter has been scheduled by the Insurance Commissioner of the State of Connecticut for November 8, 2000.
On September 7, 2000, HSB Group, Inc. announced an agreement with Employers Reinsurance Corporation (a subsidiary of General Electric Capital Securities Services, Inc.) to redeem $300 million in convertible capital securities for a price of $315 million plus accrued interest. This action resulted in an extraordinary loss of $.34 per share. On September 14, 2000, AIG loaned $315 million to HSB the proceeds of which were used to redeem the convertible capital securities. The five-year term loan to HSB was made in connection with the previously announced definitive agreement for AIG to acquire 100 percent of the outstanding stock of HSB.
HSB Group, Inc., the parent company of The Hartford Steam Boiler Inspection and Insurance Company, is a global provider of specialty insurance products, engineering services and management consulting. The Hartford Steam Boiler Inspection and Insurance Company was founded in 1866 to provide loss prevention and insurance to businesses, industries and institutions. For more information about HSB, visit its web site at www.hsb.com.
This news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are management's estimates, assumptions and projections and are not guarantees of future performance. Forward-looking statements involve known and unknown risks and uncertainties. These and other important factors, including those mentioned in various Securities and Exchange Commission filings made periodically by the company, may cause the company's actual results and performance to differ materially. Investors and prospective investors should read this news release in conjunction with the company's most recent Form 10-K, Form 10-Q and other documents filed with the Securities and Exchange Commission.
Summary of Operations
In millions, except per share amounts
Quarter Year-To-Date
Ended Sept.30, Percent Ended Sept. 30, Percent
2000 1999 Change 2000 1999 Change
Gross earned
premiums $ 157.2 $ 200.6 -21.6% $515.7 $616.3 -16.3%
Ceded premiums 51.4 107.9 219.2 333.4
Insurance
premiums $ 105.8 $ 92.7 $296.5 $282.9
Claims and
adjustment
expenses 74.0 44.5 150.9 120.7
Policy
acquisition
expenses 23.3 21.6 64.8 65.5
Underwriting
and inspection
expenses 31.3 24.4 88.7 72.6
Insurance
operating
gain (loss) $ (22.8) $ 2.2 $ (7.9) $ 24.1
Loss ratio(a) 70.0% 48.1% 50.9% 42.7%
Expense
ratio(a) 51.5% 49.6% 51.7% 48.8%
Combined
ratio(a) 121.5% 97.7% 102.6% 91.5%
Engineering
services
revenues $ 38.7 $ 30.6 26.5% $115.9 $ 86.0 34.8%
Engineering
services
expenses 36.2 29.5 107.8 80.3
Engineering
services
operating
gain $ 2.5 $ 1.1 $ 8.1 $ 5.7
Engineering
services
operating
margin(a) 6.5% 3.6% 7.0% 6.6%
Investment
income, net
of related
interest
expense $ 16.0 $ 16.5 -3.0% $ 46.5 $ 48.8 -4.7%
Realized
investment
gains 15.3 13.5 38.8 30.8
Income from
investment
operations $ 31.3 $ 30.0 $ 85.3 $ 79.6
Interest expense 1.5 0.6 2.6 1.6
Provision for
international
large risk
business
charges 20.7 -- 20.7 --
Gain on sale
of interests
in Integrated
Process
Technologies,
LLC 9.8 -- 9.8 --
Income (loss)
before income
taxes and
distributions
on capital
securities of
subsidiary
trusts $ (1.4) $ 32.7 $ 72.0 $107.8
Income taxes 2.6 9.3 27.1 31.6
Distribution on
capital
securities
of subsidiary
trusts, net of
tax 4.1 4.6 13.5 13.6
Income (loss)
before
extraordinary
item $ (8.1) $ 18.8 $ 31.4 $ 62.6
Loss on
extinguishment
of capital
securities
of subsidiary
Trust II,
net of tax 9.9 -- 9.9 --
Net income (loss)$ (18.0) $ 18.8 $ 21.5 $ 62.6
Earnings (loss)
per common
share-assuming
dilution:
Income (loss)
before
extraordinary
item $(0.28)(b) 0.64 $ 1.08 $ 2.10
Net income
(loss) $(0.62)(b) $ 0.64 $ 0.74 $ 2.10
Dividends
declared
per common
share $ 0.44 $ 0.44 $ 1.32 $ 1.28
Average common
shares
outstanding
and common
stock
equivalents 28.8 34.7 29.1 34.6
(a)Computation excludes rounding
(b)Net loss per share computed using average common shares outstanding
Summary of Financial Position
In millions, except per share amounts
Sept. 30, Dec. 31,
2000 1999
Assets
Cash and short-term investments $ 118.8 $ 126.5
Fixed maturities, at fair value 486.3 489.8
Equity securities, at fair value 384.1 381.8
Cash and invested assets 989.2 998.1
Reinsurance assets 625.4 850.3
Insurance premiums receivable 78.5 104.4
Engineering services receivable 39.5 39.1
Fixed assets 53.5 58.2
Other assets 220.7 213.1
Total assets $ 2,006.8 $ 2,263.2
Liabilities
Unearned insurance premiums and
ceding commissions $ 259.1 $ 420.1
Claims and adjustment expenses 735.3 782.3
Total borrowings 342.6 66.6
Other liabilities 201.3 208.7
Total liabilities 1,538.3 1,477.7
Company obligated mandatorily redeemable
capital securities of subsidiary Trust I
holding solely junior subordinated deferrable
interest debentures of the Company, net of
unamortized discount 105.0 109.0
Company obligated mandatorily redeemable
convertible capital securities of subsidiary
Trust II holding solely junior subordinated
deferrable interest debentures of the Company -- 300.0
Shareholders' equity 363.5 376.5
Total $ 2,006.8 $ 2,263.2
Shareholders' equity per common share(a) $ 12.56 $ 12.95
Based on common shares outstanding of 28.9 29.1
(a)Computation excludes rounding