SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1994 1-7801
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ORION CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-6069054
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
600 Fifth Avenue, New York, NY 10020-2302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-332-8080
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $1 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
9 1/8% Senior Notes due September 1, 2002
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $474,852,697 as of March 13, 1995.
As of March 13, 1995, 14,046,635 shares of Common Stock, $1.00 par value,
of registrant were outstanding exclusive of shares held by registrant and its
subsidiaries.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from
registrant's definitive proxy statement for its Annual Meeting to be held on
May 31, 1995. Registrant intends to file the proxy material, which involves the
election of directors, not later than 120 days after the close of its fiscal
year.
<PAGE>
PART I
ITEM 1. BUSINESS
Orion Capital Corporation ("Orion") is a property and casualty insurance
holding company. Although Orion's insurance subsidiaries and affiliates are
authorized to underwrite and sell most types of property and casualty
insurance, their businesses are concentrated in niche insurance markets,
particularly workers compensation, professional liability and nonstandard
automobile insurance. (Orion and its wholly-owned subsidiaries are referred
to collectively as the "Company.") The Company provides workers compensation
insurance products through the EBI Companies and Nations' Care. The Company
sells its professional liability insurance through the DPIC Companies and
writes assumed reinsurance through SecurityRe Companies and other specialty
property and casualty insurance, principally through the Connecticut Specialty
Insurance Group ("Connecticut Specialty").
The Company participates in the nonstandard commercial and personal
automobile insurance business through its slightly less than 50% interest in
Guaranty National Corporation ("Guaranty National"). (Guaranty National and
its wholly-owned subsidiaries are referred to collectively as the "Guaranty
National Companies.") Guaranty National operates as an independent publicly-
held company and, except for certain services contractually provided, is not
managed by the Company. Five of the eleven members of Guaranty National's
board of directors are also members of the Orion board of directors.
The Company also owns approximately 20% of the outstanding common stock
of Intercargo Corporation ("Intercargo"), an insurance holding company whose
subsidiaries specialize in international trade and transportation coverages.
In February, 1995, the Company and Intercargo reached an agreement which,
subject to appropriate regulatory approvals, permits the Company to purchase
additional shares in the open market, from time to time, to bring its
ownership up to 24.9% of Intercargo's outstanding common stock. Intercargo
operates as an independent company. One member of Intercargo's seven-member
board of directors is selected by Orion.
The Company's insurance subsidiaries are licensed to transact business
throughout the United States and in several Canadian provinces. They obtain
substantially all of their business from approximately 830 independent
insurance agents and brokers. The Company has approximately 1,500 employees,
substantially all of whom are employed in the Company's insurance operations.
During the past three years, Orion has reconfigured and simplified its
debt and capital structure. In March 1993, Orion entered into a bank loan
agreement ("Bank Loan") that provided initial borrowings of up to $50,000,000
as a term loan and $10,000,000 as a line of credit; in September 1992 it
issued $110,000,000 of 9 1/8% Notes due September 1, 2002 ("9 1/8% Senior
Notes") and in late 1992 and early 1993 Orion called for redemption of all
three of its then outstanding preferred stocks and both issues of its
outstanding debentures. Most holders of its two convertible exchangeable
preferred stocks opted to convert their shares of preferred stock into shares
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of common stock at or prior to the redemption date. The conversions resulted
in the issuance of 3,982,000 shares of common stock. As a result of those
actions, the only securities of Orion currently outstanding are its common
stock and its 9 1/8% Senior Notes. The reconfiguration and simplification of
its debt and capital structure enabled the Company to take advantage of
generally lower interest rates, decrease the cost of its capital and reduce
the amount of debt and preferred stock sinking fund payments that were coming
due in the next few years.
In addition, in 1994 Orion filed a shelf registration statement relating
to the offering of up to $100 million of debt and/or equity securities. The
registration statement was declared effective by the Securities and Exchange
Commission in August 1994. The shelf registration provides for Orion's
securities to be issued from time to time, with specified terms of an issue
of securities to be set forth in a prospectus supplement at the time of
issuance. The proceeds from the sale of such securities may be used for
general corporate purposes, including working capital, investment in
subsidiaries, the repayment of existing bank debt, the repurchase of shares
of common stock or for such other purpose as may be specified in a prospectus
supplement. In November 1994, the Bank Loan was amended to increase the
credit line to $30,000,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Orion was incorporated under the laws of the State of Delaware in 1960.
The Company's principal executive offices are located at 600 Fifth Avenue, New
York, New York 10020, and its telephone number is (212) 332-8080. The home
office of all the Company's wholly-owned insurance subsidiaries is located at
9 Farm Springs Drive, Farmington, Connecticut 06032.
For segment reporting purposes, the operations of the Company are
reported as four segments. The insurance operations of the Company are
treated as three segments, Regional Operations, Reinsurance/Special Programs
and the Company's interest in the Guaranty National Companies. Guaranty
National's operations were reported on a consolidated basis from 1988 through
November 20, 1991 (when the Company owned 100% of Guaranty National) and have
been reported on the equity accounting basis since then. The miscellaneous
activities of the parent holding company and various incidental subsidiaries
not involved in insurance-related activities are reported as a fourth segment
under the heading "Other."
Regional Operations is composed primarily of the EBI Companies and
Nations' Care. These operating companies underwrite and sell workers
compensation insurance through independent agents and brokers. Nations' Care
offers alternative workers compensation services and products. Regional
Operations' results include the declining costs associated with the run-off
of the Company's commercial multiple peril insurance business, which was
discontinued in 1988. Reinsurance/Special Programs includes the DPIC
Companies, which markets professional liability insurance; SecurityRe
Companies, which writes reinsurance; the Connecticut Specialty Insurance
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Group, which underwrites and sells specialty insurance programs through
independent agents and general agents; and Intercargo, which specializes in
international trade and transportation coverages. The Guaranty National
Companies write nonstandard commercial and personal automobile insurance,
general liability insurance, surplus lines commercial property and casualty
insurance and collateral protection insurance. The business of Orion's other
subsidiaries, all of which are insubstantial, as well as the miscellaneous
income and expenses (primarily interest, general and administrative expenses
and other consolidating elimination entries) of Orion itself, are reported as
a fourth segment.
Net earnings for 1994 amounted to $55,245,000 or $3.85 per primary common
share on 14,348,000 weighted average common shares outstanding as compared
with net earnings of $68,813,000 or $4.69 per primary common share (after
preferred dividends) in 1993 on 14,598,000 weighted average common shares
outstanding. Earnings in 1993 include a benefit of $11,825,000 or $.81 per
primary common share from the cumulative effect of changes in accounting
principles. Common stock and per common share data have been restated to
reflect Orion's 5-for-4 stock splits paid in the fourth quarters of 1992 and
1993. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The following tables present condensed financial information showing
revenues, pre-tax earnings (loss) and other financial data and ratios of the
Company's four segments for each of the three years in the period ended
December 31, 1994. Identifiable assets, by segment, are included in Note M
to the Consolidated Financial Statements, "Industry Segment Information."
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<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1994 1993 1992
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
REVENUES:
Regional Operations -
Premiums earned ....................... $278,040 $266,373 $268,145
Net investment income ................. 29,287 33,760 33,182
Realized investment gains ............. 1,246 4,153 2,077
Other income .......................... 239 - (193)
-------- -------- --------
Total Regional Operations ........... 308,812 304,286 303,211
-------- ------- --------
Reinsurance/Special Programs -
Premiums earned ....................... 413,183 351,031 292,060
Net investment income ................. 53,209 55,500 48,416
Realized investment gains ............. 2,191 6,706 3,027
Other income .......................... 575 915 849
-------- -------- --------
Total Reinsurance/Special Programs .. 469,158 414,152 344,352
-------- -------- --------
Other ................................... 2,977 1,717 155
-------- -------- --------
$780,947 $720,155 $647,718
======== ======== ========
EARNINGS (LOSS):
Regional Operations ..................... $ 42,514 $ 34,025 $ 4,227
Reinsurance/Special Programs ............ 34,117 44,032 50,384
Guaranty National Companies ............. 11,244 9,509 9,994
-------- -------- --------
Total property and casualty operations. 87,875 87,566 64,605
Other ................................... (16,329) (15,061) (17,891)
-------- -------- --------
71,546 72,505 46,714
Federal income taxes .................... (16,301) (15,517) (922)
Cumulative effect of adoption of new
accounting principles ................. - 11,825 -
Extraordinary loss, net of taxes ........ - - (2,920)
-------- -------- --------
Net earnings .......................... $ 55,245 $ 68,813 $ 42,872
======== ======== ========
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<CAPTION>
The following table sets forth, on a consolidated basis, certain
insurance ratios for the Company:
Year Ended December 31,
--------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Loss and loss adjustment expenses to
premiums earned ....................... 72.1% 74.4% 75.7%
Policy acquisition and other insurance
expenses to premiums earned ........... 27.0 26.8 27.3
----- ----- -----
Total before policyholders' dividends.. 99.1 101.2 103.0
Policyholders' dividends to premiums
earned ................................ 2.1 2.0 2.4
----- ----- -----
Total after policyholders' dividends .. 101.2% 103.2% 105.4%
===== ===== =====
</TABLE>
The Company's insurance subsidiaries include eight active wholly-owned
insurance companies, as well as a wholly-owned reinsurance underwriting
management company, service companies and an insurance brokerage firm. One
or more of Orion's insurance subsidiaries is licensed and transacts business
in each of the 50 states of the United States, the District of Columbia and
several provinces of Canada. In 1994, approximately 11.5% of the direct
premiums written by the insurance subsidiaries was generated in Pennsylvania,
8.7% in both California and Wisconsin and, in the aggregate, an additional
20.4% was generated in the states of Texas, Florida and Illinois. The primary
line of business in Pennsylvania, Wisconsin, Texas and Illinois was workers
compensation. California's primary line was architects and engineers
professional liability insurance and Florida premiums were mostly in auto
liability lines. The following table shows the geographical distribution of
direct insurance premiums written by the Company in 1994, 1993 and 1992:
<TABLE>
<CAPTION>
Geographical Distribution of Direct Premiums Written
Year Ended December 31,
------------------------------------------------------
State 1994 Pct. 1993 Pct. 1992 Pct.
- ----- ---- ---- ---- ---- ---- ----
(000s omitted - except for percentages)
<S> <C> <C> <C> <C> <C> <C>
Pennsylvania ..... $ 79,031 11.5% $ 74,066 11.4% $ 80,392 13.0%
California ....... 60,313 8.7 60,675 9.4 59,664 9.7
Wisconsin ........ 60,108 8.7 56,209 8.7 53,083 8.6
Texas ............ 53,439 7.7 45,050 7.0 46,684 7.6
Florida .......... 53,424 7.7 84,754 13.1 49,008 8.0
Illinois ......... 34,285 5.0 28,690 4.4 39,405 6.4
All others ....... 350,893(1) 50.7 297,982 46.0 287,780 46.7
-------- ----- -------- ----- -------- -----
$691,493 100.0% $647,426 100.0% $616,016 100.0%
======== ===== ======== ===== ======== =====
<FN>
(1) In 1994, no other single state or country accounts for more than 5%
of total direct premiums written.
</TABLE>
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<PAGE>
For 1994, 42.9% of the Company's net premiums written was derived from
workers compensation insurance written primarily in twelve selected states
(including all states listed in the preceding table except California and
Florida), 28.0% related to liability insurance other than automobile,
primarily professional liability insurance, and 19.1% came from automobile
insurance (not including premiums written by Guaranty National Companies).
No other line of business contributed in excess of 5% to 1994 net premiums
written. The following table shows premiums written for the Company, net of
reinsurance, by major statutory lines of business:
<TABLE>
<CAPTION>
Net Premiums Written
Year Ended December 31,
------------------------------------------------------
1994 Pct. 1993 Pct. 1992 Pct.
---- ---- ---- ---- ---- ----
(000s omitted - except for percentages)
<S> <C> <C> <C> <C> <C> <C>
Workers compensation .. $305,157 42.9% $311,150 49.0% $331,044 58.3%
Liability other than
automobile .......... 199,214 28.0 145,493 22.9 123,973 21.9
Commercial automobile . 73,596 10.3 61,798 9.7 43,246 7.6
Private passenger
automobile .......... 62,590 8.8 72,286 11.4 36,560 6.5
Marine ................ 30,323 4.3 10,500 1.6 7,498 1.3
Commercial multiple
peril ............... 8,701 1.2 9,028 1.4 9,104 1.6
All others ............ 32,474 4.5 25,331 4.0 16,005 2.8
-------- ----- -------- ----- -------- -----
$712,055 100.0% $635,586 100.0% $567,430 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
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<PAGE>
REGIONAL OPERATIONS
The Regional Operations segment is comprised primarily of the EBI
Companies and Nations' Care. The EBI Companies provides traditional workers
compensation insurance and Nations' Care focuses on providing alternative
workers compensation services and products.
From 1989 through 1994, the EBI Companies' and Nations' Care net premiums
written have accounted for almost all of the premium volume of the Regional
Operations segment. The EBI Companies devote substantially all of their
resources to underwriting and selling workers compensation insurance through
independent agents and brokers. EBI has a competitive edge stemming from its
service oriented approach. It is among the 25 largest writers of workers
compensation insurance in the United States based on net premiums written. For
a variety of reasons, EBI has phased out of the workers compensation business
in California, but the decrease in premium volume in California has been
substantially offset by growth in other markets, such as Arizona, Illinois,
Indiana, Michigan, Pennsylvania and Wisconsin. Regional Operations staffs its
offices with underwriters, field production representatives, claims and loss
control representatives, medical and rehabilitation experts and other
technical and administrative personnel. The EBI Companies' specialized
approach is founded upon a team concept under which loss control and claims
management personnel have significant direct involvement in account selection
and in underwriting each policy. Upon acceptance of each new account, an EBI
team begins to work with the insured and its employees to identify the factors
that influence their insurance costs. The EBI approach to underwriting is not
merely to evaluate the risk but to attempt to reduce the risk through loss
control services. During the policy term, the EBI team continues to provide
services designed to reduce the frequency and severity of injuries. In late
1994, EBI introduced the concept of "Zero Accident Culture" which focuses
insureds on creating an accident free work environment. Because of its desire
to influence and impact the workplace environment in order to reduce losses,
EBI concentrates its efforts on single-location insureds, such as small to
medium-sized manufacturers and selected service businesses, such as nursing
homes and hospitals.
Nations' Care is designed to capitalize on the Company's expertise
acquired from its service oriented and team approach to traditional workers
compensation. It applies those skills to writing workers compensation for
large accounts, accounts with large deductibles and other insurance products.
It also offers consulting and administrative services to self-insured workers
compensation programs. Nations' Care emphasizes its cost effective loss
control and claims management consulting services. Nations' Care currently
operates in five states but expects to expand its services more broadly
throughout the United States.
A workers compensation policy obligates an insurance company to pay all
compensation and other benefits for injured workers as may be required by
applicable state workers compensation laws. Such benefits include, among
other things, payments for medical and hospital expenses and disability and
vocational rehabilitation expenses. The insurance policies currently written
by the EBI Companies provide workers compensation coverage with limits of
liability set by the provisions of state workers compensation laws. The
benefits provided by these laws vary with the nature and severity of the
injury or disease, as well as with the wage level, occupation and age of the
employee. Employers liability coverage is also provided to employers who may
be subject to claims for damages (not workers compensation benefits) because
of an injury to a worker.
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The amount of workers compensation premiums earned is directly
dependent upon wage levels as well as the number of employees on the
payroll of each policyholder and the job classifications of those
employees. Accordingly, premiums may be affected by the level of
unemployment in general, and particularly by the level of unemployment
experienced in those industries and geographic areas which represent a
substantial portion of the Company's workers compensation insurance
business. Premium rates are revised annually in most states in which the
EBI Companies and Nations' Care do business. Rates vary with different job
classifications and among different employers. The EBI Companies and
Nations' Care use the rates and rating plans filed in the states where they
do business. See "Industry Characteristics - Rates."
Approximately 750 independent agents and brokers produced
substantially all of the direct business written in 1994 by the EBI
Companies and Nations' Care. All of such agents and brokers receive
commissions on the sale of insurance. No single independent agent or
broker contributed more than 5% of this segment's net written premiums.
The agents and brokers provide a broad range of insurance services to the
public within their local areas, operate as independent contractors and
generally represent other insurers as well.
REINSURANCE/SPECIAL PROGRAMS
The Company's Reinsurance/Special Programs segment is comprised of
four components: DPIC Companies, SecurityRe Companies, Connecticut
Specialty and the Company's 20% equity interest in Intercargo Corporation.
All of such components concentrate in highly specialized lines of business
in the property and casualty insurance field.
DPIC Companies writes professional liability insurance for architects,
engineers, accountants and lawyers. It is the second largest underwriter
of architect and engineer liability insurance in North America.
On October 1, 1993, DPIC Companies substantially reorganized its
operations into a structure more directly aligned to its various client
groups. The single Architects and Engineers Underwriting unit was divided
into three major divisions: Architects, Engineers and Special (large
accounts) Risks. Each division is now staffed with underwriters and other
professionals who focus on a specific discipline thus enabling them to
develop programs to address the unique issues facing their clients.
DPIC Companies also markets the Accountants Professional Liability
System (A/PL+), a program of professional liability insurance, analogous to
its architects and engineers products, for selected medium-sized certified
public accounting firms. In 1994, DPIC Companies introduced the Lawyers
Professional Liability System (L/PLS), a similar program for preferred law
firms.
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<PAGE>
Professional liability insurance covers liability arising out of
alleged negligent performance of professional services. Underwriting and
claims management require a high level of knowledge and expertise. In an
attempt to limit risk exposure, DPIC Companies' specialized underwriters
evaluate a great number of factors, including the experience of an
applicant firm's professional personnel, the loss history of the firm, the
employees covered, the type of work performed and the firm's utilization of
suggested loss prevention measures. DPIC Companies uses a premium credit
incentive program to encourage insureds to participate in its liability
education programs and to use other loss prevention practices, such as
"limitation of liability" clauses in contracts with their clients.
In most jurisdictions the coverage offered by DPIC Companies is on a
"claims-made and reported" policy form, a form which generally insures only
those claims reported by the insured during the policy term. DPIC
Companies generally uses a policy form under which defense costs, primarily
legal fees, are limited by their inclusion within the insured's stated
policy limits. This policy form has had a favorable impact in controlling
legal costs. DPIC Companies' specialized claims staff, located in eight
offices in the United States and Canada, stresses early intervention in
disputes to avoid litigation whenever possible. DPIC Companies has been a
pioneer in using alternative dispute resolution ("ADR") methods to promptly
resolve disputes. DPIC Companies' "Mediation Works" program has been
particularly successful offering incentives to insureds who agree to
mediate disputes. Currently, up to 30% of all open claims are in mediation
or some other form of ADR. Management believes that the use of such
methods has had a beneficial impact on DPIC Companies' operating results.
DPIC Companies markets its products through 53 specialized agencies,
each highly knowledgeable about risk management for the professions served
and about DPIC Companies' loss prevention programs. Management believes
that this "value added" approach is the reason why DPIC Companies has
experienced a high customer retention rate (averaging 90%) over a long
period of time and why it is less vulnerable to price competition. The
agents participate in continuing education programs sponsored by DPIC
Companies and are active in their clients' professional societies.
Connecticut Specialty currently administers the operation of
approximately 30 specialty programs written through general agents. The
specialized coverages include personal lines automobile insurance, workers
compensation insurance, as well as various liability coverages for the
trucking industry. Connecticut Specialty finds opportunity in commercial
niches, utilizing general agents not only as an efficient and ready-made
means of distribution but drawing upon their established expertise and
contacts. Connecticut Specialty also develops its own expertise in order
to supplement the contributions of its general agents. Connecticut
Specialty has developed a methodology for judging opportunities that
stresses the knowledge and quality of the general agent and the unique
aspects of the type of coverage or class of business being underwritten
which might provide a competitive advantage. Over the past six years the
use of this methodology has resulted in a conservative underwriting
approach leading to an analysis of nearly 1,200 potential programs but the
implementation of only 36.
Connecticut Specialty defines a "program" as the writing of risks in a
class of business not widely pursued, utilizing forms, coverage, pricing
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methodologies and risk management techniques tailored to the needs of the
customer. While the average program premium size is $7,500,000, a few
programs are larger, such as, long-haul and intermediate truck liability,
workers compensation for underground coal mines, "brownwater" marine, and
multi-line coverage for volunteer firefighters.
Connecticut Specialty has formed strategic alliances with what it
believes are among the most knowledgeable and well respected general agents
in the specialty insurance field. Each of its general agents has superior
knowledge of his customers and has earned their loyalty by providing
quality services and support.
Connecticut Specialty utilizes a profit sharing approach in writing
its special programs whereby minimal commissions are earned by the general
agent until the program is profitable. Connecticut Specialty closely
monitors its programs throughout their existence to ensure that profit
potential is maximized.
Pricing volatility for the business that Connecticut Specialty writes
is generally low. The specialty nature of such business provides some
insulation against the competitive pressures of the overall insurance
market. Enhanced automation designed for each general agent promotes
efficiency and effectiveness for both the agent and Connecticut Specialty.
This exclusive relationship with the general agent creates a competitive
advantage in the insurance marketplace and also directly impacts the cost
of entry by competitors. Connecticut Specialty's ability to exit and enter
markets rather quickly is an added competitive advantage.
The Reinsurance/Special Programs segment also participates in
facultative and treaty reinsurance throughout the United States through
SecurityRe Companies. SecurityRe Companies underwrites a diverse book of
primarily casualty business, using reinsurance intermediaries, with
exposures largely concentrated in the domestic market. SecurityRe
Companies' premiums in recent years have been principally concentrated in
the treaty segment relating to pro-rata business with small to medium-sized
regional and specialty companies in various lines of business (primarily
automobile and commercial coverages). Facultative coverage is provided on
an excess of loss basis for casualty and property exposures. Careful
underwriting by SecurityRe ensures that only select risks are bound so that
exposure to loss is minimized. The largest net amount insured by
SecurityRe is $1 million. Adherence to strict underwriting guidelines and
value-added services to clients make SecurityRe very competitive in the
marketplace.
The Reinsurance/Special Programs segment also includes the Company's
20% interest in Intercargo. Intercargo is an insurance holding company
whose subsidiaries specialize in international trade and transportation
coverages. Its principal product lines are U.S. Customs bonds and marine
cargo insurance sold to importers and exporters through customs brokers and
other service firms engaged in the international movement of goods.
Intercargo operates as an independent entity and a pro rata share of any
profit or loss is reflected in the Company's consolidated financial
statements, based on the Company's equity interest in Intercargo. In
February 1995, the Company and Intercargo reached an agreement which,
subject to regulatory approval, permits the Company to purchase additional
shares in the open market from time to time, to bring the Company's
ownership up to 24.9% of Intercargo's outstanding common stock.
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GUARANTY NATIONAL COMPANIES
The Company participates in nonstandard commercial and personal
automobile insurance and surplus lines insurance through its interest in
Guaranty National. Based in Englewood, Colorado, the Guaranty National
Companies underwrite and sell specialty property and casualty coverages
which are not readily available in traditional insurance markets. Guaranty
National became a publicly held company with its stock listed on the New
York Stock Exchange when the Company sold slightly more than half of the
outstanding common stock of Guaranty National it owned in a public offering
in 1991.
Approximately 83% of the Guaranty National Companies' net written
premiums during 1994 was derived from writing automobile (both private
passenger and commercial) insurance. Other types of insurance products
sold by Guaranty National Companies are general liability, low hazard
professional liability, commercial multi-peril, umbrella and property.
Guaranty National Companies have historically focused their operations on
the nonstandard markets. Nonstandard risks require specialized
underwriting,claims management and other skills and experience. Guaranty
National Companies' expertise and market position have allowed the Guaranty
National Companies to generate an underwriting profit in each of the last
seven years.
Guaranty National Companies' personal lines unit principally writes
nonstandard automobile insurance, insurance for drivers usually
unacceptable to other insurers for, among other reasons, adverse driving or
accident histories, ages or vehicle types and is sold primarily in the
Rocky Mountain and Pacific Northwest regions. Guaranty National does not
provide personal lines coverage in California. Guaranty National
Companies' commercial lines unit writes commercial automobile insurance,
which covers policyholders such as sand and gravel haulers, used car
dealers, automobile repair facilities, and local log hauling and trucking
firms. Other commercial lines coverage includes property (for example,
motor-truck cargo), general liability (for example, contractors and fuel-
convenience stores), low hazard professional liability (for example,
teachers), standard umbrella insurance, standard commercial packages and
other commercial coverages. Guaranty National, through its wholly-owned
managing general agency, Intercon General Agency, Inc., also markets
collateral protection insurance, primarily insuring automobiles pledged as
security for bank loans for which the borrower has not maintained physical
damage coverage as required by the bank. Such business represents 11%
of Guaranty National Companies' gross written premiums for 1994.
Premium levels for nonstandard risks are substantially higher than
for preferred or standard risks. In personal lines, Guaranty National
Companies' loss exposure is limited by the fact that its insureds typically
purchase low liability limits, often a state's statutory minimum. The
nonstandard insurance industry is also characterized by the insurer's
ability to minimize its exposure to unprofitable business by effecting
timely changes in premium rates and policy terms in response to changing
loss and other experiences.
In February 1994 Guaranty National's Board of Directors approved a
repurchase program of its own stock. At that time the Company agreed to
sell, and Guaranty National to buy, a portion of Guaranty National's common
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stock to the extent necessary for the Company to maintain its ownership
interest in Guaranty National at approximately its present level of
slightly under 50%. Under that program, as of December 31, 1994, Guaranty
National has repurchased 139,600 of its shares from the Company at an
aggregate cost of $2,041,000.
Guaranty National and its subsidiaries have entered into a series of
agreements with the Company. One of these agreements is a shareholders
agreement pursuant to which the Company has the right to designate three
members of Guaranty National's board, including the Chairman of the Board,
for so long as the Company beneficially owns 30% or more of Guaranty
National. The shareholder agreement was amended in March, 1995 to permit
Guaranty National to increase the size of its board of directors to eleven
members. Mr. Larry D. Hollen, President and Chief Operating Officer of the
Company, was elected to the Guaranty National board at that time as one of
Orion's three designated directors. The shareholder agreement was also
amended to permit Mr. Sanborn, a Company Director and a former Senior
Officer of the Company, to remain on the Guaranty National board. Under
the shareholder agreement, the Company also has a right until 1997 to
require Guaranty National to register under the Securities Act of 1933 all
or part of the shares of common stock it continues to hold. In addition,
the Company's insurance subsidiaries and the Guaranty National Companies
also entered into certain reinsurance agreements and a trade name
agreement. Orion and Guaranty National have signed an investment
management agreement pursuant to which the Guaranty National Companies'
investment portfolio (except for a portion of the equity securities
portfolio which is managed by an unaffiliated portfolio manager) is managed
by Orion's investment managers (under the direction and supervision of
Guaranty National) for a fee of $550,000 per year for 1994 and 1995. The
investment management agreement continues for annual periods, unless
terminated by either party upon 90 days prior written notice.
-13-
<PAGE>
INSURANCE INDUSTRY CHARACTERISTICS
Loss Reserves
- -------------
The Company establishes reserve liabilities for reported losses,
incurred but not reported ("IBNR") losses, and claim settlement and
administration expenses. Reserves for reported losses and loss adjustment
expenses are estimates of the ultimate costs of claims incurred but not
settled. IBNR loss reserves are estimates for both unreported claims and
additional development of previously reported claims. Reserves are
primarily based on the circumstances surrounding each claim, the Company's
historical experience with losses arising from claims not yet reported, the
particular experience associated with the line of business and type of risk
involved. Consideration is also given to expected changes in costs for
property, repairs to property, medical care, litigation and other legal
costs, and vocational rehabilitation. The Company regularly monitors the
factors affecting its reserves to better control claim costs. Doing so
also provides a base of information to reevaluate reserve estimates. The
reserve estimates are regularly reviewed and adjusted to consider all
pertinent information as it becomes available as to the ultimate cost of
losses and claims incurred. Such reevaluation is a normal, recurring
activity that is inherent in the process of loss reserves estimation.
Management revises its reserve estimates as appropriate and believes that
the loss and loss adjustment expense reserves of the Company's insurance
subsidiaries make reasonable and sufficient provision for the ultimate cost
of all losses and claims incurred. However, no assurances can be given
that reserve development will not occur in the future.
Accident Year Loss and Loss Adjustment Expense Analysis
- -------------------------------------------------------
Accident year is a period of exposure that is used to accumulate loss
and loss adjustment experience by the year in which an incident giving rise
to a claim occurs. Accident year information is used for loss reserving
and in establishing premium rates. Accident year loss experience is
updated in subsequent calendar years until all losses and loss adjustment
expenses related to that given accident year have been settled. Accident
year loss ratio relates losses associated with incidents giving rise to
claims occurring within a given calendar year to premiums earned during the
same calendar year. Presented below are loss reserve development tables
for the five years ended December 31, 1994 prepared in accident year
format.
For each accident year, the following table presents premiums earned,
and the provision for loss and loss adjustment expenses as a percentage of
premiums earned (the "loss ratios") as established in the initial accident
year and cumulative as of December 31, 1994:
-14-<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Loss and Loss Adjustment
Accident Premiums Expense Development
-------------------------------
Year Earned Initial Cumulative
- -------- -------- ------- ----------
(000s omitted)
<S> <C> <C> <C>
1990 $687,976 67.4% 70.5%
1991 701,386 67.7 64.8
1992 560,205 71.0 70.8
1993 617,404 70.4 71.3
1994 691,223 69.6 -
<CAPTION>
The table set forth below indicates premiums earned, the loss ratio,
the ratio of policy acquisition costs and other insurance expenses to
premiums earned (the "expense ratio"), the ratio of policyholders'
dividends to premiums earned (the "policyholders' dividend ratio") and the
total of the ratios (the "combined ratio") at December 31, 1994:
Accident Premiums Loss Expense Policyholders' Combined
Year Earned Ratio Ratio Dividend Ratio Ratio
- -------- -------- ----- ------- -------------- --------
(000s omitted)
<S> <C> <C> <C> <C> <C>
1990 $687,976 70.5% 28.7% 2.9% 102.1%
1991 701,386 64.8 30.2 2.4 97.4
1992 560,205 70.8 27.3 2.4 100.5
1993 617,404 71.3 26.8 2.0 100.1
1994 691,223 69.6 27.0 2.1 98.7
<CAPTION>
Calendar Year Loss Reserve Analysis
- -----------------------------------
An analysis of the Company's calendar year loss and loss adjustment
expense reserves net of reinsurance is presented below:
Year Ended December 31,
------------------------------------
1994 1993 1992
-------- -------- --------
(000s omitted)
<S> <C> <C> <C>
Beginning of year .................. $830,805 $746,298 $668,467
-------- -------- --------
Provision:
Current year ..................... 480,826 434,840 397,551
Prior years ...................... 17,297 24,292 26,481
-------- -------- --------
498,123 459,132 424,032
-------- -------- --------
Payments:
Current year ..................... 134,120 125,042 105,883
Prior years ...................... 303,266 249,583 240,318
-------- -------- --------
437,386 374,625 346,201
-------- -------- --------
End of year ........................ $891,542 $830,805 $746,298
======== ======== ========
-15-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cumulative reserve development for the Company's wholly-owned insurance subsidiaries (excluding Guaranty National Companies
for all years) as of December 31, 1994 for the calendar years 1984 through 1994 is shown in the table that follows:
Year Ended December 31, 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
- ----------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(000s omitted)
<S> C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for
unpaid loss and
loss adjustment
expenses.......... $284,480 $294,427 $359,623 $401,677 $520,304 $602,519 $595,455 $668,467 $ 746,298 $ 830,805 $ 891,542
Paid (cumulative)
as of:
One year later .... 197,895 226,776 211,102 178,100 236,657 281,224 261,464 240,318 249,583 303,266 -
Two years later.... 317,705 364,206 320,000 318,883 403,147 438,250 408,624 378,524 429,501 - -
Three years later.. 396,482 436,665 409,019 414,616 488,397 526,235 493,218 484,335 - - -
Four years later .. 424,881 493,399 468,971 457,182 544,449 581,880 567,068 - - - -
Five years later .. 467,781 534,321 494,838 490,973 582,527 633,413 - - - - -
Six years later ... 494,273 550,743 518,397 515,478 624,415 - - - - - -
Seven years later.. 514,382 571,652 537,567 551,055 - - - - - - -
Eight years later.. 531,036 588,050 566,205 - - - - - - - -
Nine years later .. 547,286 611,700 - - - - - - - - -
Ten years later ... 566,256 - - - - - - - - - -
Net liability
reestimated as of:
One year later .... 354,216 416,208 434,056 469,137 573,632 647,585 657,100 694,948 770,590 848,102 -
Two years later ... 432,944 478,093 486,631 504,814 624,337 695,154 685,692 714,953 782,348 - -
Three years later.. 471,155 527,200 517,476 548,883 658,024 722,626 705,516 732,047 - - -
Four years later .. 500,835 574,073 557,124 568,114 687,818 741,789 741,096 - - - -
Five years later .. 533,435 605,513 577,977 597,103 705,475 770,359 - - - - -
Six years later ... 555,123 623,291 604,056 610,086 733,836 - - - - - -
Seven years later.. 575,438 645,114 611,108 637,322 - - - - - - -
Eight years later.. 590,215 652,011 633,723 - - - - - - - -
Nine years later .. 602,085 673,417 - - - - - - - - -
Ten years later ... 620,583 - - - - - - - - - -
Net deficiency ...... (336,103) (378,990) (274,100) (235,645) (213,532) (167,841) (145,641) (63,580) (36,050) (17,297) -
<PAGE>
Gross liability ..... $1,081,396 $1,140,403 $1,181,329
Reinsurance
recoverable ....... 335,098 309,598 289,787
---------- ---------- ----------
Net liability ....... $ 746,298 $ 830,805 $ 891,542
========== ========== ==========
Gross re-estimated
liability ......... $1,094,514 $1,144,023 -
Re-estimated
recoverable ....... 312,166 295,921 -
---------- ----------
Net re-estimated
liability ......... $ 782,348 $ 848,102 -
========== ==========
Gross deficiency .... $ (13,118)$ (3,620) -
========== ==========
-16-
</TABLE>
<PAGE>
<PAGE>
The preceding loss reserve development table indicates the aggregate
year-end liability for loss and loss adjustment expenses net of reinsurance,
the cumulative amounts paid attributable to those reserves through December
31, 1994, the re-estimate of the aggregate liability as of December 31 of each
subsequent year and the cumulative development of prior years' reserves.
Information is also provided on a gross basis for 1992 through 1994.
Consistent with industry practice, certain claims for long-term disability
workers compensation benefits are carried at discounted values. At December
31, 1994 and 1993, approximately $55,986,000 and $73,215,000, respectively, of
long-term disability workers compensation loss reserves are included in the
consolidated financial statements at net present value using a statutory
interest rate of 3.5%. The amount of long-term disability workers
compensation reserves declined in 1994 as a result of the Company's efforts to
minimize the severity of losses and the continued closing of older claims.
The Company's IBNR loss and loss adjustment expense reserves and other
bulk reserves for losses and loss adjustment expenses for which claim files
have not been established, net of reinsurance, were $438,194,000, $336,446,000
and $298,653,000 as of December 31, 1994, 1993 and 1992, respectively.
The following table presents the differences between loss and loss
adjustment expense reserves reported in the consolidated financial statements
in accordance with generally accepted accounting principles ("GAAP"), and
those reported in the consolidated annual statement filed with state insurance
departments in accordance with statutory accounting practices ("SAP"):
<TABLE>
<CAPTION>
December 31,
----------------------
1994 1993
---- ----
(000s omitted)
<S> <C> <C>
Liability on SAP basis ...................... $ 909,723 $ 850,418
Estimated salvage and subrogation
recoveries recorded on a cash basis for
SAP and on an accrual basis for GAAP .... (14,151) (15,164)
GAAP Reinsurance payable included in SAP
reserves ................................ (13,817) (11,244)
Foreign subsidiary reserves ............... 9,787 6,795
---------- ----------
Liability on GAAP basis, net of reinsurance.. 891,542 830,805
Reinsurance on GAAP reserves ................ 289,787 309,598
---------- ----------
Liability on GAAP basis ..................... $1,181,329 $1,140,403
========== ==========
</TABLE>
During 1994, the Company strengthened loss reserves and experienced
development for prior years' business based upon the Company's ongoing
actuarial analysis utilizing the most current information available. The 1994
provision for prior accident year losses by major line of business is as
follows:
-17-
<PAGE>
(000s omitted)
Reinsurance, pools and associations ....... $ 10,389
Automobile liability ...................... 9,977
Surety .................................... 5,237
Commercial multiple peril ................. 2,855
Workers compensation ...................... (13,393)
Other...................................... 2,232
--------
$ 17,297
========
Adverse development relating to reinsurance, pools and associations
includes the Company's assumed reinsurance business, in which loss and loss
adjustment expense experience is indicative of the ceding companies'
experience. The Company's voluntary participation in various pools and
associations business is generally recorded as the information is reported to
the Company. The development from automobile liability primarily relates to
the Company's Florida non-standard automobile program, which was discontinued
in 1994, and the truck program, where reported losses in 1994 developed
greater than anticipated. Losses in the surety line of business principally
relates to a program that was discontinued in 1993. In prior years, the
commercial multiple peril line was responsible for a greater amount of the
adverse development. Starting in 1983, the Company expanded its commercial
multiple peril business and then withdrew from that line of business in 1988
due to greater than expected losses. In 1993 and 1994, the commercial
multiple peril line had significantly less development due to stronger
reserving. The favorable development from the workers compensation line of
business is the result of continued improvement from the application of risk
management and loss control procedures. The other liability category includes
the Company's professional liability program for architects and engineers and
losses from the Company's discontinued general liability line of business.
The majority of the adverse development for the other lines of business
relates to strengthening reserves based on historical loss development
patterns. The significantly decreased level of adverse development during
more recent years is consistent with the strengthening of loss reserves and
the strong performance of the Company's ongoing lines of business.
Loss reserve estimates are based on forecasts of the ultimate settlement
of claims and are subject to uncertainty with respect to future events. Loss
reserve amounts are based on management's informed estimates and judgments,
using data currently available. Reserve amounts and the underlying actuarial
factors and assumptions are regularly analyzed and adjusted to reflect new
information. The Company has experienced substantial development of losses
from prior accident years, particularly accident years 1984 and 1985 which
were the worst years in recent history for the Company and for the
property/casualty insurance industry in general. The Company's adverse
development primarily resulted from terminated lines of business, pools and
other programs, higher than anticipated inflationary pressures, unforeseen
judicial decisions (including interpretations of policy coverages beyond what
was originally anticipated) and other external factors exposing the Company to
risks not known when the insurance policies were priced and issued.
To reduce loss development, the Company realigned certain management
responsibilities in its Regional Operations segment several years ago. Key
management positions were added in that segment to further strengthen loss
control and prevention, and to focus more attention towards back-to-work
programs for injured workers. These factors tend to reduce loss costs and
-18-
<PAGE>
adverse development. For the design professionals liability line of business,
the Company has increasingly used alternative dispute resolution techniques
which includes the extensive use of mediation procedures to settle claims.
These procedures often result in reduced litigation and other claim related
expenses. The commercial multiple peril business that is being run off has a
specifically designated group of claims personnel assigned who have been
aggressively settling claims, resulting in an acceleration of payment patterns
in more recent years.
Estimates for IBNR claim reserves are based on actuarial analysis of
historical loss experience and current trends. Although the reserves are
deemed adequate to cover all probable claims, there is a reasonable
possibility that the adverse development from prior accident years could
continue into the future. Variability in claim emergence and settlement
patterns, and other trends in loss experience, can result in future
development patterns different than expected. The Company believes that the
adverse development experienced in recent years relates to the timing of
recurring claims activities that are inherent to the estimation of
property/casualty reserves. Future variability cannot be accurately factored
into the reserve estimations. However, management believes that past reserve
strengthening and a higher level of initial reserving, together with increased
stabilization in the Company's business, will continue to limit adverse loss
development in the future.
The Company analyzes loss reserves for its major lines of business on a
regular basis. Several methods are used, including paid and incurred loss
development, and incurred claim counts and average claim costs. These methods
are subject to variability in reserve estimation for a number of reasons,
including improved claims department operating procedures and accelerated
claims settlement due to the use of alternate dispute resolution and expedited
resolution of civil suits in litigation. Additionally, other factors that are
analyzed and are considered in the determination of loss reserves include (i)
claim emergence and settlement patterns and changes in these patterns from
year to year,(ii) trends in the frequency and severity of paid and incurred
losses, (iii) changes in policy limits and changes in reinsurance coverages,
(iv) changes in the mix and classes of business, and (v) changes in claims
handling procedures as determined by discussions with claims and operating
staff and through claim audits.
Current operations are more focused on underwriting risks where the
Company has specialized knowledge and can provide enhanced service to reduce
loss costs. This concentration, and the specialized knowledge and growing
experience in its selected lines of business arising from such concentration,
have enabled the Company to implement improvements in its claims
administration and underwriting procedures which have enhanced the Company's
ability to analyze data and project reserve trends.
-19-
<PAGE>
Investments
- -----------
The Company derives a significant part of its income from its
investments. Investments of the Company's insurance subsidiaries are made in
compliance with applicable insurance laws and regulations of the respective
states in which such companies are domiciled and other jurisdictions in which
they conduct business. Neither Orion nor any of its non-insurance
subsidiaries is constrained by investment restrictions set forth in state
insurance laws.
The Company maintains a diversified portfolio representing a broad
spectrum of industries and types of securities. The Company has no significant
investments in real estate, although it does own the DPIC Companies' home
office building in Monterey, California and has invested in several real
estate limited partnerships valued at $10,769,000 at December 31, 1994.
Investments are managed to achieve a superior total return, while maintaining
a proper balance of safety, liquidity, maturity and marketability.
Investments are made based on long-term economic value rather than short-term
market conditions. Except for investments in Guaranty National and securities
of the United States Government and its agencies, the Company did not have any
other investments in any one issuer that exceeded $20,000,000 at December 31,
1994.
During 1994 and 1993 the Company has continued the process of changing
the composition of its investment portfolio toward more tax-advantaged
securities. Historically, as a result of the Company's net operating tax loss
carryforwards ("NOLs"), the Company invested primarily in fully taxable
securities, since the income of such securities could be offset by the NOLs.
Such fully taxable securities, in general, pay a higher pre-tax rate of return
than tax advantaged securities. With the change in the Company's tax
position, following the full utilization of its NOLs for federal income tax
purposes in 1991, management began to shift the composition of the Company's
investment portfolio toward the purchase of a greater percentage of tax-
advantaged securities.
The Company has the ability to hold its fixed maturity investments to
term since its operating cash flow and its short-term investment portfolio
provide the Company with substantial liquidity. Fixed maturity investments
that the Company has the positive intent to hold to maturity are recorded at
amortized cost. Fixed maturity investments which may be sold in response to,
among other things, changes in interest rates, prepayment risk, income tax
strategies, or liquidity needs are classified as available-for-sale and are
carried at market value, with unrealized gains and losses reflected in
stockholders' equity. Equity securities are stated at market value. Both the
fixed maturities and equity investments consist primarily of readily
marketable securities.
The following table shows the composition of the investment portfolio of
the Company as of December 31, 1994 and 1993, and the quality ratings for the
Company's fixed maturity investments. The investments shown below are listed
at their cost, market value and financial statement (book) values.
-20-<PAGE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1994 Cost Market Value Book Value
- ----------------- ------------------ ------------------ ------------------
(000s omitted - except for percentages)
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
AAA ............. $ 413,949 30.9% $ 390,075 29.8% $ 394,291 29.9%
AA .............. 172,362 12.8 170,235 13.0 170,221 12.9
A ............... 112,923 8.4 107,677 8.2 110,051 8.3
BBB ............. 104,180 7.8 100,128 7.6 101,579 7.7
BB .............. 51,875 3.9 45,805 3.5 46,302 3.5
B and Below ..... 38,507 2.9 34,909 2.7 34,909 2.7
Not Rated ....... 39,501 2.9 40,510 3.1 40,488 3.1
---------- ----- ---------- ----- ---------- -----
Sub-total ..... 933,297 69.6 889,339 67.9 897,841 68.1
Equity Securities.. 250,929 18.7 264,434 20.2 264,434 20.0
Other Long Term
Investments ..... 52,564 3.9 52,564 4.0 52,564 4.0
Short Term
Investments ..... 104,201 7.8 104,201 7.9 104,201 7.9
---------- ----- ---------- ----- ---------- -----
$1,340,991 100.0% $1,310,538 100.0% $1,319,040 100.0%
========== ===== ========== ===== ========== =====
December 31, 1993
- -----------------
Fixed Maturities:
AAA ............. $ 408,254 32.4% $ 427,448 31.9% $ 417,147 31.5%
AA .............. 191,858 15.2 207,461 15.5 202,614 15.3
A ............... 101,172 8.0 105,456 7.9 103,772 7.9
BBB ............. 107,958 8.6 112,814 8.4 111,552 8.4
BB .............. 31,728 2.5 31,972 2.4 32,319 2.4
B and Below ..... 20,371 1.6 22,118 1.6 22,118 1.7
Not Rated ....... 40,777 3.3 43,216 3.2 43,216 3.3
---------- ----- ---------- ----- ---------- -----
Sub-total ..... 902,118 71.6 950,485 70.9 932,738 70.5
Equity Securities.. 210,311 16.7 242,643 18.1 242,643 18.4
Other Long Term
Investments ..... 50,682 4.0 50,682 3.8 50,682 3.8
Short Term
Investments ..... 96,473 7.7 96,473 7.2 96,473 7.3
---------- ----- ---------- ----- ---------- -----
$1,259,584 100.0% $1,340,283 100.0% $1,322,536 100.0%
========== ===== ========== ===== ========== =====
<CAPTION>
Year Ended December 31,
-----------------------
1994 1993
---- ----
<S> <C> <C>
Yield on average
investments:
Pre-tax ......... 6.5% 7.4%
=== ===
After-tax ....... 5.0% 5.5%
=== ===
-21-
</TABLE>
<PAGE>
Effective December 31, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which establishes the
"available-for-sale" category of investment securities and requires such
securities to be recorded at market value, with unrealized gains and losses
reported as a separate component of stockholders' equity. As a result of
the adoption of this standard, the Company reclassified investments with a
market value of $452,102,000 from fixed maturities recorded at amortized
cost to fixed maturities recorded at market. The result of that
reclassification increased unrealized appreciation on investments, a
component of stockholders' equity, by $20,720,000, net of deferred income
taxes, on December 31, 1993.
The Company strives to enhance the average return of its portfolio by
investing a small percentage of it in a diversified group of non-investment
grade fixed maturity securities, or securities that are not rated. The
risk of loss due to default is generally considered greater for non-
investment grade securities than for investment grade securities because
the former, among other things, are typically unsecured, often subordinated
to other debts of the issuer and are often issued by highly leveraged
companies. In the non-investment grade segment of the investment
portfolio, the Company maintains a high degree of diversity, with an
average investment per issuer of approximately $1,665,000 at December 31,
1994. Only six high yield investments, aggregating $41,147,000, were in
excess of $5,000,000 as of December 31, 1994.
The Company closely monitors the financial stability of issuers of
securities that it owns. When conditions are deemed appropriate, the
Company ceases to accrete discount, or accrue interest and dividends. In
cases where the value of investments are deemed to be other than
temporarily impaired, the Company recognizes losses. During 1994,
provisions for such losses were $381,000 for equity securities and $750,000
for fixed maturity investments. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Net Investment Income
and Realized Investment Gains."
Reinsurance
- -----------
In the ordinary course of business, the Company's insurance
subsidiaries enter into reinsurance contracts with other insurers which
serve to limit the Company's maximum loss from catastrophes, large risks or
unusually hazardous risks. Ceding reinsurance reduces an insurer's
operating leverage ratio.
A large portion of the Company's reinsurance protection is provided by
reinsurance contracts known as treaties. In other instances, reinsurance
is obtained by negotiation for individual risks, or facultative
reinsurance. The Company's insurance subsidiaries have certain excess-of-
loss and catastrophe treaties with unaffiliated insurers or reinsurers
which provide protection against a specified part or all of certain types
of losses over stipulated dollar amounts arising from one or more
occurrences. The amount of each risk retained by an insurer is subject to
maximum limits which vary by line of business and type of coverage.
-22-
<PAGE>
Retention limits are periodically revised as the capacity of the Company's
insurance subsidiaries to retain risk varies and as reinsurance prices
change. The Company is very selective as to its reinsurers, placing
reinsurance with only those reinsurers considered to be in sound financial
condition and having satisfactory underwriting ability. Many of the
Company's reinsurance agreements are subject to annual renewal as to
coverage, limits and price. The financial strength of its reinsurers is
continually monitored by the Company. The Company's insurance
subsidiaries, to their knowledge, have no material exposure to potential
unrecognized losses due to reinsurers that are in known financial
difficulties.
The Company's insurance subsidiaries have reinsurance protection for
workers compensation losses in excess of $1,500,000 up to $100,000,000.
DPIC Companies have reinsurance for a portion of losses from architect and
engineer liability in excess of $1,000,000 up to $5,000,000, the maximum
policy limit written by the DPIC Companies. Certain commercial auto and
general liability policies are reinsured for a portion of losses in excess
of $500,000 up to $1,000,000. The Company's reinsurance subsidiary
maintains various reinsurance arrangements for its facultative and treaty
exposures, including catastrophe protection above the $1,000,000 level. In
addition to the foregoing, the Company's insurance subsidiaries also
maintain other reinsurance arrangements in support of their specific
business needs. In 1994 and 1993, the Company's insurance subsidiaries net
premiums written to year-end statutory surplus were at levels of 1.6:1 and
1.4:1, respectively.
Government Regulation
- ---------------------
The Company's insurance subsidiaries are subject to regulation by the
Insurance Department of Connecticut, the state of their incorporation. In
order to simplify the Company's regulatory environment, effective December
30, 1994, all of the Company's insurance subsidiaries previously
incorporated in California were redomesticated into the State of
Connecticut, where all of the Company's other insurance subsidiaries are
incorporated. All insurance companies must file annual statements and
other reports with state regulatory agencies and are subject to regular and
special examinations by those agencies. A regular periodic examination of
the Company's insurance subsidiaries, covering their operations and
statutory financial statements through December 31, 1991, was
satisfactorily completed in 1993 by the Insurance Departments of California
and Connecticut.
Each of the Company's insurance subsidiaries is also subject to
regulation by other jurisdictions in which it sells insurance, including
certain Canadian provinces. States regulate the insurance business through
supervisory agencies which have broad administrative powers, including
powers relating to, among other things, the standards of solvency which
must be met and maintained; the licensing of insurers and their agents;
restrictions on the amount of risk which may be insured under a single
policy; the approval of premium rates; the form and content of the
insurance policy and sales literature; the form and content of financial
statements; reserve requirements; and the nature of and limitations on
permitted investments. In general, such regulation is for the protection of
policyholders rather than stockholders.
-23-
<PAGE>
In some instances, particularly in connection with workers
compensation insurance, various states routinely require deposits of assets
for the protection of policyholders and their employee claimants in those
states. As of December 31, 1994 and 1993, securities representing
approximately 18% and 21%, respectively, of the book value of the Company's
investment portfolio were on deposit with various state treasurers or
custodians. Such deposits consist of securities of the types which comply
with the standards that each state has established.
The Company is also subject to state laws regulating insurance holding
company systems. Most states have enacted legislation and adopted
administrative regulations affecting insurance holding companies and the
acquisition of control of insurance companies, as well as transactions
between insurance companies and their affiliates. The nature and extent of
such legislation and regulations currently in effect vary from state to
state. Most states, including Connecticut, currently require
administrative approval of the acquisition of 10% or more of the
outstanding shares of an insurance company incorporated in the state or the
acquisition of 10% or more of an insurance holding company whose insurance
subsidiary is incorporated in the state. The acquisition of 10% of such
shares (which would include securities convertible into voting securities)
is deemed to be the acquisition of "control" for the purpose of most
holding company statutes and requires the filing of detailed information
concerning the acquiring parties and the plan of acquisition and
administrative approval prior to such acquisition. Material transactions
between insurance companies and affiliated members of the holding company
system are generally required to be "fair and reasonable" and in some cases
are subject to administrative approval.
All state jurisdictions in which the Company is authorized to transact
business require participation in guaranty funds. Insurers authorized to
transact business in those jurisdictions can be assessed by a state
guaranty fund a percentage (usually from 1% to 2%) of direct premiums
written in that jurisdiction each year to pay claims on behalf of insolvent
insurers. The likelihood and amount of any future assessment cannot be
estimated until after an insolvency has occurred. For the years ended
December 31, 1994 and 1993 the Company's insurance subsidiaries were
assessed approximately $1,051,000 and $407,000, respectively (net of
estimated future recoveries) as a result of known insolvencies. Insurance
companies are required by certain states in which they do business to
participate in automobile insurance plans and workers compensation plans.
These plans provide insurance on risks which are not written in the
voluntary market. Participation in these plans has usually been
unprofitable for the Company.
A number of state legislatures and the United States Congress have for
years been considering, or have now enacted, some type of legislative
proposals which alter the rules for tort claims and increase the states'
authority to regulate insurance companies. These initiatives have
expanded, in some instances, the states' regulation over rates (See "Rates"
below) and also have increased data reporting requirements. In recent
years the state insurance regulatory framework has come under federal
scrutiny, and certain state legislatures have considered or enacted laws
that alter, and in many cases increase, state authority to regulate
insurance companies and insurance holding company systems. Further, the
National Association of Insurance Commissioners ("NAIC") and state
regulators are re-examining existing laws and regulations and issues
-24-
<PAGE>
relating to the solvency of insurers. The NAIC has recently adopted risk
based capital ("RBC") requirements for property and casualty insurers. The
capital of each of the Company's insurance subsidiaries at December 31,
1994 exceeds the RBC requirements.
Although the federal government generally does not directly regulate
the business of insurance, federal initiatives often have an impact on the
business in a variety of ways. There are various current and proposed
federal measures which may significantly affect the Company's insurance
business, including, among other proposals, the revocation of the antitrust
exemption provided by the McCarran-Ferguson Act and reforms to the
litigation system. The various proposed reforms to limit punitive damages
and assess costs to the losing side in a lawsuit, if any are enacted, might
have a positive impact on the Company and the insurance industry in
general. Suggested changes to the nation's health care system, however, if
enacted, might negatively affect the Company's workers compensation and
automobile liability businesses. The economic and competitive effects of
any proposals upon the Company would depend upon the final form such
legislation might take. The Company is unable to predict what regulatory
proposals may be adopted in the future, or the effect any such proposals
might have on the Company's business if adopted.
Limitations on Payments from Insurance Subsidiaries
- ---------------------------------------------------
The principal sources of cash available to Orion are dividends,
reimbursement of various administrative charges, and tax payments from its
subsidiaries. The payment of dividends to Orion by its insurance
subsidiaries is subject to state regulation. No state restricts dividend
payments by Orion to its stockholders.
The ability of the Company's insurance subsidiaries to declare
dividends is governed primarily by the insurance laws of the state of
incorporation of all of the Company's insurance subsidiaries. Generally,
such laws currently provide that, unless prior approval is obtained,
dividends of a property and casualty insurance company in any consecutive
12-month period shall not exceed the greater of its net income for the
preceding calendar year or 10% of its policyholders' surplus as of the
preceding December 31, determined on a statutory accounting basis.
Dividends and distributions by the Company's insurance subsidiaries are
also subject to a requirement that statutory policyholders' surplus be
reasonable in relation to outstanding liabilities and adequate to meet the
companies' financial needs following the declaration of any dividends or
distributions. State insurance regulators have, however, broad
discretionary authority with respect to approving the payment of dividends
by insurance companies. Under current Connecticut regulations, the maximum
dividends permitted at December 31, 1994 for the ensuing twelve months,
without prior approval, aggregated $52,377,000. Orion received $30,013,000
in dividends from its wholly-owned insurance subsidiaries in 1994. Since
it is difficult to predict future levels of statutory policyholders'
surplus or earnings, the amount of dividends that could be paid in the
future without prior approval cannot be determined at this time.
-25-
<PAGE>
Rates
- -----
The Company's insurance subsidiaries are generally subject to
regulation as to rates. Most states have insurance laws requiring that
rate schedules and other information be filed with or made available to the
state's regulatory authority, either directly or through a rating
organization with which the insurer is affiliated. The regulatory
authority may, in most states, disapprove a rate filing if it finds that
the rates are inadequate, excessive or unfairly discriminatory. Rates,
which are not necessarily uniform for all insurers, vary by class of
business, hazard assumed and size of risk. Subject to regulatory
requirements, the Company's management determines the prices charged for
its policies based on a variety of factors including recent historical
claims experience, inflation, competition, tax law and anticipated changes
in the legal environment, both judicial and legislative. The Company's
management believes that its rate outlook for its principal lines of
business will remain stable during 1995.
Some states have adopted open rating systems for workers compensation
which permit insurers to set premium rates independently without the prior
approval of the insurance commissioners. A number of other states permit
insurers to deviate from standard rates for workers compensation insurance
after receiving prior approval. In insuring professional liability risks
the DPIC Companies are generally not limited to the standard rates of a
rating organization but set their own rates because of the unique nature of
the risks being underwritten.
In November 1988, California voters passed an initiative known as
Proposition 103 which amended the California Insurance Code to provide,
among other things, that for at least one year rates for automobile and
many other insurance policies issued or renewed on or after November 8,
1988, be rolled back to the levels of November 8, 1987 and then reduced by
20%. In 1989, the California Supreme Court ruled that an insurer could be
compelled to make refunds for the rollback year only to the extent that it
would not deprive the insurer of a fair and reasonable rate of return.
Workers compensation insurance and reinsurance are excluded from the
Proposition's rate rollback provisions. The Insurance Department of the
State of California ("Department") subsequently issued regulations with
respect to California Proposition 103. On August 18, 1994, the Supreme
Court of the State of California upheld the validity of the Department's
current regulations. In January 1995 the newly elected Commissioner of the
Department announced that he would like to quickly resolve all Proposition
103 liability with California insurers through negotiations. On
January 31, 1995, the Department advised the Company that it had an
indicated rollback liability under the regulations of approximately
$4,000,000, plus interest. The Department asked the Company to provide
information, including California specific data, that would impact its
calculation. The data used by the Department to determine the rollback
liability was based on national figures and contained some inapplicable
information as to the Company's California business. The regulations
provide for the use of California data where available and reliable. When
the calculation under the regulations is performed using the Company's
California specific data, the Company has no rollback liability. The
Company intends to resolve the matter with the Department during 1995.
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<PAGE>
In recent years, certain social, economic and political issues have led
to an increased number of legislative and regulatory proposals and judicial
decisions aimed at addressing the cost, benefits and availability of
certain types of insurance. Initiatives attempting to freeze or roll back
premium rates, similar to the California Proposition have been introduced
in other states, as well as proposals to redefine or expand risk exposure,
such as by increasing the amount and types of workers compensation benefits
and by the expansion of the liability for employee illness caused by
cumulative trauma, stress or previously unknown causes. Most of these
legislative proposals have failed to date to become law. While such
initiatives may continue to be proposed, it is impossible to predict
whether any such proposals will be adopted. However, depending on the
circumstances, the Company may be able to mitigate the longer term effects
on profitability through discontinuance of the affected business and
redeployment of capital into more attractive markets, as it has done in the
past.
Competition
- -----------
The insurance industry is highly competitive. Of the nearly 3,900
property and casualty insurance companies in the United States, about 900
companies write most of the business but no single company or group has
more than 10% of the market. The Company's insurance subsidiaries are in
competition with numerous stock and mutual property and casualty insurance
companies, as well as state run workers compensation insurance funds, many
of which are substantially larger and have significantly greater resources
than the Company. Competition may take the form of lower premiums,
specialized products, more complete and complex product lines, greater
pricing flexibility, superior service, different marketing methods or
higher policyholder dividend rates. Superior service and marketing methods
are of particular importance in workers compensation. Competition might
also come from service organizations which administer self-insured
programs.
The Company's insurance subsidiaries sell their insurance principally
through independent agents, brokers and general agents, who typically also
represent one or more competing insurance companies. They are paid
commissions based on premiums collected from insureds. Commission rates
vary according to the type and amount of insurance sold. Some competitors
in certain lines obtain their business at a lower direct cost through the
use of salaried personnel rather than independent agents and brokers.
Rating
- ------
A.M. Best Company rates the Company's primary insurance subsidiaries
"A (Excellent)." In general, A.M. Best Company's ratings are based on an
analysis of the financial condition and operation of an insurance company
as it relates to the industry. These ratings are not primarily designed
for investors and do not constitute recommendations to buy, sell or hold
any security. A.M. Best Company has upgraded the ratings of the Company
three times in the last five years.
-27-
<PAGE>
MISCELLANEOUS OPERATIONS
The Company's fourth business segment consists primarily of the
miscellaneous income and expense (principally interest and general and
administrative expenses) of Orion itself. For financial reporting
purposes, the Company applies federal income taxes and benefits, as if
fully utilizable, to its segments. Any consolidating elimination entries
are accounted for in this fourth segment.
ITEM 2. PROPERTIES
The Company's executive office is located at 600 Fifth Avenue, New
York, New York. The home office of the insurance operations of the Company
is located in Farmington, Connecticut. The New York office facilities
consist of approximately 12,000 square feet and are leased at an average
annual rental, over ten years, of $465,000. The Farmington office consists
of approximately 140,000 square feet and is leased at an annual rental of
$4,310,000.
The DPIC Companies owns its office building, which consists of
approximately 42,000 square feet, in Monterey, California. The DPIC
Companies purchased the building on January 26, 1990 for approximately
$11,950,000. In November 1990 the DPIC Companies mortgaged the leasehold
interest in its office building to other subsidiaries of the Company and to
Guaranty National Insurance Company for an aggregate of $9,000,000.
All of the other insurance operations of the Company are conducted
from leased premises in or adjacent to major urban centers throughout the
United States and in Canada. These operations, in the aggregate, occupy
approximately 245,000 square feet, at an annual rental of approximately
$4,450,000.
The Company believes that its current facilities are suitable and
adequate for their present use and anticipated requirements.
-28-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is routinely engaged in litigation incidental to its
businesses. In the judgment of the Company's management, there are no
significant legal proceedings pending against Orion or its wholly-owned
subsidiaries which, net of reserves established therefor are likely to
result in judgments for amounts that are material to the financial
condition, liquidity or results of operations of Orion and its consolidated
subsidiaries, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
INFORMATION CONCERNING EXECUTIVE OFFICERS OF THE COMPANY
The following is a summary of certain information regarding the
current executive officers of Orion. All officers of Orion and its
subsidiaries serve at the pleasure of their respective Boards of Directors.
Alan R. Gruber, Chairman of the Board and Chief Executive Officer of
Orion since March 1976; Chairman of Orion Capital Companies, Inc. ("OC
Companies"), which provides management services to the Orion Capital
Companies, since October 1982; age 67.
Larry D. Hollen, President and Chief Operating Officer of Orion since
March 1, 1994; a director of Orion since March 20, 1992; President of the
OC Companies since February 1994; Executive Vice President and Assistant
Chief Operating Officer of Orion from December 1, 1992 to February 28,
1994; Senior Vice President of Orion from March 1990 to December 1992;
Vice President of Orion from 1988 to March 1990; President of the EBI
Companies from January 1990 to May 31, 1993; age 49.
W. Marston Becker, Senior Vice President of Orion and President and
Chief Executive Officer of the DPIC Companies and Senior Vice President of
the OC Companies since July 1994; President and Chief Executive Officer of
McDonough Caperton Insurance Group, an insurance brokerage firm, from March
1987 to July 1994; age 42.
Raymond W. Jacobsen, Senior Vice President of Orion since July 1994;
Vice President of Orion from March 1990 to July 1994; President and Chief
Executive Officer of the EBI Companies since June 1, 1993; Executive Vice
President of the EBI Companies from December 1989 to May 31, 1993; Senior
Vice President of the OC Companies since March 1990; age 42.
Arthur B. McHugh, Senior Vice President of Orion and Senior Vice
President of the OC Companies since July 1994, President and Chief
Executive Officer of the Connecticut Specialty Insurance Group since May
1994; Executive Vice President of Zurich American Insurance Group from 1987
to 1994; age 43.
Daniel L. Barry, Vice President and Controller of Orion since October
1987; Senior Vice President of OC Companies since January 1989; Controller
of OC Companies since October 1986; Treasurer of OC Companies from October
1987 to December 1990; age 44.
Michael P. Maloney, Vice President, General Counsel and Secretary of
Orion since August 1979; Senior Vice President of OC Companies since March
1987; age 50.
-29-
<PAGE>
William G. McGovern, Vice President and Chief Actuary of Orion since
March 1990; Senior Vice President and Chief Actuary of OC Companies since
October 1989; age 42.
Vincent T. Papa, Vice President and Treasurer of Orion since June
1985; Senior Vice President of OC Companies since March 1987 and Treasurer
since December 1990; age 48.
Raymond J. Schuyler, Vice President-Investments of Orion since June
1984; Senior Vice President of OC Companies since March 1986; age 59.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Principal Market. The principal market on which Orion's
Common Stock is traded is the New York Stock Exchange.
(b) Stock Price and Dividend Information. The table below
presents the high and low market prices and dividend information for
Orion's Common Stock for 1994 and 1993, adjusted to reflect the effect of
the 5-for-4 stock split paid on November 15, 1993.
Cash
Stock Prices Dividends
High Low Declared
---- --- ---------
1994:
Quarter Ended December 31........ $35.25 $28.125 $.20
Quarter Ended September 30....... 34.625 29.75 .20
Quarter Ended June 30............ 34.75 29.875 .18
Quarter Ended March 31........... 34.00 30.00 .18
-----
Total........................ $.76
=====
1993:
Quarter Ended December 31........ $36.30 $28.625 $.18
Quarter Ended September 30....... 37.50 30.30 .18
Quarter Ended June 30............ 37.10 30.10 .16
Quarter Ended March 31........... 36.80 27.20 .16
----
Total........................ $.68
====
Cash dividends have been paid on Orion's Common stock in every quarter
since the fourth quarter of 1978, when dividends were first commenced.
(c) Approximate Number of Holders of Common Stock. The number of
holders of record of Orion's Common Stock as of March 13, 1995 was 1,999.
-30-<PAGE>
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes information with respect to the operations and financial
condition of Orion and its subsidiaries. Common stock and per common share data have been
restated to give effect to the 5-for-4 stock splits paid on both November 15, 1993 and
December 7, 1992. All of the Company's $1.90 Preferred Stock, $2.125 Preferred Stock and
Adjustable Rate Preferred Stock were converted into common stock or redeemed during 1992 and
1993. In November 1991, the Company sold 6,250,000 shares of Guaranty National Corporation in
an initial public offering, reducing its level of ownership from 100% to slightly less than
50%. Guaranty National's financial statements have been consolidated with those of the
Company through November 20, 1991. For the periods subsequent to November 20, 1991, the
portion of Guaranty National's results attributable to the Company's ownership is included on
an equity accounting basis. Information presented as of December 31, 1991 through 1994
excludes the accounts of Guaranty National. The consolidated financial statements and related
notes thereto are furnished under Item 8 of this report.
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(000s omitted-except for per share data)
<S> <C> <C> <C> <C> <C>
For the year ended December 31:
Total revenues ................. $ 780,947 $ 720,155 $ 647,718 $ 837,294 $ 783,879
Gain on sale of common stock
of Guaranty National ......... - - - 33,931 -
After-tax investment gains
(losses) ..................... 2,427 5,888 3,113 (1,804) (7,368)
Earnings before cumulative
effect of change in accounting
principles and extraordinary
loss ......................... 55,245 56,988 45,792 44,668 25,461
Net earnings ................... 55,245 68,813 42,872 44,668 25,461
Earnings per common share before
cumulative effect of change in
accounting principles and
extraordinary loss ........... 3.85 3.88 3.62 3.75 1.79
Net earnings per common
share ........................ 3.85 4.69 3.35 3.75 1.79
Dividends declared -
Adjustable rate preferred
share ...................... - 1.10 4.16 4.37 4.44
$1.90 preferred share ........ - - 1.43 1.90 1.90
$2.125 preferred share ....... - .12 2.125 2.125 2.125
Common share ................. .76 .68 .60 .59 .58
Weighted average number of
common shares and equivalents
outstanding .................. 14,348 14,598 10,914 9,964 10,091
As of December 31:
Total cash and investments ..... $1,325,241 $1,328,969 $1,169,379 $1,087,454 $1,145,887
Total assets ................... 2,112,761 2,117,454 1,937,408 1,827,069 1,995,729
Total policy liabilities ....... 1,450,835 1,412,285 1,326,872 1,228,951 1,443,720
Notes payable and debentures ... 152,382 160,372 129,863 142,311 175,290
Adjustable rate preferred stock - - 18,705 19,125 19,505
Stockholders' equity ........... 365,088 394,195 311,287 249,829 191,958
Common shares outstanding ...... 14,041 14,372 13,100 9,905 9,928
Book value per common share .... $ 26.00 $ 27.43 $ 21.48 $ 19.00 $ 13.07
-31-
</TABLE>
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries
(collectively the "Company") operate principally in the property and casualty
insurance business which is reported as three segments - Regional Operations,
Reinsurance/Special Programs and Guaranty National Companies. Regional
Operations provides workers compensation insurance products through EBI
Companies and Nations' Care. Reinsurance/Special Programs includes (i) DPIC
Companies ("DPIC"), which markets professional liability insurance, (ii)
Connecticut Specialty Insurance Group ("Connecticut Specialty"), which writes
specialty insurance programs, (iii) SecurityRe Companies ("SecurityRe"), a
reinsurer and (iv) a 20.0% interest in Intercargo Corporation ("Intercargo")
which underwrites insurance coverages for international trade. The third
segment consists of the Company's interest in Guaranty National Companies,
which specializes in nonstandard commercial and personal automobile insurance.
The miscellaneous income and expenses (primarily interest, general and
administrative expenses and other consolidating elimination entries) of the
parent company are reported as a fourth segment.
The Company's insurance operations have experienced favorable trends for
the past several years, as indicated by its combined ratio which has improved
from 109.4% in 1991, to 105.4% in 1992, 103.2% in 1993 and 101.2% in 1994.
Operating earnings (defined as earnings after taxes, excluding the effects of
the adoption of new accounting principles, extraordinary items and after-tax
realized investment gains) were $52,818,000, $51,100,000 and $42,679,000, or
$3.68, $3.47 and $3.33 per share, in 1994, 1993, and 1992, respectively, based
on weighted average shares outstanding of 14,348,000 in 1994, 14,598,000 in
1993 and 10,914,000 in 1992. Preferred stock dividends of $409,000 in 1993
and $6,358,000 in 1992 were deducted from earnings in order to compute
earnings per common share.
RESULTS OF OPERATIONS
Earnings (loss) by segment before federal income taxes, cumulative effect
of the adoption of new accounting principles and extraordinary item are
summarized as follows for the three years ended December 31, 1994:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1994 1993 1992
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Regional Operations ................... $ 42,514 $ 34,025 $ 4,227
Reinsurance/Special Programs .......... 34,117 44,032 50,384
Guaranty National Corporation ......... 11,244 9,509 9,994
-------- -------- --------
Total ............................. 87,875 87,566 64,605
Other ................................. (16,329) (15,061) (17,891)
-------- -------- --------
$ 71,546 $ 72,505 $ 46,714
======== ======== ========
</TABLE>
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<PAGE>
REVENUES
Premiums
Net premiums written increased 12.0% ($76,469,000) to $712,055,000 in
1994 from $635,586,000 in 1993 and 12.0% ($68,156,000) in 1993 from
$567,430,000 in 1992. The results by segment are as follows:
- Regional Operations' net premiums written increased 5.5% ($14,656,000) to
$279,738,000 in 1994 from $265,082,000 in 1993 and decreased 1.7%
($4,468,000) in 1993 from $269,550,000 in 1992. Premiums written
increased in geographic areas where the Company has had favorable loss
experience stemming from its service-oriented approach. The increase in
1994 was partially offset by, and the decrease in 1993 was attributable
to, the impact of legislative reforms in certain states which have led to
lower premium rates and a reduction in losses and expenses, resulting in
higher profit margins. The increase in this segment for 1994 was also
offset by a reduction in net premiums at Nations' Care, resulting from
its transition toward high-deductible and fee-based workers compensation
products.
- Reinsurance/Special Programs' net premiums written increased 16.7%
($61,813,000) to $432,317,000 in 1994 from $370,504,000 in 1993 and 24.4%
($72,624,000) in 1993 from $297,880,000 in 1992. Net written premiums by
DPIC for professional liability insurance, the largest special program,
were $173,205,000, $123,637,000 and $111,837,000 in 1994, 1993 and 1992,
respectively. The increase in 1994 is primarily attributable to the
discontinuation on January 1, 1994 of a reinsurance contract in order to
retain more of DPIC's profitable business. The premium increases in 1994
and 1993 reflect both new business and a continuation of a high level of
policy renewals. Premium volume for Connecticut Specialty decreased 4.6%
($8,819,000) to $183,427,000 in 1994 from $192,246,000 in 1993 and
increased 21.8% ($34,360,000) in 1993 from $157,886,000 in 1992. The
decrease in 1994 is largely attributable to the cancellation of a
personal injury protection program in Florida and a physical damage
program in Texas, where the Company has had unfavorable loss experience,
offset in part by increased premiums written in the truck liability
program and the introduction of an additional marine program. The
largest increases for 1993 were in the automobile personal injury
protection and physical damage programs. The percentage of treaty and
facultative reinsurance assumed to total net premiums written for
Reinsurance/Special Programs amounted to 17.5%, 14.7% and 11.7% in 1994,
1993 and 1992, respectively. The Company's reinsurance operations are
benefitting from A.M. Best Company's upgrade in 1993 of the rating
applicable to the Company's principal insurance subsidiaries to "A
(Excellent)". A.M. Best Company ratings are not primarily designed for
investors and do not constitute recommendations to buy, sell or hold any
security.
Premiums earned increased 12.0% ($73,819,000) to $691,223,000 in 1994
from $617,404,000 in 1993 and 10.2% ($57,199,000) in 1993 from $560,205,000 in
1992. Premiums earned for 1994 and 1993 reflect the recognition in income of
the changing levels of net premium writings.
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<PAGE>
Net Investment Income
Pre-tax net investment income amounted to $84,915,000, $91,803,000 and
$82,483,000 in 1994, 1993 and 1992, respectively. The year-to-year changes in
net investment income are attributable to a decrease in equity earnings from
limited partnership investments of $8,648,000 from 1993 to 1994, and an
increase in limited partnership income of $5,708,000 from 1992 to 1993. The
increase in 1993 stems principally from several large gains on sales of real
properties by certain of these partnerships. The decrease in 1994 reflects
the absence of such gains, and the poor performance of the investment markets
during 1994. Net investment income was increased in both years by income
generated from the employment of operating cash flow of $118,779,000 in 1994
and $123,154,000 in 1993. The pre-tax yields on the average investment
portfolio were 6.5% in 1994 and 7.4% for both 1993 and 1992, reflecting the
fluctuation in earnings from limited partnership investments and an increase
in each year in the Company's investments in tax-advantaged securities, which
generally yield less than fully taxable securities. The after-tax yields on
the average investment portfolio were 5.0% in 1994, 5.5% in 1993 and 5.3% in
1992. The carrying value of the Company's investment portfolio amounted to
$1,319,040,000 at December 31, 1994 and $1,322,536,000 at December 31, 1993.
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which establishes the "available-for-sale"
category of investment securities and requires such securities to be recorded
at market value, with unrealized gains and losses reported in a separate
component of stockholders' equity. As a result of the adoption of this
standard on December 31, 1993, the Company reclassified investments with a
market value of $452,102,000 from fixed maturities recorded at amortized cost
to fixed maturities recorded at market, and increased unrealized appreciation
on investments, a component of stockholders' equity, by $20,720,000, net of
deferred income taxes. Fixed maturity investments which the Company has both
the positive intent and the ability to hold to maturity are recorded at
amortized cost. Investments which may be sold in response to, among other
things, changes in interest rates, prepayment risk, income tax strategies or
liquidity needs are classified as available-for-sale and are carried at market
value. The carrying value of fixed maturity and short-term investments
amounted to $1,002,042,000 and $1,029,211,000 at December 31, 1994 and 1993,
respectively, or approximately 75.6% and 77.4% of the Company's cash and
investments.
The Company's investment philosophy is to achieve a superior rate of
return after taxes and maintain a high degree of safety and liquidity. The
Company invests primarily in investment grade securities and strives to
enhance the average return of its portfolio through limited investment in a
diversified group of non-investment grade fixed maturity securities or
securities that are not rated. The risk of loss due to default is generally
considered greater for non-investment grade securities than for investment
grade securities because the former, among other things, are often
subordinated to other indebtedness of the issuer and are often issued by
highly leveraged companies. At December 31, 1994 and 1993, the Company's
investment in non-investment grade and unrated fixed maturity securities were
carried at $119,853,000 and $97,653,000 with market values of $119,277,000 and
$97,306,000, respectively. These investments represented a total of 9.0% and
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<PAGE>
7.3% of cash and investments and 5.7% and 4.6% of total assets at December 31,
1994 and 1993, respectively. The increase in non-investment grade securities
during 1994 reflects both net purchases of such investments as well as rating
agency downgrades of securities issued by Long Island Lighting Company and
Cleveland Electric Illuminating Company (which had a combined carrying value
of $15,793,000, or 1.2% of total cash and investments, at December 31, 1994).
The Company closely monitors the financial condition of the issuers of
securities that it owns. When conditions are deemed appropriate, the Company
ceases to accrete discount, or accrue interest and dividends, and, in cases
where the value of such investments is deemed to be other than temporarily
impaired, recognizes losses. The Company's non-investment grade investments
are highly diversified, with an average investment per issuer of approximately
$1,665,000 at December 31, 1994. Only six non-investment grade investments
aggregating $41,147,000 were in excess of $5,000,000 at December 31, 1994.
Realized Investment Gains
Net realized investment gains amounted to $3,437,000 in 1994, $9,478,000
in 1993 and $3,667,000 in 1992. Sales of equity securities resulted in net
gains of $3,845,000, $11,273,000 and $5,864,000 and sales of fixed maturities
resulted in net gains of $723,000, $6,662,000 and $5,365,000 in 1994, 1993 and
1992, respectively. Realized investment gains were reduced by provisions for
losses on securities deemed to be other than temporarily impaired. These
provisions amounted to $381,000 in 1994, $6,310,000 in 1993 and $5,429,000 in
1992 for equity securities and $750,000, $2,147,000 and $2,133,000 in 1994,
1993 and 1992, respectively, for fixed maturity investments. Such provisions,
based on available information at the time, were made in consideration of the
decline in the financial condition of the issuers of these securities.
Realized gains (losses) vary from period to period, depending on market
conditions relative to the Company's investment holdings, the timing of
investment sales generating gains and losses, the occurrence of events which
give rise to other than temporary impairment of investments, and other
factors. At December 31, 1994 the Company held equity securities with
unrealized appreciation of $13,505,000, as compared to $32,332,000 for equity
securities held at December 31, 1993. The amortized cost of the fixed
maturities portfolio at December 31, 1994 exceeded market value by
$43,958,000. This compares with an excess of market value over amortized cost
of $48,367,000 for fixed maturities at December 31, 1993. Such amounts can
vary significantly depending upon fluctuations in the financial markets. The
decline in market values during 1994 is primarily attributable to the
significant rise in interest rates during the year. The average maturity of
the Company's fixed maturities has not varied significantly in recent years,
and no material change in average maturity is expected in the foreseeable
future.
The performance of the Company's investments, including net investment
income, net realized gains (losses) and unrealized appreciation (depreciation)
is as follows for the three most recent years:
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<PAGE>
Year Ended December 31,
--------------------------------
1994 1993 1992
---- ---- ----
(000s omitted)
Net investment income ..................... $ 84,915 $ 91,803 $ 82,483
-------- -------- --------
Net realized gains (losses) -
Fixed maturities ........................ (27) 4,515 3,232
Equity securities ....................... 3,464 4,963 435
-------- -------- --------
3,437 9,478 3,667
-------- -------- --------
Net unrealized appreciation (depreciation) -
Fixed maturities ........................ (92,325) 21,556 11,954
Equity securities ....................... (18,827) 16,468 22,584
-------- -------- --------
(111,152) 38,024 34,538
-------- -------- --------
$(22,800) $139,305 $120,688
======== ======== ========
EXPENSES AND OTHER
Operating Ratios
The following table sets forth certain ratios of insurance operating
expenses to premiums earned for the Company:
Year Ended December 31,
--------------------------------
1994 1993 1992
---- ---- ----
Loss and loss adjustment expenses ....... 72.1% 74.4% 75.7%
Policy acquisition and other insurance
expenses .............................. 27.0 26.8 27.3
----- ----- -----
Total before policyholders' dividends.. 99.1 101.2 103.0
Policyholders' dividends ................ 2.1 2.0 2.4
----- ----- -----
Total after policyholders' dividends .. 101.2% 103.2% 105.4%
===== ===== =====
The ratio of loss and loss adjustment expenses to premiums earned (the
"loss ratio") was 72.1%, 74.4% and 75.7% in 1994, 1993 and 1992, respectively.
The decrease in the 1994 loss ratio was attributable to improvements in both
the Regional Operations and Reinsurance/Special Programs segments, while the
improvement in the 1993 loss ratio was attributable to a decrease in the loss
ratio for the Regional Operations segment offset by higher levels of initial
reserving in the Reinsurance/Special Programs segment.
The loss ratio for Regional Operations was 67.1% in 1994, 72.0% in 1993
and 80.1% in 1992. These loss ratios reflect continued improvement in workers
compensation insurance, reduced losses due to the cancellation in 1992 of
participation in a workers compensation loss sharing pool and decreasing
levels of losses applicable to discontinued business that is being runoff,
principally from closed offices and from the Company having ceased writing
commercial package business.
-36-
<PAGE>
Reinsurance/Special Programs' loss ratio was 75.4% in 1994, 76.1% in 1993
and 71.7% in 1992. The decrease for 1994 is attributable to increased
writings in programs with lower loss ratios, offset in part by increased
losses incurred in Connecticut Specialty's personal injury protection and
physical damage programs which were cancelled in 1994. The increase for 1993
as compared to 1992 is primarily due to higher levels of initial reserving.
The ratio of deferred acquisition costs and other insurance expenses to
premiums earned (the "expense ratio") was 27.0%, 26.8% and 27.3% in 1994, 1993
and 1992, respectively. The 1994 and 1993 expense ratios reflect low levels
of assessments from certain assigned risk pools. The ratio of policyholders'
dividends to premiums earned (the "dividend ratio") was 2.1%, 2.0% and 2.4% in
1994, 1993 and 1992, respectively. The combined ratio was 101.2% in 1994,
103.2% in 1993 and 105.4% in 1992.
Provisions for losses and loss adjustment expenses include development of
loss and loss adjustment expense reserves relating to prior accident years,
which increased the calendar year combined ratio by 2.5 percentage points in
1994, 3.9 percentage points in 1993 and 4.7 percentage points in 1992. The
loss ratios were adversely affected by loss development in the reinsurance and
pool and association businesses (including assigned risk pools) where loss
reserves are established by the Company based on information provided from
sources outside the Company, and where loss patterns were significantly
different than in the past. Other contributing factors were higher than
anticipated reported losses for automobile liability business and reserve
strengthening for certain other lines of business, including discontinued
programs. In 1994 adverse development was reduced by the continued
improvement in workers compensation insurance from the application of risk
management and loss control procedures.
Management believes that the Company's reserves for loss and loss
adjustment expenses make reasonable and sufficient provision for the ultimate
cost of all losses on claims incurred. However, there can be no assurance
that changes in loss trends will not result in additional development of prior
years' reserves in the future. Variability in claim emergence and settlement
patterns and other trends in loss experience can result in future development
patterns different than expected. The Company believes that any such
development will continue at the low levels experienced in recent years,
considering actions taken to increase reserving levels, to improve
underwriting standards and to emphasize loss control and prevention. The
Company's loss ratios in recent years, including development of prior years'
losses, have compared favorably with loss ratios experienced by the industry.
The Company limits both current loss expense and future development of
losses by ceding business to reinsurers (See Note D to Consolidated Financial
Statements). The Company continually monitors the financial strength of its
reinsurers and, to the Company's knowledge, has no material exposure with
regard to potential unrecognized losses due to reinsurers having known
financial difficulties.
The Company's environmental claims principally relate to asbestos and
hazardous waste, arising from certain liability business written prior to the
mid 1980's, which business was never a major element of the Company's
operations. Environmental claims are also received from certain reinsurance
pools and associations where reserves are established based on information
reported to the Company by the managers of those pools and associations.
-37-
<PAGE>
Establishing reserve liabilities for environmental claims is subject to
significant uncertainties that make reserve estimation difficult. Legal
decisions have tended to expand insurance coverage beyond the intent of the
original policies. The disposition of such claims often requires lengthy and
costly litigation. Uncertainties as to required clean-up remedies and
difficulties in identifying the responsible parties add further to the
complexity of reserve estimation for these claims. In recent years, the
Company has intensified its efforts to settle and close environmental claims.
To help minimize the cost of losses and claims, the Company maintains a
dedicated environmental claims staff which administers and continually
evaluates each claim and its defense and settlement possibilities. In 1994,
1993 and 1992, the Company paid $7,233,000, $5,557,000 and $4,221,000,
respectively, for the costs of defending and settling such claims. Payments
in 1994, 1993 and 1992 related to 292, 216 and 117 claims, respectively, for
the Company's direct business. Claim counts have been aggregated by year of
coverage for each occurrence for which policyholders are being defended, and
often include numerous claimants.
As of December 31, 1994 and 1993, the Company has environmental claims-
related loss and loss adjustment expense reserves, net of reinsurance
recoverables, of $20,601,000 and $17,189,000, respectively, which include 467
and 512 claims, respectively, for direct business written by the Company. In
estimating liabilities for environmental-related claims, the Company considers
all pertinent information as it becomes available.
Interest Expense
Interest expense was $13,597,000 in 1994, $13,044,000 in 1993 and
$12,754,000 in 1992. The 4.2% increase in interest expense in 1994 is
primarily attributable to an increase in average interest rates. The 2.3%
increase from 1992 to 1993 reflects an increase in the average amount of debt
outstanding in 1993 as compared to 1992, including debt incurred to redeem the
Company's Adjustable Rate Preferred Stock, offset for the most part by lower
average interest rates.
Equity in Earnings of Affiliates
Equity in earnings of affiliates includes the Company's portion of
earnings from Guaranty National and Intercargo. Earnings (loss) of $342,000
and ($122,000) were recorded from the Intercargo investment in 1994 and 1993,
respectively. The Company's portion of Guaranty National's net earnings
before the cumulative effect of adopting changes in accounting principles was
$11,244,000 in 1994, $9,509,000 in 1993 and $9,994,000 for 1992 based on
Guaranty National's earnings of $22,551,000, $19,285,000 and $20,271,000,
respectively. Gross premiums written for Guaranty National increased to
$364,348,000 in 1994 from $321,766,000 in 1993 and $273,400,000 in 1992.
Guaranty National's combined ratios were 97.5% in 1994, 99.6% in 1993 and
97.7% in 1992.
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<PAGE>
Earnings From Operations Before Federal Income Taxes
Operating earnings before income taxes were $71,546,000, $72,505,000 and
$46,714,000 for 1994, 1993 and 1992, respectively. The 1.3% decrease in pre-
tax earnings from 1993 to 1994 reflects an increase in insurance operations
profitability of $5,082,000 and a decrease in realized investment gains of
$6,041,000. The 55.2% increase in pre-tax earnings for 1993 over 1992
reflects an improvement in insurance operations profitability of $19,980,000
and an increase in realized investment gains of $5,811,000.
Federal Income Taxes
Federal income taxes on pre-tax operating results and the related
effective tax rates amounted to $16,301,000 (22.8%), $15,517,000 (21.4%) and
$922,000 (2.0%) in 1994, 1993 and 1992, respectively. The Company files
consolidated federal income tax returns. Effective January 1, 1993, the
Company adopted SFAS No. 109, "Accounting for Income Taxes." Upon adoption of
SFAS No. 109, the Company recorded a benefit of $16,881,000 which was
principally attributable to its deferred tax benefits that had not been
recognized due to limitations under prior accounting standards. The Company's
effective tax rates for 1994 and 1993 reflect both the absence of such
deferred tax benefits and the benefit of income derived from tax-advantaged
securities. The tax rate for 1993 reflects a tax benefit of $450,000 from the
effect of the increase in the federal tax rate on the Company's deferred tax
asset. The consolidated federal income tax provision for 1992 was reduced by
the recognition of deferred tax benefits to the extent that the Company was
able to utilize its NOL for financial reporting purposes under SFAS No. 96,
"Accounting for Income Taxes."
Cumulative effect of adoption of new accounting principles
Effective January 1, 1993 the Company recorded the cumulative effect of
adopting SFAS No. 109 (discussed above) and SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." SFAS No. 106
requires the accrual of the estimated cost of retiree benefit payments during
the years the employees provide services. Upon adoption of SFAS No. 106 the
cumulative effect of the Company's accumulated obligation for providing
medical benefits to retirees was $5,056,000, after a related tax benefit of
$2,604,000. Included in the cumulative effects of adopting these accounting
principles is the Company's portion of Guaranty National's benefit from
changes in accounting principles in 1993 of $360,000, net of $185,000 of
federal income taxes provided by the Company.
Earnings Per Common Share
Common stock and per common share data have been restated to give effect
to the 5-for-4 stock splits paid on both November 15, 1993 and December 7,
1992. Primary earnings per share amounted to $3.85 in 1994, $4.69 ($3.88
before the effect of adopting new accounting principles) in 1993 and $3.35
($3.62 before extraordinary item) in 1992. Reflected in the calculation of
1993 and 1992 earnings per common share are dividends of $409,000 and
$6,358,000, respectively, on the Company's Adjustable Rate Preferred Stock,
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<PAGE>
(redeemed in 1993), $1.90 Preferred Stock (converted into common stock or
redeemed in 1992) and $2.125 Preferred Stock (converted into common stock or
redeemed in 1993). All of these conversions and redemptions were effected
pursuant to the terms of the preferred stocks. The $1.90 Preferred Stock and
the $2.125 Preferred Stock were assumed to be converted, if dilutive, for the
purpose of computing fully-diluted earnings per common share. Fully-diluted
earnings per share amounted to $3.85 in 1994, $4.67 ($3.86 before the effect
of adopting new accounting principles in 1993 and $2.85 ($3.05 before
extraordinary item) in 1992. Reflected in the calculation of fully-diluted
earnings per share in 1993 and 1992 are Adjustable Rate Preferred Stock
dividends of $407,000 and $1,581,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities decreased $4,375,000 to
$118,779,000 in 1994 from $123,154,000 in 1993 and increased $42,621,000 in
1993 from $80,533,000 in 1992. In 1994 operating cash flow included a
$10,223,000 receipt from DPIC's discontinuation of a reinsurance contract.
Cash flow for 1993 included a receipt of $17,096,000 under a retrospectively
rated program written by DPIC, and the benefit of an income tax overpayment of
approximately $4,000,000 from 1992. Also, cash provided by operations in 1992
was decreased by an $18,410,000 payment for reinsurance applicable to a 1991
contract. Excluding these one-time items, year-to-year operating cash flows
increased $6,498,000 from 1993 to 1994 and decreased $885,000 from 1992 to
1993. The increase in 1994 is primarily due to an increase in premiums
collected offset by increases in paid losses, policy acquisition costs and
federal income tax payments. The change in operating cash flow for 1993 is
attributable to an increase in premiums collected, particularly for
Connecticut Specialty, more than offset by an increase in paid losses.
Cash used in investment activities decreased $38,230,000 to $86,185,000
in 1994 from $124,415,000 in 1993 and increased $65,162,000 in 1993 from
$59,253,000 in 1992. Cash is used in investment activities primarily for
purchases of investments, which are funded by maturities and sales of
investments, as well as by the net cash remaining from positive operating cash
flows after payments made to fund financing activities as described below.
Cash used in financing activities increased $27,536,000 to $32,582,000 in
1994 from $5,046,000 in 1993 and decreased $16,250,000 in 1993 from
$21,296,000 in 1992. Cash used in financing activities includes dividend
payments, scheduled debt repayments and payments related to the Company's
common stock repurchase program. Cash provided in 1993 from an increase in
bank borrowings was used to fund the redemption of Orion's Adjustable Rate
Preferred Stock. Dividends paid to stockholders were lower in 1994 and 1993
due to the conversions and redemptions of the $1.90 Preferred Stock and $2.125
Preferred Stock into common stock and the redemption of the Adjustable Rate
Preferred Stock. Proceeds from financing activities in 1992 include
$107,834,000 from the issuance of 9 1/8% Senior Notes in September 1992,
$19,930,000 from the issuance of bank debt in December 1992 and proceeds of
$9,497,000 from the issuance of common stock in April 1992. These sources of
cash were offset by debt repayments in 1992, including repayment of the
Company's bank loan and the retirement of the Company's 13 1/2% Senior
Subordinated Debentures and its 12 1/2% Subordinated Debentures.
-40-
<PAGE>
Orion's uses of cash consist of debt service, dividends to stockholders
and overhead expenses. These cash uses are funded from existing available
cash, financing transactions and receipt of dividends, reimbursement of
overhead expenses and amounts in lieu of federal income taxes from Orion's
insurance subsidiaries. Orion received $30,013,000, $25,512,000 and
$15,645,000 in dividends, $5,735,000, $5,230,000 and $4,500,000 for overhead
expenses and federal tax payments of $6,000,000, $5,600,000 and $6,250,000
from its insurance subsidiaries in 1994, 1993 and 1992, respectively. In 1993
Orion also received an extraordinary dividend of $65,470,000 (principally
securities) from a California-domiciled subsidiary which was simultaneously
contributed as capital to a Connecticut-domiciled subsidiary to effect a
change in pooling percentages among its insurance subsidiaries. Payments of
dividends by Orion's insurance subsidiaries must comply with insurance
regulatory limitations concerning stockholder dividends and capital adequacy.
State insurance regulators have broad discretionary authority with respect to
limitations on the payment of dividends by insurance companies. Limitations
under current regulations are well in excess of Orion's cash requirements.
Orion's insurance subsidiaries maintain liquidity in their investment
portfolios substantially in excess of that required to pay claims and
expenses. The insurance subsidiaries held cash and short-term investments of
$96,572,000 and $92,421,000 at December 31, 1994 and 1993, respectively.
Orion's insurance subsidiaries had consolidated policyholders' surplus of
$458,676,000 at December 31, 1994 and $460,986,000 at December 31, 1993, and
statutory operating leverage ratios of net premiums written to policyholders'
surplus of 1.6:1 and 1.4:1 at December 31, 1994 and 1993, respectively.
In August 1994, Orion's shelf registration statement relating to the
offering of up to $100 million of its debt and/or equity securities was
declared effective by the Securities and Exchange Commission ("SEC"). The
shelf registration provides for securities to be issued from time to time,
with specified terms of an issue of securities set forth in a prospectus
supplement at the time of issuance. The proceeds from the sale of securities
may be used for general corporate purposes, including working capital,
investment in subsidiaries, the repayment of existing bank debt, the
repurchase of shares of common stock, or for such other purpose as may be
specified in a prospectus supplement.
During 1992 and 1993, Orion reconfigured its debt structure to take
advantage of generally lower interest rates and the stronger capital position
of the Company, and to reduce the amount of debt maturing within five years.
On September 8, 1992, Orion issued 9 1/8% Senior Notes due 2002 with a face
value of $110,000,000 in a public offering. The net proceeds from the
offering of $107,834,000 were used to repay bank debt of $80,100,000, and to
retire Orion's 13 1/2% Senior Subordinated Debentures on October 9, 1992 for
$20,160,000 plus accrued interest. On November 30, 1992 Orion entered into a
bridge loan facility (the "Bridge Loan") with two banks aggregating
$25,000,000, under which it borrowed $20,000,000 to redeem its 12 1/2%
Subordinated Debentures on December 31, 1992 for $20,500,000 plus accrued
interest.
In March 1993 Orion entered into a bank loan arrangement (the "Loan
Agreement") that provided for initial borrowings of up to $60,000,000,
consisting of a $50,000,000 term loan (reduced by $12,500,000 in scheduled
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<PAGE>
commitment reductions through December 31, 1994) and a $10,000,000 line of
credit. These borrowings are unsecured and bear interest at or below prime.
The proceeds were used to repay the Bridge Loan and to redeem Orion's
Adjustable Rate Preferred Stock. In November 1994 Orion amended the Loan
Agreement to increase the credit line to $30,000,000. At December 31, 1994,
borrowings under the Loan Agreement amounted to $42,500,000 and the Company
has available $25,000,000 in unused commitments under the line of credit.
The terms of the Loan Agreement and Orion's Indenture for its 9 1/8%
Senior Notes limit the amount of additional borrowings, prepayments on
existing indebtedness, liens and guarantees by the Company. Management does
not believe that any of these limitations unduly restrict the Company's
operations or limit Orion's ability to pay dividends on its stock. At
December 31, 1994 the Company was in compliance with the terms of its debt
agreements. Management believes that the Company continues to have
substantial sources of capital and liquidity from the capital markets and bank
borrowings.
On October 1, 1992 and December 21, 1992, Orion called for redemption its
$1.90 Preferred Stock and $2.125 Preferred Stock on November 2, 1992 and
January 21, 1993, respectively. In both cases, the market price of the shares
of common stock that a holder would receive upon conversion of the preferred
stock was substantially higher than the redemption price of $21.30 per share
and $25.76 per share, respectively. Consequently, most holders converted into
common stock prior to the redemption dates, resulting in the issuance of
2,558,173 shares of common stock prior to December 31, 1992 and 1,423,544
shares of common stock in January 1993. Holders of 2,730 shares of $1.90
Preferred Stock and 21,605 shares of $2.125 Preferred Stock, who did not elect
to convert, redeemed their shares for an aggregate of $58,000 and $557,000,
respectively.
On April 15, 1992, Orion sold 515,625 shares of its common stock for
$9,497,000, net of expenses. The sale was made in a private transaction,
subject to the provisions of Regulation S of the Securities Act of 1933, as
amended. The proceeds from the sale were used for general corporate purposes.
The Company repurchased 442,327 shares, 177,658 shares and 22,420 shares
of its common stock at an aggregate cost of $13,746,000, $5,472,000 and
$554,000 in 1994, 1993 and 1992, respectively. The Company's remaining stock
purchase authorization from its Board of Directors amounted to $2,135,000 at
December 31, 1994.
Orion and its subsidiaries are routinely engaged in litigation incidental
to their businesses. Management believes that there are no significant legal
proceedings pending against the Company or its subsidiaries which, net of
reserves established therefor, are likely to result in judgments for amounts
that are material to the financial condition, liquidity or results of
operations of Orion and its consolidated subsidiaries, taken as a whole. (See
also Note I to the consolidated financial statements).
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of Orion Capital Corporation is responsible for the
consolidated financial statements and the information included therein. The
consolidated financial statements are fairly presented and have been prepared
in accordance with generally accepted accounting principles appropriate in the
circumstances, and, where necessary, include amounts based on management's
informed estimates and judgments.
The Company has a system of internal controls which it believes provides
reasonable assurance that assets are safeguarded from loss or unauthorized
use, transactions are recorded in accordance with management's policies and
that the financial records are reliable for preparing financial statements.
The system of internal controls includes written policies and procedures which
are communicated to all appropriate personnel and updated as necessary.
Compliance with the system of internal controls is continuously
maintained and monitored by management. The internal audit staff of the
Company evaluates and reports on the adequacy of and adherence to these
controls, policies and procedures. In addition, as part of its audit of the
consolidated financial statements, Deloitte & Touche LLP, the independent
auditors for the Company, perform an evaluation of the system of internal
controls to the extent they consider necessary to express an opinion on the
consolidated financial statements. Recommendations concerning the system of
internal controls are provided by both the internal auditors and Deloitte &
Touche LLP, and management takes actions which are believed to be appropriate
responses to these recommendations.
The Audit Committee of the Board of Directors is comprised of independent
directors, and has general responsibility for oversight of financial controls
and audit activities of the Company and its subsidiaries. The Audit
Committee, which reports to the Board, annually reviews the qualifications of
the independent auditors and meets periodically with them, the internal
auditors and management to review the plans and results of the audits. Both
internal and independent auditors have free access to the Audit Committee,
without members of management present, to discuss the adequacy of the system
of internal controls and any other matters which they believe should be
brought to the attention of the Committee.
Alan R. Gruber Daniel L. Barry
Chairman & Chief Executive Officer Vice President & Controller
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<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ORION CAPITAL CORPORATION
New York, New York
We have audited the accompanying consolidated balance sheets of Orion
Capital Corporation and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a)2. These financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Orion Capital Corporation and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1994 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
As discussed in Note A to the consolidated financial statements, in 1993
the Company adopted four new accounting standards required by generally
accepted accounting principles. On January 1, 1993 the Company changed its
method of accounting for income taxes and postretirement benefits to conform
with Statement of Financial Accounting Standards Nos. 109 and 106,
respectively. The Company changed its method of accounting for reinsurance to
conform with Statement of Financial Accounting Standards No. 113. Also,
effective December 31, 1993 the Company changed its method of accounting for
investments to conform with Statement of Financial Accounting Standards No.
115.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 24, 1995
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<PAGE>
<TABLE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(000s omitted)
ASSETS
December 31,
-------------------------
1994 1993
---- ----
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $358,915 - 1994 and $402,149 - 1993) .. $ 367,417 $ 384,402
Fixed maturities at market (amortized
cost $565,880 - 1994 and $517,716 - 1993) ..... 530,424 548,336
Common stocks at market (cost $116,078 - 1994
and $111,325 - 1993) .......................... 141,919 139,022
Non-redeemable preferred stocks at market
(cost $134,851 - 1994 and $98,986 - 1993) ..... 122,515 103,621
Other long-term investments ..................... 52,564 50,682
Short-term investments .......................... 104,201 96,473
---------- ----------
Total investments ............................ 1,319,040 1,322,536
Cash .............................................. 6,201 6,433
Accrued investment income ......................... 17,364 17,623
Investments in and advances to affiliates ......... 108,510 111,459
Accounts and notes receivable (less allowance
for doubtful accounts $1,954 - 1994 and
$1,859 - 1993) .................................. 125,132 111,539
Reinsurance recoverables and prepaid reinsurance .. 336,032 393,309
Deferred policy acquisition costs ................. 70,137 57,522
Property and equipment (less accumulated
depreciation $20,173 - 1994 and $19,788 - 1993).. 25,157 23,596
Excess of cost over fair value of net assets
acquired (less accumulated amortization
$17,586 - 1994 and $16,414 - 1993) .............. 29,415 30,587
Deferred federal income taxes ..................... 42,008 18,891
Other assets ...................................... 33,765 23,959
---------- ----------
Total assets ................................. $2,112,761 $2,117,454
========== ==========
<FN>
See Notes to Consolidated Financial Statements
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<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(000s omitted - except for share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
-------------------------
1994 1993
---- ----
<S> <C> <C>
Liabilities:
Policy liabilities -
Losses ........................................ $ 952,531 $ 937,775
Loss adjustment expenses ...................... 228,798 202,628
Unearned premiums ............................. 256,855 259,359
Policyholders' dividends ...................... 12,651 12,523
---------- ----------
Total policy liabilities .................... 1,450,835 1,412,285
Federal income taxes payable .................... 14,829 19,294
Notes payable ................................... 152,382 160,372
Other liabilities ............................... 129,627 131,308
---------- ----------
Total liabilities ........................... 1,747,673 1,723,259
---------- ----------
Commitments and Contingencies (Notes H and I)
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares -
issued and outstanding - none
Common stock, $1 par value; authorized
30,000,000 shares; issued 15,337,650 shares ... 15,338 15,338
Capital surplus ................................. 147,598 148,167
Net unrealized investment gains (losses), net of
federal income taxes (benefit) of $(14,146) -
1994 and $18,718 - 1993 ....................... (11,498) 49,566
Net unrealized foreign exchange translation
losses, net of federal income tax benefits of
$553 - 1994 and $394 - 1993 ................... (3,959) (3,665)
Retained earnings ............................... 242,908 198,491
Treasury stock, at cost (1,296,834 shares - 1994
and 965,442 shares - 1993) .................... (22,451) (12,182)
Deferred compensation on restricted stock ....... (2,848) (1,520)
---------- ----------
Total stockholders' equity .................. 365,088 394,195
---------- ----------
Total liabilities and stockholders' equity... $2,112,761 $2,117,454
========== ==========
<FN>
See Notes to Consolidated Financial Statements
-46-
<PAGE>
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(000s omitted - except for per share data)
Year Ended December 31,
------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Revenues:
Premiums earned ..................................... $691,223 $617,404 $560,205
Net investment income ............................... 84,915 91,803 82,483
Realized investment gains ........................... 3,437 9,478 3,667
Other income ........................................ 1,372 1,470 1,363
-------- -------- --------
Total revenues .................................... 780,947 720,155 647,718
-------- -------- --------
Expenses:
Losses incurred ..................................... 386,685 366,716 332,653
Loss adjustment expenses ............................ 111,438 92,416 91,379
Amortization of deferred policy acquisition costs ... 165,108 148,440 135,670
Other insurance expenses ............................ 21,461 17,381 17,158
Dividends to policyholders .......................... 14,836 12,513 13,558
Interest expense .................................... 13,597 13,044 12,754
Other expenses ...................................... 7,862 6,527 7,826
-------- -------- --------
Total expenses .................................... 720,987 657,037 610,998
-------- -------- --------
Earnings from operations before equity in earnings of
affiliates, federal income taxes, cumulative effect
of adoption of new accounting principles and
extraordinary item .................................. 59,960 63,118 36,720
Equity in earnings of affiliates ...................... 11,586 9,387 9,994
-------- -------- --------
Earnings from operations before federal income taxes,
cumulative effect of adoption of new accounting
principles and extraordinary item ................... 71,546 72,505 46,714
Federal income taxes .................................. 16,301 15,517 922
-------- -------- --------
Earnings before cumulative effect of adoption of new
accounting principles and extraordinary item ........ 55,245 56,988 45,792
Cumulative effect of adoption of new accounting
principles .......................................... - 11,825 -
Extraordinary item - loss on early extinguishment of
debt, net of income tax benefit of $60 .............. - - (2,920)
-------- -------- --------
Net earnings ........................................ $ 55,245 $ 68,813 $ 42,872
======== ======== ========
<PAGE>
Earnings (loss) per common share:
Primary -
Earnings before cumulative effect of adoption of
new accounting principles and extraordinary item. $ 3.85 $ 3.88 $ 3.62
Cumulative effect of adoption of new accounting
principles ...................................... - .81 -
Extraordinary item ................................ - - (.27)
-------- -------- --------
Net earnings .................................... $ 3.85 $ 4.69 $ 3.35
======== ======== ========
Fully diluted -
Earnings before cumulative effect of adoption of
new accounting principles and extraordinary item. $ 3.85 $ 3.86 $ 3.05
Cumulative effect of adoption of new accounting
principles ...................................... - .81 -
Extraordinary item ................................ - - (.20)
-------- -------- --------
Net earnings .................................... $ 3.85 $ 4.67 $ 2.85
======== ======== ========
<FN>
See Notes to Consolidated Financial Statements
-47-
<PAGE>
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(000s omitted)
Year Ended December 31,
------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Convertible exchangeable preferred stock:
Balance, beginning of year ................ $ - $ 28,524 $ 58,576
Conversion of preferred stock ............. - (28,524) (30,052)
-------- -------- --------
Balance, end of year ...................... $ - $ - $ 28,524
======== ======== ========
Common stock:
Balance, beginning of year ................ $ 15,338 $ 11,110 $ 7,527
Conversion of preferred stock ............. - 1,139 1,667
Sale of common stock ...................... - - 330
Exercise of stock options and issuance of
restricted stock ........................ - 24 14
Stock issued in 5-for-4 stock splits ...... - 3,065 1,572
-------- -------- --------
Balance, end of year ...................... $ 15,338 $ 15,338 $ 11,110
======== ======== ========
Capital surplus:
Balance, beginning of year ................ $148,167 $124,754 $ 96,345
Redemptions and conversions of preferred
stock ................................... - 26,072 28,118
Sale of common stock ...................... - - 9,167
Exercise of stock options and issuance
of restricted stock ..................... (569) 406 1,153
Stock issued in 5-for-4 stock splits ...... - (3,065) (10,029)
-------- -------- --------
Balance, end of year ...................... $147,598 $148,167 $124,754
======== ======== ========
Net unrealized investment gains (losses):
Balance, beginning of year ................ $ 49,566 $ 18,815 $ (6,324)
Cumulative effect of adoption of new
accounting principle, net of taxes
of $11,157 .............................. - 20,720 -
Change in unrealized investment gains
(losses), net of taxes in 1994 and 1993.. (61,064) 10,031 25,139
-------- -------- --------
Balance, end of year ...................... $(11,498) $ 49,566 $ 18,815
======== ======== ========
Net unrealized foreign exchange translation
gains (losses):
Balance, beginning of year ................ $ (3,665) $ (2,918) $ 191
Change in unrealized foreign exchange
translation gains (losses), net of taxes
in 1994 and 1993 ........................ (294) (747) (3,109)
-------- -------- --------
Balance, end of year ...................... $ (3,959) $ (3,665) $ (2,918)
======== ======== ========
<PAGE>
Retained earnings:
Balance, beginning of year ................ $198,491 $139,947 $110,074
Net earnings .............................. 55,245 68,813 42,872
Dividends declared ........................ (10,828) (10,269) (12,999)
-------- -------- --------
Balance, end of year ...................... $242,908 $198,491 $139,947
======== ======== ========
Treasury stock:
Balance, beginning of year ................ $(12,182) $ (6,694) $(15,267)
Exercise of stock options and issuance
(cancellation) of restricted stock ...... 3,476 (15) 671
Acquisition of treasury stock ............. (13,745) (5,473) (555)
Stock issued in 5-for-4 stock split ....... - - 8,457
-------- -------- --------
Balance, end of year ...................... $(22,451) $(12,182) $ (6,694)
======== ======== ========
Deferred compensation on restricted stock:
Balance, beginning of year ................ $ (1,520) $ (2,251) $ (1,293)
Issuance of restricted stock .............. (2,247) (108) (1,438)
Amortization of deferred compensation on
restricted stock ........................ 919 839 480
-------- -------- --------
Balance, end of year ...................... $ (2,848) $ (1,520) $ (2,251)
======== ======== ========
<FN>
See Notes to Consolidated Financial Statements
-48-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(000s omitted)
Year Ended December 31,
----------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Premiums collected ........................ $ 696,735 $ 626,678 $ 540,437
Net investment income collected ........... 83,603 81,178 72,168
Losses and loss adjustment expenses paid .. (437,386) (374,625) (346,201)
Policy acquisition costs paid ............. (185,217) (162,717) (153,246)
Dividends paid to policyholders ........... (14,708) (13,150) (11,728)
Interest paid ............................. (12,931) (12,405) (11,032)
Federal income tax payments ............... (10,860) (7,100) (6,805)
Other payments ............................ (457) (14,705) (3,060)
--------- --------- ---------
Net cash provided by operating
activities ............................ 118,779 123,154 80,533
--------- --------- ---------
Cash flows from investing activities:
Maturities of fixed maturities ............ - 152,442 118,301
Maturities of fixed maturities
held-to-maturity ........................ 55,200 - -
Maturities of fixed maturities
available-for-sale ...................... 28,839 - -
Sales of fixed maturities ................. - 90,720 189,282
Sale of fixed maturity held-to-maturity ... 1,155 - -
Sales of fixed maturities
available-for-sale ...................... 88,804 - -
Sales of equity securities................. 49,881 91,144 89,799
Investments in fixed maturities ........... - (311,183) (442,633)
Investments in fixed maturities
held-to-maturity ........................ (53,230) - -
Investments in fixed maturities
available-for-sale ...................... (156,927) - -
Investments in equity securities .......... (84,582) (120,609) (110,571)
Investment in Intercargo Corporation ...... - (19,315) -
Net sales (purchases) of short-term
investments ............................. (7,505) 8,885 105,662
Other payments ............................ (7,820) (16,499) (9,093)
--------- --------- ---------
Net cash used in investing activities ... (86,185) (124,415) (59,253)
--------- --------- ---------
<PAGE>
Cash flows from financing activities:
Proceeds from issuance of notes payable ... - 59,672 127,764
Proceeds from issuance of common stock .... 598 286 9,545
Repayment of notes payable and debentures.. (8,000) (29,500) (144,998)
Dividends paid to stockholders ............ (10,609) (10,776) (13,155)
Purchases of common stock and purchases
and redemption of adjustable rate
preferred stock ......................... (14,220) (23,615) (412)
Other payments ........................... (351) (1,113) (40)
--------- --------- ---------
Net cash used in financing activities ... (32,582) (5,046) (21,296)
--------- --------- ---------
Effect of foreign exchange rate changes
on cash ................................... (244) (24) 2
--------- --------- ---------
Net decrease in cash .................... (232) (6,331) (14)
Cash balance, beginning of year ............. 6,433 12,764 12,778
--------- --------- ---------
Cash balance, end of year ................... $ 6,201 $ 6,433 $ 12,764
========= ========= =========
<FN>
See Notes to Consolidated Financial Statements
-49-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
(000s omitted)
Year Ended December 31,
------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings ................................. $ 55,245 $ 68,813 $ 42,872
-------- -------- --------
Adjustments:
Cumulative effect of adoption of new
accounting principles .................... - (11,825) -
Depreciation and amortization .............. 4,936 3,939 2,970
Amortization of excess of cost over fair
value of net assets acquired ............. 1,172 1,173 1,173
Deferred federal income taxes .............. 9,906 (931) (5,182)
Amortization of fixed maturity investments . 1,700 128 (659)
Non-cash investment income ................. (2,840) (11,586) (6,378)
Equity in earnings of affiliates ........... (11,586) (9,387) (9,994)
Dividends received from affiliates ......... 3,295 3,135 3,072
Realized investment gains .................. (3,437) (9,478) (3,667)
Foreign exchange translation adjustment .... 257 152 (73)
Extraordinary loss ......................... - - 2,920
Other....................................... (38) (34) -
Changes in assets and liabilities:
Decrease (increase) in accrued investment
income ................................... 259 492 (1,550)
Increase in accounts and notes receivable .. (13,593) (9,298) (6,245)
Decrease (increase) in reinsurance
recoverables and prepaid reinsurance ..... 57,277 21,326 (7,402)
Decrease (increase) in deferred policy
acquisition costs ........................ (12,615) (1,388) 2,737
Increase in other assets ................... (7,589) (431) (861)
Increase in losses ......................... 14,756 52,695 47,043
Increase in loss adjustment expenses ....... 26,170 6,312 23,414
Increase (decrease) in unearned premiums ... (2,504) 27,043 25,634
Increase (decrease) in policyholders'
dividends ................................ 128 (637) 1,830
Increase (decrease) in federal income taxes
payable .................................. (4,465) 9,242 944
Increase (decrease) in other liabilities ... 2,345 (16,301) (32,065)
-------- -------- --------
Total adjustments and changes ............ 63,534 54,341 37,661
-------- -------- --------
Net cash provided by operating activities .. $118,779 $123,154 $ 80,533
======== ======== ========
<FN>
See Notes to Consolidated Financial Statements
-50-
/TABLE
<PAGE>
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1994, 1993 and 1992
Note A - Significant Accounting Policies
Basis of Financial Statement Presentation - Orion Capital Corporation
("Orion") and its wholly-owned subsidiaries (collectively the "Company")
operate principally in the property and casualty insurance business. The
consolidated financial statements and notes thereto are presented in
accordance with generally accepted accounting principles ("GAAP") for property
and casualty insurance companies and include the accounts of Orion and its
majority-owned subsidiaries. The Company's investments in unconsolidated
affiliates are accounted for using the equity method (See Note B). All
material intercompany balances and transactions have been eliminated.
Adoption of new accounting principles - In 1993 the Company adopted four
new accounting standards issued by the Financial Accounting Standards Board,
which had a significant impact on the Company's financial statements. The
Company was required to adopt these standards, which are more fully discussed
in the notes that follow:
SFAS No. 106 - Employers' Accounting for Postretirement Benefits Other Than
Pensions
SFAS No. 109 - Accounting for Income Taxes
SFAS No. 113 - Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts
SFAS No. 115 - Accounting for Certain Investments in Debt and Equity
Securities
Regulation - The Company's insurance subsidiaries are subject to
comprehensive regulation by various state insurance departments including
regulations limiting dividend payments to Orion and intercompany transactions.
Under these regulations, the maximum dividends permitted at December 31, 1994
for the ensuing twelve months, without prior approval, aggregated $52,377,000.
However, state insurance regulators have broad discretionary authority with
respect to approving the payment of dividends by insurance companies.
Policyholders' surplus of Orion's wholly-owned insurance subsidiaries
determined in accordance with prescribed statutory accounting practices
amounted to $458,676,000 at December 31, 1994 and $460,986,000 at December 31,
1993. Statutory net income amounted to $61,518,000, $66,862,000 and
$43,733,000 for 1994, 1993 and 1992, respectively.
Cash - For purposes of the consolidated statement of cash flows, the
Company considers only demand deposit accounts to be cash.
-51-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments - Effective December 31, 1993, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which establishes the "available-
for-sale" category of investment securities and requires such securities to be
recorded at market value, with unrealized gains and losses reported in a
separate component of stockholders' equity. As a result of the adoption of
this standard on December 31, 1993, the Company reclassified investments with
a market value of $452,102,000 from fixed maturities recorded at amortized
cost to fixed maturities recorded at market, and increased unrealized
appreciation on investments, a component of stockholders' equity, by
$20,720,000, net of deferred income taxes. Fixed maturity investments include
bonds, preferred stocks with mandatory redemption features, and certificates
of deposit that mature more than one year after the balance sheet date. Fixed
maturity investments that the Company has both the positive intent and the
ability to hold to maturity are recorded at amortized cost. Fixed maturity
investments which may be sold in response to, among other things, changes in
interest rates, prepayment risk, income tax strategies or liquidity needs, are
classified as `available-for-sale' and are carried at market value. Common
stocks and non-redeemable preferred stocks are stated at market value.
Fluctuations in the market value of these equity securities are recorded as
unrealized investment gains or losses and credited or charged to stockholders'
equity. Other long-term investments include equity ownership interests in
limited partnerships which are recorded using the equity method of accounting,
and mortgage loans which are stated at their unpaid balance. Short-term
investments include certificates of deposit and commercial paper which mature
within one year of the balance sheet date, money market accounts and United
States Treasury Bills. Estimates of market values are generally based on
quoted market prices or dealer quotes, if available, or otherwise on an
evaluation of the issuers' financial statements. Realized investment gains
and losses, including provision for other than temporary impairment of
investment securities, are recognized on the specific identification method.
Deferred Policy Acquisition Costs - Costs that vary with, and are
directly related to, the production of new and renewal business are deferred
and amortized as the related premiums are earned. The test for recoverability
of such deferred costs includes the consideration of net investment income.
Excess of Cost Over Fair Value of Net Assets Acquired - The excess of the
cost of acquiring subsidiaries over the fair value of their net assets
("goodwill") is amortized on a straight-line basis over periods of 25 to 40
years.
Revenue Recognition - Premiums are earned on a daily pro rata basis over
the policy period. A provision is made for anticipated retrospective premium
adjustments and audit premiums. Direct and assumed premiums are reduced for
reinsurance ceded to other insurers.
-52-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Policy Liabilities and Reinsurance - Loss and loss adjustment expense
liabilities are established in consideration of individual cases for reported
losses and past experience for incurred but not yet reported losses ("IBNR").
The Company adopted SFAS No. 113 "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts" on January 1, 1993. The statement
establishes the conditions required for a contract with a reinsurer to be
accounted for as reinsurance, and amends SFAS No. 60, "Accounting and
Reporting by Insurance Enterprises", to require reinsurance receivables and
prepaid reinsurance premiums to be reported as assets rather than to be offset
against the related liabilities. Estimated reinsurance receivables are
recognized in a manner consistent with the liabilities relating to the
underlying reinsured contracts. At December 31, 1994 and 1993, approximately
$55,986,000 and $73,215,000, respectively, of long-term disability workers
compensation loss reserves are included in the consolidated financial
statements at net present value using a statutory interest rate of 3.5%.
Policyholders' dividends on participating policies are accrued at estimated
payment rates as the related premiums are earned. Participating business
represented 21% of premiums in-force at both December 31, 1994 and 1993. As a
percent of premiums earned, participating business amounted to 21% in 1994 and
1993, and 28% in 1992.
Federal Income Taxes - As of January 1, 1993 the Company prospectively
adopted SFAS No. 109, "Accounting for Income Taxes," replacing the previous
standard for accounting for income taxes, SFAS No. 96. The objectives of SFAS
No. 109 are to recognize taxes payable or refundable for the current year, and
deferred tax assets or liabilities for the future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. The new standard provides for the recognition of deferred tax assets
that were not recognized under SFAS No. 96, and resulted in the recognition of
a cumulative tax benefit of $16,881,000 ($1.16 per share) in the Company's
consolidated statement of earnings for the year ended December 31, 1993.
Postretirement Benefits - Effective January 1, 1993 the Company adopted
SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions" which requires the Company to accrue the estimated cost of retiree
benefits during the years the employees provide services. The Company
previously expensed the cost of medical benefits provided to retirees as they
were paid. The cumulative effect of adopting SFAS No. 106 as of January 1,
1993 was a decrease in net earnings of $5,056,000 ($.35 per share), after a
tax benefit of $2,604,000, which has been included in the Company's
consolidated statement of earnings for the year ended December 31, 1993.
Stock Splits - Common stock and per common share data have been restated,
as required, to give effect to the 5-for-4 stock splits paid on November 15,
1993 to stockholders of record on October 15, 1993 and on December 7, 1992 to
stockholders of record on November 20, 1992.
Earnings Per Common Share - Primary and fully-diluted earnings per
common share are computed using the weighted average common and dilutive
common equivalent shares outstanding.
-53-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note B - Investments in Affiliates
On November 20, 1991 the Company sold 6,250,000 shares of common stock of
its wholly-owned subsidiary, Guaranty National Corporation ("Guaranty
National"), in a public offering, and reduced its ownership to slightly less
than fifty percent. Just prior to the sale, Guaranty National issued 9 1/2%
subordinated notes, with a final maturity in January 1998, to the Company
aggregating $20,896,000. The principal of the notes was refinanced on August
1, 1993 at 7.85%, with the terms extended to semi-annual installments
beginning January 1, 1998 through July 1, 2003. During 1994 Guaranty National
purchased 319,600 shares of its common stock in the open market and 139,600
shares were purchased from the Company to maintain the Company's ownership
percentage at just under fifty percent.
On September 13, 1993 the Company acquired 700,000 shares of common stock
of Intercargo Corporation ("Intercargo"), a publicly held corporation. On
December 28, 1993 the Company purchased an additional 826,484 shares which
increased its ownership of Intercargo to 20.0%. The aggregate purchase price,
including expenses, was $19,314,000. The excess of cost over the fair value
of the underlying equity in net assets acquired was $11,158,000, which is
being amortized over a 25 year period.
The Company's financial statements include the portion of Guaranty
National's and Intercargo's results attributable to the Company's ownership on
an equity accounting basis. The Company records its share of Intercargo's
operating results in the subsequent quarter, after Intercargo has reported its
financial results. The Company's share of the undistributed earnings of
Guaranty National after November 20, 1991, and Intercargo after September 13,
1993, were, in the aggregate, $22,874,000 as of December 31, 1994 and
$14,926,000 as of December 31, 1993.
Transactions with Guaranty National for 1994, 1993 and 1992 reported in
the consolidated statement of earnings include interest income on the
subordinated notes of $1,640,000, $1,843,000 and $2,004,000, investment
management fee income of $550,000, $550,000 and $700,000, respectively, and
interest expense on a mortgage participation loan of $407,000 in each year.
-54-
<PAGE>
<TABLE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized financial information for the Company's affiliates is set
forth below:
Year Ended December 31,
------------------------------
1994 1993 1992
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Revenues:
Premiums earned ...................... $376,444 $272,636 $220,033
Realized investment gains ............ 3,007 5,996 2,342
Investment and other income .......... 28,090 21,813 23,125
-------- -------- --------
407,541 300,445 245,500
-------- -------- --------
Expenses:
Insurance expenses ................... 367,501 274,377 214,927
Interest and other ................... 5,428 3,447 3,241
-------- -------- --------
372,929 277,824 218,168
-------- -------- --------
Earnings before federal income taxes
and cumulative effect of change in
accounting principles ................ 34,612 22,621 27,332
Federal income taxes ................... 8,734 4,481 7,061
-------- -------- --------
Earnings before cumulative effect of
change in accounting principles .... $ 25,878 $ 18,140 $ 20,271
======== ======== ========
The Company's proportionate share:
Earnings before cumulative effect of
change in accounting principles .... $ 11,586 $ 9,387 $ 9,994
======== ======== ========
Cumulative effect of change in
accounting principles
(SFAS Nos. 106 and 109) ............ $ 545
========
<CAPTION>
December 31,
-------------------
1994 1993
---- ----
(000s omitted)
<S> <C> <C>
Cash and investments ................................. $461,203 $460,779
Other assets ......................................... 268,872 228,803
-------- --------
730,075 689,582
Policy liabilities ................................... (426,997) (387,783)
Notes payable ........................................ (56,383) (49,844)
Other liabilities .................................... (62,405) (60,915)
-------- --------
Stockholders' equity ................................. $184,290 $191,040
======== ========
-55-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
-------------------
1994 1993
---- ----
(000s omitted)
<S> <C> <C>
The Company's investment in and advances to
affiliates were as follows:
Book value ......................................... $108,510 $111,459
Market value ....................................... 138,786 143,255
Guaranty National shares held ...................... 6,004 6,143
- Book value of shares held ...................... $ 72,564 $ 75,394
- Market value of shares held .................... 110,320 107,510
Intercargo shares held ............................. 1,526 1,526
- Book value of shares held ...................... $ 18,750 $ 18,869
- Market value of shares held .................... 12,593 17,936
<CAPTION>
Note C - Investments
Net investment income for the three years ended December 31, 1994 was as
follows:
Year Ended December 31,
---------------------------------
1994 1993 1992
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Net investment income:
Fixed maturities ...................... $ 67,305 $ 69,565 $ 63,739
Equity securities ..................... 14,964 10,495 9,842
Other long-term investments ........... 685 9,130 3,499
Short-term investments ................ 2,902 3,276 5,919
Accounts and notes receivable ......... 134 179 105
Other ................................. 411 712 467
-------- -------- --------
Total investment income ............. 86,401 93,357 83,571
Less investment expenses .............. 1,486 1,554 1,088
-------- -------- --------
Net investment income ............... $ 84,915 $ 91,803 $ 82,483
======== ======== ========
-56-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Certain information concerning realized and unrealized gains (losses) for
fixed maturities and equity securities is set forth below:
Year Ended December 31,
---------------------------------
1994 1993 1992
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Fixed maturities (only available-for-sale
securities for 1994)
Gross realized gains .................. $ 4,774 $ 10,817 $ 10,273
Gross realized losses ................. (4,267) (4,155) (4,908)
Provision for other than temporary
impairment .......................... (750) (2,147) (2,133)
$ (243) $ 4,515 $ 3,232
======== ======== ========
Change in unrealized gains (losses)
recorded in stockholders equity ..... $(66,076) $ 29,131 $ 1,489
======== ======== ========
Equity securities
Gross realized gains .................. $ 5,319 $ 15,163 $ 8,394
Gross realized losses ................. (1,474) (3,890) (2,530)
Provision for other than temporary
impairment .......................... (381) (6,310) (5,429)
$ 3,464 $ 4,963 $ 435
======== ======== ========
Change in unrealized gains (losses)
recorded in stockholders equity ..... $(18,827) $ 16,468 $ 22,584
======== ======== ========
In 1994 the Company transferred securities of two issuers with an
amortized cost of $11,469,000 and a market value of $10,122,000 from the held-
to-maturity portfolio to the available-for-sale category due to a
deterioration in the creditworthiness of these issuers. The Company sold only
one security with an amortized cost of $991,000 from the held-to-maturity
portfolio during 1994, resulting in a realized gain of $164,000.
-57-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and estimated market values of investments in fixed
maturities, equity securities and short-term investments are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1994 Cost Gains Losses Value
- ----------------- ---------- ---------- ---------- ---------
(000s omitted)
<S> <C> <C> <C> <C>
Held-to-maturity securities:
United States Government
and government agencies
and authorities ........... $ 124,176 $ 242 $ (4,084) $ 120,334
States, municipalities and
political subdivisions .... 137,736 1,848 (3,062) 136,522
Foreign governments ......... 50 - - 50
Corporate securities ........ 105,455 1,020 (4,466) 102,009
---------- -------- -------- ----------
$ 367,417 $ 3,110 $(11,612) $ 358,915
========== ======== ======== ==========
Available-for-sale securities:
United States Government
and government agencies
and authorities ........... $ 168,022 $ 1,016 $(18,083) $ 150,955
States, municipalities and
political subdivisions .... 180,145 955 (5,738) 175,362
Foreign governments ......... 7,678 113 (133) 7,658
Corporate securities ........ 193,909 2,884 (15,553) 181,240
Mortgage-backed securities
(exclusive of government
agencies) ................ 16,126 102 (1,019) 15,209
Equity securities ........... 250,929 37,345 (23,840) 264,434
Short-term investments....... 104,201 - - 104,201
---------- -------- -------- ----------
$ 921,010 $ 42,415 $(64,366) $ 899,059
========== ======== ======== ==========
<PAGE>
December 31, 1993
- -----------------
Held-to-maturity securities:
United States Government
and government agencies
and authorities ........... $ 140,784 $ 8,224 $ (627) $ 148,381
States, municipalities and
political subdivisions .... 123,852 7,528 (202) 131,178
Foreign governments ......... 7,270 308 - 7,578
Corporate securities ........ 112,496 3,704 (1,188) 115,012
---------- -------- -------- ----------
$ 384,402 $ 19,764 $ (2,017) $ 402,149
========== ======== ======== ==========
Available-for-sale securities:
United States Government
and government agencies
and authorities ........... $ 145,511 $ 10,156 $ (4,573) $ 151,094
States, municipalities and
political subdivisions .... 144,839 15,183 (180) 159,842
Foreign governments ......... 7,381 923 - 8,304
Corporate securities ........ 175,853 10,540 (2,126) 184,267
Mortgage-backed securities
(exclusive of government
agencies) ................ 44,132 1,020 (323) 44,829
Equity securities ........... 210,311 38,568 (6,236) 242,643
Short-term investments....... 96,473 - - 96,473
---------- -------- -------- ----------
$ 824,500 $ 76,390 $(13,438) $ 887,452
========== ======== ======== ==========
-58-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and estimated market values of fixed maturity and
short-term investments at December 31, 1994, by contractual fiscal maturity,
are shown below. Expected maturities will differ from contractual maturities
because issuers of securities may have the right to call or prepay obligations
with or without call or prepayment penalties.
<CAPTION>
Fixed Maturities Fixed Maturities
Held-to-Maturity Available-for-Sale
-------------------- --------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
(000s omitted)
<S> <C> <C> <C> <C>
Due in one year or less .......... $ 16,590 $ 16,648 $107,470 $107,074
Due after one year through five
years .......................... 191,684 186,080 55,991 53,012
Due after five years through ten
years .......................... 59,973 58,773 83,234 80,088
Due after ten years .............. 99,170 97,414 253,651 242,618
-------- -------- -------- --------
367,417 358,915 500,346 482,792
Mortgage-backed securities ....... - - 169,735 151,833
-------- -------- -------- --------
$367,417 $358,915 $670,081 $634,625
======== ======== ======== ========
</TABLE>
Other long-term investments had aggregate carrying values of $52,564,000
at December 31, 1994 and $50,682,000 at December 31, 1993 including mortgage
loans on real estate of $1,764,000 and $1,690,000, respectively. Estimated
market values of mortgage loans and other long-term investments approximate
their carrying values.
The carrying value of the Company's investments in principal-only
securities and interest-only securities totalled approximately $14,038,000, or
1.1% of total invested assets at December 31, 1994. The Company does not
have any derivative financial instruments and does not actively engage in
hedging its investment positions or its foreign currency and/or interest rate
exposures.
The carrying value of securities on deposit with state regulatory
authorities in accordance with statutory requirements totalled $234,265,000
and $283,537,000 at December 31, 1994 and 1993, respectively. Excluding
investments in Guaranty National and securities of the United States
Government and its agencies, the Company did not have any investments in
securities of any one issuer that exceeded $20,000,000. The Company had
$1,344,000 and $226,000 of fixed maturity investments for which it was not
accruing income for the years ended December 31, 1994 and 1993, respectively.
-59-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note D - Reinsurance
In the normal course of business, the Company's insurance subsidiaries
reinsure certain risks, generally on an excess-of-loss or pro rata basis, with
other companies in order to limit losses. Reinsurance does not discharge the
primary liability of the original insurer. As of December 31, 1994 and 1993,
recoverables for reinsurance ceded to the Company's three largest reinsurers
were an aggregate of $82,679,000 and $106,414,000, respectively. At December
31, 1994 and 1993, these reinsurers provided qualified trust accounts for the
benefit of the Company of $43,526,000 and $46,167,000 and letters of credit
totalling $1,770,000 and $4,372,000, respectively. The table below
illustrates the effect of reinsurance on premiums written and premiums earned:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
(000s omitted-except for percentages)
<S> <C> <C> <C>
Direct premiums written ................ $ 691,493 $ 647,426 $ 616,016
Reinsurance assumed .................... 120,851 132,702 74,726
--------- --------- ---------
Gross premiums written ................. 812,344 780,128 690,742
Reinsurance ceded ...................... (100,289) (144,542) (123,312)
--------- --------- ---------
Net premiums written ................... $ 712,055 $ 635,586 $ 567,430
========= ========= =========
Percentage of amount assumed to net .... 17.0% 20.9% 13.2%
========= ========= =========
Direct premiums earned ................. $ 685,110 $ 635,374 $ 589,570
Reinsurance assumed .................... 129,737 117,711 75,540
--------- --------- ---------
Gross premiums earned .................. 814,847 753,085 665,110
Reinsurance ceded ...................... (123,624) (135,681) (104,905)
--------- --------- ---------
Net premiums earned .................... $ 691,223 $ 617,404 $ 560,205
========= ========= =========
Loss and loss adjustment expenses
incurred recoverable from reinsurers.. $ 56,778 $ 70,297 $ 75,521
========= ========= =========
</TABLE>
Reinsurance recoverables and prepaid reinsurance includes prepaid
reinsurance of $31,708,000 at December 31, 1994 and $55,043,000 at December
31, 1993.
-60-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note E - Loss and Loss Adjustment Expense Reserves
An analysis of the Company's calendar year loss and loss adjustment
expense reserves is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Net balance, beginning of year ....... $ 830,805 $ 746,298 $ 668,467
---------- ---------- ----------
Provision:
Current year ....................... 480,826 434,840 397,551
Prior years ........................ 17,297 24,292 26,481
---------- ---------- ----------
498,123 459,132 424,032
---------- ---------- ----------
Payments:
Current year ....................... 134,120 125,042 105,883
Prior years ........................ 303,266 249,583 240,318
---------- ---------- ----------
437,386 374,625 346,201
---------- ---------- ----------
Net balance, end of year ............. 891,542 830,805 746,298
Add reinsurance recoverables ....... 289,787 309,598 335,098
---------- ---------- ----------
Balance, end of year ................. $1,181,329 $1,140,403 $1,081,396
========== ========== ==========
</TABLE>
Loss reserve estimates are based on forecasts of the ultimate settlement
of claims and are subject to uncertainty with respect to future events. Loss
reserve amounts are based on management's informed estimates and judgments,
using data currently available. Reserve amounts and the underlying actuarial
factors and assumptions are regularly analyzed and adjusted to reflect new
information. A substantial portion of the loss development experienced by the
Company during the three years ended December 31, 1994 results from pools and
associations and other reinsurance, where development is related to the ceding
companies' experience, and from discontinued programs or lines of business.
Reserve strengthening, higher initial reserving and increased stabilization in
the Company's business has resulted in a decreasing level of loss development.
An analysis of the Company's loss and loss adjustment expense
environmental reserves and related claim counts for 1994 and 1993 is presented
below:
-61-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1994 1993
--------------- ---------------
Claim Claim
Amount Counts Amount Counts
------ ------ ------ ------
(000s omitted for dollar amounts)
<S> <C> <C> <C> <C>
Net balance, beginning of year ........ $17,189 512 $15,184 335
Provision ........................... 10,645 7,562
Payments ............................ (7,233) (5,557)
------- -------
Net balance, end of year .............. 20,601 467 17,189 512
Add reinsurance recoverables ........ 11,391 4,699
------- -------
Balance, end of year .................. $31,992 $21,888
======= =======
</TABLE>
Establishing reserve liabilities for environmental claims is subject to
significant uncertainties that make reserve estimation difficult. Legal
decisions have tended to expand insurance coverage beyond the intent of the
original policies. The Company does not use discounting in determining its
reserves for environmental claims. IBNR of $13,791,000 and $6,680,000 is
included in net reserves for environmental claims at December 31, 1994 and
1993, respectively.
The Company's environmental claims principally relate to asbestos and
hazardous waste, arising from certain liability business written prior to the
mid 1980's, which business was never a major element of the Company's
operations. Environmental claims are also received from certain reinsurance
pools and associations where reserves are established based on information
reported to the Company by the managers of those pools and associations. In
view of the lines of insurance that the Company has traditionally written,
environmental claims have not represented, and are not expected to represent
in the future, a material portion of the Company's total claims. Such claims
were not specifically segregated in the Company's claims systems prior to
1993. The information above is not presented for 1992 due to the relative
insignificance of the Company's exposure to environmental liability and the
cost of obtaining the data.
-62-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note F - Notes Payable
Orion issued 9 1/8% Senior Notes due 2002 (the "9 1/8% Senior Notes") in
a public offering on September 8, 1992. The proceeds were used to extinguish
the Company's debt under its loan agreement with various banks at that date,
and to redeem its 13 1/2% Senior Subordinated Debentures on October 9, 1992.
The Company entered into a loan agreement (the "Bridge Loan") with two banks
on November 30, 1992, and borrowed $20,000,000 under this agreement in
December 1992, the proceeds of which were used to redeem the Company's 12 1/2%
Subordinated Debentures on December 31, 1992. The costs of the early
extinguishment of the Company's bank debt and debentures in 1992 were
approximately $2,980,000. These costs are reported as an extraordinary item
in the Company's financial statements, net of a $60,000 tax benefit. Debt
extinguishment costs include the premiums required to call the debentures, the
unamortized discount of the debentures and unamortized deferred financing
costs of the debentures and bank debt.
Orion entered into a bank loan agreement (the "Loan Agreement") in March
1993 which was amended in 1994 to increase the credit line. The proceeds were
used to repay the Bridge Loan and to redeem the Company's Adjustable Rate
Preferred Stock. As of December 31, 1994, the Company had $42,500,000
outstanding under the Loan Agreement, and $25,000,000 in unused commitments
available under the line of credit. There is a commitment fee of 1/4% of 1%
per annum on the unused portion of the revolving credit facility. The Company
can elect to borrow at the prime rate, or at certain other short-term
borrowing rates. The rates for notes payable under the Loan Agreement were
between 6.71% and 6.90% at December 31, 1994 and between 4.59% and 4.90% at
December 31, 1993. The terms of the Loan Agreement limit the amount of
additional borrowings, prepayments on existing indebtedness, liens and
guarantees by the Company, and require the Company to meet minimum net worth
and certain financial ratio tests. The 9 1/8% Senior Notes Indenture limits
the Company's ability to incur secured indebtedness without equally and
ratably securing the 9 1/8% Senior Notes.
Notes payable are recorded at face value less unamortized discount. The
carrying value and estimated market value of notes payable consists of the
following:
<TABLE>
<CAPTION>
Estimated
Carrying Value Market Value
------------------ ------------------
December 31, 1994 1993 1994 1993
------------ ---- ---- ---- ----
(000s omitted)
<S> <C> <C> <C> <C>
Borrowings under loan agreement with various
banks (various interest rates) .............. $ 42,500 $ 50,500 $ 42,500 $ 50,500
$110,000,000 face amount, 9 1/8% Senior Notes,
due September 1, 2002 ....................... 109,882 109,872 111,815 119,053
-------- -------- -------- --------
$152,382 $160,372 $154,315 $169,553
======== ======== ======== ========
-63-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<CAPTION>
The Company's debt is scheduled to be repaid as follows:
(000s omitted)
<S> <C>
1995 ................................... $ 10,000
1996 ................................... 12,000
1997 ................................... 12,000
1998 ................................... 3,500
1999 ................................... 5,000
2002 ................................... 110,000
--------
152,500
Less unamortized discount .............. 118
--------
$152,382
========
</TABLE>
Note G - Federal Income Taxes
Orion and its wholly-owned subsidiaries file consolidated federal income
tax returns. The consolidated federal income tax current provision for 1994
was based on the alternative minimum tax method. The current provisions for
1993 and 1992 were computed by the regular tax method. The 1993 tax provision
reflects a tax benefit of $450,000 from the effect of the increase in the
federal tax rate on the Company's deferred tax asset. The Company adopted
SFAS No. 109 effective January 1, 1993. The new standard provides for the
recognition of deferred tax assets that were not recognized under the prior
standard, SFAS No. 96. The cumulative effect of adopting SFAS No. 109 was a
benefit of $16,881,000. Substantially all federal income taxes incurred by
the Company and its subsidiaries relate to domestic operations.
<TABLE>
<CAPTION>
Total income taxes on income from operations and allocations of taxes
(benefits) to other items for the years ended December 31, 1994 and 1993 are
as follows:
Year Ended December 31,
-----------------------
1994 1993
---- ----
(000s omitted)
<S> <C> <C>
Taxes on income from continuing
operations .................................... $ 16,301 $ 15,517
Taxes allocated to other items:
Cumulative effect of change in accounting for
postretirement benefits ..................... - (2,604)
Stockholders' equity, for unrealized
appreciation (depreciation) of securities ... (32,864) 18,718
Stockholders' equity, for foreign exchange
translation losses .......................... (159) (394)
-------- --------
$(16,722) $ 31,237
======== ========
-64-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tax effects of the temporary differences comprising the Company's net
deferred tax asset as of December 31, 1994 and 1993 are as follows:
December 31,
----------------------
1994 1993
---- ----
(000s omitted)
<S> <C> <C>
Deferred tax assets:
Loss reserve discounting ...................... $52,940 $55,479
Unearned premium reserves ..................... 16,145 14,675
Policyholders' dividends ...................... 4,188 4,348
Realized investment losses .................... 3,672 4,054
Unrealized investment losses .................. 8,975 -
Deferred income ............................... 2,659 2,836
Retiree medical benefits ...................... 3,097 2,726
Other ......................................... 8,426 6,717
------- -------
100,102 90,835
------- -------
Deferred tax liabilities:
Deferred policy acquisition costs ............. 24,548 20,133
Investment in affiliates ...................... 19,091 15,800
Investment income ............................. 10,375 6,853
Unrealized investment gains ................... - 23,899
Other ......................................... 4,080 5,259
------- -------
58,094 71,944
------- -------
$42,008 $18,891
======= =======
<CAPTION>
The components of the provision (benefit) for federal income taxes are as
follows:
Year Ended December 31,
-----------------------------
1994 1993 1992
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Current ...................... $ 6,395 $16,448 $ 6,104
Deferred .................... 9,906 (931) (5,182)
------- ------- -------
$16,301 $15,517 $ 922
======= ======= =======
-65-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of expected federal income tax expense on pre-tax
earnings before cumulative effect of adoption of new accounting principles and
extraordinary item at regular corporate rates to actual tax expense is as
follows:
Year Ended December 31,
------------------------------------------------
1994 1993 1992
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(000s omitted-except for percentages)
<S> <C> <C> <C> <C> <C> <C>
Expected income tax expense.. $25,041 35.0% $25,377 35.0% $15,883 34.0%
Utilization of NOLs ......... - - - - (6,135) (13.1)
Change in enacted tax rate .. - - (905) (1.3) - -
Dividends-received deduction (5,830) (8.2) (4,019) (5.5) (3,504) (7.5)
Tax-exempt interest ......... (5,362) (7.5) (4,929) (6.8) (2,652) (5.7)
Amortization of goodwill .... 410 .6 410 .6 399 .9
Other ....................... 2,042 2.9 (417) (.6) (3,069) (6.6)
------- ----- ------- ----- ------- -----
Actual income tax expense ... $16,301 22.8% $15,517 21.4% $ 922 2.0%
======= ===== ======= ===== ======= =====
</TABLE>
Note H - Commitments
Minimum lease commitments at December 31, 1994, with the majority having
initial lease periods from one to twenty-five years, are as follows:
(000s omitted)
1995 ....................................... $10,894
1996 ....................................... 9,072
1997 ....................................... 7,951
1998 ....................................... 5,725
1999 ....................................... 4,960
2000 and thereafter ........................ 40,983
-------
Minimum rental commitments ............... $79,585
=======
Rent expense amounted to $11,519,000, $11,976,000 and $12,224,000 net of
sublease rentals of $9,000, $419,000 and $765,000 in 1994, 1993 and 1992,
respectively. Substantially all leases are for office space and equipment. A
number of lease commitments contain renewal options ranging from one to thirty
years.
Note I - Contingencies
In November 1988, California voters passed an initiative known as
Proposition 103 which amended the California Insurance Code to provide, among
other things, that for at least one year rates for automobile and many other
insurance policies issued or renewed on or after November 8, 1988, be rolled
back to the levels of November 8, 1987 and then reduced by 20%. In 1989, the
California Supreme Court ruled that an insurer could be compelled to make
-66-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
refunds for the rollback year only to the extent that it would not deprive the
insurer of a fair and reasonable rate of return. Workers compensation
insurance and reinsurance are excluded from the California Proposition's rate
rollback provisions.
The Insurance Department of the State of California ("Department")
subsequently issued regulations with respect to California Proposition 103.
On August 18, 1994, the Supreme Court of the State of California upheld the
validity of the Department's current regulations. In January 1995 the newly
elected Commissioner of the Department announced that he would like to quickly
resolve all Proposition 103 liability with California insurers through
negotiation. On January 31, 1995, the Department advised the Company that it
had an indicated rollback liability under the regulations of approximately
$4,000,000, plus interest. The Department asked the Company to provide
information, including California specific data, that would impact its
calculation. The data used by the Department to determine the rollback
liability was based on national figures and contained some inapplicable
information as to the Company's California business. The regulations provide
for the use of California data where available and reliable. When the
calculation under the regulations is performed using the Company's California
specific data, the Company has no rollback liability. The Company intends to
resolve the matter with the Department during 1995.
Orion and its subsidiaries are routinely engaged in litigation incidental
to their businesses. Management believes that there are no significant legal
proceedings pending against the Company or its subsidiaries which, net of
reserves established therefor, are likely to result in judgments for amounts
that are material to the financial condition, liquidity or results of
operations of Orion and its consolidated subsidiaries, taken as a whole.
Note J - Stockholders' Equity and Earnings Per Common Share
During 1994, the Company repurchased 442,327 shares of its common stock
at an aggregate cost of $13,746,000. The Company repurchased 177,658 shares
for $5,472,000 in 1993 and 22,420 shares for $554,000 in 1992.
Orion declared a 5-for-4 split of its common stock which was paid on
November 15, 1993 to shareholders of record on October 15, 1993. The Company
had also paid a 5-for-4 common stock split on December 7, 1992 to shareholders
of record on November 20, 1992. All common stock and per common share data
presented in the financial statements give effect to these stock splits.
On April 15, 1992, Orion sold 515,625 shares of its common stock for
$9,497,000, net of expenses. The sale was made in a private transaction,
subject to the provisions of Regulation S of the Securities Act of 1933.
On December 21, 1992, Orion called for redemption its $2.125 Convertible
Exchangeable Preferred Stock (the "$2.125 Preferred Stock") on January 21,
1993. The market price of the shares of common stock that a holder would
receive upon conversion of the preferred stock was substantially higher than
the redemption price of $25.76 per share. Consequently, most holders
converted into common stock prior to the redemption date, resulting in the
-67-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
issuance of 3,579 shares of common stock in December 1992 and 1,423,544 shares
of common stock in January 1993. Holders of 21,605 shares of $2.125 Preferred
Stock, who did not elect to convert, redeemed their shares for an aggregate of
$557,000.
Orion issued 2,601,050 shares of common stock for conversions elected by
holders of 1,581,470 shares of its $1.90 Convertible Exchangeable Preferred
Stock (the "$1.90 Preferred Stock"), in 1992. These conversions were
primarily the result of Orion calling this issue on November 2, 1992 at the
redemption price of $21.30 per share including accrued dividends. The
remaining 2,730 shares of $1.90 Preferred Stock were redeemed for
approximately $58,000.
On April 7, 1993, the Company redeemed all of the outstanding shares of
its Adjustable Rate Preferred Stock for $18,520,000 in cash. The redemption
was funded with borrowings under the Loan Agreement.
Dividends declared on Orion's common and preferred stock for 1994, 1993
and 1992 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1994 1993 1992
----------------- ----------------- -----------------
Per Share Amount Per Share Amount Per Share Amount
--------- ------- --------- ------- --------- -------
(000s omitted - except for per share data)
<S> <C> <C> <C> <C> <C> <C>
Common Stock .......... $ .76 $10,828 $ .68 $ 9,860 $ .60 $ 6,641
Adjustable Rate
Preferred Stock ..... - - 1.10 407 4.16 1,581
$1.90 Preferred Stock.. - - - - 1.43 2,227
$2.125 Preferred Stock. - - .12 2 2.13 2,550
------- ------- -------
$10,828 $10,269 $12,999
======= ======= =======
</TABLE>
The weighted average common shares outstanding for purposes of computing
earnings per share amounted to 14,348,000, 14,598,000 and 10,914,000 shares
for 1994, 1993 and 1992, respectively. Dividends on preferred stock were
deducted from earnings in 1993 and 1992 to compute primary earnings per common
share. The $2.125 Preferred Stock for 1993 and 1992, and the $1.90 Preferred
Stock for 1992, were assumed to be converted for the full year, if dilutive,
for the purpose of computing fully-diluted earnings per common share. The
weighted average common shares, on a fully-diluted basis, amounted to
14,367,000, 14,655,000 and 14,474,000 shares for 1994, 1993 and 1992,
respectively.
Orion has a Stockholder Rights Plan (the "Rights Plan") under which each
outstanding share of common stock includes 64% of one preferred stock purchase
right (the "Rights"). The Rights Plan is designed to assure stockholders that
they will receive equitable treatment in the event of a proposed takeover.
Under the Rights Plan, each holder of a Right is entitled to buy one-hundredth
of a share of Series A Participating Junior Preferred Stock. The Rights
-68-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
become exercisable if an acquiror gains a 20% or greater beneficial ownership
interest in Orion's common stock, on other than fair and favorable terms to
all stockholders. Each Right not owned by such acquiror will enable the
holder to purchase, at an initial exercise price of $80, common stock having a
value of twice the Right's exercise price. In addition, under certain
circumstances if Orion is involved in a merger each Right will entitle its
holder to purchase, at the Right's then current exercise price, common shares
of such other company having a value of twice the Right's exercise price.
Note K - Employee Benefit Plans
The Company maintains a Stock Savings and Retirement Plan (the "Plan"),
qualified under Internal Revenue Code Section 401(k), for eligible employees
of the Company. Employee and employer matched contributions to the savings
funds are limited to the extent allowable under the Plan and federal income
tax law. The Plan also provides for defined contribution savings and
retirement benefits that allow the Company to make annual contributions to the
Plan based on a percentage of employees' compensation. Employees vest in the
Company's contributions over a six-year period with vesting credit given for
prior service with the Company. The Company has adopted a Surplus Benefit
Plan which provides deferred benefits for those employees who received less
than the full employer contribution to the Company's 401(k) plan as a result
of federal tax limitations on participation in the Plan.
The Company maintains a number of incentive plans for key employees.
Under the Company's 1982 Long-Term Performance Incentive Plan, shares of
restricted stock as well as stock options may be granted by Orion. Orion
granted 70,015, 5,688 and 66,016 shares of restricted stock to key employees
during 1994, 1993 and 1992, respectively. Restricted stock is considered
issued and outstanding when awarded, and is recorded as deferred compensation.
There are restrictions as to its transferability, which restrictions lapse
proportionately from the second to the fifth anniversaries of grant date. As
of December 31, 1994, the restrictions have not lapsed on 148,459 shares of
restricted stock. All stock options granted by Orion, at fair market value at
date of grant, are intended to qualify as incentive stock options becoming
exercisable from the first through fourth anniversaries of the date of grant,
expiring ten years after the date of grant. As of December 31, 1994, the
number of shares of stock reserved under all plans is 530,011 of which 348,802
are for outstanding stock options and 173,064 of these stock options are
exercisable. A summary of the option transactions is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1994 1993 1992
---- ---- ----
Price Price Price
Options Range Options Range Options Range
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1 ... 284,337 $10.16-32.40 305,860 $10.16-23.92 257,422 $ 8.64-9.20
Granted ............... 129,800 32.50-33.75 3,438 32.40 92,969 23.92
Cancelled ............. (19,531) 14.56-23.92 - -
Exercised ............. (45,804) 10.16-23.92 (24,961) 10.16-14.56 (44,531) 8.64-9.04
------- ------- -------
Balance - December 31.. 348,802 10.16-33.75 284,337 10.16-32.40 305,860 10.16-23.92
======= ======= =======
</TABLE>
-69-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Orion also maintains a non-qualified defined benefit retirement plan for
members of the Board of Directors who are not employees. Benefits are based
on years of service and director fee levels at retirement. The Board of
Directors approved a stock option plan for non-employee directors in 1994.
The total expense for 1994, 1993 and 1992 for the above pension benefit
plans for employees and directors amounted to $4,659,000, $3,277,000 and
$2,694,000, respectively.
Note L - Postretirement Medical Benefits
The Company provides postretirement medical benefits to full-time
employees who have worked for 10 years and attained age 55 while in service
with the Company. The Company's postretirement health care plan is not
funded. The accumulated postretirement benefit obligation of the plan
included in other liabilities in the consolidated balance sheet is as follows:
December 31,
----------------
1994 1993
---- ----
(000s omitted)
Retirees ................................. $2,143 $2,260
Fully eligible active plan participants .. 976 1,425
Other active plan participants ........... 3,234 4,104
Unrecognized net gains ................... 2,496 -
------ ------
$8,849 $7,789
====== ======
Net postretirement benefit cost for the years ended December 31, 1994 and
1993 was $1,243,000 and $598,000 consisting of service cost benefits earned of
$813,000 and $130,000 and interest on the accumulated postretirement benefit
obligation of $539,000 and $468,000, respectively, and amortization of
unrecognized net gain of $109,000 in 1994.
The expected health care cost trend rate used as of December 31, 1994 was
10.25% for 1995, and 9.5% in 1996 decreasing linearly each year until it
reaches 6% for 2003 and future years. At December 31, 1993 the expected
health care cost trend rates used were 16% for 1994 and 10% for 1995. A one-
percentage-point increase in the assumed health care cost trend rate for each
year would increase the aggregate service cost and interest cost for 1994 and
1993 by $289,000 and $145,000, respectively, and increase the accumulated
postretirement benefit obligation as of December 31, 1994 and 1993 by $953,000
and $1,325,000, respectively. A one-percentage-point decrease in the health
care cost rate would decrease service and interest costs and the accumulated
post retirement benefit obligation by similar amounts. The assumed discount
rate used in determining the accumulated postretirement benefit obligation was
8.5% at December 31, 1994 and 7.0% at December 31, 1993.
-70-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note M - Industry Segment Information
The Company's insurance operations are organized and reported as three
business segments: Regional Operations, Reinsurance/Special Programs and
Guaranty National Companies. Regional Operations provides workers
compensation insurance products through EBI Companies and Nations' Care.
Reinsurance/Special Programs includes DPIC Companies (which markets
professional liability insurance), Connecticut Specialty Insurance Group
(which writes specialty insurance programs), SecurityRe Companies (a
reinsurer), and a 20% interest in Intercargo (which underwrites international
trade). The third segment consists of the Company's interest in Guaranty
National Companies, which specializes in nonstandard commercial and personal
automobile insurance. The Company includes its share of Guaranty National's
earnings using the equity method of accounting. The miscellaneous income and
expenses (primarily interest, general and administrative expenses and other
consolidating elimination entries) of the parent company are reported as a
fourth segment. Identifiable assets of the Regional Operations and
Reinsurance/Special Programs segments are primarily allocated based on the
cash flows of these segments.
Financial information for the Company's segments for 1994, 1993 and 1992
is shown below:
-71-<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Earnings (Loss)
from Operations
Before Federal
Income Taxes,
Cumulative Effect
Realized of Accounting
Net Investment Changes and
Premiums Investment Gains Other Total Extraordinary Identifiable
Earned Income (Losses) Income Revenues Item Assets
-------- ---------- ---------- -------- -------- ----------------- ------------
(000s omitted)
<S> <C> <C> <C> <C> <C> <C> <C>
1994:
Regional Operations ... $278,040 $ 29,287 $ 1,246 $ 239 $308,812 $ 42,514 $ 748,680
Reinsurance/Special
Programs ............ 413,183 53,209 2,191 575 469,158 34,117 1,213,026
Guaranty National
Companies ........... - - - - - 11,244 89,760
Other ................. - 2,419 - 558 2,977 (16,329) 61,295
-------- -------- -------- -------- -------- -------- ----------
Total ............... $691,223 $ 84,915 $ 3,437 $ 1,372 $780,947 $ 71,546 $2,112,761
======== ======== ======== ======== ======== ======== ==========
1993:
Regional Operations ... $266,373 $ 33,760 $ 4,153 $ - $304,286 $ 34,025 $ 758,596
Reinsurance/Special
Programs ............ 351,031 55,500 6,706 915 414,152 44,032 1,234,033
Guaranty National
Companies ........... - - - - - 9,509 92,590
Other ................. - 2,543 (1,381) 555 1,717 (15,061) 32,235
-------- -------- -------- -------- -------- -------- ----------
Total ............... $617,404 $ 91,803 $ 9,478 $ 1,470 $720,155 $ 72,505 $2,117,454
======== ======== ======== ======== ======== ======== ==========
1992:
Regional Operations.... $268,145 $ 33,182 $ 2,077 $ (193) $303,211 $ 4,227 $ 774,030
Reinsurance/Special
Programs ............ 292,060 48,416 3,027 849 344,352 50,384 1,055,679
Guaranty National
Companies ........... - - - - - 9,994 81,632
Other ................. - 885 (1,437) 707 155 (17,891) 26,067
-------- -------- -------- -------- -------- -------- ----------
Total ............... $560,205 $ 82,483 $ 3,667 $ 1,363 $647,718 $ 46,714 $1,937,408
======== ======== ======== ======== ======== ======== ==========
</TABLE>
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note N - Selected Quarterly Financial Data (Unaudited)
<TABLE>
Quarterly results of operations and earnings per common share for 1994 and 1993
are summarized as follows:
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(000s omitted-except for per share data)
<S> <C> <C> <C> <C>
1994:
Premiums earned ......................... $167,095 $162,443 $180,703 $180,982
Net investment income ................... 20,768 20,601 22,550 20,996
Realized investment gains ............... 533 178 1,197 1,529
Other income ............................ 302 415 341 314
-------- -------- -------- --------
Total revenues ...................... $188,698 $183,637 $204,791 $203,821
======== ======== ======== ========
Net earnings ........................ $ 13,240 $ 11,567 $ 15,329 $ 15,109
======== ======== ======== ========
Net earnings per common share -
Primary ............................... $ .91 $ .80 $ 1.07 $ 1.07
======== ======== ======== ========
Fully diluted ......................... $ .91 $ .80 $ 1.07 $ 1.06
======== ======== ======== ========
1993:
Premiums earned ........................ $149,272 $157,404 $151,641 $159,087
Net investment income .................. 21,677 21,170 22,218 26,738
Realized investment gains .............. 4,812 1,755 1,131 1,780
Other income ........................... 303 464 428 275
-------- -------- -------- --------
Total revenues ..................... $176,064 $180,793 $175,418 $187,880
======== ======== ======== ========
Earnings before cumulative effect of
change in accounting principles .. $ 14,328 $ 13,907 $ 12,868 $ 15,885
======== ======== ======== ========
Net earnings ....................... $ 26,153 $ 13,907 $ 12,868 $ 15,885
======== ======== ======== ========
Net earnings per common share -
Primary:
Earnings before cumulative effect of
change in accounting principles .. $ .97 $ .95 $ .88 $ 1.09
======== ======== ======== ========
Net earnings ....................... $ 1.78 $ .95 $ .88 $ 1.09
======== ======== ======== ========
Fully diluted:
Earnings before cumulative effect of
change in accounting principles .. $ .95 $ .95 $ .88 $ 1.09
======== ======== ======== ========
Net earnings ....................... $ 1.75 $ .95 $ .88 $ 1.09
======== ======== ======== ========
<FN>
The sum of quarterly per common share amounts may not agree with the
corresponding annual amounts due to rounding or antidilution during certain
quarters.
-72-
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Pursuant to General Instruction G(3) to this form, the information
required by Part III (Items 10, 11, 12 and 13) hereof is incorporated by
reference from the Company's definitive proxy statement for its Annual Meeting
to be held on May 31, 1995. The Company intends to file the proxy material,
which involves the election of directors, not later than 120 days after the
close of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) 1 Financial Statements:
The following financial statements are included in
Part II, Item 8.
Page
----
Report of Management................................. 43
Independent Auditors' Report......................... 44
Orion Capital Corporation and Subsidiaries:
December 31, 1994 and 1993
Consolidated Balance Sheet................. 45-46
For the years ended December 31, 1994, 1993 and
1992
Consolidated Statement of Earnings......... 47
Consolidated Statement of Stockholders'
Equity................................... 48
Consolidated Statement of Cash Flows....... 49-50
Notes to the Consolidated Financial Statements.. 51-72
(a) 2. Financial Statement Schedules:
Selected Quarterly Financial Data - for the years ended
December 31, 1994, and 1993 - Included in Part II, Item 8.
-73-
<PAGE>
Page
----
Schedule I Consolidated Summary of
Investments - Other than
Investments in Related
Parties - December 31,
1994........................ S-1
II Condensed Financial
Information of Registrant - S-2, S-3,
December 31, 1994, 1993 S-4, S-5,
and 1992.................... S-6
III Supplementary Insurance
Information - December 31,
1994, 1993 and 1992............. S-7
V Valuation and Qualifying
Accounts - December 31, 1994,
1993 and 1992................... S-8
VI Supplemental Information
For Property - Casualty
Insurance Underwriters -
December 31, 1994, 1993 and
1992............................ S-10
Schedules other than those listed above are omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the Financial Statements or notes thereto.
(a) 3. Exhibits:
Exhibit 3(i) Restated Certificate of Incorporation of Orion,
as amended on June 3, 1993; filed as Exhibit
3(i) to the Company's Annual Report on Form
10-K for 1993.
Exhibit 3(ii) By-Laws of Orion, as amended on May 7, 1993;
filed as Exhibit 3(ii) to the Company's Annual
Report on Form 10-K for 1993.
Exhibit 4(i) Certificate of Designation, Preferences and
Rights of Series A Junior Participating
Preferred Stock of Orion, dated March 23,
1989; filed as Exhibit 4(xi) to the Company's
Annual Report on Form 10-K for 1988.
-74-
<PAGE>
Exhibit 4(ii) Specimen certificate representing shares of
Orion's Common Stock (proof of March 27,
1989); filed as Exhibit 4(xii) to the
Company's Annual Report on Form 10-K for 1988.
Exhibit 4(iii) Indenture, dated as of September 8, 1992,
between Orion and the Connecticut National
Bank (now known as Shawmut Bank Connecticut,
National Association), as Trustee of Orion's
9 1/8% Senior Notes due September 1, 2002;
filed as Exhibit 4(v) to the Company's Annual
Report on Form 10-K for 1992.
Exhibit 4(iv) Specimen certificate representing Orion's
9 1/8% Senior Notes; filed as Exhibit 4(vi)
to the Company's Annual Report on Form 10-K
for 1992.
Exhibit 10(i)* Orion's Deferred Compensation Plan, as
amended; filed as Exhibit 10(i) to the
Company's Annual Report on Form 10-K for
1991.
Exhibit 10(ii)* Orion's 1982 Long-Term Performance Incentive
Plan, as amended; filed as Exhibit 10(iii)
to the Company's Annual Report on Form 10-K
for 1992.
Exhibit 10(iii)* Orion's 1994 Stock Option Plan for Non-
Employee Directors.
Exhibit 10(iv)* Employment Agreement between Alan R. Gruber
and Orion, dated as of March 19, 1993; filed
as Exhibit 10(v) to the Company's Annual Report
on Form 10-K for 1992.
Exhibit 10(v)* Employment Agreement between Robert B. Sanborn
and Orion, dated as of March 19, 1993; filed
as Exhibit 10(vi) to the Company's Annual Report
on Form 10-K for 1992.
Exhibit 10(vi)* Employent Agreement between Larry D. Hollen and
Orion, dated as of December 1, 1992; filed as
Exhibit 10(viii) to the Company's Annual Report
on Form 10-K for 1992.
*Management contract or compensatory plan or arrangement.
-75-
<PAGE>
Exhibit 10(vii)* Employment Agreement between Raymond W. Jacobsen
and Orion, dated as of July 19, 1994.
Exhibit 10(viii) Lease Agreement between Connecticut UTF, Inc.,
as lessor, and Security Insurance Company of
Hartford ("Security"), as lessee, dated as of
December 19, 1984; filed as Exhibit 10(xxxiii)
to the Company's Annual Report on Form 10-K
for l984.
Exhibit 10(ix) Second Assignment of Lease and Agreement from
Connecticut UTF, Inc. to Security, dated as of
December 19, 1984; filed as Exhibit 10(xxxiv)
to the Company's Annual Report on Form 10-K
for 1984.
Exhibit 10(x) Purchase Money Second Mortgage from
Connecticut UTF, Inc., as mortgagor, to
Security, as mortgagee, dated as of
December 19, 1984; filed as Exhibit 10(xxxvi)
to the Company's Annual Report on Form 10-K
for 1984.
Exhibit 10(xi) Purchase Money Note, in the face amount of
$2,800,000, from Connecticut UTF, Inc. to
Security, dated December 19, 1984; filed as
Exhibit 10(xxxvi) to the Company's Annual
Report on Form 10-K for l984.
Exhibit 10(xii) Guarantee from Orion to Connecticut UTF, Inc.,
dated as of December 19, 1984, guaranteeing
the performance of Security under its lease
with Connecticut UTF, Inc.; filed as Exhibit
10(xxxvii) to the Company's Annual Report on
Form 10-K for 1984.
Exhibit 10(xiii) Form of Indemnification Agreement, dated as of
June 3, 1987, between Orion and each of its
Directors and Executive Officers; filed as
Exhibit 10(xl) to the Company's Annual Report
on Form 10-K for l987.
Exhibit 10(xiv) Rights Agreement, dated as of March 15, 1989,
between Orion and Manufacturers Hanover Trust
Company, Rights Agent; filed as Exhibit 1 to
the Company's Form 8-A filed March 28, 1989.
*Management contract or compensatory plan or arrangement.
-76-
<PAGE>
Exhibit 10(xv) Specific Excess Reinsurance Agreement,
effective January 1, 1990, by and among
several of the Company's wholly-owned
insurance subsidiaries and Cologne
Reinsurance Company (Dublin) Ltd.; filed
as Exhibit 10(xxiv) to the Company's Annual
Report on Form 10-K for 1990.
Exhibit 10(xvi)* Retirement Plan for Directors of Orion,
as amended (September, 1994).
Exhibit 10(xvii)* Orion Supplemental Benefits Plan, filed as
Exhibit 10(xxv) to the Company's Annual Report
on Form 10-K for 1991.
Exhibit 10(xviii) Shareholder Agreement, dated as of November 7,
1991 by and among the Company, Guaranty
National Corporation and certain wholly-owned
subsidiaries of the Company; filed as Exhibit
10(xxv) to the Company's Annual Report on
Form 10-K for 1991.
Exhibit 10(xix) Amendments to the Shareholder Agreement by and
among the Company, Guaranty National Corporation
and certain wholly-owned subsidiaries of the
Company made as of February 2, 1994 and March 2,
1995.
Exhibit 10(xx) Loan Agreement, dated March 8, 1993, by and
among Orion, the banks signatory thereto
and National Westminster Bank USA, as Agent;
filed as Exhibit 10(xxvi) to the Company's
Annual Report on Form 10-K for 1992.
Exhibit 10(xxi) Amendment No. 1 and Amendment No. 2 to the
Loan Agreement, by and among Orion, the banks
signatory thereto and National Westminster Bank
USA, as Agent, dated February 22, 1994 and Novem-
ber 9, 1994, respectively.
Exhibit 10(xxii) Letter Agreement, dated September 13, 1993, by
and between Orion and Intercargo Corporation;
filed as Exhibit 10(xxii) to the Company's
Annual Report on Form 10-K for 1993.
Exhibit 10(xxiii) Amendment, dated February 14, 1995, to the Letter
Agreement by and between Orion Capital Corporation
and Intercargo Corporation.
Exhibit 10(xxiv) Agreement, dated September 13, 1993, by and
between Orion and The Harper Group, Inc.;
filed as Exhibit 10(xxiii) to the Company's
Annual Report on Form 10-K for 1993.
*Management contract or compensatory plan or arrangement.
-77-
<PAGE>
Exhibit 11 Statement re: computation of earnings
per common share.
Exhibit 21 Subsidiaries of Orion.
Exhibit 23 Consents of Deloitte & Touche LLP
Exhibit 27 Financial Data Schedule.
Exhibit 28 Information from reports furnished to state
insurance regulatory authorities.
Copies of exhibits may be obtained upon payment of a $.50 per page fee.
Such requests should be made in writing to: Corporate Secretary, Orion Capital
Corporation, 600 Fifth Avenue, New York, New York 10020.
(b) Reports on Form 8-K:
None.
(c) Filed exhibits:
See Exhibit Index
(d) Financial statements of non-consolidated subsidiaries:
The Audited Consolidated Financial Statements of
Guaranty National Corporation and subsidiaries,
Consolidated Balance Sheet at December 31, 1994
and 1993, Consolidated Statement of Earnings, State-
ment of Changes in Shareholders' Equity and Statement
of Cash Flows for the years ended December 31,
1994, 1993 and 1992, the Related Notes to the
Consolidated Financial Statements and Financial
Statement Schedules included in Guaranty National
Corporation's Annual Report on Form 10-K for the
1994 fiscal year are incorporated herein by
reference ("Guaranty National 1994 Form 10-K").
In addition, the information set forth under
the caption "Reserves" (on pages 11 through 15)
of the Guaranty National 1994 Form 10-K is in-
corporated by reference herein. The Company
currently holds a slightly less than 50% interest
in Guaranty National's outstanding common stock.
Since November 1991, Guaranty National's operations
have been reported by the Company on the equity
accounting basis.
-78-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ORION CAPITAL CORPORATION
By: /s/ Alan R. Gruber March 16, 1995
------------------
Alan R. Gruber Chairman of the Board
(Principal Executive)
and Financial Officer)
By: /s/ Daniel L. Barry March 16, 1995
-------------------
Daniel L. Barry Vice President and
Controller (Principal
Accounting Officer)
-79-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons (including a
majority of the members of the Board of Directors of the Registrant) in the
capacities and on the dates indicated:
Signature and Title Date
- ------------------------- --------------
/s/ Alan R. Gruber March 16, 1995
- -------------------------
Alan R. Gruber
Chairman of the Board
/s/ Bertram J. Cohn March 16, 1995
- -------------------------
Bertram J. Cohn
Director
/s/ John C. Colman March 16, 1995
- -------------------------
John C. Colman
Director
/s/ Larry D. Hollen March 16, 1995
- -------------------------
Larry D. Hollen
Director
- -------------------------
Robert H. Jeffrey
Director
/s/ Warren R. Lyons March 16, 1995
- -------------------------
Warren R. Lyons
Director
/s/ James K. McWilliams March 16, 1995
- -------------------------
James K. McWilliams
Director
/s/ R. W. Moore March 16, 1995
- -------------------------
Ronald W. Moore
Director
-80-
<PAGE>
Signature and Title Date
- ---------------------- --------
/s/ Robert B. Sanborn March 16, 1995
- ----------------------
Robert B. Sanborn
Director
/s/ William J. Shepherd March 16, 1995
- -----------------------
William J. Shepherd
Director
/s/ John R. Thorne March 16, 1995
- -----------------------
John R. Thorne
Director
/s/ Roger Ware March 16, 1995
- -----------------------
Roger B. Ware
Director
-81-<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS-OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 1994
(000s omitted)
==============================================================================
Column A Column B Column C Column D
-------- -------- -------- --------
Amount Shown
on Balance
Type of Investment Cost Value Sheet
______________________________________________________________________________
<S> <C> <C> <C>
Fixed maturities held-to-maturity:
Bonds -
United States Government and
government agencies and
authorities ................ $ 124,176 $120,334 $ 124,176
States, municipalities and
political subdivisions .... 137,736 136,522 137,736
Foreign governments ......... 50 50 50
Public utilities ............ 1,440 1,539 1,440
All other corporate bonds ... 39,984 38,714 39,984
Redeemable preferred stocks ... 64,031 61,756 64,031
---------- -------- ----------
Total fixed maturities .... 367,417 358,915 367,417
---------- ======== ----------
Fixed maturities available-for-sale:
Bonds -
United States Government and
government agencies and
authorities ................ 168,022 150,955 150,955
States, municipalities and
political subdivisions .... 180,145 175,362 175,362
Foreign governments ......... 7,678 7,658 7,658
Public utilities ............ 13,197 11,480 11,480
All other corporate bonds ... 175,959 166,889 166,889
Redeemable preferred stocks ... 20,879 18,080 18,080
---------- -------- ----------
Total fixed maturities .... 565,880 530,424 530,424
---------- ======== ----------
Equity securities:
Common stocks -
Public utilities ............ 8,591 8,555 8,555
Banks, trusts and insurance
companies ................. 40,491 54,254 54,254
Industrial, miscellaneous and
all other ................. 66,996 79,110 79,110
Non-redeemable preferred stocks 134,851 122,515 122,515
---------- -------- ----------
Total equity securities ... 250,929 264,434 264,434
---------- ======== ----------
Mortgage loans on real estate ... 1,764 1,764
Other long-term investments ..... 50,800 50,800
Short-term investments .......... 104,201 104,201
---------- ----------
Total investments ......... $1,340,991 $1,319,040
========== ==========
S-1
<PAGE>
<CAPTION>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ORION CAPITAL CORPORATION
BALANCE SHEET
(000s omitted)
ASSETS
December 31,
--------------------
1994 1993
---- ----
<S> <C> <C>
Fixed maturities held at market (cost $1,344 - 1994) .. $ 1,344 $ -
Short-term investments ................................ 12,838 8,527
Cash .................................................. 180 446
Notes receivable and other assets ..................... 4,078 2,911
Deferred federal income taxes ......................... 42,008 18,891
Investment in subsidiaries ............................ 497,024 556,240
Excess of cost over fair value of net assets acquired.. 28,140 29,250
-------- --------
Total assets ........................................ $585,612 $616,265
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities ..................................... $ 27,325 $ 23,960
Due to affiliates ..................................... 25,988 18,444
Federal income taxes payable .......................... 14,829 19,294
Notes payable ......................................... 152,382 160,372
-------- --------
Total liabilities ................................... 220,524 222,070
Stockholders' equity .................................. 365,088 394,195
-------- --------
Total liabilities and stockholders' equity .......... $585,612 $616,265
======== ========
<FN>
See Notes to Condensed Financial Information of Registrant
S-2
<PAGE>
<CAPTION>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ORION CAPITAL CORPORATION
STATEMENT OF EARNINGS
(000s omitted)
Year Ended December 31,
----------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net investment income ....................... $ 396 $ 458 $ 325
Realized investment gains (losses) .......... - (13) 13
Other income ................................ 550 550 700
-------- -------- --------
946 995 1,038
-------- -------- --------
Expenses:
Interest .................................... 13,190 12,670 12,192
General and administrative .................. 3,676 1,629 3,801
Amortization of excess of cost over fair
value of net assets acquired .............. 1,110 1,111 1,111
-------- -------- --------
17,976 15,410 17,104
-------- -------- --------
Loss before federal income taxes (benefit),
equity in net earnings of subsidiaries,
cumulative effect of adoption of new
accounting principles and extraordinary
item ........................................ (17,030) (14,415) (16,066)
-------- -------- --------
Federal income taxes (benefit):
Current ..................................... 6,395 16,448 6,104
Deferred .................................... 9,906 (931) (5,182)
-------- -------- --------
16,301 15,517 922
-------- -------- --------
Loss before equity in net earnings of
subsidiaries, cumulative effect of change in
accounting principles and extraordinary item. (33,331) (29,932) (16,988)
Equity in net earnings of subsidiaries ........ 88,576 86,920 62,780
-------- -------- --------
Earnings before cumulative effect of change in
accounting principles and extraordinary item. 55,245 56,988 45,792
Cumulative effect of change in accounting
principles .................................. - 11,825 -
Extraordinary item - loss on early
extinguishment of debt, net of income tax
benefit of $60 .............................. - - (2,920)
-------- -------- --------
Net earnings .................................. $ 55,245 $ 68,813 $ 42,872
======== ======== ========
<FN>
See Notes to Condensed Financial Information of Registrant
S-3
<PAGE>
<CAPTION>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ORION CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
(000s omitted)
Year Ended December 31,
------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Dividends received from subsidiaries ...... $ 30,013 $ 25,512 $ 15,645
Net investment income collected ........... 212 156 326
Federal income taxes received from
subsidiaries ............................ 6,000 5,600 6,250
Interest paid ............................. (12,524) (11,998) (10,362)
Other expenses paid ....................... (2,454) (2,249) (2,486)
Other receipts ............................ 3,230 634 7,331
-------- -------- --------
Net cash provided by operating activities. 24,477 17,655 16,704
-------- -------- --------
Cash flows from investing activities:
Sales of equity securities ................ - 426 188
Purchase of fixed maturities .............. (1,344) - -
Net sales (purchases) of short-term
investments ............................. (4,313) (4,793) (1,603)
Investments in subsidiaries ............... 763 (6,983) (3,578)
Other receipts (payments) ................. (795) (17) 94
-------- -------- --------
Net cash used in investing activities ... (5,689) (11,367) (4,899)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable ... - 59,672 127,764
Proceeds from issuance of common stock .... 598 286 9,545
Repayment of notes payable and debentures.. (8,000) (29,500) (134,123)
Dividends paid to stockholders ............ (11,263) (11,598) (14,539)
Purchases of common stock and purchases
and redemption of adjustable rate
preferred stock ......................... (38) (23,615) (412)
Other payments ............................ (351) (1,113) (40)
-------- -------- --------
Net cash used in financing activities ... (19,054) (5,868) (11,805)
-------- -------- --------
Net increase (decrease) in cash ......... (266) 420 -
Cash balance, beginning of year ........... 446 26 26
-------- -------- --------
Cash balance, end of year ................. $ 180 $ 446 $ 26
======== ======== ========
<FN>
See Notes to Condensed Financial Statements of Registrant
S-4
<PAGE>
<CAPTION>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ORION CAPITAL CORPORATION
STATEMENT OF CASH FLOWS - (Continued)
(000s omitted)
Year Ended December 31,
------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings ................................ $ 55,245 $ 68,813 $ 42,872
-------- -------- --------
Adjustments:
Cumulative effect of change in accounting
principles .............................. - (11,825) -
Equity in net earnings of subsidiaries .... (88,576) (86,920) (62,780)
Consolidating elimination of subsidiaries
income taxes ............................ 10,576 18,962 11,631
Dividends received from subsidiaries ...... 30,013 25,512 15,645
Depreciation and amortization ............. 2,064 1,966 1,603
Deferred federal income taxes (benefit) ... 9,906 (931) (5,182)
Realized investment (gains) losses ........ - 13 (13)
Amortization of discount on debt .......... 10 9 292
Extraordinary loss ........................ - - 2,920
Change in assets and liabilities:
Decrease (increase) in notes receivable and
other assets ............................ (520) 470 276
Increase (decrease) in taxes payable and
other liabilities ....................... (1,668) 9,952 1,361
Increase (decrease) in due to affiliates .. 7,427 (8,366) 8,079
-------- -------- --------
Total adjustments and changes ........... (30,768) (51,158) (26,168)
-------- -------- --------
Net cash provided by operating activities.. $ 24,477 $ 17,655 $ 16,704
======== ======== ========
<FN>
Non-cash transaction:
As a result of a change in pooling by the Registrant's insurance
subsidiaries, the Registrant received an extraordinary dividend of
$65,470,000 (principally securities) in 1993 which it simultaneously
contributed to another insurance subsidiary.
See Notes to Condensed Financial Information of Registrant
S-5
</TABLE>
<PAGE>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Years Ended December 31, 1994, 1993 and 1992
Note A - Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
Estimated
Carrying Value Market Value
----------------- -----------------
1994 1993 1994 1993
---- ---- ---- ----
(000s omitted)
<S> <C> <C> <C> <C>
Borrowings under loan agreement with
various banks (various interest rates). $ 42,500 $ 50,500 $ 42,500 $ 50,500
$110,000,000 face amount, 9 1/8% Senior
Notes, due September 1, 2002 .......... 109,882 109,872 111,815 119,053
-------- -------- -------- --------
$152,382 $160,372 $154,315 $169,553
======== ======== ======== ========
<CAPTION>
The Registrant's debt is scheduled to be repaid as follows:
(000s omitted)
<S> <C>
1995 ................................. $ 10,000
1996 ................................. 12,000
1997 ................................. 12,000
1998 ................................. 3,500
1999 ................................. 5,000
2002 ................................. 110,000
--------
152,500
Less unamortized discount ............ 118
--------
$152,382
========
</TABLE>
Note B - Expense Reimbursement and Management Fees
During 1992 through 1994, the Registrant was reimbursed for payroll,
office rental and other expenses incurred by it to support the operations of
its insurance subsidiaries. This reimbursement of $5,735,000, $5,230,000 and
$4,500,000 in 1994, 1993 and 1992, respectively, is accounted for as a
reduction of general and administrative expenses. The Registrant received an
investment management fee from Guaranty National of $550,000 in 1994 and 1993
and $700,000 in 1992.
S-6
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
ORION CAPITAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(000s omitted)
- -----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column J Column K
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Reserve
For Unpaid Dividends Amortization
Deferred Losses Payable Losses and of Deferred Policy-
Policy and Loss to Net Loss Policy Other holders'
Acquisition Adjustment Unearned Policy- Premiums Investment Adjustment Acquisition Insurance Dividends Premiums
Segment Costs Expenses Premiums Holders Earned Income Expenses Costs Expenses Expenses Written
(a) (a) (b)
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994:
Regional Operations $21,313 $ 463,360 $ 62,431 $11,179 $278,040 $ 29,287 $186,437 $ 55,986 $ 9,871 $12,404 $279,738
Reinsurance/
Special Programs. 48,824 717,969 194,424 1,472 413,183 53,209 311,686 109,122 11,590 2,432 432,317
Other ............. - - - - - 2,419 - - - - -
------- ---------- -------- ------- -------- -------- -------- -------- ------- ------- --------
$70,137 $1,181,329 $256,855 $12,651 $691,223 $ 84,915 $498,123 $165,108 $21,461 $14,836 $712,055
======= ========== ======== ======= ======== ======== ======== ======== ======= ======= ========
1993:
Regional Operations $19,326 $ 474,903 $ 67,310 $10,581 $266,373 $ 33,760 $191,826 $ 59,596 $ 8,144 $ 9,232 $265,082
Reinsurance/
Special Programs. 38,196 665,500 192,049 1,942 351,031 55,500 267,306 88,844 9,237 3,281 370,504
Other ............. - - - - - 2,543 - - - - -
------- ---------- -------- ------- -------- -------- -------- -------- ------- ------- --------
$57,522 $1,140,403 $259,359 $12,523 $617,404 $ 91,803 $459,132 $148,440 $17,381 $12,513 $635,586
======= ========== ======== ======= ======== ======== ======== ======== ======= ======= ========
1992:
Regional Operations $21,481 $ 510,836 $ 67,791 $ 9,919 $268,145 $ 33,182 $214,692 $ 62,704 $10,595 $ 9,366 $269,550
Reinsurance/
Special Programs. 34,653 570,560 164,525 3,241 292,060 48,416 209,340 72,966 6,563 4,192 297,880
Other ............. - - - - - 885 - - - - -
------- ---------- -------- ------- -------- -------- -------- -------- ------- ------- --------
$56,134 $1,081,396 $232,316 $13,160 $560,205 $ 82,483 $424,032 $135,670 $17,158 $13,558 $567,430
======= ========== ======== ======= ======== ======== ======== ======== ======= ======= ========
<FN>
(a) Balances for 1992 have been restated to reflect the adoption of SFAS No. 113, which requires reinsurance recoverables
to be reported as assets rather than offsetting liabilities.
(b) Net investment income for Regional Operations and Reinsurance/Special Programs is allocated on the basis of cash flow.
S-7
/TABLE
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE V
ORION CAPITAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(000s omitted)
===============================================================================
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
----------------------
(1) (2)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Deductions End of
Description Period Expenses Accounts (a) Period
_______________________________________________________________________________
<S> <C> <C> <C> <C> <C>
1994:
Allowance for
doubtful accounts-
Accounts and notes
receivable $1,859 $1,030 $ $ 935 $1,954
====== ====== ====== ====== ======
1993:
Allowance for
doubtful accounts-
Accounts and notes
receivable $1,959 $2,337 $ - $2,437 $1,859
====== ====== ====== ====== ======
1992:
Allowance for
doubtful accounts-
Accounts and notes
receivable $2,636 $2,327 $ - $3,004 $1,959
====== ====== ====== ====== ======
<FN>
(a) Accounts written off
</TABLE>
S-8
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI
ORION CAPITAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION FOR PROPERTY-CASUALTY INSURANCE UNDERWRITERS
(000s omitted)
===================================================================================================================================
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Reserve
for Losses and Loss
Unpaid Adjustment Expenses Amortization Paid
Deferred Losses Discount Incurred Related to of Deferred Losses
Policy and Loss Deducted Net (1) (2) Policy and Loss
Affiliation with Acquisition Adjustment in Column Unearned Premiums Investment Current Prior Acquisition Adjustment Premiums
Registrant Costs Expenses (C) Premiums Earned Income Year Year Costs Expenses Written
(a) (b) (a)
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994:
Consolidated
property and
casualty entities $ 70,137 $1,181,329 $ 4,100 $256,855 $691,223 $ 82,496 $480,826 $ 17,297 $165,108 $437,386 $712,055
======== ========== ======== ======== ======== ======== ======== ======== ======== ======== ========
1993:
Consolidated
property and
casualty entities $ 57,522 $1,140,403 $ 4,100 $259,359 $617,404 $ 89,260 $434,840 $ 24,292 $148,440 $374,625 $635,586
======== ========== ======== ======== ======== ======== ======== ======== ======== ======== ========
1992:
Consolidated
property and
casualty entities $ 56,134 $1,081,396 $ 4,100 $232,316 $560,205 $ 81,598 $397,551 $ 26,481 $135,670 $346,201 $567,430
======== ========== ======== ======== ======== ======== ======== ======== ======== ======== ========
<FN>
(a) Balances for 1992 have been restated to reflect the adoption of SFAS No. 113, which requires reinsurance recoverables to be
recorded as assets rather than offsetting liabilities.
(b) Discount deducted in Column C is computed using a statutory interest rate of 3.5% for certain workers compensation losses.
S-9
/TABLE
<PAGE>
<PAGE>
EXHIBIT INDEX
Exhibit 10(iii)* Orion's 1994 Stock Option Plan for Non-
Employee Directors.
Exhibit 10(vii)* Employment Agreement between Raymond W. Jacobsen
and Orion, dated as of July 19, 1994.
Exhibit 10(xvi) Retirement Plan for Directors of Orion, as
amended (September, 1994).
Exhibit 10(xix) Amendments to the Shareholder Agreement by
and among the Company, Guaranty National
Corporation and certain wholly-owned sub-
sidiaries of the Company made as of February
2, 1994 and March 2, 1995.
Exhibit 10(xxi) Amendment No. 1 and Amendment No. 2 to the
Loan Agreement, by and among Orion, the
banks signatory thereto and National
Westminster Bank USA, as Agent, dated
February 22, 1994 and November 9, 1994,
respectively.
Exhibit 10(xxiii) Amendment, dated February 14, 1995, to the
Letter Agreement by and between Orion Capital
Corporation and Intercargo Corporation.
Exhibit 11 Statement re: computation of earnings
per common share.
Exhibit 21 Subsidiaries of Orion.
Exhibit 23 Consents of Deloitte & Touche.
Exhibit 27 Financial Data Schedule.
Exhibit 28 Information from reports furnished to state P
insurance regulatory authorities.
EXHIBIT 10(iii)
ORION CAPITAL CORPORATION
1994 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
1. Purpose The purpose of the Orion Capital Corporation 1994 Stock
Option Plan for Non-Employee directors (the "Plan") is to promote the
interests of Orion Capital Corporation (the "Company") and its stockholders
by strengthening the Company's ability to attract and retain the services of
experienced and knowledgeable non-employee directors and by encouraging such
directors to acquire an increased proprietary interest in the Company.
2. Shares Subject to the Plan Subject to adjustment as provided in
Article 7, the total number of shares of common stock (the "Common Stock") of
the Company for which options may be granted under the Plan shall be 100,000
shares of Common Stock (the "Shares"). The Shares shall be shares currently
authorized but unissued or currently held or subsequently acquired by the
Company as treasury shares, including shares purchased in the open market or
in private transactions. If any option granted under the Plan expires or
terminates for any reason without having been exercised in full, the Shares
subject to, but not delivered under, such options may become available for
that grant of other options under the Plan. No shares delivered to the
Company in full or partial payment of an option exercise price payable
pursuant to Section 6.3 shall become available for the grant of other options
under the Plan.
3. Administration of the Plan The Plan shall be administered by the
Compensation Committee of the Company's Board of Directors (the "Committee"),
subject to Articles 10 and 11. Subject to the terms of the Plan, the
Committee shall have the power to construe the provisions of the Plan, to
determine all questions arising thereunder, and to adopt and amend such rules
and regulations for administering the Plan as the Committee deems desirable.
4. Participation in the Plan Each member of the Company's Board of
Directors (a "Director") who is not otherwise an employee of the Company or
any subsidiary of the Company (an "Eligible Director") shall be eligible to
participate in the Plan.
5. Nonstatutory Stock Options all options granted under the Plan shall
be nonstatutory options not intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended.
6. Option Terms Each option granted to an Eligible Director under the
Plan and the issuance of Shares thereunder shall be subject to the following
terms:
6.1 Option Agreements. Each option granted under the Plan shall be
evidenced by an option agreement (an "Agreement") duly executed on behalf of
the Company and by the Eligible Director to whom such option is granted and
dated as of the applicable date of grant. Each Agreement shall be signed on
behalf of the Company by an officer or officers delegated such authority by
the Committee using either manual or facsimile signature. Each Agreement
shall comply with and be subject to the terms and conditions of the Plan. Any
Agreement may contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the Committee.
<PAGE>
6.2 Option Grant Size and Grant dates.
6.2.1 Initial Grants. An option to purchase 5,000 Shares as
adjusted pursuant to Article 7 (an "Initial Grant") shall be granted to
a. each Director who is an Eligible Director on the Effective Date
(as hereinafter defined), and
b. each other Eligible Director immediately following the Annual
Meeting at which such Director is first elected to be a Director or at the
close of business on the day upon which such Eligible Director is first
appointed by the Board to be a Director, whichever first occurs; provided,
that if an Eligible Director who previously received an Initial Grant
terminates service as a Director and is subsequently elected or appointed
to the Board, such Director shall not be eligible to receive a second Initial
Grant, but shall be eligible to receive only Annual Grants as provided in
Section 6.2.2.
6.2.2 Annual Grants. An option to purchase 1,000 Shares as adjusted
pursuant to Article 7 (an "Annual Grant"), shall be granted automatically each
year, immediately following the Annual Meeting, to each Director who is an
Eligible Director at such time.
6.3 Option Exercise Price. Each Agreement shall state the exercise price
per share of the shares of Common Stock to which it relates. The exercise
price per share of Common Stock subject to an option shall not be less than
100% of the fair market value ("Fair Market Value") per share of such Common
Stock at the close of business on the day of the grant of the option. For
purposes of this Plan, Fair Market Value on any date shall be the closing
price per share of Common Stock on such date as reported on the New York Stock
Exchange composite tape.
6.4 Exercisability. Subject to Section 6.7, an option shall become
exercisable on the first anniversary of the day on which such option was
granted, if the optionee has continued to serve as a Director until that day.
6.5 Time and Manner of Option Exercise. Any vested and exercisable
option is exercisable in whole or in part at any time or from time to time
during the term of the option period by giving written notice, signed by the
person exercising the option, to the Company stating the number of Shares with
respect to which the option is being exercised, accompanied by payment in full
of the option exercise price for the number of Shares to be purchased and by
the payment or making provision satisfactory to the Company for the payment
of any taxes which the Company is obligated to collect with respect to the
issue or transfer of the Shares upon such exercise. The date both such notice
and payment are received by the office of the Secretary of the Company shall
be the date of exercise for the stock option as to such number of Shares. No
option may at any time be exercised with respect to a fractional Share.
6.6 Payment of Exercise Price. Payment of the option exercise price may
be in cash or payment may be in whole or part by
a. transfer to the Company of shares of Common Stock having a Fair
Market Value equal to the option exercise price at the time of such exercise,
or
-2-
<PAGE>
b. delivery of instructions to the Company to withhold shares, that
would otherwise be issued on such exercise of the option, having a Fair Market
Value at the time of such exercise equal to the total option exercise price
of the options being exercised.
If the Fair Market Value of the number of whole shares transferred or
the number of whole option Shares surrendered is less than the total exercise
price of the option being exercised, the shortfall must be made up in cash.
6.7 Terms of Options. Each option shall expire ten years from its date
of grant, but shall be subject to earlier termination as follows:
a. In the event of the termination of an optionee's services as a
Director by reason of voluntary mid-term retirement, declining to stand
for re-election, becoming a full time employee of the Company or a
subsidiary of the Company or becoming disabled, all options granted
pursuant to this Plan but unexercisable pursuant to Section 6.4 shall
automatically expire and shall not be exercisable and all options
exercisable pursuant to Section 6.4 but unexercised shall continue to be
exercisable until the stated expiration date of such options.
b. In the event of the death of an optionee or total disability
while the optionee is a Director, the then outstanding options of such
optionee that have vested pursuant to Section 6.4 shall be exercisable for one
year from the date of the death of the optionee or until the stated grant
expiration date, whichever is earlier, by his/her successors in interest, in
accordance with the paragraph below. However, all options which have been
granted, but have not become exercisable pursuant to Section 6.4, shall
automatically expire.
c. In the event of the termination of an optionee's service as a
Director by the Board of Directors for cause or the failure of such Director
to be re-elected (other than for the reasons set forth in Section 6.7(a) or
(b), the Committee in its sole discretion can cancel the then-outstanding
options of such optionee, including those options which are exercisable and
such options shall automatically expire and become non-exercisable on the
effective date of such termination.
Exercise of a deceased optionee's options that are still exercisable
shall be by the estate of such optionee or by a person or persons whom the
optionee has designated in writing filed with the Company, or, if no such
designation has been made, by the person or persons to whom the optionee's
rights have passed by will or the laws of descent and distribution.
6.8 Transferability. The right of any optionee to exercise an option
granted under the Plan shall, during the lifetime of such optionee, be
exercisable only by the optionee and shall not be assignable or transferable
by such optionee other than by will or the laws of descent and distribution.
6.9 Limitation of Rights.
6.9.1 Limitation as to Shares. Neither the recipient of an option
under the Plan nor an optionee's successor or
-3-
<PAGE>
successors in interest shall have any rights as a stockholder of the
Company with respect to any Shares subject to an option granted to such person
until the date of issuance of a stock certificate for such Shares.
6.9.2 Limitation as to Directorship. Neither the Plan, nor the
granting of an option, nor any other action taken pursuant to the Plan shall
constitute or be evidence of any greement or understanding, express or
implied, that an Eligible Director has a right to continue as a Director for
any period of time or at any particular rate of compensation.
6.10 Regulatory Approval and Compliance. The Company shall not be
required to issue any certificate or certificates for Shares upon the exercise
of an option granted under the Plan or to record as a holder of record of
Shares the name of the individual exercising an option under the Plan, without
obtaining to the complete satisfaction of the Committee the approval of all
regulatory bodies deemed necessary by the Committee and without complying, to
the Committee's complete satisfaction, with all rules and regulations under
federal, state, or local law deemed applicable by the Committee.
7. Capital Adjustments The aggregate number and class of Shares subject
to and authorized by the Plan, the number of class of Shares with respect to
which an option may be granted to an Eligible Director under the Plan as
provided in Article 6, the number and class of Shares subject to each
outstanding option, and the exercise price per share specified in each such
option shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a split-up or
consolidation of shares or any like capital adjustment or the payment of any
stock dividend, or other increase or decrease in the number of such Shares
effected without receipt of consideration by the Company.
8. Effectiveness of the Plan The Plan shall be effective as of 1994
(the "Effective Date"), subject to the approval by the Company's stockholders.
All options issued prior to the date of the approval of the Plan by the
Company's stockholders shall be issued subject to such approval. The Plan
shall continue in effect until it is terminated by action of the Board or the
Company's stockholders, but such termination shall not affect the terms of
any then-outstanding options.
10. Termination and Amendment of the Plan The Board may amend,
terminate or suspend the Plan at any time, in its sole and absolute
discretion; provided, however, that if required to qualify the Plan under Rule
16b-3 promulgated under Section 16, of the Securities Exchange Act of 1934,
as amended, ("Rule 16b-3") no amendment shall be made more than once every six
months that would change the amount, price or timing of the Initial and Annual
Grants, other than to comport with changes in the Internal Revenue Code of
1986, as amended, or the rules and regulations promulgated thereunder; and
provided, further, that if required to qualify the Plan under the Rule 16b-3,
no amendment that would
a. materially increase the number of Shares that may be issued under
the Plan,
b. materially modify the requirements as to eligibility for
participation in the Plan, or
c. otherwise materially increase the benefits accruing to
participants under the Plan shall be made without the approval
of the Company's stockholders.
-4-
<PAGE>
11. Compliance with Rule 16b-3 Other provisions of the Plan
notwithstanding, neither the Committee nor any other person (other than an
Eligible Director acting in conformity with the terms of the Plan) shall have
any discretionary authority to make determinations regarding the Plan required
by Rule 16b-3 to be afforded exclusively to "disinterested persons" as defined
thereunder.
Adopted by the Board of Directors on September 12, 1994 and approved by
the stockholders of the Company on June , 1995.
-5-
EXHIBIT 10(vii)
CONFORMED
Employment Agreement
---------------------
THIS EMPLOYMENT AGREEMENT, dated as of the 19th day of July, 1994
(the "Agreement"), between Orion Capital Corporation, a Delaware
corporation (the "Company"), and Raymond W. Jacobsen ("Executive");
WHEREAS, the Company and Executive hereby agree as follows:
1. Employment.
-----------
The Company hereby employs Executive to render services as Senior
Vice President of the Company and President and Chief Executive Officer of
the EBI Companies ("EBI"), subsidiaries of the Company. The Executive
shall assume such responsibilities, perform such duties and have such
authority as may from time to time be assigned, delegated or limited by the
Company's Board of Directors and Executive shall provide such other
services in the future to the Company and its subsidiaries as the Executive
and the Company may mutually agree. The Company agrees that Executive will
be located, and will render such services (subject to necessary and
appropriate business related travel), at EBI's offices in Milwaukee,
Wisconsin. Executive hereby accepts such employment and agrees to render
his services fully, faithfully, and to the best of his ability, subject to
the direction and control of the Board of Directors of the Company.
Executive's services shall be exclusive to the Company.
2. TERM.
-----
The term of this Agreement shall be for a period of five years
commencing on July 19, 1994 and ending on July 18, 1999 (the "Term"). Such
Term shall be automatically extended, on July 20, 1997, and at the end of
each day thereafter, for one additional day unless the Company or the
Executive shall at any time give written notice to the other of its or his,
as the case may be, intention not to extend such Term, it being the
<PAGE>
intention of the parties that this Agreement shall, on and after July 20,
1997, at all times have an unexpired term of at least two years unless
either party shall have given notice of termination in accordance with the
provisions hereof.
3. COMPENSATION AND BENEFITS.
--------------------------
(a) Base Salary.
For the services to be rendered by Executive under this
Agreement, the Company shall pay to Executive an annual base salary at the
rate of not less than $170,000, payable in equal semi-monthly installments
or on such other basis as may be applicable to senior executive officers of
the Company, less income tax withholdings and other normal employee
deductions. Executive will be entitled to receive such increases in his
annual base salary as may be approved by the Company.
(b) Bonus.
Executive shall be entitled to participate in any bonus plan in
effect for senior executive officers of the Company and shall receive bonus
compensation in accordance therewith as determined by the Board of
Directors of the Company or any Committee thereof designated by it.
(c) Incentive Compensation
and Stock Options.
Executive shall participate in long-term and short-term
incentive and deferred compensation programs and in stock option and stock
award plans of the Company to the extent deemed appropriate by the Board of
Directors of the Company in light of Executive's position in the Company.
Executive shall, in any event, on and as of the date of this Agreement, be
granted 8,000 shares of Restricted Stock of the Company in accordance with
the terms of the Company's 1982 Long-Term Performance Incentive Plan, as
amended, (the "Plan"). The restriction on the Restricted Stock granted
-2-
<PAGE>
hereunder shall lapse in installments over a period of five years as
follows: 25% as such shares of Restricted Stock shall vest on July 19, 1996
and an additional 25% of such shares of Restricted Stock shall vest on each
of the third, fourth and fifth anniversaries of the date hereof. Executive
shall also be granted 4,000 Performance Units pursuant to the Plan and the
Performance Period (as defined in the Plan) applicable thereto shall expire
not later than July 18,1999. In the event of Executive's death or
disability prior to the complete vesting of these awards, such Restricted
Stock and Performance Units will continue to vest as if Executive were
still fully employed by the Company.
(d) Other Benefits Plans.
Executive shall participate in and receive benefits under and in
accordance with the provisions of any employee benefit plan adopted or to
be adopted by the Company and which is generally applicable to senior
executive officers of the Company.
4. VACATION.
--------
Executive shall be entitled to a vacation of not less than four
weeks during each year.
5. REIMBURSEMENT FOR EXPENSES.
---------------------------
Executive shall be entitled to incur on behalf of the Company
reasonable and necessary expenses in connection with his duties and the
Company shall pay for or reimburse Executive for all such expenses.
6. TERMINATION.
------------
(a) Executive's employment under this Agreement shall terminate:
(i) upon the death of Executive;
(ii) upon written notice from the Company to Executive in the
-3-
<PAGE>
event of an illness or other cause incapacitating him from performing his
duties for 180 consecutive days or for an aggregate of 180 days in any
period of nine consecutive months;
(iii) upon written notice from the Company in the event that
Executive commits any felonious act, is guilty of gross negligence in the
performance of his duties, or willfully fails or refuses to comply with the
reasonable directions of the Board of Directors of the Company, which
notice shall set forth the effective date of termination of this Agreement;
(iv) upon seven days written notice to the other party, either
party to this Agreement shall have the right to terminate this Agreement
prior to the expiration of the Term hereof, for any reason whatsoever.
(b) Upon the termination of employment:
(i) pursuant to Section 6(a)(i), Executive's estate shall
be entitled to receive within 30 days of the termination date
base salary payments to the effective date of termination, a pro rata
portion of such bonus, if any, as the Board of Directors of the Company
shall determine would have been payable to Executive in respect of the
fiscal year in which Executive dies and such other benefits, if any, as may
be provided to Executive or his successors or beneficiaries under the terms
(as modified by Section 3(c) hereof) of retirement, benefit, incentive,
option, stock award and other programs of the Company in which he may be or
may have been a participant;
(ii) pursuant to Section 6(a)(ii), Executive shall be
entitled to receive disability compensation in accordance with the terms
and conditions of the Company's disability insurance program, plus such
other benefits, if any, as may be provided to him or his successors or
beneficiaries under the terms of retirement, benefit, incentive, option,
stock award and other programs of the Company in which he may be or may
-4-
<PAGE>
have been a participant;
(iii) pursuant to Section 6(a)(iii), Executive shall be
entitled to receive on the termination date set forth in the notice given
pursuant to that Section his base salary to the date of
termination and such other benefits, if any, as may be provided to him
under the terms of retirement, benefit, incentive, option, stock award and
other programs of the Company in which he may be or may have been a
participant and to which he is then entitled upon termination of employment
under the circumstances provided for in Section 6(a)(iii).
(iv) pursuant to Section 6(a)(iv), if (x) Executive gives
such notice of termination, Executive shall be entitled to receive his base
salary to date of termination as set forth in the notice given pursuant to
that Section and such other benefits, if any, as may be provided to him
under the terms of retirement, benefit, incentive, option, stock award and
other programs of the Company in which he may be or may have been a
participant and to which he is then entitled upon termination of his
employment, or (y) the Company gives such notice of termination, Executive
shall be entitled to receive his base salary payments as is in effect on
the date of such termination during the remaining portion of the unexpired
Term and a pro rata portion of such bonus, if any, as the Board of
Directors of the Company shall determine would have been payable to
Executive in respect of the fiscal year in which Executive terminates
employment, and such other benefits, if any, as may be provided to him
under the terms of retirement, benefit, incentive, option, stock award and
other programs of the Company in which he may be or may have been a
participant and to which he is then entitled upon termination of
employment.
-5-
<PAGE>
7. UNFAIR COMPETITION.
-------------------
In the course of his employment, Executive will have access to
confidential records and information of the Company and its subsidiaries
and affiliates. During his employment by the Company or any of its
subsidiaries, and thereafter, Executive will not directly or indirectly
misuse any such information or disclose the same except in accordance with
his duties under this Agreement. This provision of this Section 7 shall
survive the expiration or termination, for any reason, of this Agreement or
Executive's employment.
During the Term and for a period of two years thereafter,
Executive agrees not to carry on in any state of the United States of
America or in any foreign country in which the Company or any subsidiary or
affiliate thereof is conducting business, either for himself or as a member
of any partnership, or as a stockholder, director, officer, agent, or
employee of another person, firm or
corporation or otherwise, any business similar to that being carried on by
the Company (or any subsidiary or affiliate thereof) if such
business is materially detrimental to the Company or any such subsidiary,
provided, however, that the mere ownership by Executive of not more than 5%
of any corporation or similar business venture shall not be deemed to be a
violation of this covenant.
8. MERGER OR REORGANIZATION.
--------------------------
This Agreement shall not be terminated by the voluntary or
involuntary dissolution of the Company or by any merger or consolidation
where the Company is not the surviving or resulting corporation, or upon
any transfer of all or substantially all of the assets of the Company. In
the event of any such merger or consolidation or transfer of assets, the
-6-
<PAGE>
provisions of this Agreement shall be binding and shall inure to the
benefit of the surviving or resulting corporation or the corporation to
which such assets shall be transferred.
9. ARBITRATION.
------------
Any controversy or claim arising out of or relating to this
Agreement, the breach thereof or the coverage of this arbitration provision
shall be settled by arbitration which shall be in accordance with the
Commercial Arbitration Rules of the American Arbitration Association as
such rules shall be in effect on the date of delivery of demand for
arbitration. The arbitration of such issues, including the determination
of the amount of any damages suffered by either party hereto by reason of
the acts or omissions of the other, shall be to the exclusion of any court
of law. The decision of the arbitrators or a majority of them shall be
final and binding on both parties and their respective heirs, executors,
administrators, successors and assigns. There shall be three arbitrators,
one to be chosen directly by each party at will and the third arbitrator to
be selected by the two arbitrators so chosen. Each party shall pay the
fees of the arbitrator selected by him and of his own attorneys and the
expenses of his witnesses and all other expenses connected with the
presentation of his case. All other costs of the arbitration, including
the cost of the record or transcripts thereof, if any, administrative fees,
and all other fees and costs shall be borne equally by the parties.
10. NON-ASSIGNABILITY.
------------------
The obligations of Executive hereunder are personal and may not
be assigned or transferred in any manner whatsoever, nor are such
obligations subject to involuntary alienation, assignment or transfer.
-7-
<PAGE>
11. AMENDMENT.
----------
This instrument contains the entire agreement of the parties. It
may not be changed orally but only by a written agree-ment executed by both
of the parties hereto.
12. NOTICES.
--------
All notices which a party is required or may desire to give to the
other party under or in connection with this Agreement shall be sufficient
if given by addressing same to the other party as follows:
(a) if to Executive to:
Raymond W. Jacobsen
20815 Saxon Court
Brookfield, Wisconsin 53045
(b) if to the Company to:
Orion Capital Corporation
30 Rockefeller Plaza
New York, New York 10112
Attn: Secretary
or at such other place as may be designed in writing by like notice. Any
notice shall be deemed to have been delivered when addressed as required
herein and deposited, postage prepaid, in the United States Mail.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date hereinabove set forth.
ORION CAPITAL CORPORATION
By:
------------------------------------
Alan R. Gruber
Chairman and Chief Executive Officer
EXECUTIVE
By:
---------------------------------------
Raymond W. Jacobsen
-8-
EXHIBIT 10(xvi)
RETIREMENT PLAN FOR DIRECTORS OF
ORION CAPITAL CORPORATION
(As Amended September 12, 1994)
Section 1. PURPOSE
The purpose of the Plan is to provide the non-employee Directors
of Orion Capital Corporation with post-retirement compensation for
their services and to assist Orion Capital Corporation in attracting
and retaining qualified individuals to serve as Directors.
Section 2. DEFINITIONS
"Affiliated Company" shall mean any company more than 50
percent of the voting stock of which is directly or indirectly owned
by the Corporation.
"Corporation" shall mean Orion Capital Corporation.
"Credited Service" shall mean all years and fractions
thereof of service as a Director, whether before or after the
Effective Date. No period during which a Director was employed in
the capacity of an employee of the Corporation or any Affiliated
Company shall be included in determining the length of a Director's
Credited Service.
"Director" shall mean a member of the Board of Directors of
the Corporation.
"Effective Date" shall be April 1, 1990.
"Payment Date" shall mean the date or dates on which
persons who at such time are currently Directors are paid the
Retainer.
"Plan" shall mean this Retirement Plan for Directors of the
Corporation.
"Plan Administrator" shall mean the Secretary of the
Corporation.
"Retainer" shall mean the annual fee established by the
Board of Directors of the Corporation for service as a Director, but
excluding meeting fees, any additional fees paid to a Chairman of a
Committee of the Board of Directors of the Corporation, expense
reimbursements, and any stock options granted to any Director.
Section 3. PARTICIPATION
All individuals who are Directors on and after the
Effective Date and who have at least five (5) years of Credited
Service shall be entitled to participate in the Plan and receive the
benefits provided hereunder, except that all individuals who were
Directors after the Effective Date and prior to September 12, 1994,
<PAGE>
shall be entitled to participate in the Plan and receive the benefits
hereunder irrespective of whether or not any such individual has five
(5) years of Credited Service.
Section 4. ELIGIBILITY FOR RETIREMENT BENEFITS
A Director shall be entitled upon the termination of
service as a Director to the retirement benefits provided under
Section 6 of this Plan when such Director terminates service as a
Director to the Corporation or following a Change in Control, as
defined in Section 5 below.
Section 5. CHANGE IN CONTROL
For the purpose of this Plan, a "Change in Control" shall
be deemed to have occurred if and when:
(i) any "person", as such term is used in Sections 13(d)
and 14(d) (2) of the Securities Exchange Act of 1934 (the
"Act"),becomes a beneficial owner, as such term is used in Rule 13d-3
of the Act, of securities of the Corporation representing 40 percent
or more of the voting power of the outstanding common stock of the
Corporation, (any such owner being hereinafter referred to as an
"Acquiring Person");
(ii) a majority of the Board of Directors of the Corporation
(the "Board") at anytime consists of individuals elected to
membership at a Board meeting or a Corporation shareholders' meeting
other than individuals nominated or approved by a majority of
Disinterested Directors;
(iii) all or substantially all of the business of the
Corporation is disposed of pursuant to a merger, consolidation or
other transaction (other than a merger, consolidation or other
transaction with a company of which 50 percent or more of the
combined voting power of the outstanding securities having a right to
vote at the election of directors is owned, directly or indirectly,
by the Corporation both before and immediately after the merger,
consolidation or other transaction) in which the Corporation is not
the surviving corporation or the Corporation is materially or
completely liquidated.
(iv) The Corporation combines with another company and is the
surviving corporation (other than a merger, consolidation or other
transaction with a company of which 50 percent or more of the
combined voting power of the outstanding securities having a right to
vote at the election of directors is owned, immedately after the
merger, consolidation or other trans-
action), but immediately after the combination, the shareholders of
the Corporation hold, directly or indirectly less than 50 percent of
the total outstanding securities of the combined company having a
right to vote at the election of directors.
For this purpose, "Disinterested Directors" shall mean any
member of the Board (i) who is not an officer or employee of the
Corporation or any of its subsidiaries, (ii) who is not an Acquiring
-2-
<PAGE>
Person or an affiliate or associate of an Acquiring Person or a
nominee or representative of an Acquiring Person and (iii) who was a
member of the Board on the Effective Date or was recommended for
election or elected by a majority of the Disinterested Directors then
on the Board.
Section 6. RETIREMENT BENEFITS
The annual retirement benefit payable under the Plan to a
retired Director shall be equal to one half (1/2) the annual Retainer
in effect on the date a Director's service terminates. The
retirement benefit retirement benefit payable for a fractional period
of Credited Service shall equal the appropriate fraction of such
Retainer. This annual retirement benefit shall be payable to the
former Director (or, in the event of his or her death, thereafter to
his or her beneficiary or beneficiaries) for a period equal to the
length of his or her Credited Service or fifteen (15) years,
whichever is less. Payment of the retirement benefit shall be made
on each Payment Date commencing with the Payment Date following his
or her termination of service, for any reason, as a Director.
Notwithstanding the foregoing provisions, however, in the case of
retirement benefits to be received following a Change in Control,
such benefits, calculated as set forth above, shall be paid in one
lump sum, without discount, on the first Payment Date following such
Change in Control.
Section 7. DEATH BENEFITS
In the event that a Director dies while serving as a
Director, then a death benefit shall be paid under this Plan to the
Director's beneficiary or beneficiaries in an amount and at the times
a retirement benefit would have been payable to the Director
pursuant to Section 6.
Section 8. BENEFICIARIES
A Director or former Director's beneficiary or
beneficiaries shall be the person or persons last designated as such
in a writing and filed by the Director or former Director with the
Plan Administrator. If no designation is in effect or the person or
persons so designated do not survive the Director or former Director,
the beneficiary shall be the estate of the Director or former
Director.
Section 9. SUSPENSION OF BENEFITS
In the event a retired Director who is receiving retirement
benefits under this Plan returns to service as a Director, payment of
such retirement benefits shall be suspended during such subsequent
period of service. Payment of retirement benefits shall commence
again on the Payment Date following the date such subsequent service
as a Director terminates. The amount of the remaining retirement
benefits following such subsequent termination shall be based on the
Retainer in effect at the time of such subsequent termination of
service as a Director. Payments shall continue until the total
period that payment of retirement benefits are made, including the
-3-
<PAGE>
time of payments made prior to an individual's return to service as
a Director, equals the total Credited Service by the individual as a
Director, or fifteen (15) years, whichever is less.
Section 10. FUNDING
The benefits payable under this Plan shall not be secured
by any assets of the Corporation or any Affiliated Company, nor shall
any assets of the Corporation or any Affiliated Company be set aside
or allocated to the satisfaction of such benefits. Benefits under
the Plan shall be paid from the general assets of the Corporation and
each Director's interest in his or her benefits under this Plan shall
be only that of an unsecured general creditor of the Corporation.
Section 11. ADMINISTRATION
The Plan shall be administered by the Plan Administrator.
In addition to the powers otherwise specifically granted the Plan
Administrator under this Plan, the Plan Administrator shall (i) be
empowered to administer and interpret the Plan, (ii) adopt or revise
any rules or regulations pertaining to the Plan, and (iii) make any
other determinations which he or she believes are necessary or
advisable for the administration of the Plan.
Section 12. ALIENATION OF BENEFITS
No interest of any Director or beneficiary hereunder shall
be transferred, assigned, pledged, anticipated or alienated by the
Director or beneficiary or beneficiaries in any manner (except by
will or the laws of descent and distribution) nor shall it be subject
to attachment, bankruptcy proceedings or to any other legal process
or the interference or control of creditors of the Director or any
beneficiary or beneficiaries of the Director.
Section 13. GOVERNING LAWS
This Plan shall be governed by and construed under the laws
of the State of Delaware.
Section 14. AMENDMENT, MODIFICATION, OR TERMINATION OF
THE PLAN
The Board of Directors at any time may in any respect
terminate, amend or modify the Plan, without the consent of any
Director or beneficiary, provided that no amendment may reduce the
accrued benefits of any Director.
-4-
EXHIBIT 10(xix)
CONFORMED
AMENDMENT TO SHAREHOLDER AGREEMENT
This Amendment Agreement (the "Amendment") is made as of
February 2, 1994, by and among Guaranty National Corporation, a
Colorado corporation ("Guaranty"), Orion Capital Corporation, a
Delaware corporation ("Orion"), and the wholly owned subsidiaries
of Orion (the "Selling Shareholders") listed on Schedule 1 to the
Shareholder Agreement dated as of November 7, 1991 (the
"Shareholder Agreement"), among Guaranty, Orion and the Selling
Shareholders.
WHEREAS, the parties have determined that it would be in
their mutual best interests to provide for a further increase in
the number of independent directors of Guaranty,
NOW THEREFORE, in consideration of the premises and the
mutual covenants and agreements, and subject to the terms and
considerations set forth herein, the parties hereto agree as
follows:
1. Section 1.1(b) of the Shareholder Agreement is
hereby amended so as to provide in the end of the first sentence
thereof that "the Board of Directors of Guaranty shall consist of
ten members." Clause (iii) of the second sentence thereof is
hereby amended to provide that the Board of Directors of Guaranty
shall include "up to five nominees . . . mutually agreeable to
Orion and Guaranty . . ."
2. Except as expressly provided herein, the Shareholder
Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto duly
authorized thereunto, has executed this Agreement as of the day
and year set forth in the heading hereof.
GUARANTY NATIONAL CORPORATION
By: /s/ Michael L. Pautler
--------------------------
Michael L. Pautler
Senior Vice President
ORION CAPITAL CORPORATION
By: /s/ Michael P. Maloney
----------------------------
Michael P. Maloney
Vice President
<PAGE>
THE CONNECTICUT INDEMNITY COMPANY
CONNECTICUT SPECIALTY INSURANCE
COMPANY
DESIGN PROFESSIONALS INSURANCE
COMPANY
EMPLOYEE BENEFITS INSURANCE
COMPANY
THE FIRE & CASUALTY INSURANCE
COMPANY OF CONNECTICUT
SECURITY INSURANCE COMPANY OF
HARTFORD
SECURITY REINSURANCE COMPANY
By: /s/ Michael P. Maloney
---------------------------
Michael P. Maloney
Senior Vice President
-2-
<PAGE>
AMENDMENT TO SHAREHOLDER AGREEMENT
This Amendment Agreement (the "Amendment") is made as of
March 2, 1995, by and among Guaranty National Corporation, a
Colorado corporation ("Guaranty"), Orion Capital Corporation, a
Delaware corporation ("Orion"), and the wholly owned subsidiaries
of Orion (the "Selling Shareholders") listed on Schedule 1 to the
Shareholder Agreement dated as of November 7, 1991 (the
"Shareholder Agreement"), among Guaranty, Orion and the Selling
Shareholders.
WHEREAS, the parties have determined that it would be in
their mutual best interests to provide for a further increase in
the number of independent directors of Guaranty,
NOW THEREFORE, in consideration of the premises and the
mutual covenants and agreements, and subject to the terms and
considerations set forth herein, the parties hereto agree as
follows:
1. Section 1.1(b) of the Shareholder Agreement is
hereby further amended so as to provide at the end of the first
sentence thereof that ". . . the Board of Directors of Guaranty
shall consist of eleven members." (Emphasis added.) The second
------
sentence thereof is hereby amended to provide that "Nominees for
such eleven directorships shall be designated as follows: . . .
------
(iii) up to six nominees shall be nominees mutually agreeable to
----------
Orion and Guaranty who are not (x) officers, directors or
employees of Orion or its wholly-owned subsidiaries, other than
---------
one such nominee who is a retired officer and director of Orion
- ---------------------------------------------------------------
but who is still an employee of Orion, or (y) . . ." (Emphasis
- --------------------------------------
added.)
2. Except as expressly provided herein, the Shareholder
Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto duly
authorized thereunto, has executed this Agreement as of the day
and year set forth in the heading hereof.
GUARANTY NATIONAL CORPORATION
By: /s/ Roger Ware
--------------------------
Roger Ware
ORION CAPITAL CORPORATION
By: /s/ Alan R. Gruber
----------------------------
Alan R. Gruber
<PAGE>
THE CONNECTICUT INDEMNITY COMPANY
CONNECTICUT SPECIALTY INSURANCE
COMPANY
DESIGN PROFESSIONALS INSURANCE
COMPANY
EMPLOYEE BENEFITS INSURANCE
COMPANY
THE FIRE & CASUALTY INSURANCE
COMPANY OF CONNECTICUT
SECURITY INSURANCE COMPANY OF
HARTFORD
SECURITY REINSURANCE COMPANY
By: /s/ Vincent T. Papa
---------------------------
Vincent T. Papa
Senior Vice President
-2-
EXHIBIT 10(xxi)
CONFORMED
As of February 22, 1994
Orion Capital Corporation
30 Rockefeller Plaza
New York, New York 10112
Attention: Vincent T. Papa,
Vice President
Dear Mr. Papa:
Reference is made to (i) the Loan Agreement (the "Loan
Agreement") dated March 8, 1993 by and between Orion Capital
Corporation, a Delaware corporation (the "Borrower"), the banks
signatory thereto (the "Banks) and National Westminster Bank USA,
as Agent (the "Agent"). Capitalized terms not otherwise defined
herein shall have the meanings ascribed thereto in the Loan
Agreement.
This letter confirms our agreement that the Loan Agreement is
hereby amended by:
1. Amending the definition of "Significant Subsidiaries" in
Article I by deleting "EBI," in the second line thereof.
2. Deleting "15" in the first line of subsection 5.11(a) and
substituting "30" therefor.
3. Amending Section 7.4 by:
(i) deleting "and" at the end of subsection 7.4(c);
(ii) inserting "acquire all or substantially all of the
capital stock of EBIC or" after "may" in the first line of
subsection 7.4(d);
(iii) deleting "(i)" and "(ii)" in the fourth and sixth
lines, respectively of subsection 7.4(d) and substituting "(A)" and
"(B)", respectively, therefor; and
(iv) deleting the period at the end of subsection 7.4(d)
and substituting "; and" therefor and inserting the following new
subsection 7.4(e) thereafter:
"(e)Orion Capital Companies, Inc. may acquire all or
substantially all of the capital stock of DPIC Companies, Inc. and
EBI Companies, Inc."
<PAGE>
Orion Capital Corporation
As of February 22, 1994
Page 2
4. Deleting "(b)" in the eighth line of Section 7.7 and
substituting "(c)" therefor and by inserting "(b) the dissolution
of EBI and Design Professionals Financial Corporation;" after the
semi-colon in the eighth line thereof.
5. Inserting "(i) any termination in connection with the
dissolution of EBI or Design Professionals Financial Corporation or
(ii)" after "except" in the fourth line of subsection 7.12(a).
6. Deleting Schedule 3.1 in its entirety and substituting the
attached Schedule 3.1 therefor.
7. Whether or not expressly referred to in paragraphs 1
through 6 above, each other provision of the Loan Agreement shall
be deemed amended hereby to the extent necessary consistent with
and to effectuate the provisions hereof.
All references in the Loan Agreement, the Loan Documents and
all other instruments, documents and agreements executed and
delivered pursuant to any of the foregoing to the "Loan Agreement",
shall be deemed to refer to the Loan Agreement as amended and
supplemented by this Amendment.
The Borrower hereby represents and warrants to the Agent and
the Banks:
1. After giving effect to this Amendment, each and every one
of the representations and warranties set forth in Article 3 of the
Loan Agreement is true in all respects as of the date hereof and
there exists no Default or Event of Default under the Loan
Agreement, and no event which, with the giving of notice or lapse
of time or both, would constitute an Event of Default.
2. It has full power and authority to enter into, and has
taken all proper and necessary corporate action to authorize this
Amendment.
3. This Amendment has been duly executed and delivered and
constitutes the valid and legally binding obligation of the
Borrower, enforceable in accordance with its terms.
This Amendment shall be binding upon and inure to the benefit
of the Borrower and its successors and to the benefit of the Agent
and the Banks and their successors and assigns.
<PAGE>
Orion Capital Corporation
As of February 22, 1994
Page 3
Except as amended hereby, the Loan Agreement shall remain in
full force and effect in accordance with its terms.
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
This Amendment may be signed in any number of counterparts
with the same effect as if the signatures thereto and hereto were
upon the same instrument.
Sincerely,
NATIONAL WESTMINSTER BANK USA,
as Agent and a Bank
By /s/ Robert M. Carley
--------------------------------
Robert M. Carley
Vice President Title
FLEET BANK, NATIONAL ASSOCIATION
By /s/ Jan-Gee W. McCollam
---------------------------------
Jan-Gee W. McCollam
Senior Vice President Title
SHAWMUT BANK CONNECTICUT, N.A.
By /s/ Jeffrey L. Seavey
--------------------------------
Jeffrey L. Seavey
Vice President Title
CONTINENTAL BANK N.A.
By /s/ Janet R. Gates
---------------------------------
Janet R. Gates
Vice President Title
<PAGE>
Orion Capital Corporation
As of February 22, 1994
Page 4
SANWA BANK CALIFORNIA
By /s/ John E. Linder
-------------------------------
John E. Linder
Vice President Title
STATE STREET BANK AND TRUST
COMPANY
By /s/ Edward M. Anderson
---------------------------------
Edward M. Anderson
Vice President Title
ACCEPTED AND AGREED:
ORION CAPITAL CORPORATION
By /s/ Vincent T. Papa
-------------------------------------
Vincent T. Papa
Vice President & Treasurer Title
AMENDMENT NO. 2 TO
LOAN AGREEMENT
AMENDMENT NO. 2 dated the 9th day of November, 1994 by
and between ORION CAPITAL CORPORATION, a Delaware corporation (the
"Borrower"), the Banks that have executed the signature pages
hereto (individually, a "Bank" and collectively, the "Banks") and
NATIONAL WESTMINSTER BANK USA, a national banking association, as
Agent for the Banks (in such capacity, the "Agent").
W I T N E S S E T H:
WHEREAS:
(A) The Borrower, the Banks and the Agent entered into
a Loan Agreement dated March 8, 1993 (as amended by a letter
agreement dated as of February 22, 1994, the "Loan Agreement")
pursuant to which the Banks agreed to make loans to the Borrower;
(B) The Borrower desires that the Loan Agreement be
amended in certain respects;
(C) The Banks are willing to amend the Loan Agreement
upon the terms and subject to the conditions of this Amendment No.
2; and
(D) Capitalized terms not defined herein shall have the
meanings ascribed to such terms in the Loan Agreement;
NOW, THEREFORE, in consideration of the foregoing and for
other good and valuable consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
<PAGE>
ARTICLE 1 AMENDMENTS TO LOAN AGREEMENT.
--------- -----------------------------
Subject to the satisfaction of the conditions contained in
Article 5 hereof, the Loan Agreement is hereby amended as follows:
1.01 Article 1 of the Loan Agreement is hereby
amended by:
(a) Deleting the definitions set forth opposite the
capitalized terms set forth below and substituting therefor the
following definitions:
Applicable Margin: as of any date of
determination thereof, the applicable percentage set forth in
the table below based upon the type of Loan and the rating of
the Senior Notes (or any refinancing thereof which is senior
unsecured long-term debt, without third party credit
enhancement) as determined by each of Standard & Poor's
Corporation, Moody's Investors Service, Inc. and Duff & Phelps
Credit Rating Co. as at such date of determination:
EURODOLLAR PRIME RATE
RATINGS LOANS CD LOANS LOANS
- -------- ---------- --------- -----------
A-/A3 and higher 0.50% 0.75% -0-
BBB+/Baa1 0.70% 0.85% -0-
BBB/Baa2 0.90% 1.00% -0-
BBB-/Baa3 1.10% 1.20% -0-
BB+/Ba1 and lower 1.30% 1.40% -0-
; provided, however, that in the event the rating of the Senior
Notes (or such refinancing thereof) as determined by each of
Standard & Poor's Corporation, Moody's Investors Service, Inc. and
Duff & Phelps Credit Rating Co. shall not be equivalent, then the
rating of the two such rating agencies that are equivalent shall be
used in determining the Applicable Margin, or, if none of the
ratings of such rating agencies are equivalent, then the rating of
the rating agency that is the middle rating shall be used in
determining the Applicable Margin; provided, further, that if any
of Standard & Poor's Corporation, Moody's Investors Service, Inc.
or Duff & Phelps Credit Rating Co. shall cease to issue a rating of
-2-
<PAGE>
the Senior Notes (or such refinancing thereof) and the rating of
the Senior Notes (or such refinancing thereof) of the two remaining
rating agencies is not equivalent, the rating of the rating agency
that is the higher rating shall be used in determining the
Applicable Margin; provided, further, that if none of Standard &
Poor's Corporation, Moody's Investors Service, Inc. or Duff &
Phelps Credit Rating Co. shall issue a rating of the Senior Notes
(or such refinancing), then the Agent and the Borrower shall
negotiate in good faith to agree upon a substitute rating agency
(and to correlate the system of ratings of such substitute rating
agency with that of the rating agency for which it is substituting)
and after such substitute rating agency is agreed upon, the
foregoing determination shall be made on the basis of the rating
assigned by such substitute rating agency provided that such
substitute rating agency shall have been approved by the Majority
Banks."
"Commitment(s): as to each Bank, the respective amounts
set forth opposite such Bank's name on the signature pages to
Amendment No. 2 under each of the captions "Term Loan Commitment"
and "Revolving Credit Commitment", as the case may be, as such
amounts shall and/or may be reduced in accordance with the terms
hereof."
"Consolidated Net Worth: the sum of: (a) the common
stock equity and preferred stock (including, without limitation,
the Preferred Stock) equity of the Borrower, plus (without
duplication) (b) the amount of capital surplus and retained
earnings (or in the case of a deficit, minus the deficit); all of
which shall be determined in accordance with generally accepted
accounting principles consistently applied except (i) to the extent
that an inconsistency results from compliance with financial
accounting standards adopted by the Borrower after March 8, 1993
with which the Borrower's independent certified public accountants
concur and (ii) that Consolidated Net Worth shall be determined
excluding the effects of classifying fixed maturity investments as
other than "held to maturity" in accordance with Financial
Accounting Standards Board Statement of Financial Accounting
Standard number 115 since December 31, 1993."
Fee(s): as defined in subsection 2.7(f) hereof."
Net Loss: for any fiscal year, the consolidated net loss
(if any) of the Borrower and its consolidated Subsidiaries as
reported in their consolidated financial statements delivered
pursuant to Section 5.1 hereof, but shall exclude: (i) any
extraordinary gains or losses; (ii) the cumulative effects of any
accounting changes pursuant to generally accepted accounting
-3-
<PAGE>
principles, (iii) the effects of classifying fixed maturity
investments as other than "held to maturity" in accordance with
Financial Accounting Standards Board Statement of Financial
Accounting Standard number 115; and (iv) any gains (or losses)
after taxes recognized by the Borrower or any of its Subsidiaries
upon the sale of any GNC Stock."
"Revolving Credit Commitment: as to each Bank, the
amount set forth opposite such Bank's name on the signature pages
of Amendment No. 2 under the caption "Revolving Credit
Commitment"."
"Revolving Credit Commitment Termination Date:
December 31, 1999."
(b) Adding thereto the following definitions in the
appropriate alphabetical order:
"Amendment No. 2: Amendment No. 2 to Loan Agreement
dated the Second Amendment Closing Date between the Borrower, the
Banks and the Agent."
"Second Amendment Closing Date: November 9, 1994."
"Second Amendment Fee: as defined in Subsection
2.7(e) hereof."
1.02 Section 1.2 of the Loan Agreement is hereby amended
by inserting "as provided in the definitions of Consolidated Net
Worth and Net Loss in Section 1.1 hereof and" after "except" in the
fourth line thereof.
1.03 Section 2.4(b) of the Loan Agreement is hereby
deleted in its entirety and the following is substituted therefor:
"(b) The Revolving Credit Loans made by each Bank
shall be evidenced by a single promissory note of the Borrower to
such Bank in substantially the form of Exhibit A to Amendment No.
2 (each, a "Revolving Credit Note" and collectively, the "Revolving
Credit Notes" and, together with the Term Notes, each a "Note" and
collectively, the "Notes"). Each Revolving Credit Note shall be
dated the Second Amendment Closing Date, shall be payable to the
order of such Bank in a principal amount equal to such Bank's
-4-
<PAGE>
Revolving Credit Commitment as in effect on the Second Amendment
Closing Date (after giving effect to Amendment No. 2), and shall
otherwise be duly completed. The Revolving Credit Notes shall be
payable as provided in subsection 2.1(b) hereof."
1.04 Subsections 2.5(a)(i) and 2.5(e) of the Loan
Agreement are each hereby deleted in their entirety and the
following substituted therefor:
"[INTENTIONALLY OMITTED]"
1.05 Subsection 2.5(c) of the Loan Agreement is hereby
amended by deleting "2.5(a)(i) and" from the fifth line thereof.
1.06 Section 2.7 of the Loan Agreement is hereby amended
by deleting subsection 2.7(e) in its entirety and substituting the
following therefor:
"(e) Simultaneously with the execution and delivery
of Amendment No. 2, the Borrower shall pay to the Agent, for the
account of the Banks, pro rata according to their respective
Revolving Credit Commitments, a non-refundable facility fee (the
"Second Amendment Fee") in an aggregate amount equal to Seventy-
five Thousand Dollars ($75,000.00).
(f) The Revolving Credit Commitment Fee, the Term
Loan Commitment Fee, the Facility Fee, the Agency Fee and the
Second Amendment Fee are hereinafter sometimes referred to
individually as a "Fee" and collectively, as the "Fees"."
1.07 Section 2.10 of the Loan Agreement is hereby amended
by adding a new sentence at the end thereof to read as follows:
"Each change in the Applicable Margin as a result of
a change in the rating of the Senior Notes (or any refinancing
thereof as provided in the definition of Applicable Margin) shall
become effective, (a) on the date upon which such change in rating
occurs with respect to Prime Rate Loans and (b) on the first day of
each Interest Period commencing after the date upon which such
change in rating occurs with respect to Eurodollar Loans and CD
Loans."
-5-
<PAGE>
1.08 Section 3.5 of the Loan Agreement is hereby amended
by deleting "$4,000,000" in the third line thereof and substituting
"$7,000,000" therefor.
1.09 Section 3.6 of the Loan Agreement is hereby amended
by deleting "$4,000,000" in the seventh and eleventh lines thereof
and substituting in each case "$7,000,000" therefor.
1.10 Section 5.4 of the Loan Agreement is hereby amended
by deleting "$1,000,000" in the tenth line thereof and substituting
"$5,000,000" therefor.
1.11 Section 6.7 of the Loan Agreement is hereby amended
by deleting "Four Million Dollars ($4,000,000)" in the seventh line
thereof and substituting "Seven Million Dollars ($7,000,000)"
therefor.
1.12 Subsection 6.9(a) of the Loan Agreement is hereby
deleted in its entirety and the following substituted therefor:
"(a)Have and maintain as at the last day of each
fiscal quarter during the periods set forth below a Consolidated
Net Worth of not less than the respective amounts set forth
opposite each such period:
Minimum Consolidated
Period Net Worth
- ------- --------------------
March 8, 1993 through
and including December 31, 1993 $260,000,000
January 1, 1994 through
and including October 31, 1994 $285,000,000
<PAGE>
November 1, 1994 through
and including December 31, 1994 $330,000,000
January 1, 1995 through
and including December 31, 1995 $345,000,000
January 1, 1996 through
and including December 31, 1996 $360,000,000
January 1, 1997 through
and including December 31, 1997 $375,000,000
January 1, 1998 through
and including December 31, 1998 $390,000,000
January 1, 1999 through
and including December 31, 1999 $405,000,000
provided, however, that (1) the amounts set forth above shall be
increased automatically by an amount equal to all gains after taxes
recognized by the Borrower or any Subsidiary upon the sale of any
GNC Stock held by it (including, without limitation, by the amount
of all gains recognized upon the sale of the initial 300,000 shares
of GNC Stock sold by the Borrower and/or its Subsidiaries referred
to below) provided that such amounts shall be increased in
accordance with this clause (1) only after the date on which the
Borrower and its Subsidiaries have sold, in the aggregate, more
than 300,000 shares of GNC Stock after the date of this Agreement;
and (2) the amounts set forth above shall be decreased
automatically by an amount equal to the purchase price paid (less
any broker's commission paid in connection with any such
repurchase) by the Borrower for the repurchase of its common stock
after September 30, 1994 provided that such amounts shall be
decreased in accordance with this clause (2) only after the date on
which the Borrower has repurchased in the aggregate more than
200,000 shares of its common stock after September 30, 1994."
1.13 Subsection 7.2(d) of the Loan Agreement is hereby
amended by deleting "$3,000,000" in the ninth line thereof and
substituting "$7,000,000" therefor.
1.14 Subsection 7.3(g) of the Loan Agreement is hereby
amended by deleting "$5,000,000" in the fourth line thereof and
substituting "$7,000,000" therefor.
-7-
<PAGE>
1.15 Subsection 7.4(d) of the Loan Agreement is hereby
amended by deleting clause (B) thereof in its entirety and
substituting the following therefor:
"(B)the aggregate amount of the consideration
(whether Cash, notes or other forms of payment) paid by the
Borrower for or in all such purchases permitted under this
subsection 7.4(d) after the Second Amendment Closing Date would not
exceed the lesser of (x) an amount equal to fourteen percent (14%)
of the tangible net worth of the Borrower and its consolidated
Subsidiaries (as determined in accordance with generally accepted
accounting principles) as at the fiscal quarter most recently
completed prior to the date of such purchase and (y) $50,000,000."
1.16 Section 7.13 of the Loan Agreement is hereby amended
by deleting "$5,000,000" in the fourth line thereof and
substituting "$10,000,000" therefor.
1.17 Section 7.14 of the Loan Agreement is hereby amended
by deleting the chart contained therein and substituting the
following therefor:
"Fiscal Year Policyholders' Surplus
------------ -----------------------
1993 $220,000,000
1994 $275,000,000
1995 $290,000,000
1996 $305,000,000
1997 $320,000,000
1998 $335,000,000
1999 $350,000,000"
1.18 Section 7.16 of the Loan Agreement is hereby deleted
in its entirety and the following substituted therefor:
"Section 7.16 Net Loss.
With respect to the Borrower and its consolidated
Subsidiaries, have a Net Loss in each of two consecutive fiscal
years and which combined exceed $25,000,000."
-8-
<PAGE>
1.19 Section 8.4 of the Loan Agreement is hereby amended
by deleting "$5,000,000" in the last line thereof and substituting
"$10,000,000" therefor.
1.20 Section 8.7 of the Loan Agreement is hereby amended
by (a) deleting "$5,000,000" in the third and eleventh lines
thereof and substituting "$10,000,000" therefor and (b) deleting
"$10,000,000" in the fourth and eleventh lines thereof and
substituting "$20,000,000" therefor.
1.21 Section 10.6 of the Loan Agreement is hereby amended
by deleting the first sentence thereof in its entirety and
substituting the following therefor:
"No modification, amendment or waiver of or with respect to
any provision of this Agreement, any Notes, or any of the other
Loan Documents and all other agreements, instruments and documents
delivered pursuant hereto or thereto, nor any departure by the
Borrower from any of the terms or conditions hereof or thereof,
shall in any event be effective unless it shall have been consented
to in writing by the Agent and each Bank, except that any
modification or amendment of, or waiver or departure by the
Borrower with respect to, Articles 1 (other than the definition of
"Majority Banks" set forth in Section 1.1 hereof), 3, 4 (provided,
however, that the consummation of a Loan by a Bank shall be deemed,
with respect to such Loan only, to have the effect of such Bank
consenting to the waiver of, or departure from, any term or
provision of Article 4 that has not been satisfied as of the date
of consummation of such Loan), 5, 6, 7, 8 (other than Sections 8.1
or 8.6 hereof) and 10 (other than this Section 10.6) may be
consented to in writing by the Majority Banks, which written
consent shall be signed by the Agent upon the direction of such
Majority Banks."
1.22 Section 10.9 of the Loan Agreement is hereby amended
by deleting paragraphs (a) and (c) thereof in their entirety and
substituting the following therefor:
-9-
<PAGE>
"(a)If to the Borrower:
Orion Capital Corporation
600 Fifth Avenue
New York, New York 10020
Attention: Mr. Vincent T. Papa
Vice President and
Treasurer
Telecopier No.: (212) 581-7261
with a copy to:
Donovan Leisure Newton & Irvine
30 Rockefeller Plaza
New York, New York 10112
Attention: John J. McCann, Esq.
Telecopier No.: (212) 632-3315"
"(c)If to the Agent:
National Westminster Bank USA,
as Agent
592 Fifth Avenue
New York, New York 10036
Attention: Mr. David C. Tesher
Vice President
Telecopier No.: (212) 602-2080
with a copy (other than in the
case of Borrowing Notices and
reports and other documents
delivered in compliance with
Article 5 hereof) to:
Winston & Strawn
175 Water Street
New York, New York 10038
Attention: Marc C. Lewis, Esq.
Telecopier No.: (212) 858-4700"
1.23 The Loan Agreement is hereby amended by deleting the
schedules thereto in their entirety and substituting therefor the
schedules attached to Amendment No. 2 as Exhibit B.
-10-
<PAGE>
ARTICLE 2. AMENDED AND RESTATED REVOLVING CREDIT NOTES.
--------------------------------------------
2.01 Simultaneously with the execution and delivery of
this Amendment No. 2, the Borrower shall execute and deliver to
each Bank an Amended and Restated Revolving Credit Note in
substitution for, and in restatement of, the indebtedness evidenced
by the Revolving Credit Note of such Bank. Upon the execution of
the Amended and Restated Revolving Credit Note and delivery thereof
by the Borrower to such Bank, such Bank shall mark its existing
Revolving Credit Note "Amended and Restated by Substitution of
Amended and Restated Revolving Credit Note" and shall return it to
the Borrower. All interest accrued and unpaid on the existing
Revolving Credit Note through the date of execution and delivery of
the Amended and Restated Revolving Credit Note shall be evidenced
by and payable under the Amended and Restated Revolving Credit
Note.
ARTICLE 3. ACKNOWLEDGMENTS AND CONFIRMATIONS.
-----------------------------------
3.01 The Borrower acknowledges and confirms that:
(a) the term "Obligations" as used in the Loan
Documents (or any other term used therein to refer to the
Indebtedness, liabilities and obligations of the Borrower to a
Bank) includes, without limitation, Indebtedness, liabilities and
obligations to such Bank under the Loan Agreement, as amended by
-11-
<PAGE>
this Amendment No. 2, and the Amended and Restated Revolving Credit
Note;
(b) all references in the Loan Agreement, the
other Loan Documents and in any other agreement, instrument and
document executed and delivered pursuant to any of the foregoing to
the "Loan Agreement" and, in the case of the Loan Agreement to
"this Agreement", shall be deemed to refer to the Loan Agreement,
as amended hereby; and
(c) all references in the Loan Agreement,the
other Loan Documents and in any other agreement, instrument or
document executed and delivered pursuant to any of the foregoing to
the "Notes" or the "Revolving Credit Notes" shall be deemed to
refer to the Amended and Restated Revolving Credit Notes.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES.
-------------------------------
4.01 The Borrower represents and warrants to the Agent
and the Banks that:
(a) without giving effect to the amendments to the
Loan Agreement set forth in this Amendment No. 2, each of the
representations and warranties set forth in Article 3 of the Loan
Agreement is true in all respects as of the date hereof and with
the same effect as though made on the date hereof, and is hereby
incorporated herein in full by reference as if fully restated
herein in its entirety, except for changes in the ordinary course
-12-
<PAGE>
of business, which are not, either singly or in the aggregate,
materially adverse to the business or financial condition of the
Borrower and its Subsidiaries taken as a whole;
(b) without giving effect to the amendments to the
Loan Agreement set forth in this Amendment No. 2, as of the date
hereof, there exists no Event of Default under the Loan Agreement,
and no event which, with the giving of notice or lapse of time, or
both, would constitute such an Event of Default;
(c) it has the power to execute, deliver and perform
this Amendment No. 2 and each of the Amended and Restated Revolving
Credit Notes. The Borrower has taken all necessary action to
authorize the execution, delivery and performance of this Amendment
No. 2 and each of the Amended and Restated Revolving Credit Notes.
No consent or approval of any Person (including, without
limitation, any stockholder), no consent or approval of any
landlord or mortgagee, no waiver of any Lien or right of distraint
or other similar right and no consent, license, approval,
authorization or declaration of any governmental authority, bureau
or agency, is required in connection with the execution, delivery
or performance by the Borrower, or the validity or enforcement of
this Amendment No. 2 and each of the Amended and Restated Revolving
Credit Notes;
(d) the execution and delivery by it of this
Amendment No. 2 and each of the Amended and Restated Revolving
-13-
<PAGE>
Credit Notes and performance by it hereunder and thereunder, will
not violate any provision of law and will not conflict with or
result in a breach of any order, writ, injunction, ordinance,
resolution, decree or other similar document or instrument of any
court or governmental authority, bureau or agency, domestic or
foreign, or its certificate of incorporation or by-laws, or create
(with or without the giving of notice or lapse of time, or both) a
default under or breach of any agreement, bond, note or indenture
to which it is a party, or by which it is bound or any of its
properties or assets is affected, or result in the imposition of
any Lien of any nature whatsoever upon any of the properties or
assets owned by or used in connection with its business; and
(e) this Amendment No. 2 and the Amended and
Restated Revolving Credit Notes have been duly executed and
delivered by it and each constitutes the valid and legally binding
obligation of the Borrower, enforceable in accordance with its
terms, except as such enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other
similar laws, now or hereafter in effect, relating to or affecting
the enforcement of creditors' rights generally and except that the
remedy of specific performance and other equitable remedies are
subject to judicial discretion.
-14-
<PAGE>
ARTICLE 5. CONDITIONS.
-----------
5.01 The effectiveness of the amendments contained in
Article 1 of this Amendment No. 2 shall be subject to the
satisfaction of the following conditions:
(a) The Borrower shall have executed and delivered this
Amendment No. 2;
(b) The Borrower shall have executed and delivered to each
Bank its Amended and Restated Revolving Credit Note against
surrender of the outstanding Revolving Credit Notes;
(c) The Agent shall have received: (i) (A) a copy of the
certificate of incorporation of the Borrower certified by the
secretary of state of the state of the Borrower's incorporation and
(B) a certificate of the secretary of the Borrower to the effect
that the certificate of incorporation and by-laws of the Borrower
delivered to the Agent pursuant to the Loan Agreement have not been
amended, modified or changed in any respect and are in full force
and effect as of the Second Amendment Closing Date; (ii) copies of
all corporate action taken by the Borrower to authorize the
execution, delivery and performance of this Amendment No. 2 and
each of the Amended and Restated Revolving Credit Notes and the
transactions contemplated hereby and thereby, certified as true,
correct and complete by its secretary; and (iii) an incumbency
certificate (with specimen signatures) with respect to the
Borrower;
-15-
<PAGE>
(d) Donovan Leisure Newton & Irvine, counsel to the
Borrower, shall have delivered its opinion to the Agent and the
Banks, in form and substance satisfactory to the Agent and its
counsel;
(e) (i) There shall exist no Event of Default or Default
under the Loan Agreement; and
(ii) The representations and warranties contained in
Article 4 of this Amendment No. 2 shall be true and correct with
the same effect as though made on the Second Amendment Closing
Date,
and the Agent shall have received a certificate dated the Second
Amendment Closing Date signed by an officer of the Borrower to the
foregoing effect;
(f) All legal matters incident to this Amendment No. 2
shall be satisfactory to counsel to the Agent;
(g) The Borrower shall have paid to the Agent for the
ratable benefit of the Banks the Second Amendment Fee of $75,000;
and
(h) The Borrower shall have paid to the Agent all
reasonable legal fees and disbursements incurred by the Agent in
connection with the preparation, negotiation and execution of this
Amendment No. 2 and the Amended and Restated Revolving Credit
Notes, and any documents, instruments and agreements required
hereby or thereby.
-16-
<PAGE>
ARTICLE 6. MISCELLANEOUS; NO WAIVER.
-------------------------
6.01 The provisions of Article 10 of the Loan Agreement
shall govern this Amendment No. 2 with respect to the subject
matter set forth therein. THIS AMENDMENT NO. 2, THE AMENDED AND
RESTATED REVOLVING CREDIT NOTES, THE LOAN AGREEMENT AND THE OTHER
LOAN DOCUMENTS ACKNOWLEDGED, AMENDED AND CONFIRMED HEREBY, AND ALL
OTHER DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN
CONNECTION HEREWITH AND THEREWITH, SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF NEW YORK.
6.02 Whether or not the transactions contemplated by this
Amendment No. 2 are consummated (unless the failure to consummate
the transactions contemplated by this Amendment No. 2 is solely the
result of any action or inaction of the Agent or the Banks), the
Borrower will pay all fees and out-of-pocket expenses of the Agent
and Banks incurred in connection with such transactions, including
all reasonable fees and disbursements of legal counsel to the
Agent.
6.03 Except as specifically amended herein, the Loan
Agreement and each of the other Loan Documents shall remain in full
force and effect in accordance with their respective terms.
6.04 This Amendment No. 2 may be signed in any number of
counterparts which, when taken together, shall constitute one and
the same document.
-17-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this
Amendment on the date first above written.
ORION CAPITAL CORPORATION
By:/s/ Vincent T. Papa
-----------------------------
Title: Vice President & Treasurer
-18-
<PAGE>
Term Loan Commitment: NATIONAL WESTMINSTER BANK USA,
$13,333,333.33 as Agent and as a Bank
Revolving Credit By /s/ David C. Tesher
Commitment: ----------------------------
$8,000,000.00 David C. Tesher
Vice President
Lending Office for Prime Rate
Loans, Eurodollar Loans and
CD Loans:
592 Fifth Avenue
New York, New York 10036
Attention: David C. Tesher
Vice President
Address for Notices:
National Westminster Bank USA
592 Fifth Avenue
New York, New York 10036
Attention: David C. Tesher
Vice President
Telex: 232369
Answer-Back Code: NBNA UR
Telecopier: (212) 602-2080
-19-
<PAGE>
Term Loan Commitment: FLEET BANK, NATIONAL ASSOCIATION
$10,000,000.00
Revolving Credit
Commitment: BY /s/ Jan-Gee W. McCollam
$6,000,000.00 ----------------------------
Jan-Gee W. McCollam
Senior Vice President
Lending Office for Prime Rate
Loans:
One Constitution Plaza
Hartford, Connecticut 06115
Lending Office for CD Loans
and Eurodollar Loans:
One Constitution Plaza
Hartford, Connecticut 06115
Attention: Jan-Gee W. McCollam
Senior Vice President
Address for Notices:
One Constitution Plaza
Hartford, Connecticut 06115
Attention: Jan-Gee W. McCollam
Senior Vice President
Telecopier: (203) 244-5391
Telephone: (203) 244-5975
-20-
<PAGE>
Term Loan Commitment: SHAWMUT BANK CONNECTICUT, N.A.
$10,000,000.00
Revolving Credit By /s/ Thomas E. McKinlay
Commitment: -----------------------------
$6,000,000.00 Thomas E. McKinlay
Vice President
Lending Office for Prime Rate
Loans:
777 Main Street
Hartford, Connecticut 06115
Lending Office for CD Loans
and Eurodollar Loans:
777 Main Street
Hartford, Connecticut 06115
Attention: Thomas E. McKinlay
Vice President
Address for Notices:
Shawmut Bank Connecticut, N.A.
Insurance Industry MSN 250
777 Main Street
Hartford, Connecticut 06115
Attention: Thomas E. McKinlay
Vice President
Telecopier: (203) 240-1264
-21-
<PAGE>
Term Loan Commitment: BANK OF AMERICA ILLINOIS
$6,666,666.67
Revolving Credit By /s/ John R. Wolak
Commitment: -----------------------------
$4,000,000.00 Vice President Title
Lending Office for Prime Rate
Loans:
231 S. LaSalle Street
Chicago, Illinois 60697
Lending Office for CD Loans
and Eurodollar Loans:
231 S. LaSalle Street
Chicago, Illinois 60697
Attention: John R. Wolak
Address for Notices:
Bank of America Illinois
Insurance Division 10th Floor
231 S. LaSalle Street
Chicago, Illinois 60697
Attention: Deborah Lacy
Telex No.: 25233
Answer-Back Code: CON
Telecopier: (312) 987-0889
-22-
<PAGE>
Term Loan Commitment: SANWA BANK CALIFORNIA
$5,000,000.00
Revolving Credit By /s/ John C. Hyche
Commitment: ----------------------------
$3,000,000.00 John C. Hyche
Vice President
Lending Office for Prime Rate
Loans:
601 South Figueroa Street
Los Angeles, California 90017
Lending Office for CD Loans
and Eurodollar Loans:
601 South Figueroa Street
Los Angeles, California 90017
Attention: John C. Hyche
Vice President
Address for Notices:
601 South Figueroa Street
Los Angeles, California 90017
Attention: John C. Hyche, VP
Insurance &
Financial Services
Telex No.: 823038
Answer-Back Code: SANWALA
Telecopier: (213) 896-7282
-23-
<PAGE>
Term Loan Commitment: STATE STREET BANK AND TRUST
$5,000,000.00 COMPANY
Revolving Credit By /s/ Edward M. Anderson
Commitment: -----------------------------
3,000,000.00 Vice President Title
Lending Office for Prime Rate
Loans:
225 Franklin Street
Boston, Massachusetts 02110
Lending Office for CD Loans
and Eurodollar Loans:
225 Franklin Street
Boston, Massachusetts 02110
Attention: Edward M. Anderson
Vice President (AH2)
Address for Notices:
State Street Bank and Trust
Company of Connecticut, N.A.
Insurance Service Division
50 Main Street, Suite 1114
Hartford, Connecticut 06103
Attention: Robert P. Engvall,
Jr. Vice President
Telex No.: 200139
Answer-Back Code: STATE UR
Telecopier: (203) 244-1889
-24-
EXHIBIT A
TO
AMENDMENT NO. 2
TO LOAN AGREEMENT
FORM OF AMENDED AND RESTATED
REVOLVING CREDIT NOTE
$ New York, New York
---------------- November 9, 1994
FOR VALUE RECEIVED, the undersigned, ORION CAPITAL
CORPORATION, a Delaware corporation (the "Borrower"), hereby
promises to pay to the order of (the
"Bank") on December 31, 1999 or on such earlier date as is provided
for in the Loan Agreement dated March 8, 1993 by and among the
Borrower, the Banks signatory thereto and National Westminster Bank
USA, as agent for such Banks (in such capacity, the "Agent") (as
heretofore amended and as it may from time to time be further
amended, modified or supplemented, hereinafter referred to as the
"Loan Agreement") the principal sum of DOLLARS ($ )
(or such lesser amount as shall be equal to the aggregate unpaid
principal amount of the Revolving Credit Loans (as defined in the
Loan Agreement) made by the Bank under the Loan Agreement), and to
pay interest on the unpaid principal amount of each Revolving
Credit Loan from the date thereof at the rates per annum and for
the periods set forth in or established by the Loan Agreement and
calculated as provided therein.
All indebtedness outstanding under this Note shall bear
interest (computed in the same manner as interest on this Note
prior to maturity) at the Post-Default Rate (as such term is
defined in the Loan Agreement) for all periods when an Event of
Default has occurred and is continuing, commencing on the
occurrence of such Event of Default until such Event of Default has
been cured or waived as acknowledged in writing by the Agent and
the Banks pursuant to Section 10.6 of the Loan Agreement, and all
such interest shall be payable on demand.
Anything herein to the contrary notwithstanding, the
obligation of the Borrower to make payments of interest shall be
subject to the limitation that payments of interest shall not be
required to be made to the Bank to the extent that the Bank's
receipt thereof would not be permissible under the law or laws
applicable to the Bank limiting rates of interest which may be
-25-
<PAGE>
charged or collected by the Bank. Any such payments of interest
which are not made as a result of the limitation referred to in the
preceding sentence shall be made by the Borrower to the Bank on the
earliest interest payment date or dates on which the receipt
thereof would be permissible under the laws applicable to the Bank
limiting rates of interest which may be charged or collected by the
Bank.
Payment of both principal and interest on this Note are
to be made at the office of the Agent at 592 Fifth Avenue, New
York, New York 10036, or such other place as the holder hereof
shall designate to the Borrower in writing, in lawful money of the
United States of America in immediately available funds.
This Note is one of the Amended and Restated Revolving
Credit Notes referred to in the Loan Agreement (as amended by
Amendment No. 2 (as defined in the Loan Agreement)), is subject to
prepayment upon the terms and conditions thereof and is entitled to
the benefits thereof.
The Bank is hereby authorized by the Borrower to record
on the schedule annexed to this Note (or on a supplemental schedule
thereto) the amount of each Revolving Credit Loan made by the Bank
to the Borrower and the amount of each payment or prepayment of
principal of such Loans received by the Bank, it being understood,
however, that failure to make any such notation shall not affect
the rights of the Bank or the obligations of the Borrower hereunder
in respect of this Note. The Bank may, at its option, record such
matters in its internal records rather than on such schedule.
Upon the occurrence of any Event of Default, as defined
in the Loan Agreement, the principal amount of and accrued interest
on this Note may be declared due and payable in the manner and with
the effect provided in the Loan Agreement.
Without limiting Section 10.1 of the Loan Agreement, the
Borrower shall pay all costs and expenses of collection, including,
without limitation, all reasonable attorneys' fees and
disbursements in the event that any action, suit or proceeding is
brought by the holder hereof to collect this Note.
THIS NOTE SHALL BE GOVERNED BY AND ENFORCED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS RULES
PERTAINING TO CONFLICTS OF LAWS.
ORION CAPITAL CORPORATION
By
----------------------
Title
-26-
<PAGE>
SCHEDULE TO
AMENDED AND RESTATED
REVOLVING CREDIT NOTE
This Note evidences Revolving Credit Loans made under the
within described Loan Agreement, in the principal amounts, and on
the dates set forth below, subject to the payments or prepayments
of principal set forth below:
Principal Principal
Date Type of Amount Amount Paid Balance
Made Loan of Loan or Prepaid Outstanding Initials
- ----- ----- ---------- ----------- ----------- ---------
-27-
<PAGE>
EXHIBIT B
TO
AMENDMENT NO. 2
TO LOAN AGREEMENT
REVISED SCHEDULES
------------------
-28-
EXHIBIT 10(xxiii)
CONFORMED
[Letterhead Of INTERCARGO CORPORATION]
140 East American Lane, 20th Floor
Schaumburg, Illinois 60173
February 14, 1995
Mr. Alan R. Gruber
Chairman & Chief Executive Officer
Orion Capital Corporation
600 Fifth Avenue
New York, NY 10020-2301
Dear Alan:
This letter amends the Letter Agreement dated
September 13, 1993 (the "Agreement") between Intercargo
Corporation (the "Company") and Orion Capital Corporation
("Orion") with respect to Orion's ownership of shares of the
Company's common stock. For purposes of this amendment, the
definitions as set forth in the original Agreement shall have the
same meanings in this letter.
By this letter the Company and Orion agree that the
Agreement is amended as follows:
1. The "Percentage Limitation" referred to in Clause
(A) of Section 5(a) of the Agreement is increased to "24.9%".
2. Section 4 is amended by adding the following new
sentence as the final sentence:
"Orion agrees that prior to December 31, 1998, it
will not seek, directly or indirectly, to have
more than one person designated by it elected to
the Board of Directors of the Company, and prior
to that date Orion shall be limited to one
representative on the Board of Directors."
3. All other terms and conditions of the Agreement
remain unchanged.
<PAGE>
Mr. Alan R. Gruber
February 14, 1995
Page 2
This amendment to the Agreement is conditioned upon
Orion and Intercargo receiving all required regulatory approvals
from the States of Illinois and California.
Very truly yours,
INTERCARGO CORPORATION
By /s/ James R. Zuhlke
----------------------
James R. Zuhlke
President and Chief
Executive Officer
Accepted and agreed on the date
written above:
ORION CAPITAL CORPORATION
By: /s/ Alan R. Gruber
----------------------------------
Alan R. Gruber
Chairman and
Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
ORION CAPITAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(000s omitted-except for per common share data)
Year Ended December 31,
---------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Computation of weighted average
number of common and equivalent
shares outstanding:
PRIMARY -
Weighted average number of shares
outstanding ............................. 14,249 14,461 10,826
Dilutive effect of stock options .......... 99 137 88
------- ------- -------
Weighted average number of common and
equivalent shares ....................... 14,348 14,598 10,914
======= ======= =======
Net earnings before preferred dividend
requirements ............................ $55,245 $68,813 $42,872
Preferred dividends ....................... - 409 6,358
------- ------- -------
Net earnings attributable to common
stockholders ............................ $55,245 $68,404 $36,514
======= ======= =======
Net earnings per common share ............. $ 3.85 $ 4.69 $ 3.35
======= ======= =======
FULLY DILUTED -
Weighted average number of shares
outstanding ............................. 14,249 14,461 10,826
Dilutive effect of stock options .......... 118 137 128
Conversion of $1.90 Preferred Stock ....... - - 2,066
Conversion of $2.125 Preferred Stock ...... - 57 1,454
------- ------- -------
Weighted average number of common and
equivalent shares ....................... 14,367 14,655 14,474
======= ======= =======
Net earnings before preferred dividend
requirements ............................ $55,245 $68,813 $42,872
Adjustable rate preferred stock dividends.. - 407 1,581
------- ------- -------
Net earnings attributable to common
stockholders ............................ $55,245 $68,406 $41,291
======= ======= =======
Net earnings per common share ............. $ 3.85 $ 4.67 $ 2.85
======= ======= =======
</TABLE>
EXHIBIT 21
SUBSIDIARIES*
OF
ORION CAPITAL CORPORATION
State or Other
Jurisdiction
Subsidiary of Incorporation
- ------------ -----------------
Clarke & Towner, Inc. Connecticut
Connecticut Specialty Group, Inc. Connecticut
Connecticut Specialty Insurance Company Connecticut
Connecticut Specialty Insurance Group, Inc. Connecticut
Design Professionals Administration Corporation California
Design Professionals Insurance Company Connecticut
DPIC Companies, Inc. California
EBI Companies, Inc. Connecticut
EBI Consulting Services, Inc. California
EBI Indemnity Company Connecticut
EFC Property Management, Inc. California
Employee Benefits Insurance Company Connecticut
Independent Financial Planners Corporation New Jersey
Jabawwat, Inc. Delaware
Nations' Care, Inc. Connecticut
Orion Capital Companies, Inc. Connecticut
Orion Properties Corporation Delaware
Peninsula Excess Insurance Brokers, Inc. California
Risk Analysis and Research Corporation California
Security Insurance Company of Hartford Connecticut
Security Insurance Company (U.K.) Limited United Kingdom
SecurityRe, Inc. Connecticut
Security Reinsurance Company Connecticut
Security Warranty Association of Florida, Inc. Florida
The Connecticut Indemnity Company Connecticut
The Fire and Casualty Insurance Company of Connecticut Connecticut
- --------------------------------------------------------------------------------
*The listed subsidiaries are wholly-owned by Orion Capital
Corporation (the "Company") as of December 31, 1994. The
Company owns slightly less than 50% of Guaranty National
Corporation of Englewood, Colorado and approximately 20% of
Intercargo Corporation of Schaumburg, Illinois.
________________________________________________________________________________
- - 2 -
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 2-65348 on Forms S-8 and S-16 relating to the Orion Capital
Corporation 1976 and 1979 Stock Option Plans, No. 2-80636 on Form S-8
relating to the Orion Capital Corporation 1982 Long-Term Performance
Incentive Plan, No. 2-63344 on Form S-8 relating to the Orion Capital
Corporation Employees' Stock Savings and Retirement Plan and No. 33-53759
on Form S-3 of our report dated February 24, 1995, appearing in this
Annual Report on Form 10-K of Orion Capital Corporation for the year
ended December 31, 1994.
Deloitte & Touche LLP
Hartford, Connecticut
March 14, 1995
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Annual Report on
Form 10-K of Orion Capital Corporation for the year ended December 31,
1994 of our reports dated February 22, 1995, appearing in the Annual
Report on Form 10-K of Guaranty National Corporation for the year ended
December 31, 1994.
Deloitte & Touche LLP
Denver, Colorado
March 14, 1995
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ORION CAPITAL CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,
1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-1-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 530,424
<DEBT-CARRYING-VALUE> 367,417
<DEBT-MARKET-VALUE> 358,915
<EQUITIES> 264,434
<MORTGAGE> 1,754
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,319,040
<CASH> 6,201
<RECOVER-REINSURE> 304,324
<DEFERRED-ACQUISITION> 70,137
<TOTAL-ASSETS> 2,112,761
<POLICY-LOSSES> 1,181,329
<UNEARNED-PREMIUMS> 256,855
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 12,651
<NOTES-PAYABLE> 152,382
<COMMON> 162,936
0
0
<OTHER-SE> 202,152
<TOTAL-LIABILITY-AND-EQUITY> 2,112,761
691,223
<INVESTMENT-INCOME> 84,915
<INVESTMENT-GAINS> 3,437
<OTHER-INCOME> 1,372
<BENEFITS> 498,123
<UNDERWRITING-AMORTIZATION> 165,108
<UNDERWRITING-OTHER> 36,297
<INCOME-PRETAX> 71,546
<INCOME-TAX> 16,301
<INCOME-CONTINUING> 55,245
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,245
<EPS-PRIMARY> 3.85
<EPS-DILUTED> 3.85
<RESERVE-OPEN> 830,805
<PROVISION-CURRENT> 480,826
<PROVISION-PRIOR> 17,297
<PAYMENTS-CURRENT> 134,120
<PAYMENTS-PRIOR> 303,266
<RESERVE-CLOSE> 891,542
<CUMULATIVE-DEFICIENCY> 17,297
</TABLE>
