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, 1995 1-7801
----------------
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
-------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
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
7 1/4% Senior Notes due July 15, 2005
(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. [x]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $619,689,366 as of March 14, 1996.
As of March 14, 1996, 13,890,8064 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
June 5, 1996. 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. Orion's insurance subsidiaries and affiliates are authorized
to underwrite and sell most types of property and casualty insurance. Orion's
insurance businesses are concentrated in niche insurance markets, particularly
workers compensation, professional liability, nonstandard automobile insurance
and underwriting ocean marine, inland marine and property insurance through
underwriting pools. (Orion and its wholly-owned subsidiaries are referred to
collectively as the "Company.") The Company provides workers compensation
insurance products through the EBI Companies. The Company sells its
professional liability insurance through the DPIC Companies and writes other
specialty property and casualty insurance, principally through Connecticut
Specialty Insurance Group ("Connecticut Specialty"). The Company also writes
assumed reinsurance through SecurityRe Companies. Additionally, the Company
provides underwriting management and related services through Wm. H. McGee &
Co., Inc. ("McGee").
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 is 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 Orion's 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
permits the Company to purchase additional shares 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.
On June 30, 1995, Orion purchased all the capital stock of McGee from Sun
Alliance Group plc for $22,000,000 in cash. McGee has been underwriting ocean
marine, inland marine and property insurance on behalf of the insurance
companies it represents for over 108 years. Orion's subsidiary, Security
Insurance Company of Hartford, has been represented by McGee for over a
century. McGee provides all related services in connection with this
business, including policy issuance, claim settlement, accounting and
placement of reinsurance. Operations are conducted in the United States,
through its head office in New York and twenty branch offices throughout the
country. Activities in Canada, Bermuda and Puerto Rico are managed by McGee's
subsidiaries located in those jurisdictions and they perform substantially
similar services.
-2-
<PAGE>
On July 17, 1995, Orion issued 7 1/4% Senior Notes due July 15, 2005 (the
"7 1/4% Senior Notes") with a face value of $100,000,000 in a public offering
pursuant to a shelf registration filed with the Securities and Exchange
Commission in 1994. The 7 1/4% Senior Notes issued are non-callable to
maturity and were sold at 99.23% of par to yield 7.36% per annum. The net
proceeds from the offering were approximately $98,113,000, of which
$46,500,000 was used to repay all of Orion's debt under its bank loan
agreement. The balance is available for general corporate purposes.
The only securities Orion currently has outstanding are its Common Stock,
9 1/8% Senior Notes due September 1, 2002 (the "9 1/8% Senior Notes") and the
7 1/4% Senior Notes. The reconfiguration and simplification of Orion's debt
and capital structure over the past several years has enabled the Company to
take advantage of generally lower interest rates, decrease the cost of its
capital and eliminate debt sinking fund payments until maturity of the 9 1/8%
Senior Notes and 7 1/4% Senior Notes. 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. The head office of McGee
is located at Four World Trade Center, New York, New York 10048.
The Company's insurance, brokerage and management subsidiaries are
licensed to transact business throughout the United States and in all Canadian
provinces. They obtain substantially all of their business from approximately
3,000 independent insurance agents and brokers. The Company has approximately
2,200 employees, substantially all of whom are employed in the Company's
insurance-related operations.
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."
-3-
<PAGE>
Regional Operations provides workers compensation insurance products
through the EBI Companies. The EBI Companies underwrite and sell workers
compensation insurance through independent agents and brokers and also offer
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
market professional liability insurance; Connecticut Specialty, which
underwrites and sells specialty insurance programs through independent agents
and general agents; SecurityRe Companies, which write reinsurance; McGee, an
underwriting management company that specializes in ocean marine, inland
marine and property insurance; and a 20% interest in 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 1995, 1994 and 1993 amounted to $67,622,000, $55,245,000
and $68,813,000 or $4.77, $3.85 and $4.69 per share, respectively, based on
weighted average common shares outstanding of 14,187,000 in 1995, 14,348,000
in 1994 and 14,598,000 in 1993. Earnings in 1993 include a benefit of
$11,825,000, or $.81 per share, from the cumulative effect of changes in
accounting principles. 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, 1995. Identifiable assets, by segment, are included in Note N
to the Consolidated Financial Statements, "Industry Segment Information."
-4-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
REVENUES:
Regional Operations -
Premiums earned ....................... $322,098 $278,040 $266,373
Net investment income ................. 35,750 29,287 33,760
Realized investment gains ............. 4,636 1,246 4,153
Other income .......................... 188 239 -
-------- -------- --------
Total Regional Operations ........... 362,672 308,812 304,286
-------- -------- --------
Reinsurance/Special Programs -
Premiums earned ....................... 426,905 413,183 351,031
Net investment income ................. 59,584 53,209 55,500
Realized investment gains ............. 7,781 2,191 6,706
Other income .......................... 13,564 575 915
-------- -------- --------
Total Reinsurance/Special Programs .. 507,834 469,158 414,152
-------- -------- --------
Other ................................... 3,774 2,977 1,717
-------- -------- --------
$874,280 $780,947 $720,155
======== ======== ========
EARNINGS (LOSS):
Regional Operations ..................... $ 57,830 $ 42,514 $ 34,025
Reinsurance/Special Programs ............ 43,241 34,117 44,032
Guaranty National Companies ............. 4,466 11,244 9,509
-------- -------- --------
Total property and casualty operations. 105,537 87,875 87,566
Other ................................... (17,502) (16,329) (15,061)
-------- -------- --------
88,035 71,546 72,505
Federal income taxes .................... (20,413) (16,301) (15,517)
Cumulative effect of adoption of new
accounting principles ................. - - 11,825
-------- -------- --------
Net earnings .......................... $ 67,622 $ 55,245 $ 68,813
======== ======== ========
-5-
<PAGE>
<CAPTION>
The following table sets forth, on a consolidated basis, certain
insurance ratios for the Company:
Year Ended December 31,
--------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Loss and loss adjustment expenses to
premiums earned ....................... 68.4% 72.1% 74.4%
Policy acquisition and other insurance
expenses to premiums earned ........... 29.0 27.0 26.8
----- ----- -----
Total before policyholders' dividends.. 97.4 99.1 101.2
Policyholders' dividends to premiums
earned ................................ 2.9 2.1 2.0
----- ----- -----
Total after policyholders' dividends .. 100.3% 101.2% 103.2%
===== ===== =====
</TABLE>
The Company's insurance subsidiaries include eight active wholly-owned
insurance companies, as well as a wholly-owned reinsurance underwriting
management company, an insurance management company, service companies and
insurance brokerage firms. 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 all provinces of Canada. In 1995, approximately
13.9% of the direct premiums written by the insurance subsidiaries was
generated in Pennsylvania, 8.0% in Wisconsin and, in the aggregate, an
additional 19.1% was generated in the states of Texas, California 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. The following table shows the
geographical distribution of direct insurance premiums written by the Company
in 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Geographical Distribution of Direct Premiums Written
Year Ended December 31,
---------------------------------------------------
State 1995 Pct. 1994 Pct. 1993 Pct.
- ----- ---- ---- ---- ---- ---- ----
(000s omitted - except for percentages)
<S> <C> <C> <C> <C> <C> <C>
Pennsylvania ....... $110,993 13.9% $ 79,031 11.5% $ 74,066 11.4%
Wisconsin .......... 64,090 8.0 60,108 8.7 56,209 8.7
Texas .............. 62,426 7.8 53,439 7.7 45,050 7.0
California ......... 45,308 5.7 60,313 8.7 60,675 9.4
Illinois ........... 44,494 5.6 34,285 5.0 28,690 4.4
All others (1) ..... 471,973 59.0 404,317 58.4 382,736 59.1
-------- ----- -------- ----- -------- -----
$799,284 100.0% $691,493 100.0% $647,426 100.0%
======== ===== ======== ===== ======== =====
<FN>
(1) In 1995, no other single state or country accounts for more than 5%
of total direct premiums written.
</TABLE>
-6-
<PAGE>
For 1995, 47.0% of the Company's net premiums written was derived from
workers compensation insurance written primarily in thirteen selected states
(including all states listed in the preceding table except California); 27.8%
related to liability insurance other than automobile, primarily professional
liability insurance; 13.0% came from automobile insurance (not including
premiums written by Guaranty National Companies); and 6.5% was from marine
insurance coverages. No other line of business contributed in excess of 5%
to 1995 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,
------------------------------------------------------
1995 Pct. 1994 Pct. 1993 Pct.
---- ---- ---- ---- ---- ----
(000s omitted - except for percentages)
<S> <C> <C> <C> <C> <C> <C>
Workers compensation .. $355,691 47.0% $305,157 42.9% $311,150 49.0%
Liability other than
automobile .......... 210,679 27.8 199,214 28.0 145,493 22.9
Commercial automobile . 64,874 8.6 73,596 10.3 61,798 9.7
Marine ................ 49,152 6.5 30,323 4.3 10,500 1.6
Private passenger
automobile .......... 33,161 4.4 62,590 8.8 72,286 11.4
Commercial multiple
peril ............... 5,654 .7 8,701 1.2 9,028 1.4
All others ............ 38,225 5.0 32,474 4.5 25,331 4.0
-------- ----- -------- ----- -------- -----
$757,436 100.0% $712,055 100.0% $635,586 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
-7-
<PAGE>
REGIONAL OPERATIONS
The Regional Operations segment is comprised primarily of the EBI
Companies, which provide traditional workers compensation insurance as well
as alternative workers compensation services and products. During 1995,
Nations' Care, Inc., the Company's subsidiary which provided alternative
workers compensation products, was reintegrated with the EBI Companies'
operations. Through the addition of alternative products and pricing
approaches to workers compensation operations, the EBI Companies expect to
extend the length of their client relationships and further expand their
presence in the workers compensation market.
From 1990 through 1995, the EBI Companies' 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. The EBI Companies have a competitive edge stemming from
their service oriented approach. They rank among the 25 largest writers of
workers compensation insurance in the United States based on net premiums
written.
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 Companies team begins to work with the
insured and its employees to identify the factors that influence their
insurance costs. The EBI Companies approach to underwriting is not merely to
evaluate the risk but to attempt to reduce the likelihood of loss through loss
control services. During the policy term, an EBI team continues to provide
services designed to reduce the frequency and severity of injuries. In late
1994, the EBI Companies introduced the concept of "Zero Accident Culture"
(service mark), which focuses insureds on creating an accident free work
environment. With a desire to influence and impact the work place environment
in order to reduce losses, the EBI Companies concentrate their efforts on
single-location insureds, such as small to medium-sized manufacturers, and
selected service businesses, such as nursing homes and hospitals. These
businesses are generally small enough not to have their own risk management
staffs but are large enough to benefit from the EBI Companies' cost-reduction
services.
Alternative workers compensation products and services are designed to
capitalize on the Company's expertise acquired from its service oriented and
team approach to traditional workers compensation. The EBI Companies apply
those skills to writing workers compensation for large accounts, accounts with
large deductibles and other insurance products. They also offer consulting
and administrative services to self-insured workers compensation programs and
emphasize cost effective loss control and claims management consulting
services.
-8-
<PAGE>
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.
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 do business. Rates vary with different job classifications
and among different employers. The EBI Companies use the rates and rating
plans filed in the states where they do business. See "Industry
Characteristics - Rates."
The EBI Companies has recorded solid underwriting results for the past
few years which has led them to continue a plan of geographic expansion.
Always selective about the states in which they operate, EBI Companies'
expansion strategy is to anticipate reform initiatives in various states
and establish a foothold in such new markets before reform benefits are
realized. The EBI Companies are thus able to gain a reputation for service
and effective control before such markets attract the more traditional
workers compensation companies.
Approximately 760 independent agents and brokers produced
substantially all of the direct business written in 1995 by the EBI
Companies. 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
five components: DPIC Companies, Connecticut Specialty, SecurityRe
Companies, McGee 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.
-9-
<PAGE>
DPIC
----
DPIC Companies write professional liability insurance for architects,
engineers, accountants and lawyers. They are the second largest
underwriter of architect and engineer liability insurance in North America.
DPIC Companies' operations are organized to be directly aligned with
their various client groups. The architects and engineers underwriting
unit is divided into three divisions: Architects, Engineers and Special
(large accounts) Risks. Each division is 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 market the Accountants Professional Liability
System (A/pls+) (registered mark), a program of professional liability
insurance analogous to their architects and engineers products, for
selected medium-sized certified public accounting firms. In 1994, DPIC
Companies introduced the Lawyers Professional Liability System, a similar
program for preferred law firms.
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 use a premium credit
incentive program to encourage insureds to participate in their 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 reported" policy form, a form which generally insures only
those claims reported by the insured during the policy term. DPIC
Companies generally use 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 have
pioneered the use of 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, approximately one third 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.
-10-
<PAGE>
DPIC Companies market their 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 have
experienced a high customer retention rate (averaging over 90% for the
ninth consecutive year) and why they are 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.
----------------------
Connecticut Specialty currently administers the operation of
approximately two dozen specialty programs written through general agents.
The specialized coverages include workers compensation and brownwater
marine 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 in order to
provide a competitive advantage.
Connecticut Specialty defines a "program" as the writing of risks in a
class of business not widely pursued, utilizing forms, coverage, pricing
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 knowledgeable and well respected general agents in the
specialty insurance field. Each of its general agents has superior
knowledge of its markets and has earned customer loyalty by providing
quality services and support.
Connecticut Specialty utilizes a profit-sharing approach in writing
its special programs whereby minimal profits 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.
The specialty nature of Connecticut Specialty's 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.
-11-
<PAGE>
SecurityRe Companies.
---------------------
The Reinsurance/Special Programs segment also participates in
facultative and treaty reinsurance throughout the United States through
SecurityRe Companies. SecurityRe Companies underwrite 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 reinsuring 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 $1,000,000.
Adherence to strict underwriting guidelines and value-added services to
clients make SecurityRe very competitive in the marketplace.
McGee.
------
On June 30, 1995, the Company acquired McGee, a leading ocean marine,
inland marine and property insurance underwriter. McGee has been in
business since 1887. Security Insurance Company of Hartford ("Security"),
a subsidiary of the Company, has been represented by McGee since 1894.
McGee provides all related services in connection with this business,
including policy issuance, claim settlement, accounting and placement of
reinsurance. Operations are conducted in the United States, through its
head office in New York and twenty branch offices throughout the country.
Activities in Canada, Bermuda and Puerto Rico are managed by McGee's
subsidiaries located in those jurisdictions and they perform substantially
similar services.
Each insurer represented by McGee participates in either the United
States or Canadian Inter-Office Reinsurance Agreement (the "McGee Pools").
It is through these underwriting pooling agreements that premiums and risk
are allocated among the various insurers. The insurers participating in
the McGee Pools and the percentage allocated to each insurer is reviewed
and revised annually. The current Pool participants have an average tenure
of 47 years. Security is a participant in both the United States and
Canadian Pools. For the year ending December 31, 1995, McGee underwrote
approximately $102,800,000 in net premiums on behalf of the insurers
participating in the McGee Pools. The Company's participation in the
United States pool was 6%, 7% and 14.5% in 1993, 1994 and 1995,
respectively. Participation in the Canadian pool was 10% in 1993 and 1994
and 15% in 1995. Pursuant to the terms of the McGee Purchase Agreement,
the Company has agreed to increase its rate of participation for 1996 to
37% in the United States and approximately 49% in Canada. In 1997, the
Company's participation in both McGee Pools will increase by an additional
10.5% and, at the Company's option, may increase by a further 6%.
-12-
<PAGE>
McGee, as an underwriting manager, does not directly solicit business
from insureds but instead relies on a production force consisting of insurance
brokers and agents appointed to represent the portion of the insurers'
business which McGee manages. McGee is compensated for its services by the
insurers it represents based upon a combination of factors, including a
percentage of the premiums written, the profitability of the business written
and the management services provided.
Intercargo Corporation.
-----------------------
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 permits the Company to purchase additional shares
from time to time, to bring the Company's ownership up to 24.9% of
Intercargo's outstanding common stock.
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 in a public offering in 1991.
Approximately 84% of the Guaranty National Companies' net written
premiums during 1995 was derived from writing personal and commercial
automobile insurance. Other types of insurance products sold by Guaranty
National Companies are general 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 them to
generate an underwriting profit in eight of the last nine 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
history, age or vehicle type, and is sold primarily in the Western and
Midwestern regions. Guaranty National's commercial lines unit writes
commercial automobile insurance, which covers policyholders such as local and
intermediate trucking, garages, used car dealers, public and private livery,
-13-
<PAGE>
and artisan contractors. Other commercial lines coverage includes property
(for example, motor-truck cargo), general liability (for example, contractors
and fuel-convenience stores), standard umbrella insurance, standard commercial
packages and other commercial coverages. Guaranty National also markets
collateral protection insurance, primarily insuring automobiles pledged as
security for loans for which the borrower has not maintained physical damage
coverage as required by the lender. Such business represents 12% of Guaranty
National Companies' gross written premiums for 1995.
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.
On July 18, 1995 Guaranty National acquired all the capital stock of
Viking Insurance Holdings, Inc. ("Viking") from Talegen Holdings, Inc., a
Xerox Financial Services company, for total consideration of $102,700,000
(subject to certain adjustments). Viking is the parent company of Viking
Insurance Company of Wisconsin and other affiliated companies which specialize
in providing nonstandard personal automobile insurance. Headquartered in
Madison, Wisconsin, Viking writes business primarily in California and 17
other western and midwestern states.
Guaranty National financed the acquisition of Viking by selling 1,550,000
shares of its common stock in a European offering at a net price per share of
$15.76, converting $20,896,000 of outstanding notes held by the Company into
1,326,128 shares of Guaranty National common stock at a conversion price of
$15.76 per share, and utilizing a portion of a new $110,000,000 credit
facility from a group of lending banks. The Company's conversion of Guaranty
National notes into 1,326,128 shares of common stock restored the Company to
its previous ownership level of slightly less than 50% of Guaranty National,
after the increase in the number of shares outstanding resulting from Guaranty
National's European offering.
Guaranty National and its subsidiaries have entered into a series of
agreements with the Company. One of these agreements is a shareholder
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.
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 most of the Guaranty National Companies' investment portfolio,
including that of Viking, is managed by Orion's investment managers (under the
direction and supervision of Guaranty National). Orion was paid a fee of
$550,000 per year prior to Guaranty National's acquisition of Viking in July
1995, after which the fee was increased to $650,000 per year. The investment
management agreement continues for annual periods, unless terminated by either
party upon 90 days prior written notice.
-14-
<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 and 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, which 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 reserve estimation.
Several methods are used for reviewing reserves, including paid and
incurred loss development, and incurred claim counts and average claim costs.
These methods can be 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.
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, 1995 prepared in accident year format.
-15-
<PAGE>
<TABLE>
<CAPTION>
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, 1995:
Loss and Loss Adjustment
Accident Premiums Expense Development
-------------------------------
Year Earned Initial Cumulative
- -------- -------- ------- ----------
(000s omitted)
<S> <C> <C> <C>
1991 $701,386 67.7% 64.3%
1992 560,205 71.0 69.3
1993 617,404 70.4 71.8
1994 691,223 69.6 70.3
1995 749,003 66.8 -
<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, 1995:
Accident Premiums Loss Expense Policyholders' Combined
Year Earned Ratio Ratio Dividend Ratio Ratio
- -------- -------- ----- ------- -------------- --------
(000s omitted)
<S> <C> <C> <C> <C> <C>
1991 $701,386 64.3% 30.2% 2.4% 96.9%
1992 560,205 69.3 27.3 2.4 99.0
1993 617,404 71.8 26.8 2.0 100.6
1994 691,223 70.3 27.0 2.1 99.4
1995 749,003 66.8 29.0 2.9 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,
------------------------------------
1995 1994 1993
-------- -------- --------
(000s omitted)
<S> <C> <C> <C>
Beginning of year .................. $891,542 $830,805 $746,298
-------- -------- --------
Provision:
Current year ..................... 500,514 480,826 434,840
Prior years ...................... 11,719 17,297 24,292
-------- -------- --------
512,233 498,123 459,132
-------- -------- --------
Payments:
Current year ..................... 146,540 134,120 125,042
Prior years ...................... 263,257 303,266 249,583
-------- -------- --------
409,797 437,386 374,625
-------- -------- --------
End of year ........................ $993,978 $891,542 $830,805
======== ======== ========
-16-
<PAGE>
<CAPTION>
Cumulative reserve development, net of reinsurance, for the Company's wholly-owned insurance subsidiaries (excluding
Guaranty National Companies for all years) as of December 31, 1995 for the calendar years 1985 through 1995 is shown in the
table that follows:
Year Ended December 31, 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
- ----------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(000s omitted)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for
unpaid loss and
loss adjustment
expenses.......... $294,427 $359,623 $401,677 $520,304 $602,519 $595,455 $668,467 $746,298 $830,805 $891,542 $993,978
Paid (cumulative)
as of:
One year later .... 226,776 211,102 178,100 236,657 281,224 261,464 240,318 249,583 303,266 263,257 -
Two years later.... 364,206 320,000 318,883 403,147 438,250 408,624 378,524 429,501 445,369 - -
Three years later.. 436,665 409,019 414,616 488,397 526,235 493,218 484,335 514,172 - - -
Four years later .. 493,399 468,971 457,182 544,449 581,880 567,068 540,325 - - - -
Five years later .. 534,321 494,838 490,973 582,527 633,413 605,039 - - - - -
Six years later ... 550,743 518,397 515,478 624,415 660,648 - - - - - -
Seven years later.. 571,652 537,567 551,055 643,447 - - - - - - -
Eight years later.. 588,050 566,205 563,977 - - - - - - - -
Nine years later .. 611,700 576,116 - - - - - - - - -
Ten years later ... 619,077 - - - - - - - - - -
Net liability
reestimated as of:
One year later .... 416,208 434,056 469,137 573,632 647,585 657,100 694,948 770,590 848,102 903,261 -
Two years later ... 478,093 486,631 504,814 624,337 695,154 685,692 714,953 782,348 854,998 - -
Three years later.. 527,200 517,476 548,883 658,024 722,626 705,516 732,047 785,995 - - -
Four years later .. 574,073 557,124 568,114 687,818 741,789 741,096 744,251 - - - -
Five years later .. 605,513 577,977 597,103 705,475 770,359 756,522 - - - - -
Six years later ... 623,291 604,056 610,086 733,836 788,288 - - - - - -
Seven years later.. 645,114 611,108 637,322 747,525 - - - - - - -
Eight years later.. 652,011 633,723 651,402 - - - - - - - -
Nine years later .. 673,417 650,303 - - - - - - - - -
Ten years later ... 684,712 - - - - - - - - - -
Net deficiency ...... (390,285) (290,680) (249,725) (227,221) (185,770) (161,067) (75,784) (39,697) (24,193) (11,719) -
-17-
<PAGE>
<CAPTION>
Cumulative reserve development for the Company's wholly-owned insurance
subsidiaries (excluding Guaranty National Companies for all years) as of
December 31, 1995 for the calendar years 1992 through 1995 is shown in the
table that follows:
1992 1993 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross liability ..... $1,081,396 $1,140,403 $1,181,329 $1,274,982
Reinsurance
recoverable ....... 335,098 309,598 289,787 281,004
---------- ---------- ---------- ----------
Net liability ....... $ 746,298 $ 830,805 $ 891,542 $ 993,978
========== ========== ========== ==========
Gross re-estimated
liability ......... $1,091,963 $1,133,514 $1,184,498 -
Re-estimated
recoverable ....... 305,968 278,516 281,237 -
---------- ---------- ----------
Net re-estimated
liability ......... $ 785,995 $ 854,998 $ 903,261 -
========== ========== ==========
Gross (deficiency)
redundancy ........ $ (10,567) $ 6,889 $ (3,169) -
========== ========== ==========
</TABLE>
The preceding loss reserve development tables indicate 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, 1995, 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 1995.
Consistent with industry practice, certain claims for long-term disability
workers compensation benefits are carried at discounted values. At December
31, 1995 and 1994, long-term disability workers compensation loss reserves are
carried at $56,603,000 and $51,886,000, respectively, in the consolidated
financial statements at net present value using a statutory interest rate of
3.5%.
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 $508,872,000, $438,194,000
and $336,446,000 as of December 31, 1995, 1994 and 1993, 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 combined annual statement filed with state insurance
departments in accordance with statutory accounting practices ("SAP"):
-18-
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
---- ----
(000s omitted)
<S> <C> <C>
Liability on SAP basis ...................... $1,002,864 $ 909,723
Estimated salvage and subrogation
recoveries recorded on a cash basis for
SAP and on an accrual basis for GAAP .... (10,381) (14,151)
GAAP Reinsurance payable included in SAP
reserves ................................ (7,774) (13,817)
Foreign subsidiary reserves ............... 9,269 9,787
---------- ----------
Liability on GAAP basis, net of reinsurance.. 993,978 891,542
Reinsurance on GAAP reserves ................ 281,004 289,787
---------- ----------
Liability on GAAP basis ..................... $1,274,982 $1,181,329
========== ==========
</TABLE>
During 1995, 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 1995
provision for prior accident year losses by major line of business is as
follows:
(000s omitted)
Pools and associations .................... $ 9,398
Reinsurance ............................... 6,504
Commercial multiple peril ................. 6,271
Workers compensation ...................... (11,784)
Other...................................... 1,330
--------
$ 11,719
========
Adverse development relating to 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 reinsurance
relates to the Company's assumed reinsurance business in which loss and loss
adjustment expense experience is indicative of the ceding companies'
experience. Starting in 1983, the Company expanded its commercial multiple
peril business and then significantly reduced that line of business in 1988
due to greater than expected losses. The development from the commercial
multiple peril line of business primarily relates to cancelled California
contractors package business, which has recently been experiencing greater
claims activity, and from Connecticut Specialty, as reported losses in certain
programs developed more than anticipated. 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
category includes the Company's professional liability program for architects
and engineers and losses from a discontinued auto liability program.
-19-
<PAGE>
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
adverse development. For the design professionals liability line of business,
the Company has increasingly used alternative dispute resolution techniques
including 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.
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.
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.
-20-
<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 $9,131,000 at December 31, 1995.
Investments are managed to achieve a superior total return after taxes, 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. Approximately 39% of the Company's fixed maturity
portfolio is invested in tax advantaged securities at December 31, 1995.
Except for investments in securities of the United States Government and its
agencies, the Company did not have any other investments in any one issuer
that exceeded $25,000,000 at December 31, 1995.
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 the 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, 1995 and 1994, 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.
-21-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 Cost Market Value Book Value
- ----------------- ------------------ ------------------ ------------------
(000s omitted - except for percentages)
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
AAA ............. $ 403,434 26.5% $ 421,737 26.1% $ 415,460 25.9%
AA .............. 232,810 15.3 248,478 15.4 244,607 15.3
A ............... 148,950 9.8 155,697 9.7 154,801 9.7
BBB ............. 90,132 5.9 94,231 5.8 94,182 5.9
BB .............. 55,602 3.7 55,432 3.4 55,352 3.4
B and Below ..... 47,024 3.1 46,945 2.9 47,005 2.9
Not Rated ....... 35,225 2.3 36,631 2.3 36,631 2.3
---------- ----- ---------- ----- ---------- -----
Sub-total ..... 1,013,177 66.6 1,059,151 65.6 1,048,038 65.4
Equity Securities.. 257,378 16.9 304,885 18.9 304,885 19.0
Other Long Term
Investments ..... 62,925 4.2 62,925 3.9 62,925 3.9
Short Term
Investments ..... 187,013 12.3 187,013 11.6 187,013 11.7
---------- ----- ---------- ----- ---------- -----
$1,520,493 100.0% $1,613,974 100.0% $1,602,861 100.0%
========== ===== ========== ===== ========== =====
December 31, 1994
- -----------------
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%
========== ===== ========== ===== ========== =====
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994
---- ----
<S> <C> <C>
Yield on average
investments:
Pre-tax ......... 7.1% 6.5%
=== ===
After-tax ....... 5.5% 5.0%
=== ===
-22-
</TABLE>
<PAGE>
Included in other long-term investments on December 31, 1995 were
investments in limited partnerships carried at $60,946,000. The assets of
these partnerships are managed by outside entities. Individual
partnerships may invest in a variety of investment vehicles, including but
not limited to U.S. and foreign bonds and equities, both public and
private, and real estate. Such partnerships are carried at the Company's
interest in the underlying net assets of the limited partnerships. The
Company's portion of the partnerships' earnings or losses are recorded in
net investment income in the Company's statement of earnings. Net
investment income on these partnerships was $9,065,000, $555,000 and
$9,203,000 for 1995, 1994 and 1993, respectively.
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 $1,545,000 at December 31,
1995. Only four such investments, aggregating $24,246,000, were in excess
of $5,000,000 as of December 31, 1995.
The Company 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 1995 provisions for such losses were
$285,000 for equity securities and $4,050,000 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 provide greater diversification of business and 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 or treaties under which all risks meeting prescribed
criteria are automatically covered. 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
-23-
<PAGE>
by line of business and type of coverage. Retention limits are
periodically revised as the capacity of the Company's insurance
subsidiaries to retain risk varies and as reinsurance prices change.
Reinsurance contracts do not relieve the Company of its obligation to the
policyholders. The collectibility of reinsurance is subject to the
solvency of the reinsurers. 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.
The DPIC Companies have reinsurance for 85% of losses from architect and
engineer liability in excess of $1,000,000 up to $5,000,000. 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 1995 and 1994, the Company's
insurance subsidiaries net premiums written to year-end statutory surplus
were at levels of 1.5:1 and 1.6:1, respectively.
Government Regulation
- ---------------------
The Company's insurance subsidiaries, in common with those of other
insurance companies, are subject to comprehensive regulation by insurance
authorities. In particular, the Company is subject to regulation by the
Insurance Department of Connecticut, the state of incorporation of all of
the Company's insurance subsidiaries. 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. A regular periodic examination covering the
Company's operations through December 31, 1994 by the Insurance Department
of Connecticut is currently in process.
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; the imposition of monetary penalties for
rules violation; and the nature of and limitations on permitted
investments. In general, such regulations are for the protection of
policyholders rather than stockholders.
-24-
<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 located in
those states. As of December 31, 1995 and 1994, securities representing
approximately 15% and 18%, 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 standards established by each state.
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 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.
Other states, in addition to an insurance company's state of domicile,
may regulate affiliated transactions and the acquisition of control of
licensed insurers. The State of California, for example, presently treats
certain insurance subsidiaries of the Company which are not domiciled in
California as though they were domestic insurers for insurance holding
company purposes. Such subsidiaries are required to comply with the
holding company provisions of the California Insurance Code, certain of
which provisions may be more restrictive than the comparable laws of the
State of Connecticut.
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, 1995 and 1994 the Company's insurance subsidiaries were
assessed approximately $222,000 and $1,051,000, 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
-25-
<PAGE>
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.
The National Association of Insurance Commissioners ("NAIC") and state
regulators are re-examining existing laws and regulations relating to the
solvency of insurers. The NAIC has adopted risk based capital ("RBC")
requirements for property and casualty insurers. RBC refers to the
determination of the amount of statutory capital required for an insurer
based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by
the insurer. A formula that applies prescribed factors to the various risk
elements in an insurer's business is used to determine the minimum
statutory capital requirement for the insurer. The capital of each of the
Company's insurance subsidiaries at December 31, 1995 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, Superfund reform 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 Connecticut, 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
-26-
<PAGE>
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, however, have 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, 1995 for the ensuing twelve months,
without prior approval, aggregated $83,173,000. Orion received $30,546,000
in dividends from its wholly-owned insurance subsidiaries in 1995. 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.
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. Methods for
arriving at rates vary by type of business, exposure asumed and size of
risk. Underwriting profitability is affected by the accuracy of these
assumptions, by the willingness of insurance regulators to approve changes
in those rates which they control and by such other matters as underwriting
selectivity and expense control. The Company's management believes that
its rate outlook for its principal lines of business will remain stable
during 1996.
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. Ocean marine insurance rates are exempt from
regulation.
On January 31, 1995, the Department of Insurance of the State of
California (the "California Department") advised the Company that it had a
liability of approximately $4,000,000, plus interest under regulations
issued with respect to an amendment to the California Insurance Code known
as Proposition 103. On November 2, 1995, the terms of a Stipulation and
Consent Order between the California Department and the Company were
adopted by the Commissioner of the California Department. Pursuant to that
order, the Company has no premium rollback liability under Proposition 103.
Further, the California Department acknowledged that premium rates charged
by the Company in California since the passage of Proposition 103 have been
in compliance with the requirements of the California Insurance Code.
-27-
<PAGE>
Competition
- -----------
The insurance industry is highly competitive. Over 3,000 property and
casualty insurance companies write business in the United States, but most
of the business is written by about 900 companies. 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.
Compet ition 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 six years.
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 Company's New York executive
office facilities consist of approximately 12,000 square feet and are
leased at an average annual rental, over ten years, of $465,000. The
-28-
<PAGE>
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.
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, Puerto Rico, Canada and in Bermuda. These operations, in
the aggregate, occupy approximately 480,000 square feet, at an annual
rental of approximately $8,843,000.
The Company believes that its current facilities are suitable and
adequate for their present use and anticipated requirements.
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 the Company 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 68.
As previously disclosed, Mr. Gruber plans to retire on December 31,
1996 as Chairman and Chief Executive Officer. After that date, Mr. Gruber
will remain a member of Orion's Board of Directors and Chairman of the
Executive Committee and, on a part-time basis, will continue employment
with the Company as a Senior Executive Consultant.
W. Marston Becker, Vice Chairman of the Board since March 8, 1996;
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 43.
-29-
<PAGE>
The Orion Board of Directors has announced its present intention of
electing Mr. Becker Chairman of the Board and Chief Executive Officer of
Orion effective January 1, 1997, following Mr. Gruber's planned retirement
from full-time employment on December 31, 1996.
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;
President of the EBI Companies from January 1990 to May 31, 1993; age 50.
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; Acting President
and Chief Executive Officer of Connecticut Specialty since October 17,
1995; 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 43.
Daniel L. Barry, Vice President and Controller of Orion since October
1987; Vice Chairman of SecurityRe Inc. since 1989; Senior Vice President of
OC Companies since January 1989; Controller of OC Companies since October
1986; age 45.
Michael P. Maloney, Vice President, General Counsel and Secretary of
Orion since August 1979; Senior Vice President of OC Companies since March
1987; age 51.
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 43.
Vincent T. Papa, Vice President and Treasurer of Orion since June
1985; Chairman of McGee since September 30, 1995; Senior Vice President of
OC Companies since March 1987 and Treasurer since December 1990; age 49.
Raymond J. Schuyler, Vice President-Investments of Orion since June
1984; Senior Vice President of OC Companies since March 1986; age 60.
-30-
<PAGE>
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 1995 and 1994.
Cash
Stock Prices Dividends
High Low Declared
---- --- ---------
1995:
Quarter Ended December 31........ $45.125 $39.875 $.23
Quarter Ended September 30....... 45.25 38.375 .23
Quarter Ended June 30............ 40.25 34.50 .20
Quarter Ended March 31........... 37.875 34.25 .20
----
Total........................ $.86
====
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
====
Cash dividends have been paid on Orion's Common stock in every quarter
since the fourth quarter of 1978, when dividends were first commenced. The
quarterly dividend was further increased in February 1996 to $.25 per
share.
(c) Approximate Number of Holders of Common Stock. The number of
holders of record of Orion's Common Stock as of March 14, 1996 was 1,856.
-31-
<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 Orion'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, Orion 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 1995 excludes the
accounts of Guaranty National. The consolidated financial statements and related notes
thereto are furnished under Item 8 of this report.
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(000s omitted-except for per share data)
<S> <C> <C> <C> <C> <C>
For the year ended December 31:
Total revenues ................. $ 874,280 $ 780,947 $ 720,155 $ 647,718 $ 837,294
Gain on sale of common stock
of Guaranty National ......... - - - - 33,931
After-tax investment gains
(losses) ..................... 7,708 2,427 5,888 3,113 (1,804)
Earnings before cumulative
effect of change in accounting
principles and extraordinary
loss ......................... 67,622 55,245 56,988 45,792 44,668
Net earnings ................... 67,622 55,245 68,813 42,872 44,668
Earnings per common share before
cumulative effect of change in
accounting principles and
extraordinary loss ........... 4.77 3.85 3.88 3.62 3.75
Net earnings per common
share ........................ 4.77 3.85 4.69 3.35 3.75
Dividends declared -
Adjustable rate preferred
share ...................... - - 1.10 4.16 4.37
$1.90 preferred share ........ - - - 1.43 1.90
$2.125 preferred share ....... - - .12 2.125 2.125
Common share ................. .86 .76 .68 .60 .59
Weighted average number of
common shares and equivalents
outstanding .................. 14,187 14,348 14,598 10,914 9,964
As of December 31:
Total cash and investments ..... $1,606,445 $1,325,241 $1,328,969 $1,169,379 $1,087,454
Total assets ................... 2,473,588 2,112,761 2,117,454 1,937,408 1,827,069
Total policy liabilities ....... 1,596,033 1,450,835 1,412,285 1,326,872 1,228,951
Notes payable and debentures ... 209,148 152,382 160,372 129,863 142,311
Adjustable rate preferred stock - - - 18,705 19,125
Stockholders' equity ........... 490,903 365,088 394,195 311,287 249,829
Common shares outstanding ...... 13,953 14,041 14,372 13,100 9,905
Book value per common share .... $ 35.18 $ 26.00 $ 27.43 $ 21.48 $ 19.00
-32-
</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. The Company reports its insurance operations in three
segments - Regional Operations, Reinsurance/Special Programs and Guaranty
National Companies. Regional Operations provides workers compensation
insurance products through EBI Companies. Reinsurance/Special Programs
includes (i) DPIC Companies ("DPIC"), which markets professional liability
insurance, (ii) Connecticut Specialty, which writes specialty insurance
programs, (iii) SecurityRe Companies ("SecurityRe"), a reinsurer, (iv) Wm. H.
McGee & Co., Inc. ("McGee"), an underwriting management company that
specializes in ocean marine, inland marine and property insurance and (v) a
20.0% interest in Intercargo Corporation ("Intercargo") which underwrites
insurance coverages for international trade. The third segment consists of
the Company's 49.1% interest in Guaranty National Corporation, 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.
On June 30, 1995, Orion purchased all of the capital stock of McGee for
$22,000,000 in cash. McGee specializes in underwriting ocean marine, inland
marine and property insurance through an underwriting pool in the United
States and one in Canada. The business is written by McGee on behalf of the
insurance companies that comprise the pools. Orion's subsidiary, Security
Insurance Company of Hartford, which has been a pool member for over 100
years, is a member of both the United States and Canadian pools. The
Company's participation in the United States pool was 6%, 7% and 14.5% in
1993, 1994 and 1995, respectively. Participation in the Canadian pool was 10%
in 1993 and 1994 and 15% in 1995. The Company has agreed to increase its rate
of participation for 1996 to 37% in the United States and approximately 49% in
Canada, and by an additional 10.5% to 16.5%, at the Company's option, for 1997
in both of the McGee pools.
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, 101.2% in 1994 and
100.3% in 1995. Operating earnings (earnings after taxes, excluding the
effects of the adoption of new accounting principles and after-tax realized
investment gains) were $59,914,000, $52,818,000 and $51,100,000, or $4.22,
$3.68 and $3.47 per share, in 1995, 1994 and 1993, respectively, based on
weighted average shares outstanding of 14,187,000 in 1995, 14,348,000 in 1994
and 14,598,000 in 1993. Preferred stock dividends of $409,000 in 1993 were
deducted from earnings to compute earnings per common share.
RESULTS OF OPERATIONS
Earnings (loss) by segment before federal income taxes and cumulative
effect of the adoption of new accounting principles are summarized as follows
for the three years ended December 31, 1995:
-33-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Regional Operations ................... $ 57,830 $ 42,514 $ 34,025
Reinsurance/Special Programs .......... 43,241 34,117 44,032
Guaranty National Corporation ......... 4,466 11,244 9,509
-------- -------- --------
Total ............................. 105,537 87,875 87,566
Other ................................. (17,502) (16,329) (15,061)
-------- -------- --------
$ 88,035 $ 71,546 $ 72,505
======== ======== ========
</TABLE>
REVENUES
Premiums
Net premiums written increased 6.4% ($45,381,000) to $757,436,000 in 1995
from $712,055,000 in 1994 and 12.0% ($76,469,000) in 1994 from $635,586,000 in
1993. The results by segment are as follows:
- Regional Operations' net premiums written increased 18.9% ($52,860,000)
to $332,598,000 in 1995 from $279,738,000 in 1994 and 5.5% ($14,656,000)
in 1994 from $265,082,000 in 1993. The premiums written increases were
in new territories where the Company believes it will benefit from its
service oriented approach. The increases were partially offset by the
impact of legislative reforms in certain states which have led to lower
premium rates and a reduction in losses and commission expenses,
resulting in higher profit margins. The increases in this segment were
also mitigated by a shift towards high-deductible workers compensation
products, which also have lower premium rates.
- Reinsurance/Special Programs' net premiums written decreased 1.7%
($7,479,000) to $424,838,000 in 1995 from $432,317,000 in 1994 and
increased 16.7% ($61,813,000) in 1994 from $370,504,000 in 1993. Net
premiums written by DPIC for professional liability insurance, the
largest special program, were $184,130,000, $173,205,000 and $123,637,000
in 1995, 1994 and 1993, respectively. The increase in 1994 was primarily
attributable to the discontinuation on January 1, 1994 of a reinsurance
contract, including a $13,704,000 premium refund received in 1994, in
order to retain more of DPIC's profitable business. Excluding this
refund, DPIC premiums written in 1995 increased 15.4% over premiums
written in 1994. The premium increases in 1995 and 1994 reflect both new
business and a continuation of a high level of policy renewals. Premium
volume for Connecticut Specialty decreased 8.3% ($15,165,000) to
$168,262,000 in 1995 from $183,427,000 in 1994 and 4.6% ($8,819,000) in
1994 from $192,246,000 in 1993. The decreases in 1995 and 1994 resulted
from the cancellation in the second half of 1994 of a personal injury
-34-
<PAGE>
protection program in Florida and a physical damage program in Texas,
where the Company had unfavorable loss experience. The reduction in
these programs was partially offset by the introduction of an additional
marine program, increased participation in McGee's underwriting pools and
an increase in premiums written in professional liability programs in
1995 and truck liability programs during 1994. The percentage of treaty
and facultative reinsurance assumed to total net premiums written for
Reinsurance/Special Programs amounted to 17.1%, 17.5% and 14.7% in 1995,
1994 and 1993, respectively.
Premiums earned increased 8.4% ($57,780,000) to $749,003,000 in 1995 from
$691,223,000 in 1994 and 12.0% ($73,819,000) in 1994 from $617,404,000 in
1993. Premiums earned reflects the recognition in income of the changing
levels of net premium writings.
Net Investment Income
Pre-tax net investment income amounted to $99,040,000, $84,915,000 and
$91,803,000 in 1995, 1994 and 1993, respectively. The pre-tax yields on the
average investment portfolio were 7.1% in 1995, 6.5% in 1994 and 7.4% in 1993,
with after-tax yields of 5.5%, 5.0% and 5.5%, respectively. The year-to-year
changes in net investment income reflect an increase in equity earnings from
limited partnership investments of $8,510,000 from 1994 to 1995, and a
decrease in limited partnership income of $8,648,000 from 1993 to 1994.
Earnings from limited partnership investments can vary considerably from year-
to-year, however, the Company's long-term experience with these investments
has been quite favorable. The increase in net investment income for 1995 is
also attributable to a higher average portfolio yield on a higher investment
base. Net investment income was increased in both years by income generated
from the deployment of operating cash flow of $148,017,000 in 1995 and
$118,779,000 in 1994. The carrying value of the Company's investment
portfolio amounted to $1,602,861,000 at December 31, 1995 and $1,319,040,000
at December 31, 1994.
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. In December of 1995, the Company reclassified
additional investments with a market value of $102,581,000 from fixed
maturities recorded at amortized cost to fixed maturities recorded at market,
increasing stockholders' equity by $1,329,000. This one-time transfer from
the held-to-maturity portfolio was permitted by the implementation guide for
SFAS No. 115. 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
-35-
<PAGE>
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
$1,235,051,000 and $1,002,042,000 at December 31, 1995 and 1994, respectively,
or approximately 76.9% and 75.6% of the Company's cash and investments.
The Company's investment philosophy is to achieve a superior rate of
return after taxes, while maintaining a proper balance of safety, liquidity,
maturity and marketability. 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, 1995 and 1994, the
Company's investment in non-investment grade and unrated fixed maturity
securities were carried at $139,075,000 and $119,853,000 with market values of
$139,067,000 and $119,277,000, respectively. These investments represented a
total of 8.7% and 9.0% of cash and investments and 5.6% and 5.7% of total
assets at December 31, 1995 and 1994, respectively.
The Company 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 $1,545,000
at December 31, 1995. Only four non-investment grade investments aggregating
$24,246,000 were in excess of $5,000,000 at December 31, 1995.
Realized Investment Gains
Net realized investment gains amounted to $11,885,000 in 1995, $3,437,000
in 1994 and $9,478,000 in 1993. Sales of equity securities resulted in net
gains of $16,531,000, $3,845,000 and $11,273,000 and sales of fixed maturities
resulted in net gains (losses) of $(311,000), $723,000 and $6,662,000 in 1995,
1994 and 1993, respectively. Realized investment gains were reduced by
provisions for losses on securities deemed to be other than temporarily
impaired. These provisions amounted to $285,000 in 1995, $381,000 in 1994 and
$6,310,000 in 1993 for equity securities and $4,050,000, $750,000 and
$2,147,000 in 1995, 1994 and 1993, 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
-36-
<PAGE>
factors. At December 31, 1995 the Company held equity securities with
unrealized appreciation of $47,507,000, as compared to unrealized appreciation
of $13,505,000 for equity securities held at December 31, 1994. The market
value of the fixed maturities portfolio at December 31, 1995 exceeded
amortized cost by $45,974,000. This compares with an excess of amortized cost
over market value of $43,958,000 for fixed maturities at December 31, 1994.
Such amounts can vary significantly depending upon fluctuations in the
financial markets. The rise in market values during 1995 is primarily
attributable to the decline in interest rates during the year. The average
maturity of the Company's fixed maturities has not varied significantly in
recent years. The Company intends to shorten the maturity of a portion of its
fixed maturity portfolio during 1996.
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:
Year Ended December 31,
--------------------------------
1995 1994 1993
---- ---- ----
(000s omitted)
Net investment income ..................... $ 99,040 $ 84,915 $ 91,803
-------- -------- --------
Net realized gains (losses):
Fixed maturities ........................ (4,361) (27) 4,515
Equity securities ....................... 16,246 3,464 4,963
-------- -------- --------
11,885 3,437 9,478
-------- -------- --------
Net unrealized appreciation (depreciation):
Fixed maturities ........................ 89,932 (92,325) 21,556
Equity securities ....................... 34,002 (18,827) 16,468
-------- -------- --------
123,934 (111,152) 38,024
-------- -------- --------
$234,859 $(22,800) $139,305
======== ======== ========
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,
--------------------------------
1995 1994 1993
---- ---- ----
Loss and loss adjustment expenses ....... 68.4% 72.1% 74.4%
Policy acquisition and other insurance
expenses .............................. 29.0 27.0 26.8
----- ----- -----
Total before policyholders' dividends . 97.4 99.1 101.2
Policyholders' dividends ................ 2.9 2.1 2.0
----- ----- -----
Total after policyholders' dividends .. 100.3% 101.2% 103.2%
===== ===== =====
-37-
<PAGE>
The ratio of loss and loss adjustment expenses to premiums earned (the
"loss ratio") was 68.4%, 72.1% and 74.4% in 1995, 1994 and 1993, respectively.
The decreases in the 1995 and 1994 loss ratios were attributable to
improvements in both the Regional Operations and Reinsurance/Special Programs
segments.
The loss ratio for Regional Operations was 62.4% in 1995, 67.1% in 1994
and 72.0% in 1993. These loss ratios reflect the continued success of the
Company's service oriented approach for workers compensation insurance, and
the growth in high-deductible policies where experience has been favorable.
Reinsurance/Special Programs' loss ratio was 72.9% in 1995, 75.4% in 1994
and 76.1% in 1993. The improvement in the 1995 loss ratio for this segment is
primarily the result of favorable loss experience for DPIC and the
cancellation of Connecticut Specialty's personal injury protection and
physical damage programs which had unfavorable loss experience in 1994. The
decrease for 1994 is attributable to increased writings in programs with lower
loss ratios, offset in part by increased losses incurred in the two
Connecticut Specialty cancelled programs.
The ratio of deferred acquisition costs and other insurance expenses to
premiums earned (the "expense ratio") was 29.0%, 27.0% and 26.8% in 1995, 1994
and 1993, respectively. The increase in the expense ratio in 1995 is
attributable to a number of factors including EBI Companies opening offices in
new territories, a change in the mix of business toward policies with lower
premiums and losses relative to policyholder servicing expenses and general
inflationary increases in fixed operating expenses. 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 2.9%, 2.1% and 2.0% in 1995, 1994 and 1993, respectively. The
increase in the dividend ratio for 1995 is reflective of the lower loss ratios
on workers compensation insurance coverages. The combined ratio was 100.3% in
1995, 101.2% in 1994 and 103.2% in 1993.
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 1.6 percentage points in
1995, 2.5 percentage points in 1994 and 3.9 percentage points in 1993. The
loss ratios were adversely affected by loss development in the pool and
association (including assigned risk pools) and reinsurance businesses 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 commercial multiple peril business and reserve
strengthening for certain other lines of business, including discontinued
programs. In 1995 and 1994 adverse development was reduced by the continued
improvement in workers compensation insurance from the application of risk
management and loss control procedures.
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.
-38-
<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
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 1995, 1994 and 1993,
the Company paid $5,675,000, $7,233,000 and $5,557,000, respectively, for the
costs of defending and settling such claims. Payments in 1995, 1994 and 1993
related to 213, 292 and 216 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, 1995 and 1994, the Company has environmental claims-
related loss and loss adjustment expense reserves, net of reinsurance
recoverables, of $34,559,000 and $20,601,000, respectively, which include 474
and 467 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.
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, improve underwriting
standards and 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. 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.
Interest Expense
Interest expense was $15,943,000 in 1995, $13,597,000 in 1994 and
$13,044,000 in 1993. The increase of 17.3% in 1995 is due to higher average
debt outstanding after the issuance of $100,000,000 of Senior Notes by Orion
on July 17, 1995. The 4.2% increase in interest expense in 1994 is primarily
attributable to an increase in average interest rates.
-39-
<PAGE>
Other Expenses
Other expenses were $24,740,000, $7,862,000 and $6,527,000 in 1995, 1994
and 1993, respectively. The increases in both other income and other expenses
for 1995 are primarily attributable to the inclusion of McGee's revenue and
expenses after it was acquired by the Company on June 30, 1995.
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
$1,038,000, $342,000 and ($122,000) were recorded from the Intercargo
investment in 1995, 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 $4,466,000 in 1995, $11,244,000 in 1994
and $9,509,000 in 1993 based on Guaranty National's earnings of $8,929,000,
$22,551,000 and $19,285,000, respectively. Gross premiums written for
Guaranty National increased to $451,513,000 in 1995 from $364,991,000 in 1994
and $322,613,000 in 1993. Guaranty National's combined ratios were 105.3% in
1995, 97.5% in 1994 and 99.6% in 1993. The increase in gross premiums written
in 1995 included $61,766,000 from the acquisition of Viking Insurance
Holdings, Inc. ("Viking") by Guaranty National in July 1995. The reduction in
Guaranty National's earnings and the higher loss ratio for 1995 are due to
Guaranty National strengthening its loss reserves in response to adverse claim
trends in the first half of the year. Specific measures have been initiated
by Guaranty National to improve results, including tightening underwriting
standards and rate increases.
In June 1995 Guaranty National sold 1,550,000 shares of its common stock
in an offering under Regulation S of the Securities Act of 1933, as amended at
a net offering price of $15.76 per share. The Company converted $20,896,000
of Guaranty National subordinated notes it held into 1,326,128 shares of
Guaranty National common stock at the net price received by Guaranty National
from the offering. The sale of stock and conversion of the subordinated notes
increased the stockholders' equity of Guaranty National and facilitated the
procurement of bank financing for Guaranty National's acquisition of Viking.
Earnings Before Federal Income Taxes
Earnings before income taxes were $88,035,000, $71,546,000 and
$72,505,000 for 1995, 1994 and 1993, respectively. The 23.0% increase in pre-
tax earnings from 1994 to 1995 reflects an improvement in insurance operations
profitability of $8,041,000 and an increase in realized investment gains of
$8,448,000. 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.
Federal Income Taxes
Federal income taxes on pre-tax operating results and the related
effective tax rates amounted to $20,413,000 (23.2%), $16,301,000 (22.8%) and
$15,517,000 (21.4%) in 1995, 1994 and 1993, respectively. The Company files
-40-
<PAGE>
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 deferred tax benefits that had not been recognized
due to limitations under prior accounting standards. The Company's effective
tax rates for 1995, 1994 and 1993 are less than the statutory tax rate of 35%
primarily because 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.
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 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
Primary earnings per common share amounted to $4.77 in 1995, $3.85 in
1994 and $4.69 ($3.88 before the effect of adopting new accounting principles)
in 1993. Reflected in the calculation of 1993 earnings per common share are
dividends of $409,000 on the Company's Adjustable Rate Preferred Stock
(redeemed in 1993) and $2.125 Preferred Stock (converted into common stock or
redeemed in 1993). The conversion and redemptions were effected pursuant to
the terms of the preferred stocks. Fully diluted earnings per share is not
presented as dilution is less than three percent for all periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased $29,238,000 to
$148,017,000 in 1995 from $118,779,000 in 1994 and decreased $4,375,000 in
1994 from $123,154,000 in 1993. Cash flow for 1995 included a disbursement of
$7,800,000 under a retrospectively rated program written by DPIC. 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.
Excluding these one-time items, year-to-year operating cash flows increased
$47,261,000 from 1994 to 1995 and $6,498,000 from 1993 to 1994. The increase
in operating cash flow for 1995 was the result of an increase in premiums
collected, net investment income received and lower paid losses, offset in
part by higher payments for policy acquisition costs and federal income taxes.
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.
-41-
<PAGE>
Cash used in investment activities increased $102,263,000 to $188,448,000
in 1995 from $86,185,000 in 1994 and decreased $38,230,000 in 1994 from
$124,415,000 in 1993. Cash is used in investment activities primarily for
purchases of investments. The purchases are funded by maturities and sales of
investments, as well as by the net cash remaining from positive operating cash
flows after cash provided by or used in financing activities. In June 1995
Orion paid $22,000,000 in cash plus acquisition costs to acquire McGee (see
discussion above).
Cash provided by financing activities was $37,778,000 for 1995. Cash
used in financing activities was $32,582,000 and $5,046,000 in 1994 and 1993,
respectively. Orion borrowed $12,000,000 under its bank line of credit in
June 1995 to finance part of the McGee acquisition. In July 1995 Orion issued
$100,000,000 of senior debt (discussed below) and repaid all of its
outstanding bank debt. Cash provided in 1993 from an increase in bank
borrowings was used to fund the redemption of Orion's Adjustable Rate
Preferred Stock. Cash used in financing activities includes dividend
payments, scheduled debt repayments and payments related to the Company's
common stock repurchase program. Orion increased the quarterly dividend rate
on its common stock by 12.5%, 11.1% and 15.0% in the third quarters of 1993,
1994 and 1995, respectively. An additional increase of 8.7% was authorized by
the Board of Directors in the first quarter of 1996.
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 $30,546,000, $30,013,000 and
$25,512,000 in dividends, $6,232,000, $5,735,000 and $5,230,000 for overhead
expenses and federal tax payments of $4,500,000, $6,000,000 and $5,600,000
from its insurance subsidiaries in 1995, 1994 and 1993, 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
$123,457,000 and $96,572,000 at December 31, 1995 and 1994, respectively.
Orion's insurance subsidiaries had consolidated policyholders' surplus of
$521,510,000 at December 31, 1995 and $458,676,000 at December 31, 1994, and
statutory operating leverage ratios of net premiums written to policyholders'
surplus of 1.5:1 and 1.6:1 at December 31, 1995 and 1994, respectively.
On July 17, 1995, Orion issued 7 1/4% Senior Notes due 2005 with a face
value of $100,000,000 in a public offering pursuant to a shelf registration
filed with the Securities and Exchange Commission in 1994. The senior notes
issued are non-callable to maturity, and were sold at 99.23% of par to yield
-42-
<PAGE>
7.36% per annum. The net proceeds from the offering were approximately
$98,113,000, of which $46,500,000 was used to repay all of Orion's debt under
its bank loan agreement. The balance is available for general corporate
purposes.
In March 1993 Orion entered into a bank loan arrangement that provided
for initial borrowings of up to $60,000,000, consisting of a $50,000,000 term
loan and a $10,000,000 line of credit. The proceeds from the term loan were
used to redeem Orion's Adjustable Rate Preferred Stock and to repay a bridge
loan facility with two banks which was used to redeem Orion's 12 1/2%
Subordinated Debentures in December 1992. In November 1994 Orion increased
its bank credit line to $30,000,000. In June 1995 Orion borrowed $12,000,000
under the credit line to finance part of the McGee acquisition. All of the
Company's bank debt was repaid in July 1995 from the proceeds of the 7 1/4%
Senior Notes.
The terms of Orion's indentures for its $100,000,000 of 7 1/4% Senior
Notes due 2005 and its $110,000,000 of 9 1/8% Senior Notes due 2002 limit the
amount of liens and guarantees by the Company, and the Company's ability to
incur secured indebtedness without equally and ratably securing the senior
notes. Management does not believe that these limitations unduly restrict the
Company's operations or limit Orion's ability to pay dividends on its stock.
At December 31, 1995 the Company was in compliance with the terms of its
senior note indentures. Management believes that the Company continues to
have substantial sources of capital and liquidity from the capital markets and
bank borrowings.
On December 21, 1992, Orion called for redemption its $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 issuance of 3,579 shares of common stock prior to
December 31, 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.
The Company repurchased 173,181 shares, 442,327 shares and 177,658 shares
of its common stock at an aggregate cost of $7,183,000, $13,745,000 and
$5,473,000 in 1995, 1994 and 1993, respectively. The Company's remaining
stock purchase authorization from its Board of Directors amounted to
$5,446,000 at December 31, 1995. Between January 1 and February 21, 1996,
Orion repurchased an additional 16,600 shares of its common stock for
$720,000, reducing the remaining authorization to $4,726,000.
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 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 J to the
consolidated financial statements).
-43-
<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, that 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
-44-
<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, 1995 and 1994, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles. 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.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 21, 1996
-45-
<PAGE>
<TABLE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(000s omitted)
ASSETS
December 31,
-------------------------
1995 1994
---- ----
<S> <C> <C>
Investments:
Fixed maturities at amortized cost (market
$276,282 - 1995 and $358,915 - 1994) .......... $ 265,169 $ 367,417
Fixed maturities at market (amortized cost
$748,008 - 1995 and $565,880 - 1994) .......... 782,869 530,424
Common stocks at market (cost $108,211 - 1995
and $116,078 - 1994) .......................... 158,895 141,919
Non-redeemable preferred stocks at market (cost
$149,167 - 1995 and $134,851 - 1994) .......... 145,990 122,515
Other long-term investments ..................... 62,925 52,564
Short-term investments .......................... 187,013 104,201
---------- ----------
Total investments ............................ 1,602,861 1,319,040
Cash .............................................. 3,584 6,201
Accrued investment income ......................... 19,290 17,364
Investments in and advances to affiliates ......... 125,731 108,510
Accounts and notes receivable (less allowance
for doubtful accounts $3,212 - 1995 and
$1,954 - 1994) .................................. 137,197 125,132
Reinsurance recoverables and prepaid reinsurance .. 360,052 336,032
Deferred policy acquisition costs ................. 77,673 70,137
Property and equipment (less accumulated
depreciation $23,223 - 1995 and $20,173 - 1994).. 34,009 25,157
Excess of cost over fair value of net assets
acquired (less accumulated amortization
$19,119 - 1995 and $17,586 - 1994) .............. 50,199 29,415
Deferred federal income taxes ..................... 8,726 42,008
Other assets ...................................... 54,266 33,765
---------- ----------
Total assets ................................. $2,473,588 $2,112,761
========== ==========
<FN>
See Notes to Consolidated Financial Statements
-46-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(000s omitted - except for share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
-------------------------
1995 1994
---- ----
<S> <C> <C>
Liabilities:
Policy liabilities -
Losses ........................................ $1,007,016 $ 952,531
Loss adjustment expenses ...................... 267,966 228,798
Unearned premiums ............................. 302,105 256,855
Policyholders' dividends ...................... 18,946 12,651
---------- ----------
Total policy liabilities .................... 1,596,033 1,450,835
Federal income taxes payable .................... 18,910 14,829
Notes payable ................................... 209,148 152,382
Other liabilities ............................... 158,594 129,627
---------- ----------
Total liabilities ........................... 1,982,685 1,747,673
---------- ----------
Commitments and Contingencies (Notes I and J)
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 ................................. 146,658 147,598
Net unrealized investment gains (losses), net of
federal income taxes (benefit) of $26,691 -
1995 and $(14,146) - 1994 ..................... 63,255 (11,498)
Net unrealized foreign exchange translation
losses, net of federal income tax benefits of
$540 - 1995 and $553 - 1994 ................... (3,935) (3,959)
Retained earnings ............................... 298,452 242,908
Treasury stock, at cost (1,385,012 shares - 1995
and 1,296,834 shares - 1994) .................. (26,534) (22,451)
Deferred compensation on restricted stock ....... (2,331) (2,848)
---------- ----------
Total stockholders' equity .................. 490,903 365,088
---------- ----------
Total liabilities and stockholders' equity... $2,473,588 $2,112,761
========== ==========
<FN>
See Notes to Consolidated Financial Statements
-47-
<PAGE>
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(000s omitted - except for per share data)
Year Ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Premiums earned ..................................... $749,003 $691,223 $617,404
Net investment income ............................... 99,040 84,915 91,803
Realized investment gains ........................... 11,885 3,437 9,478
Other income ........................................ 14,352 1,372 1,470
-------- -------- --------
Total revenues .................................... 874,280 780,947 720,155
-------- -------- --------
Expenses:
Losses incurred ..................................... 388,409 386,685 366,716
Loss adjustment expenses ............................ 123,824 111,438 92,416
Amortization of deferred policy acquisition costs ... 195,481 165,108 148,440
Other insurance expenses ............................ 21,562 21,461 17,381
Dividends to policyholders .......................... 21,790 14,836 12,513
Interest expense .................................... 15,943 13,597 13,044
Other expenses ...................................... 24,740 7,862 6,527
-------- -------- --------
Total expenses .................................... 791,749 720,987 657,037
-------- -------- --------
Earnings before equity in earnings of affiliates,
federal income taxes and cumulative effect of
adoption of new accounting principles ............... 82,531 59,960 63,118
Equity in earnings of affiliates ...................... 5,504 11,586 9,387
-------- -------- --------
Earnings before federal income taxes and cumulative
effect of adoption of new accounting principles ..... 88,035 71,546 72,505
Federal income taxes .................................. 20,413 16,301 15,517
-------- -------- --------
Earnings before cumulative effect of adoption of new
accounting principles ............................... 67,622 55,245 56,988
Cumulative effect of adoption of new accounting
principles .......................................... - - 11,825
-------- -------- --------
Net earnings ........................................ $ 67,622 $ 55,245 $ 68,813
======== ======== ========
Earnings per common share:
Earnings before cumulative effect of adoption of
new accounting principles ......................... $ 4.77 $ 3.85 $ 3.88
Cumulative effect of adoption of new accounting
principles ........................................ - - .81
-------- -------- --------
Net earnings .................................... $ 4.77 $ 3.85 $ 4.69
======== ======== ========
<FN>
See Notes to Consolidated Financial Statements
-48-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(000s omitted)
Year Ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Convertible exchangeable preferred stock:
Balance, beginning of year ................ $ - $ - $ 28,524
Conversion of preferred stock ............. - - (28,524)
-------- -------- --------
Balance, end of year ...................... $ - $ - $ -
======== ======== ========
Common stock:
Balance, beginning of year ................ $ 15,338 $ 15,338 $ 11,110
Conversion of preferred stock ............. - - 1,139
Exercise of stock options and issuance of
restricted stock ........................ - - 24
Stock issued in 5-for-4 stock split ....... - - 3,065
-------- -------- --------
Balance, end of year ...................... $ 15,338 $ 15,338 $ 15,338
======== ======== ========
Capital surplus:
Balance, beginning of year ................ $147,598 $148,167 $124,754
Redemptions and conversions of preferred
stock ................................... - - 26,072
Issuance of common stock .................. 152 - -
Exercise of stock options and issuance
of restricted stock ..................... (1,092) (569) 406
Stock issued in 5-for-4 stock split ....... - - (3,065)
-------- -------- --------
Balance, end of year ...................... $146,658 $147,598 $148,167
======== ======== ========
Net unrealized investment gains (losses):
Balance, beginning of year ................ $(11,498) $ 49,566 $ 18,815
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 .................. 74,753 (61,064) 10,031
-------- -------- --------
Balance, end of year ...................... $ 63,255 $(11,498) $ 49,566
======== ======== ========
Net unrealized foreign exchange translation
losses:
Balance, beginning of year ................ $ (3,959) $ (3,665) $ (2,918)
Change in unrealized foreign exchange
translation losses, net of taxes ........ 24 (294) (747)
-------- -------- --------
Balance, end of year ...................... $ (3,935) $ (3,959) $ (3,665)
======== ======== ========
<PAGE>
Retained earnings:
Balance, beginning of year ................ $242,908 $198,491 $139,947
Net earnings .............................. 67,622 55,245 68,813
Dividends declared ........................ (12,078) (10,828) (10,269)
-------- -------- --------
Balance, end of year ...................... $298,452 $242,908 $198,491
======== ======== ========
Treasury stock:
Balance, beginning of year ................ $(22,451) $(12,182) $ (6,694)
Issuance of common stock .................. 770 - -
Exercise of stock options and issuance
(cancellation) of restricted stock ...... 2,330 3,476 (15)
Acquisition of treasury stock ............. (7,183) (13,745) (5,473)
-------- -------- --------
Balance, end of year ...................... $(26,534) $(22,451) $(12,182)
======== ======== ========
Deferred compensation on restricted stock:
Balance, beginning of year ................ $ (2,848) $ (1,520) $ (2,251)
Issuance of restricted stock .............. (517) (2,247) (108)
Amortization of deferred compensation on
restricted stock ........................ 1,034 919 839
-------- -------- --------
Balance, end of year ...................... $ (2,331) $ (2,848) $ (1,520)
======== ======== ========
<FN>
See Notes to Consolidated Financial Statements
-49-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(000s omitted)
Year Ended December 31,
----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Premiums collected ........................ $ 738,083 $ 696,735 $ 626,678
Net investment income collected ........... 91,964 83,603 81,178
Losses and loss adjustment expenses paid .. (409,797) (437,386) (374,625)
Policy acquisition costs paid ............. (204,319) (185,217) (162,717)
Dividends paid to policyholders ........... (15,495) (14,708) (13,150)
Interest paid ............................. (12,530) (12,931) (12,405)
Federal income tax payments ............... (18,756) (10,860) (7,100)
Other payments ............................ (21,133) (457) (14,705)
--------- --------- ---------
Net cash provided by operating
activities ............................ 148,017 118,779 123,154
--------- --------- ---------
Cash flows from investing activities:
Maturities of fixed maturities
held-to-maturity ........................ 36,804 55,200 -
Maturities of fixed maturities
available-for-sale ...................... 12,640 28,839 -
Sale of fixed maturity held-to-maturity ... - 1,155 -
Sales of fixed maturities
available-for-sale ...................... 184,501 88,804 -
Maturities and sales of fixed maturities .. - - 243,162
Sales of equity securities................. 78,351 49,881 91,144
Investments in fixed maturities
held-to-maturity ........................ (41,709) (53,230) -
Investments in fixed maturities
available-for-sale ...................... (278,173) (156,927) -
Investments in fixed maturities ........... - - (311,183)
Investments in equity securities .......... (64,450) (84,582) (120,609)
Acquisition of McGee ...................... (22,355) - -
Effect on cash of consolidating McGee ..... 349 - -
Investment in Intercargo Corporation ...... - - (19,315)
Net sales (purchases) of short-term
investments ............................. (83,617) (7,505) 8,885
Other payments ............................ (10,789) (7,820) (16,499)
--------- --------- ---------
Net cash used in investing activities ... (188,448) (86,185) (124,415)
--------- --------- ---------
<PAGE>
Cash flows from financing activities:
Proceeds from issuance of notes payable ... 110,413 - 59,672
Proceeds from issuance of common stock .... 246 598 286
Repayment of notes payable ................ (54,500) (8,000) (29,500)
Dividends paid to stockholders ............ (11,674) (10,609) (10,776)
Purchases of common stock and purchases
and redemption of adjustable rate
preferred stock ......................... (6,689) (14,220) (23,615)
Other payments ........................... (18) (351) (1,113)
--------- --------- ---------
Net cash provided by (used in) financing
activities ............................ 37,778 (32,582) (5,046)
--------- --------- ---------
Effect of foreign exchange rate changes
on cash ................................... 36 (244) (24)
--------- --------- ---------
Net decrease in cash .................... (2,617) (232) (6,331)
Cash balance, beginning of year ............. 6,201 6,433 12,764
--------- --------- ---------
Cash balance, end of year ................... $ 3,584 $ 6,201 $ 6,433
========= ========= =========
<FN>
See Notes to Consolidated Financial Statements
-50-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
(000s omitted)
Year Ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings ................................. $ 67,622 $ 55,245 $ 68,813
-------- -------- --------
Adjustments:
Cumulative effect of adoption of new
accounting principles .................... - - (11,825)
Depreciation and amortization .............. 5,900 4,936 3,939
Amortization of excess of cost over fair
value of net assets acquired ............. 1,533 1,172 1,173
Deferred federal income taxes .............. (5,165) 9,906 (931)
Amortization of fixed maturity investments . 815 1,700 128
Non-cash investment income ................. (11,272) (2,840) (11,586)
Equity in earnings of affiliates ........... (5,504) (11,586) (9,387)
Dividends received from affiliates ......... 2,597 3,295 3,135
Realized investment gains .................. (11,885) (3,437) (9,478)
Foreign exchange translation adjustment .... 163 257 152
Other....................................... (43) (38) (34)
Changes in assets and liabilities (net of
effects of acquiring McGee):
Decrease (increase) in accrued investment
income ................................... (952) 259 492
Increase in accounts and notes receivable .. (11,488) (13,593) (9,298)
Decrease (increase) in reinsurance
recoverables and prepaid reinsurance ..... (24,020) 57,277 21,326
Increase in deferred policy acquisition
costs .................................... (7,536) (12,615) (1,388)
Increase in other assets ................... (18,405) (7,589) (431)
Increase in losses ......................... 54,485 14,756 52,695
Increase in loss adjustment expenses ....... 39,168 26,170 6,312
Increase (decrease) in unearned premiums ... 45,250 (2,504) 27,043
Increase (decrease) in policyholders'
dividends ................................ 6,295 128 (637)
Increase (decrease) in federal income taxes
payable .................................. 3,964 (4,465) 9,242
Increase (decrease) in other liabilities ... 16,495 2,345 (16,301)
-------- -------- --------
Total adjustments and changes ............ 80,395 63,534 54,341
-------- -------- --------
Net cash provided by operating activities .. $148,017 $118,779 $123,154
======== ======== ========
<FN>
See Notes to Consolidated Financial Statements
-51-
/TABLE
<PAGE>
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
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 C). All
material intercompany balances and transactions have been eliminated.
Adoption of new accounting principles - In 1993 the Company adopted 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. 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, 1995
for the ensuing twelve months, without prior approval, aggregated $83,173,000.
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 $521,510,000 at December 31, 1995 and $458,676,000 at December 31,
1994. Statutory net income amounted to $83,842,000, $61,518,000 and
$66,862,000 for 1995, 1994 and 1993, respectively.
Cash - For purposes of the consolidated statement of cash flows, the
Company considers only demand deposit accounts to be cash.
-52-
<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 principally include equity ownership
interests in limited partnerships, which are recorded using the equity method
of accounting. 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. The Company evaluates the recoverability of goodwill from expected
future cash flows, and impairments would be recognized in operating results if
a permanent diminution in value were to occur.
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.
-53-
<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").
Estimated reinsurance receivables are recognized in a manner consistent with
the liabilities relating to the underlying reinsured contracts. At December
31, 1995 and 1994, long-term disability workers compensation loss reserves are
carried at $56,603,000 and $51,886,000, respectively, 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 24% and 21% of premiums in-force at December 31, 1995
and 1994, respectively. As a percent of premiums earned, participating
business amounted to 24% in 1995 and 21% in 1994 and 1993.
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 Split - Common stock and per common share data have been restated,
as required, to give effect to the 5-for-4 stock split paid on November 15,
1993 to stockholders of record on October 15, 1993.
Earnings Per Common Share - Earnings per common share is computed using
the weighted average common and dilutive common equivalent shares outstanding.
-54-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note B - Acquisition of Wm. H. McGee & Co., Inc.
On June 30, 1995, Orion purchased all of the capital stock of Wm. H.
McGee & Co., Inc. ("McGee") for $22,000,000 in cash, and incurred acquisition
expenses of $355,000. McGee specializes in underwriting ocean marine, inland
marine and property insurance through an underwriting pool in the United
States and one in Canada. The business is written by McGee on behalf of the
insurance companies that comprise the pools. The Company's participation in
the United States pool was 6%, 7% and 14.5% in 1993, 1994 and 1995,
respectively. Participation in the Canadian pool was 10% in 1993 and 1994 and
15% in 1995. The Company has agreed to increase its rate of participation for
1996 to 37% in the United States and approximately 49% in Canada, and by an
additional 10.5% to 16.5%, at the Company's option, for 1997 in both of the
McGee pools. The acquisition has been accounted for by the purchase method,
and McGee's operations are included in the Company's results of operations
from July 1, 1995. The Company recorded $22,317,000 for the excess of cost
over the estimated fair value of the net assets acquired, which is being
amortized over a 30 year period. The consolidated results of the Company's
operations on a proforma basis, as if the purchase had been made as of the
beginning of the year, would not be materially different than reported herein.
Note C - Investments in Affiliates
As of December 31, 1995 the Company owned 49.1% of the common stock of
Guaranty National Corporation ("Guaranty National") and 20.0% of Intercargo
Corporation ("Intercargo"), both publicly-held companies. 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.
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
---- ----
(000s omitted)
<S> <C> <C>
The Company's investments in and advances to
affiliates were as follows:
Book value ......................................... $125,731 $108,510
Market value ....................................... 128,120 138,786
Guaranty National shares held ...................... 7,340 6,004
- Book value of shares held ...................... $106,059 $ 72,564
- Market value of shares held .................... 112,855 110,320
Intercargo shares held ............................. 1,526 1,526
- Book value of shares held ...................... $ 19,672 $ 18,750
- Market value of shares held .................... 15,265 12,593
</TABLE>
-55-
<PAGE>
In June 1995 Guaranty National sold 1,550,000 shares of its common stock
in an offering under Regulation S of the Securities Act of 1933, as amended,
at a net offering price of $15.76 per share. The Company converted
$20,896,000 of Guaranty National subordinated notes it held into 1,326,128
shares of Guaranty National common stock at the net price received by Guaranty
National from the offering. The sale of stock and conversion of the
subordinated notes increased the stockholders' equity of Guaranty National and
facilitated the procurement of financing for Guaranty National's acquisition
of Viking Insurance Holdings, Inc. in July 1995.
In 1993 the Company acquired 1,526,484 shares, or 20%, of the common
stock of Intercargo. The aggregate purchase price, including expenses, was
$19,315,000. 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 share of the undistributed earnings of Guaranty National
after it was deconsolidated following the sale by the Company of a majority
interest in a public offering on November 20, 1991, and Intercargo after
acquiring an equity interest in 1993, were, in the aggregate, $24,867,000 as
of December 31, 1995 and $22,874,000 as of December 31, 1994. Transactions
with Guaranty National for 1995, 1994 and 1993 reported in the consolidated
statement of earnings include interest income on the Guaranty National
subordinated notes of $1,101,000, $1,640,000 and $1,843,000, investment
management fee income of $595,000, $550,000 and $550,000, respectively, and
interest expense on a mortgage participation loan of $407,000 in each year.
-56-
<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,
------------------------------
1995 1994 1993
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Revenues:
Premiums earned ...................... $474,534 $376,444 $272,636
Realized investment gains ............ 3,291 3,007 5,996
Investment and other income .......... 38,422 28,090 21,813
-------- -------- --------
516,247 407,541 300,445
-------- -------- --------
Expenses:
Insurance expenses ................... 490,952 367,501 274,377
Interest and other ................... 7,452 5,428 3,447
-------- -------- --------
498,404 372,929 277,824
-------- -------- --------
Earnings before federal income taxes
and cumulative effect of change in
accounting principles ................ 17,843 34,612 22,621
Federal income taxes ................... 1,482 8,734 4,481
-------- -------- --------
Earnings before cumulative effect of
change in accounting principles .... $ 16,361 $ 25,878 $ 18,140
======== ======== ========
The Company's proportionate share:
Earnings before cumulative effect of
change in accounting principles .... $ 5,504 $ 11,586 $ 9,387
======== ======== ========
Cumulative effect of change in
accounting principles
(SFAS Nos. 106 and 109) ............ $ 545
========
<CAPTION>
December 31,
--------------------
1995 1994
---- ----
(000s omitted)
<S> <C> <C>
Cash and investments ................................. $ 714,584 $461,203
Other assets ......................................... 306,307 268,872
---------- --------
1,020,891 730,075
Policy liabilities ................................... (582,884) (426,997)
Notes payable ........................................ (112,735) (56,383)
Other liabilities .................................... (63,341) (62,405)
---------- --------
Stockholders' equity ................................. $ 261,931 $184,290
========== ========
-57-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note D - Investments
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, 1995 Cost Gains Losses Value
- ----------------- ---------- ---------- ---------- ---------
(000s omitted)
<S> <C> <C> <C> <C>
Held-to-maturity securities:
United States Government
and government agencies
and authorities ........... $ 90,770 $ 3,363 $ (295) $ 93,838
States, municipalities and
political subdivisions .... 137,807 6,424 - 144,231
Foreign governments ......... 50 - - 50
Corporate securities ........ 36,542 1,638 (17) 38,163
---------- -------- -------- ----------
$ 265,169 $ 11,425 $ (312) $ 276,282
========== ======== ======== ==========
Available-for-sale securities:
United States Government
and government agencies
and authorities ........... $ 206,722 $ 13,054 $ (3,712) $ 216,064
States, municipalities and
political subdivisions .... 246,026 18,619 (157) 264,488
Foreign governments ......... 7,900 562 - 8,462
Corporate securities ........ 270,001 9,895 (3,647) 276,249
Mortgage-backed securities
(exclusive of government
agencies) ................ 17,359 282 (35) 17,606
Equity securities ........... 257,378 61,979 (14,472) 304,885
Short-term investments....... 187,013 - - 187,013
---------- -------- -------- ----------
$1,192,399 $104,391 $(22,023) $1,274,767
========== ======== ======== ==========
<PAGE>
December 31, 1994
- -----------------
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
========== ======== ======== ==========
-58-
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net investment income for the three years ended December 31, 1995 was as
follows:
Year Ended December 31,
---------------------------------
1995 1994 1993
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Net investment income:
Fixed maturities ...................... $ 69,453 $ 67,305 $ 69,565
Equity securities ..................... 15,410 14,964 10,495
Other long-term investments ........... 9,125 685 9,130
Short-term investments ................ 6,311 2,902 3,276
Accounts and notes receivable ......... 113 134 179
Other ................................. 353 411 712
-------- -------- --------
Total investment income ............. 100,765 86,401 93,357
Less investment expenses .............. 1,725 1,486 1,554
-------- -------- --------
Net investment income ............... $ 99,040 $ 84,915 $ 91,803
======== ======== ========
<CAPTION>
Certain information concerning realized and unrealized gains (losses) for
fixed maturities and equity securities is set forth below:
Year Ended December 31,
---------------------------------
1995 1994 1993
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Fixed maturities (only available-for-sale
securities for 1995 and 1994):
Gross realized gains .................. $ 7,891 $ 4,774 $ 10,817
Gross realized losses ................. (8,372) (4,267) (4,155)
Provision for other than temporary
impairment .......................... (4,050) (750) (2,147)
-------- -------- --------
$ (4,531) $ (243) $ 4,515
======== ======== ========
Change in unrealized gains (losses)
recorded in stockholders' equity .... $ 70,317 $(66,076) $ 29,131
======== ======== ========
Equity securities:
Gross realized gains .................. $ 17,879 $ 5,319 $ 15,163
Gross realized losses ................. (1,348) (1,474) (3,890)
Provision for other than temporary
impairment .......................... (285) (381) (6,310)
-------- -------- --------
$ 16,246 $ 3,464 $ 4,963
======== ======== ========
Change in unrealized gains (losses)
recorded in stockholders' equity .... $ 34,002 $(18,827) $ 16,468
======== ======== ========
<CAPTION>
In December 1995 the Company reclassified investments with a market value
of $102,581,000 from fixed maturities recorded at amortized cost to fixed
maturities recorded at market, and recorded unrealized appreciation net of
taxes of $1,329,000. This one-time transfer from the held-to-maturity
portfolio was permitted by the implementation guide for SFAS No. 115.
-59-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
The amortized cost and estimated market values of fixed maturity and
short-term investments at December 31, 1995, 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.
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 .......... $ 19,220 $ 19,274 $232,198 $231,714
Due after one year through five
years .......................... 121,599 125,403 59,323 59,628
Due after five years through ten
years .......................... 59,894 62,950 116,893 119,686
Due after ten years .............. 64,456 68,655 368,443 396,435
-------- -------- -------- --------
265,169 276,282 776,857 807,463
Mortgage-backed securities ....... - - 158,174 162,419
-------- -------- -------- --------
$265,169 $276,282 $935,031 $969,882
======== ======== ======== ========
</TABLE>
Other long-term investments had aggregate carrying values of $62,925,000
at December 31, 1995 and $52,564,000 at December 31, 1994 including mortgage
loans on real estate of $1,979,000 and $1,764,000, 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
$7,685,000, or 0.5% of total invested assets, at December 31, 1995.
-60-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying value of securities on deposit with state regulatory
authorities in accordance with statutory requirements totalled $237,732,000
and $234,265,000 at December 31, 1995 and 1994, 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 $25,000,000. The Company had
$1,441,000 and $1,344,000 of fixed maturity investments for which it was not
accruing income for the years ended December 31, 1995 and 1994, respectively.
Note E - 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, 1995 and 1994,
recoverables for reinsurance ceded to the Company's four largest reinsurers,
excluding direct business written for the McGee pool, were an aggregate of
$84,654,000 and $99,476,000, respectively. At December 31, 1995 and 1994
these reinsurers provided qualified trust accounts for the benefit of the
Company of $39,223,000 and $43,526,000, respectively. As of December 31,
1995, recoverables for reinsurance ceded to the clearing company for the McGee
pool were $60,745,000, versus $1,777,000 for 1994, and the Company had ceded
balances payable to the clearing company of $22,660,000. The table below
illustrates the effect of reinsurance on premiums written and premiums earned:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
---- ---- ----
(000s omitted-except for percentages)
<S> <C> <C> <C>
Direct premiums written ................ $ 799,284 $ 691,493 $ 647,426
Reinsurance assumed .................... 127,445 120,851 132,702
--------- --------- ---------
Gross premiums written ................. 926,729 812,344 780,128
Reinsurance ceded ...................... (169,293) (100,289) (144,542)
--------- --------- ---------
Net premiums written ................... $ 757,436 $ 712,055 $ 635,586
========= ========= =========
Percentage of amount assumed to net .... 16.8% 17.0% 20.9%
========= ========= =========
Direct premiums earned ................. $ 754,927 $ 685,110 $ 635,374
Reinsurance assumed .................... 126,552 129,737 117,711
--------- --------- ---------
Gross premiums earned .................. 881,479 814,847 753,085
Reinsurance ceded ...................... (132,476) (123,624) (135,681)
--------- --------- ---------
Net premiums earned .................... $ 749,003 $ 691,223 $ 617,404
========= ========= =========
Loss and loss adjustment expenses
incurred recoverable from reinsurers.. $ 70,872 $ 56,778 $ 70,297
========= ========= =========
</TABLE>
Reinsurance recoverables and prepaid reinsurance includes prepaid
reinsurance of $68,525,000 at December 31, 1995 and $31,708,000 at December
31, 1994.
-61-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note F - 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,
-------------------------------------
1995 1994 1993
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Net balance, beginning of year ....... $ 891,542 $ 830,805 $ 746,298
---------- ---------- ----------
Provision:
Current year ....................... 500,514 480,826 434,840
Prior years ........................ 11,719 17,297 24,292
---------- ---------- ----------
512,233 498,123 459,132
---------- ---------- ----------
Payments:
Current year ....................... 146,540 134,120 125,042
Prior years ........................ 263,257 303,266 249,583
---------- ---------- ----------
409,797 437,386 374,625
---------- ---------- ----------
Net balance, end of year ............. 993,978 891,542 830,805
Add reinsurance recoverables ....... 281,004 289,787 309,598
---------- ---------- ----------
Balance, end of year ................. $1,274,982 $1,181,329 $1,140,403
========== ========== ==========
</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. Such reevaluation is a normal, recurring activity that is
inherent in the process of loss reserve estimation and therefore, no
assurances can be given that reserve development will not occur in the future.
A substantial portion of the loss development experienced by the Company
during the three years ended December 31, 1995 resulted 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 have 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 the three years ended
December 31, 1995 is presented below:
-62-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
Claim Claim Claim
Amount Counts Amount Counts Amount Counts
------ ------ ------ ------ ------ ------
(000s omitted for dollar amounts)
<S> <C> <C> <C> <C> <C> <C>
Net balance, beginning
of year ............. $20,601 467 $17,189 512 $15,184 335
Provision ........... 19,633 10,645 7,562
Payments ............ (5,675) (7,233) (5,557)
------- ------- -------
Net balance, end of
year ................ 34,559 474 20,601 467 17,189 512
Add reinsurance
recoverables ...... 10,509 11,391 4,699
------- ------- -------
Balance, end of year .. $45,068 $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
policies. The Company does not use discounting in determining its reserves
for environmental claims. IBNR of $21,739,000 and $13,791,000 is included in
net reserves for environmental claims at December 31, 1995 and 1994,
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.
-63-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note G - Notes Payable
On July 17, 1995, Orion issued 7 1/4% Senior Notes due 2005 with a face
value of $100,000,000 (the "7 1/4% Senior Notes") in a public offering. The
net proceeds from the offering were approximately $98,113,000, of which
$46,500,000 was used to repay Orion's debt under a bank loan agreement and the
balance was used for general corporate purposes. Orion had $42,500,000 of
notes payable under its bank loan agreement as of December 31, 1994, at
interest rates between 6.71% and 6.90%. The indentures for the 7 1/4% Senior
Notes and for Orion's 9 1/8% Senior Notes due 2002 limit the amount of liens
and guarantees by the Company, and the Company's ability to incur secured
indebtedness without equally and ratably securing the senior notes. As of
December 31, 1995, $110,000,000 of Orion's debt is scheduled to be repaid on
September 1, 2002 and the remaining $100,000,000 is due on July 15, 2005.
Notes payable are recorded at face value less unamortized discount. The
carrying value and estimated market value of notes payable consist of the
following:
<TABLE>
<CAPTION>
Estimated
Carrying Value Market Value
------------------ ------------------
December 31, 1995 1994 1995 1994
------------ ---- ---- ---- ----
(000s omitted)
<S> <C> <C> <C> <C>
$110,000,000 face amount, 9 1/8% Senior Notes,
due September 1, 2002 ....................... $109,894 $109,882 $125,642 $111,815
$100,000,000 face amount, 7 1/4% Senior Notes,
due July 15, 2005 ........................... 99,254 - 104,160 -
Borrowings under loan agreement with banks
(various interest rates) .................... - 42,500 - 42,500
-------- -------- -------- --------
$209,148 $152,382 $229,802 $154,315
======== ======== ======== ========
</TABLE>
-64-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note H - Federal Income Taxes
Orion and its wholly-owned subsidiaries file consolidated federal income
tax returns. The consolidated federal income tax current provisions for 1995
and 1993 were based on the regular tax method. The current provision for 1994
was computed by the alternative minimum 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
Orion and its subsidiaries relate to domestic operations.
<TABLE>
<CAPTION>
The components of the provision (benefit) for federal income taxes on
income from operations, and allocations of taxes (benefits) to other items for
the three years ended December 31, 1995 are as follows:
Year Ended December 31,
-----------------------------------
1995 1994 1993
---- ---- ----
(000s omitted)
<S> <C> <C> <C>
Taxes on income from continuing
operations:
Current ............................... $ 25,578 $ 6,395 $ 16,448
Deferred .............................. (5,165) 9,906 (931)
-------- -------- --------
20,413 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 .......................... 40,837 (32,864) 18,718
Stockholders' equity, for foreign
exchange translation gains (losses) . 13 (159) (394)
-------- -------- --------
$ 61,263 $(16,722) $ 31,237
======== ======== ========
-65-
<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, 1995 and 1994 are as follows:
December 31,
----------------------
1995 1994
---- ----
(000s omitted)
<S> <C> <C>
Deferred tax assets:
Loss reserve discounting ...................... $ 55,512 $ 52,940
Unearned premium reserves ..................... 16,609 16,145
Policyholders' dividends ...................... 6,596 4,188
Realized investment losses .................... 4,319 3,672
Unrealized investment losses .................. - 8,975
Deferred income ............................... 2,482 2,659
Retiree medical benefits ...................... 4,263 3,097
Other ......................................... 11,560 8,426
-------- --------
101,341 100,102
-------- --------
Deferred tax liabilities:
Deferred policy acquisition costs ............. 27,186 24,548
Investment in affiliates ...................... 20,114 19,091
Investment income ............................. 9,933 10,375
Unrealized investment gains ................... 31,482 -
Other ......................................... 3,900 4,080
-------- --------
92,615 58,094
-------- --------
$ 8,726 $ 42,008
======== ========
-66-
<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 at
regular corporate rates to actual tax expense is as follows:
Year Ended December 31,
------------------------------------------------
1995 1994 1993
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(000s omitted-except for percentages)
<S> <C> <C> <C> <C> <C> <C>
Expected income tax expense.. $30,812 35.0% $25,041 35.0% $25,377 35.0%
Change in enacted tax rate .. - - - - (905) (1.3)
Dividends-received deduction. (5,601) (6.4) (5,830) (8.2) (4,019) (5.5)
Tax-exempt interest ......... (6,470) (7.3) (5,362) (7.5) (4,929) (6.8)
Amortization of goodwill .... 536 .6 410 .6 410 .6
Other ....................... 1,136 1.3 2,042 2.9 (417) (.6)
------- ---- ------- ---- ------- ----
Actual income tax expense ... $20,413 23.2% $16,301 22.8% $15,517 21.4%
======= ==== ======= ==== ======= ====
</TABLE>
Note I - Commitments
Minimum lease commitments at December 31, 1995, with the majority having
initial lease periods from one to twenty-five years, are as follows:
(000s omitted)
1996 ....................................... $15,661
1997 ....................................... 11,473
1998 ....................................... 9,331
1999 ....................................... 6,937
2000 ....................................... 6,003
2001 and thereafter ........................ 36,441
-------
Minimum lease commitments ................ $85,846
=======
Rent expense amounted to $14,112,000, $11,519,000 and $11,976,000 net of
sublease rentals of $9,000 in 1994 and $419,000 in 1993. Substantially all
leases are for office space and equipment. A number of lease commitments
contain renewal options ranging from one to thirty years.
Note J - Contingencies
On January 31, 1995, the Department of Insurance of the State of
California (the "Department") advised the Company that it had a liability of
approximately $4,000,000 plus interest under regulations issued with respect
to an amendment to the California Insurance Code known as Proposition 103. On
November 2, 1995, the terms of a Stipulation and Consent Order between the
Department and the Company were adopted by the Commissioner of the Department.
Pursuant to that order, the Company has no premium rollback liability under
Proposition 103. Further, the Department acknowledged that premium rates
charged by the Company in California since the passage of Proposition 103 have
been in compliance with the requirements of the California Insurance Code.
-67-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 K - Stockholders' Equity and Earnings Per Common Share
During 1995, the Company repurchased 173,181 shares of its common stock
at an aggregate cost of $7,183,000. The Company repurchased 442,327 shares
for $13,745,000 in 1994 and 177,658 shares for $5,473,000 in 1993.
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. All common
stock and per common share data presented in the financial statements give
effect to the stock split.
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
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.
On April 7, 1993, the Company redeemed all of the outstanding shares of
its Adjustable Rate Preferred Stock for $18,520,000 in cash.
Orion declared dividends on its common stock of $12,078,000, $10,828,000
and $9,860,000, or $.86, $.76 and $.68 per share in 1995, 1994 and 1993,
respectively. Dividends were declared in 1993 in the amount of $407,000, or
$1.10 per share, on Orion's Adjustable Rate Preferred Stock and $2,000, or
$.12 per share, on the $2.125 Preferred Stock.
The weighted average common shares outstanding for purposes of computing
earnings per share amounted to 14,187,000, 14,348,000 and 14,598,000 shares
for 1995, 1994 and 1993, respectively. Dividends on preferred stock were
deducted from earnings in 1993 to compute earnings per common share.
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.
-68-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
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 L - 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 (except for employees of McGee). 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. 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.
McGee maintains a Profit Sharing Plan (the "McGee Plan") which is also a
401(k) plan for eligible employees of McGee. Employee and employer
contributions are limited by the McGee Plan and federal income tax law.
Employer contributions vest over a seven-year period. McGee has
noncontributory defined benefit retirement plans covering all eligible
employees, and a nonqualified supplemental retirement plan for certain key
employees. At December 31, 1995 the accumulated benefit obligation of the
defined benefit plans was approximately $20,205,000, and plan assets for these
plans were approximately $19,233,000.
The Company maintains a number of incentive plans for key employees.
Under the Company's 1982 Long-Term Performance Incentive Plan (the "Incentive
Plan"), shares of restricted stock as well as stock options may be granted by
Orion. Orion granted 27,515, 70,015 and 5,688 shares of restricted stock to
key employees during 1995, 1994 and 1993, respectively. Restricted stock is
considered issued and outstanding when awarded. 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, 1995, the
restrictions have not lapsed on 115,556 shares of restricted stock. All stock
options are granted by Orion at fair market value at date of grant, and are
intended to qualify as incentive stock options. Stock options become
-69-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
exercisable from the first through fourth anniversaries of the date of grant,
and expire ten years after the date of grant. As of December 31, 1995, the
number of shares of stock reserved under the Incentive Plan is 471,545 of
which 177,374 shares are available for future awards and 294,171 shares are
for outstanding stock options, including 175,180 stock options that are
exercisable. A summary of the option transactions is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Price Price Price
Options Range Options Range Options Range
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1 ... 348,802 $10.16-33.75 284,337 $10.16-32.40 305,860 $10.16-23.92
Granted ............... - - 129,800 32.50-33.75 3,438 32.40
Cancelled ............. (5,273) 23.92 (19,531) 14.56-23.92 - -
Exercised ............. (49,358) 10.16-23.92 (45,804) 10.16-23.92 (24,961) 10.16-14.56
------- ------- -------
Balance - December 31.. 294,171 10.16-33.75 348,802 10.16-33.75 284,337 10.16-32.40
======= ======= =======
</TABLE>
Orion 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. In 1995, Orion's
stockholders authorized 100,000 shares for a stock option plan for non-
employee directors. During 1995 Orion granted 54,000 stock options to
directors at fair market value, which become exercisable one year from the
date of grant and expire in ten years.
The total expense for 1995, 1994 and 1993 for the above savings,
retirement and pension benefit plans for employees and directors amounted to
$6,588,000, $4,659,000 and $3,277,000, respectively.
Note M - Postretirement Medical Benefits
The Company provides postretirement medical benefits to full-time
employees who have attained age 55 and have 10 years of consecutive service
immediately prior to retirement. McGee employees that attain age 55 while in
service with McGee are eligible for postretirement medical benefits if they
have 10 years of service, with an increasing level of benefits for additional
years of service up to 35. The postretirement health care plans are not
funded. The accumulated postretirement benefit obligation of these plans
included in other liabilities in the consolidated balance sheet, including
McGee's plan for 1995, is as follows:
-70-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
----------------
1995 1994
---- ----
(000s omitted)
Retirees ................................. $ 3,353 $2,143
Fully eligible active plan participants .. 1,713 976
Other active plan participants ........... 3,585 3,234
Unrecognized net gains ................... 3,528 2,496
------- ------
$12,179 $8,849
======= ======
Net postretirement benefit cost for the years ended December 31, 1995,
1994 and 1993 was $1,203,000, $1,243,000 and $598,000 consisting of service
cost benefits earned of $695,000, $813,000 and $130,000 and interest on the
accumulated postretirement benefit obligation of $612,000, $539,000 and
$468,000, respectively, and amortization of unrecognized net gains of $104,000
in 1995 and $109,000 in 1994.
The expected health care cost trend rate used as of December 31, 1995 was
9% for 1996 and 1997, decreasing linearly each year until it reaches 5% for
2005 and future years. At December 31, 1994 the expected health care cost
trend rates used were 10.25% for 1995 and 9.5% for 1996, ratably reduced to 6%
for 2003 and later years. 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 1995, 1994 and 1993 by $245,000, $289,000 and
$145,000, respectively, and increase the accumulated postretirement benefit
obligation as of December 31, 1995 and 1994 by $1,304,000 and $953,000,
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 7.0% at
December 31, 1995 and 8.5% at December 31, 1994.
-71-
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note N - 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. Reinsurance/Special
Programs includes DPIC Companies (which markets professional liability
insurance), Connecticut Specialty (which writes specialty insurance programs),
SecurityRe Companies (a reinsurer), McGee (an underwriting management company
that specializes in ocean marine, inland marine and property insurance) and a
20% interest in Intercargo (which underwrites insurance coverages for
international trade). The third segment consists of the Company's 49.1%
interest in Guaranty National Corporation, 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 1995, 1994 and 1993
is shown below:
-72-
<PAGE>
<TABLE>
<CAPTION>
Earnings (Loss)
Before Federal
Income Taxes
Realized and Cumulative
Net Investment Effect of
Premiums Investment Gains Other Total Accounting Identifiable
Earned Income (Losses) Income Revenues Changes Assets
-------- ---------- ---------- -------- -------- -------------- ------------
(000s omitted)
<S> <C> <C> <C> <C> <C> <C> <C>
1995:
Regional Operations.... $322,098 $ 35,750 $ 4,636 $ 188 $362,672 $ 57,830 $ 836,089
Reinsurance/Special
Programs ............ 426,905 59,584 7,781 13,564 507,834 43,241 1,460,435
Guaranty National
Companies ........... - - - - - 4,466 106,059
Other ................. - 3,706 (532) 600 3,774 (17,502) 71,005
-------- -------- -------- -------- -------- -------- ----------
Total ............... $749,003 $ 99,040 $ 11,885 $ 14,352 $874,280 $ 88,035 $2,473,588
======== ======== ======== ======== ======== ======== ==========
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
======== ======== ======== ======== ======== ======== ==========
</TABLE>
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note O - Selected Quarterly Financial Data (Unaudited)
<TABLE>
Quarterly results of operations and earnings per common share for 1995 and 1994
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>
1995:
Premiums earned ......................... $175,058 $186,709 $183,902 $203,334
Net investment income ................... 23,853 24,435 25,572 25,180
Realized investment gains ............... 2,560 726 5,885 2,714
Other income ............................ 326 241 6,862 6,923
-------- -------- -------- --------
Total revenues ...................... $201,797 $212,111 $222,221 $238,151
======== ======== ======== ========
Net earnings ........................ $ 17,062 $ 16,049 $ 17,257 $ 17,254
======== ======== ======== ========
Net earnings per common share ........... $ 1.20 $ 1.13 $ 1.21 $ 1.22
======== ======== ======== ========
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 ........... $ .91 $ .80 $ 1.07 $ 1.07
======== ======== ======== ========
<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.
-73-
</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 June 5, 1996. 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................................. 44
Independent Auditors' Report......................... 45
Orion Capital Corporation and Subsidiaries:
December 31, 1995 and 1994
Consolidated Balance Sheet................. 46-47
For the years ended December 31, 1995, 1994 and
1993
Consolidated Statement of Earnings......... 48
Consolidated Statement of Stockholders'
Equity................................... 49
Consolidated Statement of Cash Flows....... 50-51
Notes to the Consolidated Financial Statements.. 52-73
(a) 2. Financial Statement Schedules:
Selected Quarterly Financial Data - for the years ended
December 31, 1995, and 1994 - Included in Part II, Item 8.
-74-
<PAGE>
Page
----
Schedule I Consolidated Summary of
Investments - Other than
Investments in Related
Parties - December 31,
1995............................ S-1
II Condensed Financial
Information of Registrant - S-2, S-3,
December 31, 1995, 1994 S-4, S-5,
and 1993........................ S-6
III Supplementary Insurance
Information - December 31,
1995, 1994 and 1993............. S-7
V Valuation and Qualifying
Accounts - December 31, 1995,
1994 and 1993................... S-8
VI Supplemental Information
For Property - Casualty
Insurance Underwriters -
December 31, 1995, 1994 and
1993............................ S-9
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.
-75-
<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 4(v) Senior Debt Indenture, dated as of July 17, 1995,
between Orion and the State Street Bank and Trust
Company of Connecticut, National Association, as
Trustee of Orion's 7 1/4% Senior Notes due July 15,
2005; filed as Exhibit 4.9 to the Company's Current
Report on Form 8-K, filed on 7/14/95.
Exhibit 4(vi) First Supplemental Indenture to the Senior Debt
Indenture; filed as Exhibit 4.9(a) to the Company's
Current Report on Form 8-K, filed on 7/14/95.
Exhibit 4(vii) Specimen Certificate representing Orion's 7 1/4%
Senior Notes; filed as Exhibit 4.9(b) to the
Company's Current Report on Form 8-K, filed on
7/14/95.
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; filed as Exhibit 10(iii) to the
Company's Annual Report on Form 10-K for 1994.
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.
*Management contract or compensatory plan or arrangement.
-76-
<PAGE>
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)* Employment Agreement between Larry D. Hollen and
Orion, as amended and restated on December 6, 1995.
Exhibit 10(vii)* Employment Agreement between Raymond W. Jacobsen
and Orion, as amended and restated as of December 6,
1995.
Exhibit 10(viii)* Employment Agreement between W. Marston Becker and
Orion, dated as of October 31, 1995.
Exhibit 10(vix) 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(x) 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(xi) 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(xii) 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(xiii) 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(xiv) 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.
*Management contract or compensatory plan or arrangement.
-77-
<PAGE>
Exhibit 10(xv) 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.
Exhibit 10(xvi) 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(xvii)* Retirement Plan for Directors of Orion,
as amended (September, 1994); filed as Exhibit
10(xvi) to the Company's Annual Report on Form 10-K
for 1994.
Exhibit 10(xviii)* Orion Supplemental Benefits Plan, filed as
Exhibit 10(xxv) to the Company's Annual Report
on Form 10-K for 1991.
Exhibit 10(xix) 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(xx) 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; filed as Exhibit 10(xix) to the Company's
Annual Report on Form 10-K for 1994.
Exhibit 10(xxi) Underwriting Agreement for Orion's 7 1/4% Notes
due 2005, dated July 12, 1995; filed as Exhibit 1
to the Company's Current Report on Form 8-K, filed
on 7/14/95.
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; filed as Exhibit
10(xxiii) to the Company's Annual Report on Form
10-K for 1994.
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.
Exhibit 10(xxv) Purchase Agreement by and between Sun Alliance USA
Inc. and Orion, dated as of June 30, 1995.
*Management contract or compensatory plan or arrangement.
-78-
<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, 1995
and 1994, Consolidated Statement of Earnings, State-
ment of Changes in Shareholders' Equity and Statement
of Cash Flows for the years ended December 31,
1995, 1994 and 1993, 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
1995 fiscal year are incorporated herein by
reference ("Guaranty National 1995 Form 10-K").
In addition, the information set forth under
the caption "Reserves" (on pages 13 through 17)
of the Guaranty National 1995 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.
-79-
<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 14, 1996
------------------
Alan R. Gruber Chairman of the Board
(Principal Executive
and Financial Officer)
By: /s/ Daniel L. Barry March 14, 1996
-------------------
Daniel L. Barry Vice President and
Controller (Principal
Accounting Officer)
-80-
<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 14, 1996
- -------------------------
Alan R. Gruber
Chairman of the Board
/s/ W. Marston Becker March 14, 1996
- --------------------------
Vice Chairman
/s/ Bertram J. Cohn March 14, 1996
- -------------------------
Bertram J. Cohn
Director
/s/ John C. Colman March 14, 1996
- -------------------------
John C. Colman
Director
/s/ Larry D. Hollen March 14, 1996
- -------------------------
Larry D. Hollen
Director
/s/ Robert H. Jeffrey March 14, 1996
- ----------------------
Robert H. Jeffrey
Director
/s/ Warren R. Lyons March 14, 1996
- -------------------------
Warren R. Lyons
Director
/s/ James K. McWilliams March 14, 1996
- -------------------------
James K. McWilliams
Director
/s/ R. W. Moore March 14, 1996
- -------------------------
Ronald W. Moore
Director
-81-
<PAGE>
Signature and Title Date
- ---------------------- --------
- ----------------------
Robert B. Sanborn
Director
/s/ William J. Shepherd March 14, 1996
- -----------------------
William J. Shepherd
Director
/s/ John R. Thorne March 14, 1996
- -----------------------
John R. Thorne
Director
- --------------------
Roger B. Ware
Director
-82-
<PAGE>
EXHIBIT INDEX
Exhibit 10(vi) Employment Agreement between Larry D. Hollen and
Orion, as amended and restated on December 6, 1995.
Exhibit 10(vii) Employment Agreement between Raymond W. Jacobsen and
Orion, as amended and restated as of December 6, 1995.
Exhibit 10(viii) Employment Agreement between W. Marston Becker and
Orion, dated as of October 31, 1996.
Exhibit 10(xxvi) Purchase Agreement by and between Sun Alliance USA
Inc. and Orion, dated as of June 30, 1995.
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
insurance regulatory authorities.
- ---------------------------------
**Exhibit 28, information from reports furnished to state insurance regulatory
authorities, has been filed on paper with the Securities and Exchange
Commission under cover of Form SE.
-83-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS-OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 1995
(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 ................ $ 90,770 $ 93,838 $ 90,770
States, municipalities and
political subdivisions .... 137,807 144,231 137,807
Foreign governments ......... 50 50 50
All other corporate bonds ... 36,542 38,163 36,542
---------- -------- ----------
265,169 276,282 265,169
---------- ======== ----------
Fixed maturities available-for-sale:
Bonds -
United States Government and
government agencies and
authorities ................ 206,722 216,064 216,064
States, municipalities and
political subdivisions .... 246,026 264,488 264,488
Foreign governments ......... 7,900 8,462 8,462
Public utilities ............ 7,086 7,789 7,789
All other corporate bonds ... 188,351 194,499 194,499
Redeemable preferred stocks ... 91,923 91,567 91,567
---------- -------- ----------
748,008 782,869 782,869
---------- ======== ----------
Equity securities:
Common stocks -
Public utilities ............ 8,348 10,287 10,287
Banks, trusts and insurance
companies ................. 36,704 71,292 71,292
Industrial, miscellaneous and
all other ................. 63,159 77,316 77,316
Non-redeemable preferred stocks 149,167 145,990 145,990
---------- -------- ----------
257,378 304,885 304,885
---------- ======== ----------
Mortgage loans on real estate ... 1,979 1,979
Other long-term investments ..... 60,946 60,946
Short-term investments .......... 187,013 187,013
---------- ----------
Total investments ......... $1,520,493 $1,602,861
========== ==========
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,
--------------------
1995 1994
---- ----
<S> <C> <C>
Fixed maturities held at market (cost $666 - 1995 and
$1,344 - 1994) ...................................... $ 666 $ 1,344
Short-term investments ................................ 55,425 12,838
Cash .................................................. 3 180
Notes receivable and other assets ..................... 4,476 4,078
Deferred federal income taxes ......................... 8,739 42,008
Investment in subsidiaries ............................ 651,781 497,024
Excess of cost over fair value of net assets acquired.. 48,987 28,140
-------- --------
Total assets ........................................ $770,077 $585,612
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities ..................................... $ 31,551 $ 27,325
Due to affiliates ..................................... 19,682 25,988
Federal income taxes payable .......................... 18,793 14,829
Notes payable ......................................... 209,148 152,382
-------- --------
Total liabilities ................................... 279,174 220,524
Stockholders' equity .................................. 490,903 365,088
-------- --------
Total liabilities and stockholders' equity .......... $770,077 $585,612
======== ========
<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,
----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net investment income ....................... $ 1,770 $ 396 $ 458
Realized investment losses .................. (800) - (13)
Other income ................................ 595 550 550
-------- -------- --------
1,565 946 995
-------- -------- --------
Expenses:
Interest .................................... 15,537 13,190 12,670
General and administrative .................. 3,106 3,676 1,629
Amortization of excess of cost over fair
value of net assets acquired .............. 1,470 1,110 1,111
-------- -------- --------
20,113 17,976 15,410
-------- -------- --------
Loss before federal income taxes (benefit),
equity in net earnings of subsidiaries and
cumulative effect of adoption of new
accounting principles ....................... (18,548) (17,030) (14,415)
-------- -------- --------
Federal income taxes (benefit):
Current ..................................... 24,165 6,395 16,448
Deferred .................................... (3,881) 9,906 (931)
-------- -------- --------
20,284 16,301 15,517
-------- -------- --------
Loss before equity in net earnings of
subsidiaries and cumulative effect of change
in accounting principles .................... (38,832) (33,331) (29,932)
Equity in net earnings of subsidiaries ........ 106,454 88,576 86,920
-------- -------- --------
Earnings before cumulative effect of change in
accounting principles ....................... 67,622 55,245 56,988
Cumulative effect of change in accounting
principles .................................. - - 11,825
-------- -------- --------
Net earnings .................................. $ 67,622 $ 55,245 $ 68,813
======== ======== ========
<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,
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Dividends received from subsidiaries ...... $ 30,546 $ 30,013 $ 25,512
Net investment income collected ........... 1,737 212 156
Federal income taxes received from
subsidiaries ............................ 4,500 6,000 5,600
Interest paid ............................. (12,123) (12,524) (11,998)
Other expenses paid ....................... (2,276) (2,454) (2,249)
Other receipts ............................ 1,268 3,230 634
-------- -------- --------
Net cash provided by operating activities. 23,652 24,477 17,655
-------- -------- --------
Cash flows from investing activities:
Sales of equity securities ................ - 426
Purchase of fixed maturities .............. - (1,344) -
Net purchases of short-term investments ... (42,587) (4,313) (4,793)
Investments in subsidiaries ............... 4,476 763 (6,983)
Acquisition of McGee ...................... (22,355) - -
Other payments ............................ (99) (795) (17)
-------- -------- --------
Net cash used in investing activities ... (60,565) (5,689) (11,367)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable ... 110,413 - 59,672
Proceeds from issuance of common stock .... 246 598 286
Repayment of notes payable ................ (54,500) (8,000) (29,500)
Dividends paid to stockholders ............ (12,717) (11,263) (11,598)
Purchases of common stock and purchases
and redemption of adjustable rate
preferred stock ......................... (6,689) (38) (23,615)
Other payments ............................ (17) (351) (1,113)
-------- -------- --------
Net cash provided by (used in) financing
activities ............................ 36,736 (19,054) (5,868)
-------- -------- --------
Net increase (decrease) in cash ......... (177) (266) 420
Cash balance, beginning of year ........... 180 446 26
-------- -------- --------
Cash balance, end of year ................. $ 3 $ 180 $ 446
======== ======== ========
<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,
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings ................................ $ 67,622 $ 55,245 $ 68,813
-------- -------- --------
Adjustments:
Cumulative effect of change in accounting
principles .............................. - - (11,825)
Equity in net earnings of subsidiaries .... (106,454) (88,576) (86,920)
Consolidating elimination of subsidiaries
income taxes ............................ 30,941 10,576 18,962
Dividends received from subsidiaries ...... 30,546 30,013 25,512
Depreciation and amortization ............. 2,594 2,064 1,966
Deferred federal income taxes (benefit) ... (3,881) 9,906 (931)
Realized investment losses ................ 800 - 13
Amortization of discount on debt .......... 36 10 9
Change in assets and liabilities:
Decrease (increase) in notes receivable and
other assets ............................ 90 (520) 470
Increase (decrease) in taxes payable and
other liabilities ....................... 7,799 (1,668) 9,952
Increase (decrease) in due to affiliates .. (6,441) 7,427 (8,366)
-------- -------- --------
Total adjustments and changes ........... (43,970) (30,768) (51,158)
-------- -------- --------
Net cash provided by operating activities.. $ 23,652 $ 24,477 $ 17,655
======== ======== ========
<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, 1995, 1994 and 1993
Note A - Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
Estimated
Carrying Value Market Value
----------------- -----------------
December 31, 1995 1994 1995 1994
------------ ---- ---- ---- ----
(000s omitted)
<S> <C> <C> <C> <C>
$110,000,000 face amount, 9 1/8% Senior
Notes, due September 1, 2002 .......... $109,894 $109,882 $125,642 $111,815
$100,000,000 face amount, 7 1/4% Senior
Notes, due July 15, 2005 .............. 99,254 - 104,160 -
Borrowings under loan agreement with
banks (various interest rates) ........ - 42,500 - 42,500
-------- -------- -------- --------
$209,148 $152,382 $229,802 $154,315
======== ======== ======== ========
</TABLE>
As of December 31, 1995, $110,000,000 of the Registrant's debt is
scheduled to be repaid on September 1, 2002 and the remaining $100,000,000 is
due on July 15, 2002.
Note B - Expense Reimbursement and Management Fees
During 1993 through 1995, 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 $6,232,000, $5,735,000 and
$5,230,000 in 1995, 1994 and 1993, respectively, is accounted for as a
reduction of general and administrative expenses. The Registrant received an
investment management fee from Guaranty National of $595,000 in 1995 and
$550,000 in 1994 and 1993.
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 Dividend Premiums
Segment Costs Expenses Premiums holders Earned Income Expenses Costs Expenses Expenses Written
(a)
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995:
Regional Operations $29,516 $ 460,597 $ 84,360 $16,799 $322,098 $ 35,750 $201,054 $ 73,544 $11,302 $17,231 $332,598
Reinsurance/
Special Programs. 48,157 814,385 217,745 2,147 426,905 59,584 311,179 121,937 10,260 4,559 424,838
Other ............. - - - - - 3,706 - - - - -
------- ---------- -------- ------- -------- -------- -------- -------- ------- ------- --------
$77,673 $1,274,982 $302,105 $18,946 $749,003 $ 99,040 $512,233 $195,481 $21,562 $21,790 $757,436
======= ========== ======== ======= ======== ======== ======== ======== ======= ======= ========
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
======= ========== ======== ======= ======== ======== ======== ======== ======= ======= ========
<FN>
(a) 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>
1995:
Allowance for
doubtful accounts-
Accounts and notes
receivable $1,954 $1,689 $ - $ 431 $3,212
====== ====== ====== ====== ======
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
====== ====== ====== ====== ======
<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)
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995:
Consolidated
property and
casualty entities $ 77,673 $1,274,982 $ 4,100 $302,105 $749,003 $ 95,334 $500,514 $ 11,719 $195,481 $409,797 $757,436
======== ========== ======== ======== ======== ======== ======== ======== ======== ======== ========
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
======== ========== ======== ======== ======== ======== ======== ======== ======== ======== ========
<FN>
(a) Discount deducted in Column C is computed using a statutory interest rate of 3.5% for certain workers compensation losses.
S-9
/TABLE
<PAGE>
Exhibit 10(vi)
Amended and Restated Employment Agreement
THIS EMPLOYMENT AGREEMENT, initially dated as of the 1st day of
December, 1992 and amended and restated hereby as of December 6, 1996 (the
"Agreement"), between Orion Capital Corporation, a Delaware corporation
(the "Company"), and Larry D. Hollen ("Executive");
WHEREAS, the Company and Executive hereby agree as follows:
1. EMPLOYMENT.
The Company hereby employs Executive to render services as
President and Chief Operating Officer 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 the Company's offices in Farmington, Connecticut or
such other location as the Executive and the Company may mutually agree.
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, provided that, upon prior written
approval of the Company, the Executive may serve as a member of the board
of directors of other corporations.
2. TERM.
The term of this Agreement shall be for a period of five years
commencing on December 1, 1992 and ending on November 30, 1997 (the
"Term"). Such Term shall be automatically extended, on December 2, 1995,
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
<PAGE>
of its or his, as the case may be, intention not to extend such Term, it
being the intention of the parties that this Agreement shall, on and after
December 2, 1995, 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 $200,000, 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. Commencing April 1, 1993 and annually thereafter during the
Term, 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.
- 2 -
<PAGE>
Executive shall, in any event, on and as of the date of this Agreement, be
granted 15,625 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
hereunder shall lapse in installments over a period of five years as
follows: 25% as such shares of Restricted Stock shall vest on December 1,
1994 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 7,812.50 Performance Units pursuant to the
Plan and the Performance Period (as defined in the Plan) applicable thereto
shall expire not later than December 1, 1997. 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. PAID TIME OFF
Executive shall be entitled to paid time off of not less than
five 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.
- 3 -
<PAGE>
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
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.
(v) upon seven days written notice to the other party, at any
time during the twelve month period following any month in which a change
in the effective voting control of the Company shall have occurred, either
party shall have the right to terminate this Agreement prior to the
expiration of the Term hereof, for any reason whatsoever. A change in the
effective voting control of the Company shall be deemed to have occurred
upon the earliest to happen of the following:
A. any person or group of related or affiliated persons
shall have become the beneficial owner or owners of 40% or
more of the outstanding Common Stock of the Company;
- 4 -
<PAGE>
B. there shall have occurred a merger or consolidation
in which the Company is not the survivor or in
which holders of Common Stock of the Company shall
have become entitled to receive cash, securities
of the Company other than voting Common Stock or
securities of any other person; or
C. at any time a majority of the members of the Board
of Directors of the Company shall be persons who
were elected at one or more meetings held, or by
one or more consents given, by the stockholders of
the Company during the preceding twelve months and
who were not members of the Board of Directors twelve
months prior to that time.
(b) Upon the termination of employment:
(i) pursuant to Section 6(a)(i) because of Executive's
death, 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;
- 5 -
<PAGE>
(ii) pursuant to Section 6(a)(ii) because of Executive's
disability, as defined thereunder, 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 have been a participant;
(iii) pursuant to Section 6(a)(iii), because of Executive's
wrongful conduct, as defined thereunder, 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 for the lesser of (1) the remaining portion of
- 6 -
<PAGE>
the unexpired Term or (2) two years after the date of such termination. In
addition, Executive shall be entitled to receive 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.
(v) pursuant to an election by the Company or by Executive
under Section 6(a)(v) during the twelve month period following the month in
which a change in the effective voting control of the Company shall have
occurred, Executive (or his successors, representatives or beneficiaries if
Executive shall die or become incapacitated) shall be entitled to receive
his base salary (at the level in effect on the giving of notice pursuant to
Section 6(a)(v)) for the lesser of (1) the remaining portion of the
unexpired Term or (2) two years after the date of such termination. In
addition, Executive shall be entitled to receive a pro rata portion of such
bonus which would be payable to Executive, in respect of the year in which
notice shall have been given, if Executive had achieved target performance
for Executive's salary grade, as applied to Executive's base salary on the
date of the giving of notice by the Company or Executive, as the case may
be, plus such other benefits, if any, as may be provided to him or his
successors, representatives or beneficiaries under the terms of benefit,
incentive, option, stock award and other programs of the Company in which
he may be or have been a participant.
- 7 -
<PAGE>
(vi) If, on the date of the giving of notice by the Company
or Executive pursuant to Section 6(a)(v), Executive shall have
unexercisable stock options or restricted stock awards still subject to
restrictions, then all such options shall be deemed to be exercisable and
all restrictions in respect of such restricted stock awards shall be deemed
to have been satisfied and lapsed ten days before the effective date of
termination. If, on the date of the giving of notice pursuant to Section
6(a)(v), Executive shall have performance-related units or awards in
respect of which the period over which performance is to be based has not
expired, the period of performance shall be deemed to have expired at the
end of the month preceding the effective date of termination and Executive
shall be entitled to receive the value of such units or awards at the end
of such month on the basis on an equitable prorating of the performance
period, performance targets and award amounts.
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. After Executive terminates employment
with the Company, Executive will not solicit or otherwise encourage other
officers or employees of the company or its subsidiaries or affiliates to
leave their employment in order to join Executive in any business endeavor
nor shall Executive aid, promote, encourage or be a party to any acts, the
effect of which would divert, diminish or prejudice the goodwill or
- 8 -
<PAGE>
business of the Company or any of its subsidiaries or affiliates. The
provisions of this Section 7 shall survive the expiration or termination,
for any reason, of this Agreement or Executive's employment. Executive
understands that for the violation of the foregoing provisions, the Company
may seek injunctive relief to protect its interest, in addition to damages.
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
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 -
<PAGE>
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. Judgement upon the award rendered
by the arbitrators may be entered in any court having jurisdiction. 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.
- 10 -
<PAGE>
11. AMENDMENT.
This instrument contains the entire agreement of the parties. It
may not be changed orally but only by a written agreement 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:
Larry D. Hollen
10 Fernhurst
Farmington, Connecticut 06032
(b) if to the Company to:
Orion Capital Corporation
600 Fifth Avenue
New York, New York 10020
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:
---------------------------------
Larry D. Hollen
- 11 -
Exhibit 10(vii)
Amended and Restated Employment Agreement
THIS EMPLOYMENT AGREEMENT, initially dated as of the 19th day of
July, 1994 and amended and restated hereby as of December 6, 1996 (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 or such other location as the Executive and the Company may
mutually agree. 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, provided
that, upon prior written approval of the Company, the Executive may serve
as a member of the board of directors of other corporations.
<PAGE>
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
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.
- 2 -
<PAGE>
(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
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. PAID TIME OFF
Executive shall be entitled to paid time off of not less than
five weeks during each year.
- 3 -
<PAGE>
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 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.
(v) upon seven days written notice to the other party, at
any time during the twelve month period following any month in which a
change in the effective voting control of the Company shall have occurred,
either party shall have the right to terminate this Agreement prior to the
expiration of the Term hereof, for any reason whatsoever. A change in the
effective voting control of the Company shall be deemed to have occurred
- 4 -
<PAGE>
upon the earliest to happen of the following:
A. any person or group of related or affiliated persons
shall have become the beneficial owner or owners of 40%
or more of the outstanding Common Stock of the Company;
B. there shall have occurred a merger or consolidation
in which the Company is not the survivor or in
which holders of Common Stock of the Company shall
have become entitled to receive cash, securities of the
Company other than voting Common Stock or securities of
any other person; or
C. at any time a majority of the members of the Board
of Directors of the Company shall be persons who
were elected at one or more meetings held, or by
one or more consents given, by the stockholders of
the Company during the preceding twelve months and
who were not members of the Board of Directors twelve
months prior to that time.
(b) Upon the termination of employment:
(i) pursuant to Section 6(a)(i) because of Executive's
death, 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
- 5 -
<PAGE>
the Company in which he may be or may have been a participant;
(ii) pursuant to Section 6(a)(ii) because of Executive's
disability, as defined thereunder, 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 have been a participant;
(iii) pursuant to Section 6(a)(iii), because of Executive's
wrongful conduct, as defined thereunder, 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 for the lesser of (1) the remaining portion of
- 6 -
<PAGE>
the unexpired Term or (2) two years after the date of such termination. In
addition, Executive shall be entitled to receive 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.
(v) pursuant to an election by the Company or by Executive
under Section 6(a)(v) during the twelve month period following the month in
which a change in the effective voting control of the Company shall have
occurred, Executive (or his successors, representatives or beneficiaries if
Executive shall die or become incapacitated) shall be entitled to receive
his base salary (at the level in effect on the giving of notice pursuant to
Section 6(a)(v)) for the lesser of (1) the remaining portion of the
unexpired Term or (2) two years after the date of such termination. In
addition, Executive shall be entitled to receive a pro rata portion of such
bonus which would be payable to Executive, in respect of the year in which
notice shall have been given, if Executive had achieved target performance
for Executive's salary grade, as applied to Executive's base salary on the
date of the giving of notice by the Company or Executive, as the case may
be, plus such other benefits, if any, as may be provided to him or his
successors, representatives or beneficiaries under the terms of benefit,
incentive, option, stock award and other programs of the Company in which
he may be or have been a participant.
- 7 -
<PAGE>
(vi) If, on the date of the giving of notice by the Company
or Executive pursuant to Section 6(a)(v), Executive shall have
unexercisable stock options or restricted stock awards still subject to
restrictions, then all such options shall be deemed to be exercisable and
all restrictions in respect of such restricted stock awards shall be deemed
to have been satisfied and lapsed ten days before the effective date of
termination. If, on the date of the giving of notice pursuant to Section
6(a)(v), Executive shall have performance-related units or awards in
respect of which the period over which performance is to be based has not
expired, the period of performance shall be deemed to have expired at the
end of the month preceding the effective date of termination and Executive
shall be entitled to receive the value of such units or awards at the end
of such month on the basis on an equitable prorating of the performance
period, performance targets and award amounts.
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. After Executive terminates employment
with the Company, Executive will not solicit or otherwise encourage other
officers or employees of the company or its subsidiaries or affiliates to
leave their employment in order to join Executive in any business endeavor
or shall Executive aid, promote, encourage or be a party to any acts, the
effect of which would divert, diminish or prejudice the goodwill or
business of the Company or any of its subsidiaries or affiliates. The
- 8 -
<PAGE>
provisions of this Section 7 shall survive the expiration or termination,
for any reason, of this Agreement or Executive's employment. Executive
understands that for the violation of the foregoing provisions, the Company
may seek injunctive relief to protect its interest, in addition to damages.
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 r 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
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
- 9 -
<PAGE>
shall be settled by arbitration which shall be in accordance with the
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. Judgement upon the award rendered
by the arbitrators may be entered in any court having jurisdiction. 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.
11. AMENDMENT.
This instrument contains the entire agreement of the parties. It
may not be changed orally but only by a written agreement executed by both
of the parties hereto.
- 10 -
<PAGE>
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
730 North Plankinton Avenue, Apt. 2D
Brookfield, Wisconsin 53203
(b) if to the Company to:
Orion Capital Corporation
600 Fifth Avenue
New York, New York 10020
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
- 10 -
Exhibit 10(viii)
Employment Agreement
THIS EMPLOYMENT AGREEMENT, dated as of the 31st day of October,
1995 (the "Agreement"), between Orion Capital Corporation, a Delaware
corporation (the "Company"), and W. Marston Becker ("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 DPIC Companies ("DPIC"), 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 DPIC's offices in Monterey,
California or such other location as the Executive and the Company may
mutually agree. 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, provided
that, upon the prior written approval of the Company, the Executive may
serve as a member of the board of directors of other corporations.
2. TERM.
The term of this Agreement shall be for a period of five years
commencing on October 31, 1995 and ending on October 31, 2000 (the "Term").
<PAGE>
Such Term shall be automatically extended, on October 31, 1998, 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
intention of the parties that this Agreement shall, on and after
October 31, 1998, 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 $220,000, 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
- 2 -
<PAGE>
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 7,500 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
hereunder shall lapse in installments over a period of five years as
follows: 25% as such shares of Restricted Stock shall vest on October
31, 1997 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 3,750 Performance Units pursuant
to the Plan and the Performance Period (as defined in the Plan) applicable
thereto shall expire not later than October 31, 2000. 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. PAID TIME OFF.
Executive shall be entitled to paid time off of not less than
five 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.
- 3 -
<PAGE>
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
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.
(v) upon seven days written notice to the other party, at any time during
the twelve month period following any month in which a change in the
effective voting control of the Company shall have occurred, either party
shall have the right to terminate this Agreement prior to the expiration of
the Term hereof, for any reason whatsoever. A change in the effective
voting control of the Company shall be deemed to have occurred upon the
earliest to happen of the following:
A. any person or group of related or affiliated persons
shall have become the beneficial owner or owners of
40% or more of the outstanding Common Stock of the
Company;
B. there shall have occurred a merger or consolidation
in which the Company is not the survivor or in which
- 4 -
<PAGE>
holders of Common Stock of the Company shall have become
entitled to receive cash, securities of the Company other
than voting Common Stock or securities of any other person; or
C. at any time a majority of the members of the Board of
Directors of the Company shall be persons who were elected
at one or more meetings held, or by one or more consents
given, by the stockholders of the Company during the preceding
twelve months and who were not members of the Board of
Directors twelve months prior to that time.
(b) Upon the termination of employment:
(i) pursuant to Section 6(a)(i) because of Executive's
death, 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) because of Executive's
disability, as defined thereunder, 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 have been a participant;
- 5 -
<PAGE>
(iii) pursuant to Section 6(a)(iii) because of Executive's
wrongful conduct, as defined thereunder, 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 for the lesser of (1) the remaining portion
of the unexpired Term or (2) two years after the date of such termination.
In addition, Executive shall be entitled to receive 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.
- 6 -
<PAGE>
(v) pursuant to an election by the Company or by Executive
under Section 6(a)(v) during the twelve month period following the month in
which a change in the effective voting control of the Company shall have
occurred, Executive (or his successors, representatives or beneficiaries if
Executive shall die or become incapacitated) shall be entitled to receive
his base salary (at the level in effect on the giving of notice pursuant to
Section 6(a)(v)) for the lesser of (1) the remaining portion of the
unexpired Term or (2) two years after the date of such termination. In
addition, Executive shall be entitled to receive a pro rata portion of such
bonus which would be payable to Executive, in respect of the year in which
notice shall have been given, if Executive had achieved target performance
for Executive's salary grade, as applied to Executive's base salary on the
date of the giving of notice by the Company or Executive, as the case may
be, plus such other benefits, if any, as may be provided to him or his
successors, representatives or beneficiaries under the terms of benefit,
incentive,option, stock award and other programs of the Company in which he
may be or have been a participant.
(vi) If, on the date of the giving of notice by the Company
or Executive pursuant to Section 6(a)(v), Executive shall have
unexercisable stock options, or restricted stock awards still subject to
restrictions, then all such options shall be deemed to be exercisable and
all restrictions in respect of such restricted stock awards shall be deemed
to have been satisfied and lapsed ten days before the effective date of
termination. If, on the date of the giving of notice pursuant to Section
6(a)(v), Executive shall have performance-related units or awards in
respect of which the period over which performance is to be based has not
- 7 -
<PAGE>
expired, the period of performance shall be deemed to have expired at the
end of the month preceding the effective date of termination and Executive
shall be entitled to receive the value of such units or awards at the end
of such month on the basis on an equitable prorating of the performance
period, performance targets and award amounts.
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. After Executive terminates employment
with the Company, Executive will not solicit or otherwise encourage other
officers or employees of the Company or its subsidiaries or affiliates to
leave their employment in order to join Executive in any business endeavor
nor shall Executive aid, promote, encourage or be a party to any acts, the
effect of which would divert, diminish or prejudice the goodwill or
business of the Company or any of its subsidiaries or affiliates. The
provisions of this Section 7 shall survive the expiration or termination,
for any reason, of this Agreement or Executive's employment. Executive
understands that for the violation of the foregoing provisions, the Company
may seek injunctive relief to protect its interest, in addition to damages.
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
- 8 -
<PAGE>
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
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. Judgement upon the award rendered
- 9 -
<PAGE>
by the arbitrators may be entered in any court having jurisdiction. 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.
11. AMENDMENT.
This instrument contains the entire agreement of the parties. It
may not be changed orally but only by a written agreement 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:
W. Marston Becker
8 Sleepy Hollow Estates
Carmel Valley, CA 93924
(b) if to the Company to:
Orion Capital Corporation
600 Fifth Avenue - 24th Floor
New York, New York 10020
Attn: Secretary
- 10 -
<PAGE>
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:
------------------------------
W. Marston Becker
- 11 -
Exhibit 10(xxvi)
PURCHASE AGREEMENT
BY AND BETWEEN
SUN ALLIANCE USA INC.
AND
ORION CAPITAL CORPORATION
Dated as of June 30, 1995
<PAGE>
TABLE OF CONTENTS
Page
-----
I. THE TRANSACTION . . . . . . . . . . . . . . . . . 1
1.1 Purchase of Common Stock . . . . . . . . . 1
1.2 Consideration . . . . . . . . . . . . . . 1
II. THE CLOSING . . . . . . . . . . . . . . . . . . 2
2.1 Closing . . . . . . . . . . . . . . . . . . 2
III. REPRESENTATIONS AND WARRANTIES OF SUN . . . . . . 2
3.1 Organization and Good Standing. . . . . . 2
3.2 Capitalization . . . . . . . . . . . . . . 3
3.3 Regulatory Status . . . . . . . . . . . . 4
3.4 Authorization . . . . . . . . . . . . . . 4
3.5 Books and Records . . . . . . . . . . . . 5
3.6 No Adverse Change . . . . . . . . . . . . 5
3.7 Litigation and Other Proceedings . . . . 5
3.8 Title to Properties . . . . . . . . . . . 6
3.9 No Materially Adverse Agreements . . . . 7
3.10 No Conflicts . . . . . . . . . . . . . . 8
3.11 Taxes . . . . . . . . . . . . . . . . . . 9
3.12 Investments . . . . . . . . . . . . . . . 12
3.13 Employment Matters . . . . . . . . . . . 12
3.14 Employee Benefit Plans; ERISA . . . . . . 13
3.15 Contracts . . . . . . . . . . . . . . . . 17
- i -
<PAGE>
3.16 Capital Expenditures . . . . . . . . . . 18
3.17 Banks . . . . . . . . . . . . . . . . . . 18
3.18 Agents and Brokers . . . . . . . . . . . 18
3.19 Approved Forms of Policies . . . . . . . 18
3.20 Insurance . . . . . . . . . . . . . . . . 19
3.21 Absence of Material Changes and
Adverse Factors . . . . . . . . . . . . . 19
3.22 Environmental Matters . . . . . . . . . . 19
3.23 Finders and Brokers . . . . . . . . . . . 20
3.24 Disclosure . . . . . . . . . . . . . . . . 21
3.25 Canadian Bank Act . . . . . . . . . . . . 21
IV. REPRESENTATIONS, WARRANTIES AND
AGREEMENTS OF ORION . . . . . . . . . . . . . . . 21
4.1 Organization and Standing . . . . . . . . 21
4.2 Certificate of Incorporation and . . . . . 21
By-Laws
4.3 Authority . . . . . . . . . . . . . . . . 21
4.4 Finders and Brokers . . . . . . . . . . . 22
4.5 Investor Status . . . . . . . . . . . . . 22
4.6 Bank or Banking Institutions . . . . . . . 22
V. COVENANTS OF ORION AND SUN . . . . . . . . . . . . 23
5.1 Access to Properties, Books and
Records . . . . . . . . . . . . . . . . 23
5.2 Conduct of Business . . . . . . . . . . . 23
- ii -
<PAGE>
5.3 Regulatory and Other Filings and
Approvals . . . . . . . . . . . . . . . . 27
5.4 Premerger Notification and Clearance . . . 27
5.5 Bermuda Company . . . . . . . . . . . . . 28
5.6 Further Assurances . . . . . . . . . . . . 29
5.7 Pension Plan Matters . . . . . . . . . . . 29
5.8 Tax Matters . . . . . . . . . . . . . . . 31
VI. AGREEMENTS WITH RESPECT
TO POOL OPERATION . . . . . . . . . . . . . . . . 36
6.1 Pool Participations; Reinsurance . . . . . 36
6.2 Underwriting Operations of the Pool . . . 39
VII. CONDITIONS TO OBLIGATIONS OF ORION . . . . . . . 43
7.1 Covenants . . . . . . . . . . . . . . . . 43
7.2 Representations and Warranties . . . . . . 43
7.3 Absence of Litigation and Required
Regulatory Approvals . . . . . . . . . . . 43
7.4 Premerger Notification . . . . . . . . . . 44
7.5 No Material Adverse Effect . . . . . . . . 44
7.6 Employment and Consulting Agreements . . . 44
7.7 Management and Reinsurance Agreements . . . 44
7.8 Unfair Competition and Confidentiality
Agreements . . . . . . . . . . . . . . . 44
7.9 Opinion of Counsel for Sun and McGee . . . 45
- iii -
<PAGE>
VIII. CONDITIONS TO OBLIGATIONS OF SUN . . . . . . . 45
8.1 Covenants . . . . . . . . . . . . . . . 45
8.2 Representations and Warranties . . . . . 45
8.3 Absence of Litigation and Required
Regulatory Approvals . . . . . . . . . 45
8.4 Premerger Notification . . . . . . . . . 46
8.5 Management and Reinsurance Agreements . . 46
8.6 Opinion of Counsel for Orion . . . . . . 46
IX. TERMINATION . . . . . . . . . . . . . . . . . . 46
9.1 Termination . . . . . . . . . . . . . . . 46
9.2 Effect of Termination . . . . . . . . . . 47
9.3 Conduct Following Termination . . . . . . 47
X. AMENDMENT; WAIVERS . . . . . . . . . . . . . . . . 47
10.1 Amendments, Modifications, Etc. . . . . . 47
10.2 Waivers . . . . . . . . . . . . . . . . . 48
XI. DEFINED TERMS . . . . . . . . . . . . . . . . . . 48
XII. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . 52
12.1 Expenses . . . . . . . . . . . . . . . . 52
12.2 Notices . . . . . . . . . . . . . . . . 52
12.3 Entire Agreement . . . . . . . . . . . . 53
12.4 No Assignment . . . . . . . . . . . . . . 53
12.5 Survival of Representations and
Warranties and Covenants . . . . . . . . 54
- iv -
<PAGE>
12.6 Governing Law . . . . . . . . . . . . . . 54
12.7 Dispute Resolution . . . . . . . . . . . 54
12.8 Press Releases . . . . . . . . . . . . . 55
12.9 Counterparts . . . . . . . . . . . . . . 55
12.10 Headings . . . . . . . . . . . . . . . . 55
EXHIBITS
- --------
Exhibit A - Bermuda Management Agreement
Exhibit B - Quota Share Retrocession Agreement
in Respect of Period From
January 1, 1995 to December 31, 1995
Exhibit C - Pool Management Agreement
Exhibit D - Option Agreement in Respect of
Sun Bermuda
Exhibit E-1 - Employment Continuation Agreement
Exhibit E-2 - Consulting Agreement
Exhibit F - Agreement With Respect To
Confidentiality and Competition
SCHEDULES
- ---------
Schedule 3.2 Capitalization of McGee and Subsidiaries
Schedule 3.7 Litigation and Other Proceedings
Schedule 3.8 Properties of McGee
Schedule 3.10 Consents and Approvals of Sun
Schedule 3.12 Investments
Schedule 3.13 Employment Matters
- v -
<PAGE>
Schedule 3.14 ERISA
Schedule 3.15 Contracts
Schedule 3.16 Capital Expenditures
Schedule 3.17 Banks
Schedule 3.18 Agents and Brokers
Schedule 3.20 Insurance
Schedule 4.3 Consents and Approvals of Orion
Schedule 5.2 Conduct of Business
Schedule 6.2 Business Plan Outline
Schedule 11 Syndicates
- vi -
<PAGE>
AGREEMENT (the "Agreement"), dated June 30, 1995, by and
between ORION CAPITAL CORPORATION, a Delaware corporation
("Orion"), as purchaser, and SUN ALLIANCE USA INC., a New York
corporation ("Sun") as seller,
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Sun is the direct or indirect owner of 100% of
the outstanding shares of capital stock of each of Phoenix
Assurance Company of New York, a New Hampshire corporation
("Phoenix") and Marine Indemnity Insurance Company of America, a
New York corporation ("Marine"); and
WHEREAS, Sun Alliance Insurance Overseas Limited, an
affiliate of Sun, owns 100% of the capital stock of The London
Assurance, an English corporation, the Canadian Branch of which is
hereinafter referred to as "London"; and
WHEREAS, Wm. H. McGee & Co., Inc. ("McGee") is a
corporation duly organized and validly existing under the laws of
the State of New York, having outstanding capital stock consisting
of 4,400 shares of common stock, without par value (the "Common
Stock"); and
WHEREAS, Sun and Phoenix own in the aggregate 100% of the
Common Stock, all of which is to be sold to and purchased by Orion
pursuant hereto;
NOW, THEREFORE, the parties hereto agree as follows,
intending that defined terms used herein shall have the meanings
set forth in Article XI:
I.
THE TRANSACTION
----------------
Section 0.1 PURCHASE OF COMMON STOCK. Upon the terms
and subject to all of the conditions set forth herein, Sun agrees
to sell, and to cause Phoenix to sell, to Orion and Orion agrees to
acquire from Sun and Phoenix on the Closing Date 100% of the Common
Stock.
<PAGE>
Section 0.2 CONSIDERATION. In full consideration for
the sale of the Common Stock by Sun and Phoenix to Orion provided
for herein, together with the other undertakings and commitments
made and delivered by Sun to Orion herein, at the Closing Orion
shall deliver to Sun the sum of Seventeen Million and 00/100
($17,000,000.00) Dollars in immediately available funds and shall
deliver to Phoenix the sum of Five Million and 00/100 ($5,000,000)
Dollars in immediately available funds.
II.
THE CLOSING
------------
Section 1.1 CLOSING. The closing of the transactions
provided for herein (the "Closing") shall occur at the offices of
Sun at 10 East 50th Street in New York City or at such other place
as shall be determined by Orion and Sun, on June 30, 1995;
provided, however, that if any of the conditions provided for in
Articles VII and VIII hereof shall not have been met or waived by
Sun or by Orion, as the case may be, by the scheduled Closing, then
the party which is unable to meet such condition or conditions
shall be entitled to postpone the Closing by notice to the other
party to such effect until such condition or conditions shall have
been met (which such party will seek to cause to happen at the
earliest practicable date) or waived (such postponed Closing to be
held on five business days notice from the postponing party to the
other party), but in no event shall such postponements extend past
August 15, 1995. At the Closing, Sun and Orion shall deliver, or
cause to be delivered, to the other such certificates, receipts or
other documents or instruments, in addition to those specifically
provided for herein, as may reasonably be requested by the other
and as are customary for transactions of the type contemplated
hereunder. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
III.
REPRESENTATIONS AND WARRANTIES OF SUN
--------------------------------------
Sun represents and warrants to Orion that:
2.1 ORGANIZATION AND GOOD STANDING. McGee is a
corporation duly organized and existing and in good standing under
the laws of the State of New York, has the corporate power to carry
- 2 -
<PAGE>
on its business as it is now being conducted and is duly qualified
to do business as a foreign corporation in each jurisdiction in
which such qualification is required and where the failure so to
qualify would have a material adverse effect on the business,
properties or financial condition of McGee and its Subsidiaries
taken as a whole or the ability of any of them to carry on the
business of the Pool (a "Material Adverse Effect"). Each
Subsidiary of McGee is a corporation duly organized and existing
and in good standing under the laws of its jurisdiction of
incorporation and has the corporate power to carry on its business
as it is now being conducted and is duly qualified to do business
as a foreign corporation in each jurisdiction in which such
qualification is required and where the failure so to qualify would
have a Material Adverse Effect. To Sun's Knowledge, Sun has
heretofore made available to Orion true and complete copies of (a)
the Certificate of Incorporation and By-laws of McGee and each of
its Subsidiaries, (b) all minutes of the meetings and copies of
resolutions of stockholders, the board of directors and each
committee of the board of directors of McGee and each of its
Subsidiaries held since the date of its incorporation or
organization and (c) all powers of attorney, if any, issued by
McGee or any of its Subsidiaries.
Section 2.2 CAPITALIZATION. McGee has an authorized
capital stock consisting of 11,000 shares of Common Stock, without
par value, of which, as of the date hereof, 4,400 shares are issued
and outstanding. No shares of McGee Common Stock are held in
treasury. All of the issued and outstanding stock of McGee is duly
authorized, validly issued, fully paid and non-assessable and is
owned by Sun and Phoenix as set forth in Schedule 3.2 hereto, free
and clear (except as otherwise shown on Schedule 3.2) of any and
all claims, liens, restrictions, pledges, charges, rights of third
parties or other encumbrances. Neither Sun nor McGee is a party to
or is bound by any agreement or has since September 8, 1987 (i)
made any commitment to sell or issue any securities of McGee other
than the Common Stock which is the subject of this Agreement, or
(ii) taken any corporate action to approve, or in contemplation of,
any of the foregoing except for the approval of this Agreement.
Holders of Common Stock have no preemptive rights and the Common
Stock is subject to no voting trust, proxy or similar agreement.
Schedule 3.2 correctly identifies each of McGee's Subsidiaries, its
jurisdiction of incorporation and the percentage of its voting
stock owned by McGee and each other Subsidiary. McGee is the legal
and beneficial owner of all of the shares of voting stock it
purports to own of each Subsidiary of McGee, and such ownership is
- 3 -
<PAGE>
free and clear (except as otherwise shown on Schedule 3.2) of any
and all claims, liens, restrictions, pledges, charges, rights of
third parties or other encumbrances. All such shares have been
duly authorized, validly issued and are fully paid and
non-assessable. No Subsidiary of McGee has any common or preferred
stock authorized or outstanding other than as set forth on Schedule
3.2 and neither McGee nor Sun nor any such Subsidiary is a party to
or is bound by any agreement or commitment to sell or issue any
securities of any Subsidiary of McGee or has taken any corporate
action to approve, or in contemplation of, any of the foregoing.
Section 2.3 REGULATORY STATUS. To Sun's Knowledge,
McGee and each of its Subsidiaries has (and has caused each of its
officers and employees to have) all requisite power and authority,
and all necessary licenses, permits, franchises and other
governmental authorizations necessary to own and operate its
properties and to carry on its business as now conducted. To Sun's
Knowledge, all filings required to have been made with any
insurance or other regulatory agency by McGee or any of its
Subsidiaries (whether on its own behalf or on behalf of the Pool)
have been properly prepared and duly and timely filed except where
the failure to have made such filings could not reasonably be
expected to have a Material Adverse Effect. Such filings made
since January, 1990 have been delivered by Sun to Orion or made
available for inspection, or copies thereof have been sent by Sun
or made available to Orion. Immediately after, and after giving
effect to, the execution and delivery of this Agreement, McGee and
each of its Subsidiaries will be in compliance with each law, rule,
regulation, ordinance, code, order, judgment and decree applicable
to it or affecting its business, property or financial affairs,
failure to comply with which could reasonably be expected to have
a Material Adverse Effect.
Section 2.4 AUTHORIZATION. (a) This Agreement has been
duly authorized by all necessary corporate action of Sun and
Phoenix. Neither this Agreement nor any of the transactions
provided for herein violates any provision of the Certificate of
Incorporation or By-Laws of Sun or McGee or any Subsidiary of McGee
or any agreement by which any of them or any of their respective
properties is bound. This Agreement will, when duly executed and
delivered, be a valid and binding agreement of Sun, enforceable
against Sun in accordance with its terms, except as limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to or affecting creditors'
- 4 -
<PAGE>
rights generally, and except that the remedy of specific
performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the equitable discretion of
the court before which any proceeding therefor may be brought.
(b) Each of the Ancillary Agreements to which Phoenix,
London, Marine or Sun Bermuda is a party has been or, prior to the
Closing, will be duly authorized by all necessary corporate action
of Phoenix, London, Marine or Sun Bermuda, as the case may be.
None of the Ancillary Agreements to which any such Subsidiary of
Sun is a party, nor any of the transactions provided for therein,
violates any provision of the Certificate of Incorporation, or
similar charter document, or By-Laws of such Subsidiary or any
agreement by which such Subsidiary or its properties is bound.
Each of the Ancillary Agreements to which Phoenix, London, Marine
or Sun Bermuda is a party will, when duly executed and delivered,
be a valid and binding agreement of Phoenix, London, Marine or Sun
Bermuda, as the case may be, enforceable against it in accordance
with the terms thereof, except as limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to or affecting creditors' rights
generally, and except that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to
equitable defenses and to the equitable discretion of the court
before which any proceeding therefor may be brought.
Section 2.5 BOOKS AND RECORDS. The consolidated balance
sheets of McGee and its Subsidiaries as of December 31, 1994 and
the related consolidated statements of income, stockholders' equity
and cash flows for the fiscal year ended on such date, all of which
were audited by independent certified public accountants, and the
consolidated balance sheet of McGee and its Subsidiaries as of
March 31, 1995 and the related statement of income for the three
months ended on such date, copies of which have been delivered by
Sun to Orion, have been prepared in accordance with generally
accepted accounting principles consistently applied (except that
the March 31, 1995 financial statements are subject to normal year-
end adjustments and do not contain full footnote disclosures in
accordance with generally accepted accounting principles) and
present fairly the financial position of McGee and its Subsidiaries
as of such dates and the results of their operations for such
periods. Sun has also delivered or made available to Orion all
management letters for years beginning after December 31, 1990
which were received by Sun, McGee or any Subsidiary of McGee from
its independent certified public accountants.
- 5 -
<PAGE>
Section 2.6 NO ADVERSE CHANGE. Since December 31, 1994,
there has been no event or occurrence (or absence thereof), or
combination of the foregoing, which has had a Material Adverse
Effect.
Section 2.7 LITIGATION AND OTHER PROCEEDINGS. Except
as set forth in Schedule 3.7, there are no actions, suits,
investigations or proceedings pending against, or to Sun's
Knowledge threatened against, the Pool (provided that this
representation shall not extend to actions, suits, investigations
or proceedings against the Pool which arise solely out of claims
under insurance coverage issued by or for the Pool), McGee or its
Subsidiaries or any of their respective officers or employees or
their respective businesses, properties or assets, by any person,
governmental body or agency or by any securities exchange or
national securities association, which action, suit, investigation
or proceeding is reasonably likely to have a Material Adverse
Effect. Neither Sun nor McGee nor any Subsidiary of McGee is in
default with respect to any order of any court, governmental
authority or agency or arbitration board or tribunal or in
violation of any laws or governmental rules or regulations where
such default or violation is reasonably likely to have a Material
Adverse Effect. Neither McGee nor any of its Subsidiaries is in
default under any contract or commitment which default has had or
is reasonably likely to have a Material Adverse Effect.
Section 2.8 TITLE TO PROPERTIES. McGee and each
Subsidiary of McGee has good and marketable title to all the
property it purports to own, including that reflected in the most
recent balance sheet referred to in Section 3.5 and:
(i) All real property owned or leased by McGee or any
Subsidiary of McGee and, in the case of leased property, the
lease pursuant to which it is leased, is listed and described
on Schedule 3.8. McGee has good and marketable fee title to
all owned real property reflected on Schedule 3.8, free and
clear of all liens, charges and encumbrances, other than
rights of way and easements of record, and subject only to
liens of current real and personal property taxes, and such
minor defects of title of a nature generally found in
properties of similar character which do not in any material
way affect the marketability of such real properties or
interfere with the ownership and use of such real properties.
To Sun's Knowledge, each lease reflected on Schedule 3.8 is
valid and subsisting in accordance with its terms, no default
- 6 -
<PAGE>
by any party thereto has occurred, no event, act or omission
has occurred which constitutes or with notice or passage of
time or both would constitute a default and all such leases
are free and clear of any and all charges, liens, claims,
rights of third parties and other encumbrances. To Sun's
Knowledge, neither McGee nor any of its Subsidiaries leases
any real property to or from any, parent, affiliate, officer
or director or any person related to or owned or controlled by
any parent, affiliate, officer or director of McGee or any of
its Subsidiaries.
(ii) Schedule 3.8 contains a true and complete summary,
by office location and type of property, of all items of
personal property (other than investments reflected in
Schedule 3.12) having a value in excess of $10,000 which are
used by McGee or any Subsidiary of McGee in its business.
Except as set forth in Schedule 3.8, all such personal
property is owned or leased by McGee or a Subsidiary free and
clear of any and all liens, charges or encumbrances, except
for liens for current taxes not yet due and payable and except
for those which do not materially detract from the value of
the property subject thereto or interfere with the ownership
and use of such property. All such personal property is in
good operating condition and repair, ordinary wear and tear
excepted, and capable of performing the functions for which it
is now used. To Sun's Knowledge, neither McGee nor any
Subsidiary of McGee leases any personal property to or from
any officer or director of, or any person related to or owned
or controlled by any officer or director of, McGee or any
Subsidiary of McGee.
(iii) To Sun's Knowledge, Schedule 3.8 contains a true
and complete description of all copyrights, patents,
trademarks, trade names, franchises, computer and other
programs processes and applications and other intellectual
property owned or licensed by, and applications for any of the
foregoing made by, McGee and each Subsidiary of McGee. To
Sun's Knowledge, none of such property is subject to any lien,
charge, encumbrance or adverse claim of any kind. To Sun's
Knowledge, and except as set forth in Schedule 3.8, all such
rights are valid, subsisting and in full force and effect in
accordance with their terms without interference with, or
infringement on or by, the rights of any other person (in each
case which are material to the business and operations of
- 7 -
<PAGE>
McGee and its Subsidiaries, taken as a whole). To Sun's
Knowledge, neither McGee nor any Subsidiary of McGee is
engaged in any infringement or unlawful use of any trademark,
service mark, trade name, copyright, program, process or
application or other intangible property right owned or
alleged to be owned by others.
Section 2.9 NO MATERIALLY ADVERSE AGREEMENTS. To Sun's
Knowledge, neither McGee nor any of its Subsidiaries is a party to
any agreement or instrument or subject to any charter or other
corporate restriction which has a Material Adverse Effect or in the
future is reasonably likely (so far as Sun can now reasonably
foresee) to have a Material Adverse Effect.
Section 2.10 NO CONFLICTS. Neither the execution nor
the delivery by Sun of this Agreement, nor the consummation of the
transactions contemplated hereby, nor the compliance with or
fulfillment of the terms and provisions hereof by Sun, will:
(i) conflict with or result in a breach or violation of any of the
terms, conditions or provisions of the Certificate of Incorporation
or By-Laws of Sun or McGee or any of McGee's Subsidiaries; or (ii)
conflict with or result in a breach or violation of, or default or
loss of a material benefit under, or permit the acceleration of any
obligation under any provision of any agreement, indenture,
mortgage, lien, lease or other instrument or restriction of any
kind to which Sun, McGee or any Subsidiary of McGee is a party or
by which it or any of its assets or properties is otherwise bound;
or (iii) violate any order, writ, injunction, decree, statute, rule
or regulation applicable to Sun or McGee or any of the Subsidiaries
of McGee or any of the assets or properties of any of them; which
conflict, breach, violation, default, loss or other result, in the
case of each of clauses (ii) and (iii), is reasonably likely to
have a Material Adverse Effect or a material adverse effect on the
ability of Sun to perform its obligations hereunder. Except as set
forth in Schedule 3.10 hereto, no consent, approval or
authorization of, or filing, registration or qualification with,
any governmental authority on the part of Sun or McGee or any
Subsidiary of McGee is required in connection with the execution,
delivery and performance of this Agreement or the offer, sale or
delivery of the Common Stock as provided herein.
(b) Neither the execution nor the delivery by any
Subsidiary of Sun of any of the Ancillary Agreements to which such
Subsidiary is a party, nor the consummation by any such Subsidiary
- 8 -
<PAGE>
of the transactions contemplated by any Ancillary Agreement to
which it is a party, nor the compliance with or fulfillment by any
such Subsidiary of the terms and provisions of any Ancillary
Agreement to which it is a party, will: (i) conflict with or
result in a breach or violation of any of the terms, conditions or
provisions of the Certificate of Incorporation or By-Laws of such
Subsidiary; or (ii) conflict with or result in a breach or
violation of, or default or loss of a material benefit under, or
permit the acceleration of any obligation under any provision of
any agreement, indenture, mortgage, lien, lease or other instrument
or restriction of any kind to which such Subsidiary is a party or
by which it or any of its assets or properties is otherwise bound;
or (iii) violate any order, writ, injunction, decree, statute, rule
or regulation applicable to such Subsidiary or any of its assets or
properties; which conflict, breach, violation, default, loss or
other result, in the case of each of clauses (ii) and (iii), is
reasonably likely to have a Material Adverse Effect or a material
adverse effect on the ability of such Subsidiary to perform its
obligations under any of the Ancillary Agreements to which it is a
party.
Section 2.11 TAXES. Except as disclosed in Schedule
3.11:
a. To Sun's Knowledge, each of McGee and its Subsidiaries
(and with respect to federal income Taxes, every other entity
included in a consolidated federal Tax Return including McGee and
its Subsidiaries (collectively, the "Consolidated Group")) has duly
and timely filed (either separately or as part of a consolidated
group) with the appropriate government agencies, all federal,
state, local and foreign returns, filings and reports with respect
to Taxes (the "Tax Returns") which are due. The term "Taxes," as
used in this Agreement, shall mean all federal, state, local and
foreign income and capital taxes, value added taxes, sales and use
taxes, assessments, withholdings, duties, levies, fees and other
governmental charges or impositions of each and every kind, and
interest, penalties and additions to tax with respect thereto.
b. To Sun's Knowledge, neither McGee nor any of its
Subsidiaries is delinquent in the payment of any Taxes nor has any
of them requested any extension of time within which to pay any
such Taxes or file any Tax Return with respect thereto except to
the extent that such Taxes have since been paid or such Tax Return
has since been filed.
- 9 -
<PAGE>
c. To Sun's Knowledge, there is no agreement, waiver or
consent providing for an extension of time with respect to (1) the
filing of any Tax Return, election or designation, (2) the payment
or issuance of any assessment of any Tax or (3) the issuance of any
deficiency against McGee or any of its Subsidiaries with respect to
Taxes. In addition, no power of attorney has been granted by McGee
or any of its Subsidiaries with respect to any tax matter which is
currently in force.
d. To Sun's Knowledge, there is no (i) claim or
deficiency for any Taxes which has been threatened or asserted
against McGee or any of its Subsidiaries or the Consolidated Group,
(ii) action, suit, proceeding, investigation, audit or claim
threatened or now pending against, or with respect to, McGee or any
of its Subsidiaries or the Consolidated Group with regard to any
Taxes, or (iii) claim for additional amounts or assessments of such
Taxes asserted by any such authority.
e. The federal income Tax Returns of McGee and its
Subsidiaries (including any Tax Return filed by the Consolidated
Group) have been examined by the Internal Revenue Service for all
periods to and including 1989 and all deficiencies asserted as a
result of such examinations have been paid or finally settled and
to Sun's knowledge no issue has been raised by the Internal Revenue
Service in any such examination which, by application of the same
or similar principles, reasonably could be expected to result in a
proposed deficiency for any other period not so examined. Revenue
Canada, Taxation has mailed a notice of an original assessment in
respect of the Canadian federal income tax liability of the
Canadian Subsidiary of McGee for all fiscal years up to and
including the fiscal year ended 1993. To Sun's knowledge, no issue
has been raised by any Canadian federal or provincial taxation
authority in any examination which, by application of the same or
similar principles, reasonably could be expected to result in a
proposed deficiency for any other period not so examined.
f. To Sun's Knowledge, (i) McGee and each of its
Subsidiaries has not filed an election, consent or agreement under
Section 341(f) of the Code; (ii) no indebtedness of McGee or any of
its Subsidiaries consists of "corporate acquisition indebtedness"
within the meaning of Section 279 of the Code; (iii) since
September 8, 1987, there has not been an "ownership change," "owner
shift involving a five-percent shareholder" or an "equity structure
shift" relating to McGee or any of its Subsidiaries within the
meaning of Section 382(g) of the Code and since September 8, 1987,
- 10 -
<PAGE>
there has not been an acquisition of control of McGee or any of its
Subsidiaries within the meaning of the Income Tax Act (Canada);
(iv) no property of McGee or any of its Subsidiaries is "tax-exempt
use property" within the meaning of Section 168(h) of the Code nor
property that Orion will be required to treat as being owned by
another person pursuant to section 168(f)(8) of the Internal
Revenue Code of 1954, as amended and in effect immediately prior to
the enactment of the Tax Reform Act of 1986; (v) neither McGee nor
any of its Subsidiaries is a party to any agreement which would
require them, by reason of the transactions contemplated in this
Agreement or other related agreements executed on the Closing Date,
to make any payment which would constitute a "parachute payment"
for purposes of Sections 28OG and 4999 of the Code; (vi) neither
McGee nor any of its Subsidiaries has made any election pursuant to
state or foreign tax laws that is currently binding on Sun; (vii)
neither McGee nor any of its Subsidiaries is a "gain corporation"
within the meaning of Section 384(c)(4) of the Code; (viii) no
member of the federal consolidated group of which McGee is a member
has made an affirmative action carryover election within the
meaning of Section 1.338-4T(f)(6)(i) of the Treasury Regulations;
(ix) neither Sun nor Phoenix is a "foreign person" within the
meaning of Section 1445 of the Code; (x) no deferred intercompany
transactions within the meaning of Section 1.1502-13 of the
Treasury Regulations have occurred between the members of the
Consolidated Group and McGee and its Subsidiaries; and (xi) McGee
does not have an excess loss account as defined in Section
1.1502-19 of the Treasury Regulations with respect to any of its
Subsidiaries.
g. To Sun's Knowledge:
(i) Each of McGee and its Subsidiaries has withheld
from each payment made to any of its officers, directors,
former directors, and employees and former employees the
amount of all taxes and other deductions (including without
limitation, income taxes, unemployment, disability, and other
required taxes and contributions) required to be withheld and
has timely paid such withholding (together with its required
employer's amount, if any) and has timely and properly filed
all required information returns and Tax Returns with respect
thereto.
(ii) Neither McGee nor the Canadian Subsidiary of
McGee has, prior to the date hereof, made or filed any
elections for purposes of the Income Tax Act (Canada).
- 11 -
<PAGE>
(iii) Neither McGee nor the Canadian Subsidiary of
McGee has, prior to the date hereof, acquired property from or
disposed of property for proceeds less than the fair market
value thereof to, any person, firm or corporation with whom it
does not deal at arm's length as the term is construed under
the Income Tax Act (Canada).
(iv) The Canadian Subsidiary of McGee has no
outstanding loans or indebtedness incurred by directors,
former directors, officers, shareholders (including Sun,
Phoenix, London and Marine) of that company or by any person
or corporation not dealing at arm's length (as the term is
construed under the Income Tax Act (Canada)) with any of the
foregoing.
(v) The taxation year end of the Canadian Subsidiary
of McGee for income tax purposes is December 31. The taxation
year end of the Canadian Subsidiary of McGee has not been
changed except as a result of the transactions contemplated by
this Agreement.
(vi) McGee does not carry on business in Canada
through a permanent establishment within the meaning of that
term in the Canada-U.S. Income Tax Convention.
h. All representations and warranties of Sun as to Taxes
or matters with respect thereto are provided for in this Section
3.11, and no other section of this Article III shall be construed
or interpreted as a representation or warranty of Sun as to Taxes
or matters with respect thereto.
i. All representations and warranties set forth in this
Section 3.11 shall be considered true and correct unless the breach
thereof would have a Material Adverse Effect.
Section 2.2 INVESTMENTS. Schedule 3.12, lists (and
shows the custodial location of) all investments in bonds, stocks
and other securities owned by McGee and each of its Subsidiaries as
at the second business day prior to the date hereof, all of which
comply in all material respects with laws and regulations
applicable to the ownership of the same by McGee and its respective
Subsidiaries. McGee and each of its Subsidiaries has good and
marketable title to all its investments, free and clear of any and
all liens, charges, claims, restrictions, pledges, rights of third
parties and other encumbrances.
- 12 -
<PAGE>
Section 2.13 EMPLOYMENT MATTERS. Schedule 3.13 contains
a true and complete list of the names and total compensation of all
officers, directors and employees of McGee and each of its
Subsidiaries whose current annual rate of compensation (including
bonuses and commissions paid or committed to such individuals)
exceeds $100,000, together with a summary of the bonuses,
additional remuneration and other benefits, if any, paid or payable
to each such listed person for the years commencing on January 1,
1994 and January 1, 1995. To Sun's Knowledge, McGee has no
employment or labor contracts relating to any officers, directors
or employees of McGee or any of its Subsidiaries and no employee of
McGee or any of its Subsidiaries is represented by a labor
organization of any type. To Sun's Knowledge, there are, and has
not since September 8, 1987 been, any effort to unionize or
organize any employees of McGee or any of its Subsidiaries, and no
claim under any federal, state, provincial or local employment
related law, order, ordinance or regulation, or unfair labor
practice, discrimination, wage-and-hour or employment equity claim
is pending or, to Sun's Knowledge, threatened against or with
respect to McGee or any of its Subsidiaries.
Section 2.14 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Schedule 3.14 sets forth a true and complete list of
all employee benefit plans, agreements, commitments, practices or
arrangements of any type (including, but not limited to, plans
described in Section 3(3) of ERISA) maintained by McGee or any of
its Subsidiaries for the benefit of current or former employees or
directors, or with respect to which McGee or any of its Sub-
sidiaries has a liability, whether direct or indirect, actual or
contingent (including, but not limited to, liabilities arising from
affiliation under Section 414(b), (c), (m) or (o) of the Code or
Section 4001 of ERISA) (the "Benefit Plans"). There are no benefit
plans, agreements, commitments, practices or arrangements of any
type providing benefits to employees or directors of McGee or its
Subsidiaries for which McGee or its Subsidiaries could have any
liability other than the Benefit Plans.
(b) No Benefit Plan is a "multiemployer plan" (within
the meaning of Section 3(37) or Section 4001(a)(3) of ERISA) or a
"multiple employer plan" (within the meaning of Section 4064 of
ERISA or Section 413(c) of the Code). Neither McGee nor any of its
Subsidiaries has a current or potential liability or obligation,
whether direct or indirect, with respect to any multiemployer plan
- 13 -
<PAGE>
or multiple employer plan. Except as set forth on Schedule 3.14,
no Benefit Plan is a foreign benefit plan (a plan established or
maintained outside the United States of America for the benefit of
employees substantially all of whom are aliens not residing in the
United States of America).
(c) Sun has delivered or made available to Orion, true
and complete copies of the following documents, as they may have
been amended to the date hereof, embodying or relating to the
Benefit Plans:
(i) each of the Benefit Plans listed in Schedule 3.14,
including all amendments thereto, any related trust agreements,
group annuity contracts, insurance policies or other funding
agreements or arrangements;
(ii) the most recent determination letter, if any, as to
qualification under Section 401(a) or 403(a) of the Code,
received from the Internal Revenue Service ("IRS") with
respect to each of the Benefit Plans;
(iii) the actuarial valuation, if any, prepared with
respect to each of the Benefit Plans for the two most recent
plan years and the most recent annual and periodic accountings
of Benefit Plan assets, if applicable;
(iv) the current summary plan description, if any, for
each of the Benefit Plans and any material modifications
thereto; and
(v) the annual return/report on IRS Form 5500, 5500-C/R,
5500-C or 5500-R, if any, for each of the Benefit Plans for
the two most recent plan years.
(d) Except as provided for in this Agreement or as set
forth in Schedule 3.14, since December 31, 1994, neither Sun nor
McGee (i) has adopted, entered into, or amended any Benefit Plan
that is a defined benefit pension plan, including any change in the
assumptions or factors used in determining benefit equivalencies
under any Benefit Plan, or (ii) since the date of the most recent
actuarial valuation report, made any change in the actuarial
methods or assumptions used in funding any Benefit Plan that is a
defined benefit pension plan subject to ERISA, in the case of (i)
or (ii) other than as required by the applicable Benefit Plan, or
- 14 -
<PAGE>
as may be required to maintain compliance with the law or in
accordance with contracts or agreements elsewhere disclosed in this
Agreement.
(e) Except as set forth in Schedule 3.14, (i) the
written terms of each of the Benefit Plans and any related trust
agreement, group annuity contract, insurance policy or other
funding arrangement are in substantial compliance with the
applicable requirements, if any, of ERISA, the Code and any other
applicable law, and, to Sun's Knowledge, each of the Benefit Plans
has been administered in material compliance with such requirements
and in accordance with its terms; (ii) there are no contributions,
premiums or other payment obligations concerning the Benefit Plans
which were due and payable on or before the date hereof which have
not been made in full and in proper form, and adequate accruals
have been provided for in the financial statements for all other
contributions or amounts as may be required to be paid to the
Benefit Plans with respect to periods which include the Closing
Date or which ended prior thereto; (iii) neither Sun nor McGee has
made or agreed to make, nor is required (in order to bring any of
the Benefit Plans into substantial compliance with the applicable
requirements, if any, of ERISA, the Code or other applicable law)
to make, any change in benefits that would materially increase the
costs of maintaining any of the Benefit Plans, except as provided
for in Section 5.7(c) of this Agreement; (iv) no prohibited
transaction has occurred with respect to which McGee or any
Subsidiary of McGee may be directly or indirectly liable for any
excise tax or penalty under Section 4975 of the Code or Section
502(i) of ERISA; (v) each of the Benefit Plans for which Sun or
McGee has claimed a deduction under Section 404(a)(1), (2) or (3)
of the Code has received a favorable determination letter from the
IRS as to the tax qualification of such Benefit Plan (or has a
pending request for such a letter, which request was filed within
the period described in Section 401(b) of the Code), and such
favorable determination has not been modified, revoked or limited
by failure to satisfy any condition thereof or by a subsequent
amendment to, or failure to amend, such Benefit Plan and any
related trust is exempt from taxation under Section 501(a) of the
Code; (vi) as of the date hereof, there are no actions, suits,
disputes, arbitrations or claims pending (other than routine claims
for benefits) or legal, administrative or other proceedings or
governmental investigations pending or, to the knowledge of Sun or
McGee, threatened against any Benefit Plan or against the assets of
any Benefit Plan; (vii) all premiums, interest charges, and
- 15 -
<PAGE>
penalties for late payment, if any, due to the PBGC as of the date
hereof with respect to the Plans have been paid; (viii) no Benefit
Plan has been partially terminated under Section 411(d)(3) of the
Code (except that no representation is being made as to whether a
partial termination occurs solely by reason of the cash-out of
participants provided for under Section 5.7(c) of this Agreement)
and no Benefit Plan that is subject to Title IV of ERISA has been
terminated at any time during the seven-calendar-year period
immediately preceding the date hereof, and no proceeding has been
initiated, to the knowledge of Sun or McGee, to terminate any
Benefit Plan or to terminate any "employee benefit plan" (as
defined in Section 3(3) of ERISA) subject to Title IV of ERISA
sponsored by a member of a controlled group including Sun or McGee,
and McGee has neither incurred nor reasonably expects to incur, any
liability under Title IV of ERISA in respect of any termination of
any Benefit Plan or any employee benefit plan; (ix) to Sun's
Knowledge, McGee has satisfied any bond coverage requirement of
ERISA and all reporting and disclosure obligations under ERISA, the
Code or other applicable law with respect to each of the Benefit
Plans and the related trust, group annuity contract, insurance
policy or other funding arrangement; (x) no "reportable event"
within the meaning of Section 4043(b) of ERISA (as amended by GATT)
has occurred with respect to any Benefit Plan subject to ERISA
(other than those that may result from the transactions
contemplated by this Agreement and disregarding any such events for
which no report is required to be filed); (xi) no breach of
fiduciary duty has occurred with respect to which McGee, its
Subsidiaries, or any Benefit Plan may be liable or otherwise
damaged; (xii) all contributions made or required to be made under
each Benefit Plan for which a federal income tax deduction has been
claimed meet the requirements for deductibility under the Code;
(xiii) to the extent permitted by applicable law, McGee has
expressly reserved in itself the right to amend, modify or
terminate each written Benefit Plan which is subject to ERISA and
each written foreign benefit plan, or any portion of it, without
liability to itself; (xiv) no Benefit Plan that is subject to Part
2, Subtitle B of Title I of ERISA has invested in: (1) insurance or
annuity contracts issued by an insurance company with an A.M. Best
rating below A as of December 31, 1994, or (2) employer securities
or employer real property; (xv) no Benefit Plan requires McGee or
its Subsidiaries to continue to employ any employee, director or
consultant; (xvi) with respect to each Benefit Plan subject to
either Section 412 of the Code or Section 302 of ERISA: (1) such
plan's actuary has determined that such plan uses a funding method
permissible under ERISA and the actuarial assumptions used in
- 16 -
<PAGE>
connection therewith are reasonable, both individually and in the
aggregate, (2) no such plan has any accumulated funding deficiency,
whether or not waived; and (xvii) to Sun's knowledge, the most
recent actuarial valuation report for each Benefit Plan which is a
defined benefit plan, including any foreign defined benefit plan,
is based on information provided by McGee (or Sun, with respect to
employees of Sun Alliance Services USA Inc.) which was accurate and
complete in all material respects.
(f) Except as set forth in Schedule 3.14, with respect
to each Benefit Plan which is a welfare plan described in Section
3(1) of ERISA: (i) no such plan provides medical or death benefits
with respect to current or former employees or directors of McGee
beyond their termination of employment, other than coverage
mandated by Sections 601-608 of ERISA and 4980B(f) of the Code,
(ii) each such plan has been administered in compliance with
Sections 601-608 of ERISA and 4980B(f) of the Code; (iii) no such
plan has undisclosed reserves, assets, surpluses or prepaid
premiums; and (iv) no communication to any employee or former
employee made by or on behalf of Sun, McGee, any plan committee,
any plan fiduciary or any plan administrator has been inconsistent
with the documents or actual operation of each such plan or could
be reasonably construed to infringe on McGee's right to modify,
terminate or amend each such plan, to the extent such right exists.
(g) The consummation of the transactions contemplated by
this Agreement will not (i) entitle any individual to severance
pay, or (ii) except as provided for in Section 5.7 of this
Agreement, accelerate the time of payment or vesting, or increase
the amount, of compensation due to any individual. No payment made
or contemplated under any Benefit Plan constitutes an "excess
parachute payment" within the meaning of Section 280G of the Code.
Section 2.5 CONTRACTS. Schedule 3.15 contains a list
and description of all contracts, agreements, undertakings and
indebtedness (written or oral) to which, to Sun's Knowledge, McGee
or any Subsidiary of McGee is a party or by which it or its
property is bound and which (i) involve aggregate indebtedness, or
an aggregate commitment, of $50,000 or more or have a remaining
term which cannot be terminated on not more than ninety days'
notice or (ii) relate to McGee's operation of the Pool (but
excluding contracts of insurance and reinsurance by or on behalf of
the Pool) or the relationships between and among Pool Participants.
To Sun's Knowledge, all such contracts, agreements, undertakings
and indebtedness are free of any default or breach or any alleged
- 17 -
<PAGE>
default or breach by McGee, any Subsidiary of McGee or any other
party thereto and no event, act or omission has occurred which,
with the giving of notice or the passage of time or both, would
constitute a breach or default by McGee or any Subsidiary of McGee
or any other party thereto of any of such contracts, leases,
agreements, undertakings or indebtedness. To Sun's Knowledge, and
except as listed and described in Schedule 3.15, neither McGee nor
any Subsidiary of McGee is a party to or is bound by any contract
with, or is indebted to, any parent, affiliate, officer or director
of (or to any person related to or owned or controlled by any
parent, affiliate, officer or director of) McGee or any Subsidiary
of McGee in any amount whatsoever other than in respect of salaries
(and other compensation and benefits disclosed in Schedule 3.13) of
any officer or director of McGee or any Subsidiary of McGee.
Except as listed and described in the Schedule 3.15, none of such
parents, affiliates, officers or directors is indebted to McGee or
any Subsidiary of McGee.
Section 2.16 CAPITAL EXPENDITURES. Except as disclosed
in Schedule 3.16, neither McGee nor any Subsidiary of McGee has an
outstanding commitment for capital expenditures (including but not
limited to expenditures for data processing hardware, software and
systems) in excess of $50,000 other than for ordinary repairs and
maintenance.
Section 2.17 BANKS. Schedule 3.17 contains a true and
complete list of all banks or other financial institutions in which
either McGee or any Subsidiary of McGee has an account, line of
credit or safe deposit box, showing a description of each such
account and line of credit.
Section 2.18 AGENTS AND BROKERS. Schedule 3.18
contains a true and complete list of the names and addresses of
each person ("agents and brokers" herein) who has any authority to
bind (i) McGee or any Subsidiary of McGee or (ii) the Pool or any
Pool Participant (in its capacity as a Pool Participant) or (iii)
any insurance company in its capacity as an issuer of policies of
insurance or reinsurance on behalf of the Pool, in each case with
a description of the type of agency or binding authority granted,
and the geographical or other limits of each such authority or
agency. Sun has delivered or made available to Orion true and
complete copies of all agreements or other instruments granting any
powers of attorney, agency agreements and broker agreements,
including all current form contracts, of each of McGee and each
Subsidiary of McGee. To Sun's Knowledge, except as set forth in
- 18 -
<PAGE>
Schedule 3.18, and except where prohibited by law each such
contract with each such agent or broker is terminable by McGee or
such Subsidiary, without payment of any compensation or indemnity,
on ninety (90) days' (or less) notice. To Sun's Knowledge, (i)
each agent and broker has been and continues to be properly
licensed to represent McGee or such Subsidiary, as the case may be
to the extent required by law; (ii) except as set forth on Schedule
3.18, since December 31, 1994 neither McGee nor any Subsidiary of
McGee has terminated or experienced the resignation of any agent or
broker and (iii) McGee and each of its Subsidiaries has
satisfactory relations with its agents and brokers.
Section 2.19 APPROVED FORMS OF POLICIES. Each form of
insurance policy, policy endorsement or amendment, reinsurance
contract, annuity contract, application form, sales material and
service contract, and the rates, rating plans and premiums
therefor, now in use by McGee or any Subsidiary of McGee, or by or
on behalf of the Pool, in any jurisdiction has, where required,
been approved by the appropriate insurance regulatory authorities
of such jurisdiction except where the failure to be so approved is
not reasonably likely to have a Material Adverse Effect.
Section 2.20 INSURANCE. Schedule 3.20 contains a true
and complete list of all policies of insurance issued to McGee or
to any Subsidiary of McGee or naming any of them as insureds or
covering any of their businesses, assets or liabilities, showing
policy limits, type of coverage, annual premium, premium payment
dates, expiration dates, cash surrender value, and the amount of
loans, if any, secured. No policy listed has been cancelled and
each policy listed will continue in effect after the Closing Date
on the terms indicated in Schedule 3.20 unless cancelled by the
insured after the Closing Date.
Section 2.21 ABSENCE OF MATERIAL CHANGES AND ADVERSE
FACTORS. Since December 31, 1994, and except for the transactions
provided for herein, there has not been, in respect of McGee or any
Subsidiary of McGee:
(a) any loss or destruction of, or damage (whether or
not covered by insurance) to, any of its assets or properties which
materially affects or impairs its ability to conduct its business
as now conducted or proposed to be conducted such that a Material
Adverse Effect is reasonably likely to result therefrom;
(b) any other event or condition of any character
reasonably likely to have a Material Adverse Effect;
- 19 -
<PAGE>
(c) any declaration, setting aside or payment of any
dividend or other distribution in respect of the capital stock of
McGee or any Subsidiary of McGee or any direct or indirect
redemption, purchase or other acquisition by McGee or any
Subsidiary of McGee of any such stock; or
(d) any indebtedness or other liability or obligation
(whether absolute, accrued, contingent or otherwise) incurred or
other transaction (except that reflected in this Agreement)
incurred by it other than in the ordinary course of business.
Section 2.22 ENVIRONMENTAL MATTERS. To Sun's Knowledge,
McGee and each of McGee's Subsidiaries is in compliance with all
applicable environmental laws governing its business for which
failure to comply is likely to have a Material Adverse Effect, and
neither McGee nor any of its Subsidiaries is liable for any
material penalties, fines or forfeitures for failure to comply with
any of the foregoing in the manner set forth above. All licenses,
permits, registrations or approvals required for the business of
McGee and each of McGee's Subsidiaries under any environmental law
have, to Sun's Knowledge, been secured and McGee and each of its
Subsidiaries is in substantial compliance therewith, except such
licenses, permits, registrations or approvals the failure to
secure, or to comply with which, is not likely to have a Material
Adverse Effect. To Sun's Knowledge, there are no environmental
claims pending or threatened, which (a) question the validity, term
or entitlement of McGee or any of McGee's Subsidiaries for any
permit, license, order or registration required for the operation
of any facility which McGee or any of McGee's Subsidiaries
currently operates and (b) wherein an unfavorable decision, ruling
or finding would be reasonably likely to have a Material Adverse
Effect. To Sun's Knowledge, there are no facts, circumstances,
conditions or occurrences on any real property owned or leased by
McGee or any of McGee's Subsidiaries, or on any property adjacent
to such real property that could reasonably be expected (i) to form
the basis of an environmental claim against McGee or any of its
Subsidiaries or any real property owned or leased by McGee or any
of its Subsidiaries or (ii) to cause such real property to be
subject to any restrictions on the ownership, occupancy, use or
transferability of such real property under any environmental law,
except in each such case, such environmental claims or restrictions
that individually or in the aggregate are not reasonably likely to
have a Material Adverse Effect. To Sun's Knowledge hazardous toxic
materials have not at any time been (i) generated, used, treated or
stored on, or transported to or from, any real property owned or
- 20 -
<PAGE>
leased by McGee or any of McGee's Subsidiaries except in compliance
with applicable environmental laws or (ii) released on any such
real property, in each case where such occurrence or event is
reasonably likely to have a Material Adverse Effect.
Section 2.23 FINDERS AND BROKERS. All negotiations on
behalf of Sun relative to this Agreement and the transactions
contemplated hereby have been carried on directly by Sun without
the intervention of any broker, finder, investment banker or other
third party representing Sun. Neither Sun nor any Subsidiary nor
any officer or director of Sun or any of its Subsidiaries has
engaged or authorized any broker, finder, investment banker or
other third party to act on behalf of Sun, directly or indirectly,
as a broker, finder, investment banker or in any other like
capacity in connection with this Agreement or the transactions
contemplated hereby, or has consented to or acquiesced in anyone so
acting. Sun knows of no claim by any person against Sun or any of
its Subsidiaries or Orion for compensation for so acting or of any
basis for such a claim and Sun shall hold Orion totally harmless
against any costs or expenses to Orion arising out of any such
claim.
Section 2.24 DISCLOSURE. No representation or warranty
of Sun contained herein or in any Schedule hereto contains or will
on the Closing Date contain any untrue statement of a material fact
or omits or will on the Closing Date omit to state any material
fact necessary to make the statements herein or therein not false
or misleading.
Section 3.25 CANADIAN BANK ACT. To Sun's Knowledge, the
principal activity in Canada of McGee and each of its Subsidiaries
does not consist of (i) providing any services that a bank is
permitted by the Bank Act (Canada) to provide in Canada, (ii)
providing fiduciary services, (iii) performing the functions of an
investment dealer, stock broker, investment counsellor or portfolio
manager, (iv) the business of insurance, including the function of
an insurance agent or broker or (v) any combination of such
activities, all as defined by the provisions of the Bank Act
(Canada).
- 21 -
<PAGE>
IV.
REPRESENTATIONS, WARRANTIES AND
AGREEMENTS OF ORION
--------------------------------
Orion represents, warrants and agrees as follows:
Section 3.1 ORGANIZATION AND STANDING. Orion is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. Orion has all requisite
corporate power and authority to own its properties and to carry on
its business as now being conducted.
Section 3.2 CERTIFICATE OF INCORPORATION AND BY-LAWS.
The copies of the Certificate of Incorporation and By-Laws of Orion
which have heretofore been delivered to Sun are true, accurate and
complete and reflect all amendments or changes in effect as of the
date hereof.
Section 3.3 AUTHORITY. Orion has full corporate power
and authority to enter into this Agreement and (subject to any
requisite approvals of insurance and other regulatory authorities,
all of which are set forth on Schedule 4.3 hereto) to carry out the
transactions contemplated hereby. The execution and performance of
this Agreement have been duly and validly authorized by all
necessary corporate action on the part of Orion and this Agreement
constitutes a valid and binding obligation of Orion enforceable in
accordance with its terms, except as limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to or affecting creditors' rights
generally, and except that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to
equitable defenses and to the equitable discretion of the court
before which any proceeding therefor may be brought. Neither the
execution nor the delivery of this Agreement, nor the consummation
of the transactions herein contemplated, nor compliance with nor
fulfillment of the terms and provisions hereof, will (i) conflict
with or result in a breach or violation of any of the terms,
conditions or provisions of the Certificate of Incorporation or By-
Laws of Orion. Except as set forth in Schedule 4.3 hereto, no
consent, approval or authorization of, or filing, registration or
qualification with, any governmental authority on the part of Orion
or any Subsidiary of Orion is required in connection with the
execution, delivery and performance by Orion of this Agreement or
the purchase of the Common Stock as provided herein.
- 22 -
<PAGE>
Section 3.4 FINDERS AND BROKERS. All negotiations on
behalf of Orion relative to this Agreement and the transactions
contemplated hereby have been carried on directly by Orion without
the intervention of any broker, finder, investment banker or other
third party representing Orion. Neither Orion nor any Subsidiary
nor any officer or director of Orion or any of its Subsidiaries,
has engaged or authorized any broker, finder, investment banker or
other third party to act on Orion's behalf, directly or indirectly,
as a broker, finder, investment banker or in any other like
capacity in connection with this Agreement or the transactions
contemplated hereby, or has consented to or acquiesced in anyone so
acting. Orion knows of no claim by any person against Orion or any
of its Subsidiaries for compensation for so acting or of any basis
for such a claim and Orion shall hold Sun totally harmless against
any costs or expenses to Sun arising out of any such claim.
Section 3.5 INVESTOR STATUS. Orion is an "Accredited
Investor" within the meaning of SEC Rule 501(a).
Section 3.6 BANK OR BANKING INSTITUTION. Neither Orion
nor any affiliate (as defined) of Orion is a "foreign bank" or
"foreign banking institution" as such terms may be defined under
the Bank Act (Canada).
V.
COVENANTS OF ORION AND SUN
Section 4.1 ACCESS TO PROPERTIES, BOOKS AND RECORDS.
Prior to the Closing Date, Sun shall afford or cause McGee to
afford to the officers, attorneys, accountants and other authorized
representatives of Orion, reasonable access to McGee and to each
Subsidiary of McGee and to the officers, properties, books and
records (electronic and other) of all of the foregoing during
regular business hours and upon prior notice to Sun in order to
afford Orion the opportunity to make such investigations of the
affairs of McGee and its Subsidiaries as they may reasonably deem
necessary. Sun shall also furnish, or cause McGee and its
Subsidiaries to furnish, to Orion such information relating to
their respective businesses and affairs as Orion shall from time to
time reasonably request. All information made available to Orion
and its representatives pursuant to this Section 5.1 shall be
subject to the terms of the confidentiality letter agreement dated
January 9, 1995 between Sun and Orion (which is incorporated herein
by reference thereto).
- 23 -
<PAGE>
Section 4.2 CONDUCT OF BUSINESS.
(a) Except as otherwise permitted by this Agreement, or
as set forth on Schedule 5.2 hereto, or with the prior written
consent of Orion, prior to the Closing Date Sun shall not cause,
suffer or permit McGee or any of its Subsidiaries, either on its
own behalf or on behalf of or for the account of the Pool to:
(i) create, issue or sell any of its own stocks,
bonds, or other of its corporate securities, or grant or
otherwise issue any options, warrants or other purchase rights
with respect thereto, or enter into any contract or commitment
to do any of the foregoing;
(ii) create, incur, assume, guarantee or otherwise
become liable with respect to any obligations or liabilities,
fixed or contingent, in excess of $50,000 in the aggregate;
(iii) declare or make any payment or distribution to
its stockholders or purchase or redeem any shares of its
capital stock or the capital stock of McGee or any Subsidiary
of McGee;
(iv) sell or transfer any properties or assets
(including cash held in bank accounts or otherwise) or cancel,
release or assign any indebtedness owed to it or any claims
held by it, other than in the ordinary course of business;
(v) mortgage, pledge or subject to lien, or any
other encumbrance, any assets, tangible or intangible except
for liens (i) with respect to deposits with State insurance
departments and (ii) letters of credit, trust funds and funds
withheld arrangements, in each case relating to credit for
reinsurance provided that such liens shall have been in the
ordinary course of business;
(vi) sell, assign, transfer or otherwise dispose of
any tangible assets or cancel any debt or claim, except in
each case in the ordinary course of business;
(vii) sell, assign or transfer any intangible right
or asset;
- 24 -
<PAGE)
(viii) amend, terminate or waive any right of any
substantial value, other than in connection with the
settlement of claims, including reinsurance claims, or
otherwise in the ordinary course of business;
(ix) except in the ordinary course of business, make
any change in the methods of valuation or accounting or of
determining reserves for McGee or any Subsidiary of McGee or
for the Pool from the methods applied during and for the
period ended December 31, 1994;
(x) make any substantial change in the form of
contract currently in force between McGee or any of its
Subsidiaries and brokers and agents representing McGee or any
of its Subsidiaries or enter into any contract with any agent
or broker other than in substantially the form now used;
(xi) grant any salary increase to any officer or any
general salary increase to its employees other than, in each
case, normal merit and cost-of-living increases, or enter into
any new, or amend or alter in any material respect any
existing, employment or consulting agreement or any bonus,
incentive compensation, profit sharing, retirement, pension,
group insurance, death benefit or other fringe benefit plan,
trust agreement or similar arrangement adopted by it with
respect to its own employees or any of its agents, general
agents or underwriting managers;
(xii) amend its Certificate of Incorporation or By-
Laws or merge or consolidate with any other corporation;
(xiii) acquire or increase its beneficial ownership
of stock or assets of any other person, firm, association,
corporation or other business organization except for
investments made in the ordinary course and consistent with
prior investment practice;
(xiv) except in the ordinary course of business or
as required by this Agreement, enter into or assume any
contract, agreement, obligation, lease, license or commitment
having a term in excess of one year or involving an aggregate
monetary commitment or exposure for all such contracts in
excess of $50,000;
- 25 -
<PAGE>
(xv) arrange for or solicit the issuance or renewal
of insurance of any risk other than those insurance risks
which are undertaken by or on behalf of the Pool;
(xvi) knowingly do or omit to do any act which could
reasonably be expected to cause a breach of any contract,
commitment or obligation, which breach is reasonably likely to
have a Material Adverse Effect;
(xvii) make any capital expenditures, capital
additions or capital improvements, or commitments for any of
the foregoing, which involve, in the aggregate, in excess of
$50,000, except for commitments in effect on the date hereof
as reflected on Schedule 3.16;
(xviii) amend any Tax Return, settle any tax audit
or tax controversy, make any tax election or change any tax
accounting method;
(xix) directly or indirectly encourage, initiate or
engage in discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other
entity or group, other than Orion and its Subsidiaries,
concerning the issuance or sale of any shares of its capital
stock, any merger or other business combination, any
disposition of or grant of an interest in a substantial asset
or any similar transaction involving McGee; and Sun will and
will cause McGee to notify Orion promptly and in full detail
of any proposal made, or to be made, to Sun or McGee, with
respect to (i) any offer to purchase, or any invitation to
tender for purchase, any or all of the capital stock of McGee
or any Subsidiary of McGee; (ii) any proposed merger or other
form of business combination with McGee or any Subsidiary of
McGee; or (iii) any purchase of any substantial asset or
liability of McGee or any Subsidiary of McGee or any interest
in any substantial asset or liability of McGee or any
Subsidiary of McGee.
(d) Except as otherwise permitted by this Agreement or
with the prior written consent of Orion, prior to the Closing Date,
Sun shall cause McGee and each of its Subsidiaries to use
commercially reasonable best efforts to:
- 26 -
<PAGE>
(i) maintain at all times its status as a
corporation, duly organized, validly existing, in good
standing and duly qualified and licensed to conduct its
business as now being conducted (x) in the jurisdiction of
its incorporation and (y) except where the failure to do so
would not have a Material Adverse Effect, each of the other
jurisdictions in which it is so conducting its business;
(ii) at all times do or cause to be done, and cause
each of its officers and employees to do, all things necessary
to maintain, preserve and renew the corporate existence of
McGee and the corporate existence of the Subsidiaries of McGee
and all federal, provincial, state and local and other
licenses, permits, franchises and other governmental
authorizations necessary to own and operate their respective
properties and carry on their respective businesses, and
comply with all federal, provincial, state and local laws
applicable to McGee or any of its Subsidiaries or the Pool
except where the failure to do so is not reasonably likely to
have a Material Adverse Effect;
(iii) operate its business substantially as
presently operated and only in the ordinary course and (A)
preserve substantially intact the present business
organization (including the retention of key employees), (B)
collect all premiums, balances due from reinsurers and Pool
Participants and accounts receivable and (C) preserve its
relationships with and the goodwill of its Pool Participants,
customers, suppliers, agents, general agents, other insurers
and reinsurers and other persons having business dealings with
it except where the failure to do so is not reasonably likely
to have a Material Adverse Effect;
(iv) with respect to the properties of McGee and
each of its Subsidiaries, maintain in force all existing
casualty and liability insurance and reinsurance policies and
fidelity bonds or policies or bonds providing substantially
the same coverage;
(v) maintain proper business and accounting records
for itself in accordance with generally accepted accounting
principles and for the Pool in accordance with accounting
practices required or permitted by applicable federal,
provincial, state and local regulation;
- 27 -
<PAGE>
advise Orion in writing of any event, occurrence or
circumstance of which it is aware which is reasonably likely
to have a Material Adverse Effect;
(vii) comply in all material respects with all laws
applicable to it and to the conduct of its business;
(vi) maintain all of the properties which are
material to its business operations or financial condition in
good operating condition and repair, ordinary wear and tear
excepted, and take all steps reasonably necessary to maintain
its intangible assets.
Section 4.3 REGULATORY AND OTHER FILINGS AND APPROVALS.
Each of Orion and Sun shall duly make (and Sun shall cause its
Subsidiaries, including McGee and its Subsidiaries, to make) all
regulatory filings required to be made by each in respect of this
Agreement or the transactions contemplated hereby. Each of Orion
and Sun shall use its commercially reasonable best efforts to
obtain (and cause its Subsidiaries to obtain) all regulatory
approvals necessary to carry out the transactions contemplated by
this Agreement, including, without limitation, the obtaining by
Orion's Subsidiaries of any necessary approvals by insurance
commissioners or superintendents of insurance of policy forms to be
used by or on behalf of the Pool following the Closing.
Section Premerger Notification and Clearance. Pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "Hart-
Scott-Rodino Act"), the Investment Canada Act and the Competition
Act of Canada, each of Orion and Sun will file, or cause to be
filed, any application, notification or report form which is
required to be filed with the Premerger Notification Office of the
U.S. Federal Trade Commission or with the Antitrust Division of the
U.S. Department of Justice or with Investment Canada (collectively
referred to herein as the "Premerger Notification Agencies") in
respect of the transactions contemplated hereby, each of which
filings shall comply as to form with all requirements applicable
thereto and all of the data and information reported in which shall
be true, correct and complete in all material respects. Each of
Orion and Sun will promptly comply with all requests, if any, of
any of the Premerger Notification Agencies for additional informa-
tion or documentation in connection with each notification, report
and application filed by or on behalf of either Orion or Sun with
any of the Premerger Notification Agencies, unless in the opinion
of both Donovan Leisure Newton & Irvine and Dewey Ballantine (or of
Morris/Rose/Ledgett and Borden & Elliot in the case of filings made
- 28 -
<PAGE>
under the Investment Canada Act) such compliance is not necessary
in order to obtain clearance from the relevant Premerger
Notification Agencies. Such additional information and
documentation will comply with all requirements applicable thereto
and will be true, correct and complete in all material respects.
Section 4.5 BERMUDA COMPANY. Effective as of the
Closing, Orion shall cause Wm. H. McGee & Co. (Bermuda), Ltd., a
Bermuda corporation and a Subsidiary of McGee ("McGee Bermuda"), to
enter into a Management Agreement with Sun Bermuda substantially in
the form of Exhibit A hereto. Under such Agreement, Sun Bermuda
shall write and issue insurance exclusively for McGee and McGee
Bermuda shall pay all costs and expenses incurred by Sun Bermuda
(including, without limitation, any licensing fees) in connection
with its business and operations during the period from the Closing
through the earlier of December 31, 1997 or the date as of which
the Management Agreement is terminated because Orion has notified
Sun that it no longer requires the services of Sun Bermuda as a
writer and issuer of insurance. Sun shall have no obligation,
after the earlier of such dates to continue to write and issue or
cause to be written and issued those forms of insurance (in the
jurisdictions in which they have been issued) which have heretofore
been written and issued by Sun Bermuda on behalf of McGee or any
Subsidiary of McGee or the Pool and Orion will, if it or one of its
insurance Subsidiaries wishes to write and issue those forms of
insurance, after the earlier of such dates, either (a) exercise the
option referred to in Section 6.2(d) to purchase Sun Bermuda, or
(b) organize or acquire by that date a properly qualified and
licensed Bermuda corporation.
Section 4.6 FURTHER ASSURANCES. Each of Orion and Sun
agrees to use commercially reasonable best efforts to take such
reasonable action as may be necessary or appropriate in order to
effectuate the transactions contemplated hereby. In case at any
time after the Closing Date any further action by Sun is necessary
or desirable to vest Orion with full title to the Common Stock and
to the use, benefit and ownership of the properties, assets,
rights, approvals, immunities and franchises of McGee and its
Subsidiaries evidenced thereby, Sun shall take all such action.
(b) From and after the date hereof and until December
31, 1997, and in furtherance of and in addition to other
obligations of Sun pursuant to this Agreement and the transactions
entered into pursuant hereto, Sun shall not (i) use or purport to
license or allow any other person to license any mark, trade name
- 29 -
<PAGE>
or trade dress of McGee or any Subsidiary of McGee or (ii) in any
way damage or disparage, and shall undertake and ensure that no
Subsidiary of Sun so damages or disparages, the name, business or
reputation of McGee or any of McGee's Subsidiaries, or of the Pool
or any mark, trade name or trade dress of McGee or any Subsidiary
of McGee or of the Pool.
Section 4.7 PENSION PLAN MATTERS. Effective no later
than the Closing Date, Sun shall cease to be a participating
employer under the Wm. H. McGee & Co., Inc. Retirement Income Plan
(the "Pension Plan") and the Profit Sharing Plan of Wm. H. McGee &
Co., Inc. (the "Fidelity Plan") and McGee and its Subsidiaries
shall be the sole participating employers with the power to amend
such plans.
(b) Within 60 days following the Closing Date, Sun shall
cause to be established an individual account plan (the "Sun
Plan"), which plan shall be substantially similar to the Fidelity
Plan, except to the extent necessary to comply with the tax
qualification provisions of the Code, for the benefit of
participants in the Fidelity Plan who are current or former
employees of Sun Alliance USA Services Inc. and beneficiaries of
deceased employees or former employees of Sun Alliance USA Services
Inc. ("Plan Participants"). Contributions with respect to the Plan
Participants under the Fidelity Plan shall be made only for the
period through the Closing Date. Within 60 days following the
Closing Date, Sun shall deliver to Orion a copy of the Sun Plan and
a determination letter in respect thereof to the effect that the
terms of the Sun Plan satisfy the requirements under Section 401(a)
of the Code. As soon as practicable after the receipt of such
letter, but no later than 60 days following the Closing Date, Sun
and Orion shall cause on behalf of their respective plans the
filing with the IRS of Forms 5310-A, as either may be required to
file such form, specifying a valuation date approximately 30 days
after the filing of such form(s), as mutually agreed to by Sun and
Orion, on which date shall occur an in-kind transfer from the trust
through which the Fidelity Plan is funded to the trust for the Sun
Plan of each Plan Participant's aggregate account balance. On the
date specified in the Form(s) 5310-A, or such later valuation date
as is mutually agreed upon by Sun and Orion, or, in the event that
neither Sun nor Orion is required to file a Form 5310-A, as soon as
practicable after receipt of the determination letter, the transfer
of each Plan Participant's aggregate account balance from the
Fidelity Plan's trust to the Sun Plan's trust shall occur. Sun
- 30 -
<PAGE>
shall pay any and all Fidelity expenses, fees and disbursements in
connection with such transfer and otherwise each of Sun and Orion
shall pay its own fees, expenses and reimbursements in connection
with such transfer.
(c) On or before the Closing Date, Sun shall cause the
Pension Plan to be amended in the form set forth in Schedule 3.14.
Within a 30 day period immediately following the Closing, Sun shall
use reasonable efforts (to the extent permitted by applicable law)
to obtain the consent of each current employee of Sun Alliance USA
Services Inc. to cash him or her out of the Pension Plan as of the
next practicable valuation date after the Closing Date. After the
Closing Date, Sun shall cooperate with Orion and McGee with respect
to any reasonable request by Orion or McGee to provide information
to current employees of Sun Alliance USA Services Inc. who have not
been cashed out. Sun shall pay any and all expenses, fees and
disbursements incurred for actuarial evaluations in connection with
the cash-outs and, otherwise, each of Sun and Orion shall pay its
own expenses, fees and disbursements.
(d) Sun will indemnify and hold harmless Orion, McGee
and its Subsidiaries from and against any damages, liabilities,
losses, costs or other obligations arising in connection with or
attributable to any employee benefit plan (as defined in Section
3(3) of ERISA) maintained by or which has ever been contributed to
by Sun or any entity affiliated with Sun under Section 414(b), (c),
(m) or (o) of the Code or Section 4001 of ERISA, other than plans
maintained by or contributed to by McGee and its Subsidiaries.
(e) Orion, McGee and Sun each agree to cooperate in
providing records and administrative information to implement the
provisions of this Section.
Section 4.8 TAX MATTERS. Each of Orion and Sun
covenants that:
(a) (i) Sun shall prepare and file, or cause to be
prepared and filed, and shall have the sole authority with respect
to the form and content of, and otherwise control, all federal
income Tax Returns and all state or local combined, consolidated
and unitary Income Tax Returns which include McGee or its
Subsidiaries for all taxable periods ending on or before the
Closing Date (the "Sun Returns"), including the federal income Tax
Return required to be filed for the period commencing on January 1,
- 31 -
<PAGE>
1995 and ending on the Closing Date (the "1995 Short Period Tax
Return" and the "1995 Short Period," respectively); provided,
however, that Sun shall consult with, and reasonably consider the
views of, McGee, with respect to the treatment of any item on such
Tax Returns where such treatment (A) does not materially effect the
Consolidated Group and (B) could reasonably be expected to have a
material adverse effect on McGee. The 1995 Short Period Tax Return
shall be prepared in a manner consistent with the federal income
Tax Returns of McGee filed prior to the Closing Date (the "Prior
Returns"), as such Prior Returns shall have been amended.
(ii) Orion shall be responsible for preparing and filing
or causing McGee and its Subsidiaries to prepare and file all Tax
Returns not described above in subsection 5.8(a)(i) required to be
filed after the Closing Date which include McGee or its
Subsidiaries or the operations of McGee or its Subsidiaries.
(b) Orion shall be liable for and shall pay and hold Sun
and its Subsidiaries harmless against any and all Taxes
attributable to McGee or its Subsidiaries or such entities'
operations (including federal income Taxes that McGee is liable for
under the terms of the Federal Income Tax Allocation Agreement
among Sun and its Subsidiaries, dated March 4, 1991, as amended
through the date of this Agreement (the "Tax Allocation
Agreement")). Notwithstanding the foregoing, with respect to any
taxable periods ending on or before December 31, 1994, Orion's
indemnity liability hereunder shall not exceed the sum of (i) two-
hundred thousand dollars ($200,000) and (ii) the amount of any
refund of Taxes paid by Sun to Orion pursuant to Section 5.8 (d)
hereof or received by McGee or its Subsidiaries directly in respect
to taxable periods ending on or before December 31, 1994, net of
any additional Taxes imposed upon McGee or its Subsidiaries with
respect to any such refund, and (iii) the liabilities for, or
reserves in respect of, current or prior period Taxes which were
reflected on the financial statements of McGee and its
Subsidiaries, dated December 31, 1994, and which, as of the
Closing, remain unpaid (the amount of any Taxes not indemnifiable
by Orion by reason of the operation of this sentence being referred
to as the "Reimbursable Taxes"). Sun will indemnify and hold
harmless Orion, McGee and its Subsidiaries from and against (i) any
liability for the Taxes of any member of the Consolidated Group,
other than McGee and its Subsidiaries and (ii) any Taxes of McGee
and its Subsidiaries constituting Reimbursable Taxes. The amount
of any indemnity payment made under this Section 5.8(b) by one
- 32 -
<PAGE>
party to or for the benefit of the other party will be reduced, but
not below zero, by an amount equal to the present value of any
current or reasonably anticipated future tax benefit which is made
available, directly or indirectly, to the indemnitee or any
affiliate thereof for any taxable period (or portion thereof) by
reason of any such indemnity or other payment or the accrual of any
amount giving rise to any such payment (or by reason of the
adjustment or other event or circumstance giving rise thereto).
The calculation of the present value of any such current or
reasonably anticipated future tax benefit shall be made (A) by
discounting the amount of any reasonably anticipated future tax
benefit from the period such benefit is reasonably anticipated to
be realized to the date the related payment under this Section
5.8(b) is to be made, utilizing a discount rate equal to the
Applicable Federal Rate (as such term is defined in section 1274 of
the Code and the Treasury Regulations promulgated thereunder and
which is effective for the last day of the month preceding the
month the related payment under this Section 5.8(b) is due) which
most accurately corresponds to the length of the period such amount
is being discounted, and (B) assuming that the calculation of the
current or reasonably anticipated future tax benefit for the
item(s) in question is based on application of the highest
applicable federal, state and local income tax rate in effect for
the taxable period(s) (or portion(s) thereof) during which the
related payment under Section 5.8(b) is to be made.
(c) Orion shall cause McGee to pay to Sun, or Sun shall
pay to McGee, as the case may be, the difference between the Taxes
attributable to the 1994 federal income taxable period and the 1995
Short Period required to be paid by McGee under the Tax Allocation
Agreement and the amounts theretofore paid by McGee to Sun in
respect of the relevant taxable period, which payments shall be
paid within five (5) days of the date Sun files the 1994 federal
consolidated income Tax Return and the 1995 Short Period Tax
Return, respectively. In addition, Sun or McGee, as the case may
be, will pay to the other the amount due pursuant to Section 6.3 of
the Tax Allocation Agreement within five days of the date on which
Sun files the 1995 Short Period Tax Return.
(d) Provided that Orion or McGee have paid, indemnified
and held harmless Sun and its Subsidiaries against all Taxes
attributable to McGee or its Subsidiaries or their operations, Sun
shall pay to Orion the amount of any refund of Taxes received
(together with any interest received or credited with respect to
such refund) after the Closing Date by Sun to the extent that such
- 33 -
<PAGE>
amount is in excess of any amount that Orion has not paid by reason
of the operation of the limitation set forth in the second sentence
of subsection 5.8(b) hereof and that is attributable to McGee or
its Subsidiaries under the Tax Allocation Agreement. Sun shall pay
to Orion the amount owing hereunder within twenty (20) business
days after the receipt or realization by Sun of the related refund
or credit.
(e) Orion shall be liable for and shall pay, and shall
hold Sun and its Subsidiaries harmless against, any Taxes attribut-
able to any election under Section 338 of the Internal Revenue Code
of 1986, as amended (the "Code"), with respect to the transactions
contemplated hereunder.
(f) Orion shall be liable for and shall pay, and shall
hold Sun and its Subsidiaries harmless against, any transfer,
recordation, stamp, or similar Taxes of any kind required in the
applicable jurisdiction in connection with the effectuation of the
transactions contemplated hereunder and imposed upon Sun and its
Subsidiaries.
(g) Sun, Orion and McGee hereby agree that the transfer
of the Common Stock under this Agreement and the acquisition or
control of McGee shall be effective as of the close of business on
the Closing Date and that it is their intention, for federal income
Tax purposes, that McGee and its Subsidiaries will cease to be a
member of the Sun Consolidated Group as of said close of business.
(h) Orion agrees that, to the extent permitted by
applicable law, it shall not carry back, and shall not cause or
permit McGee or its Subsidiaries or any other affiliate of Orion to
carry back, any net operating loss, loss from operations or other
tax attribute to any taxable year or period of McGee or its
Subsidiaries or any affiliate thereof (including, but not limited
to, any member of any affiliated, combined or unitary group of
which McGee is or was a member) ending on or before the Closing
Date, or to any taxable period beginning before and ending after
the Closing Date, to the extent of the portion of such period
ending on the Closing Date. Orion agrees that Sun shall not have
any obligation under this Agreement to return or remit any refund
or other tax benefit attributable to a breach by Orion of the
foregoing undertaking.
- 34 -
<PAGE>
(i) In connection (A) with any federal income tax audit
or administrative or court proceeding relating to taxable periods
of McGee ending on or prior to the Closing Date and (B) with any
proposed assessment of any Reimbursable Taxes, Sun shall have the
sole right in good faith and in a reasonably diligent manner to
represent McGee's interest in such audit or proceeding or the
contest of any proposed assessment, including by employing counsel
of its choice. Sun will keep McGee and its counsel informed of the
status of all audits or proceedings and the contest of any proposed
assessment to the extent such matters relate to Taxes other than
Reimbursable Taxes and shall afford McGee and its counsel the right
to participate (at McGee's expense) in any such audits or
proceedings to the extent such matters relate to Taxes other than
Reimbursable Taxes. Sun shall not, without the consent of McGee
(which consent shall not be unreasonably withheld), settle any
issues or agree to any proposed assessments which settlement or
agreement involves Taxes with respect to McGee or its Subsidiaries
of $10,000 or more. Orion shall cooperate fully with Sun and make
available to Sun in a timely fashion all data and other information
reasonably requested by Sun in any such audit or proceeding
including, but not limited to, the granting of a power of attorney
to Sun to represent McGee and its Subsidiaries.
(j) With respect to the taxable periods of McGee and its
Subsidiaries ending on or before the Closing Date for which a Sun
Return is to be filed, Orion shall cause McGee and its Subsidiaries
to prepare and provide to Sun packages of tax information materials
(including, but not limited to, (1) information requested by Sun in
writing, and (2) federal and state income tax information),
together with relevant work papers and all other relevant materials
requested by Sun for these purposes (the "Tax Packages"), for
purposes of enabling Sun to prepare all Sun Returns required to be
filed by Sun pursuant to Section 5.8(a)(i) for such periods. Orion
shall use its best efforts to cause the Tax Packages for the
taxable periods ending December 31, 1994 of McGee to be delivered
to Sun on or before July 31, 1995, and Orion shall cause the Tax
Packages of McGee for all other such periods, including the Short
Period, to be delivered to Sun on or before June 30, 1996;
provided, however, that for purposes of enabling Sun to prepare and
file an extension of time for filing any Sun Returns which include
the Short Period, Orion shall cause McGee to furnish to Sun by
February 15, 1996, McGee's preliminary estimate of taxable income
for the Short Period.
- 35 -
<PAGE>
(k) Orion recognizes that from time to time after the
Closing Date, Sun and its affiliates and their agents and
representatives will need reasonable access to accounting and tax
books, records and other information h eld by McGee and its
Subsidiaries with respect to their assets or operations for events,
transactions or other items occurring or accruing on or prior to
the Closing Date ("Tax Records"). In connection therewith, Orion
agrees that it and its affiliates shall retain all the Tax Records,
including, in particular, all such Tax Records that Sun may specify
in reasonable detail in writing on or before the Closing Date
("Specified Tax Records") and will retain such other of the Tax
Records in such format and for such periods as Orion would retain
its own tax records, taking into account the expiration of the
applicable period of assessment of the Tax to which such retention
relates. Furthermore, prior to (i) knowingly discarding or
destroying any Tax Records (other than Specified Tax Records), and
(ii) discarding or destroying any Specified Tax Records, Orion
shall give Sun and its affiliates and their agents and
representatives a reasonable opportunity to inspect, review and
make copies or take possession of the Tax Records or Specified Tax
Records, as the case may be.
(l) Except with respect to the parties, obligations
under this Agreement, at the Closing, the Tax Allocation Agreement
shall be deemed terminated on and as of the Closing Date.
(m) Sun and Orion agree that any indemnity or other
payment made under this Section 5.8 shall be treated by the parties
for all purposes as an adjustment to the consideration being
provided for the Common Stock hereunder (except to the extent
required by any taxing authority or to the extent that a portion of
such indemnity or other payment is treated as interest by reason of
Section 483 of the Code), and shall be allocated pro rata between
the Common Stock held by Sun and the Common Stock held by Phoenix.
(n) The obligations of Sun and Orion under this Section
5.8 relating to any Taxes or matters with respect thereto shall
survive until the lapse of the statute of limitations for the
assessment of such Tax or sixty (60) days after the final
administrative or judicial determination of such Tax and for a tax
for which McGee or its Subsidiaries are not primarily liable, the
later to occur of (a) the lapse of the statute of limitations for
the collection of such Tax or (b) sixty (60) days after the final
- 36 -
<PAGE>
administrative or judicial determination that such tax is
collectable against Sun or its Subsidiaries; provided, however,
that any claim in respect of an obligation under this Section 5.8
asserted in writing prior to the lapse of the statute of
limitations or sixty days after the final administrative or
judicial determination shall continue to survive.
(o) After the Closing, neither party shall have any
liability or obligation to the other for Taxes or matters with
respect thereto except pursuant to this Section 5.8.
VI.
AGREEMENTS WITH RESPECT
TO POOL OPERATION
----------------------
Section 5.1 POOL PARTICIPATIONS; REINSURANCE. Subject
to the occurrence of the Closing:
(a) Effective as of 12:00 a.m. New York Time on January
1, 1995 (the "Pool Transfer Time") the participations of Marine and
Phoenix (or another Subsidiary of Sun which has capital and surplus
at least equal to that of Phoenix) in the U.S. Pool will be as
follows:
(i) as to all business with an inception date
during the period from the Pool Transfer Time through 12:00
p.m. New York Time on December 31, 1995 the aggregate and
individual interest of Marine and Phoenix as U.S. Pool
Participants shall be unchanged from the levels thereof set
forth in the definition of "Pool" in Article XI hereof except
to the extent set forth in the reinsurance agreement referred
to in Section 6.1(b);
(ii) as to all business with an inception date
during the period from 12:00 a.m. New York Time on January 1,
1996 until 12:00 p.m. New York Time on December 31, 1996 the
aggregate interest of Marine and Phoenix as Pool Participants
shall be not more than 22.5% of the U.S. Pool and not less
than 12% of the U.S. Pool, such aggregate interest (and the
individual interests of each of Marine and Phoenix, in each
case so long as it is a Subsidiary of Sun) to be determined by
Orion in its sole discretion and to be set forth in a written
- 37 -
<PAGE>
notice delivered by Orion to each of Marine and Phoenix not
later than October 31, 1995; and the interest of SICH, as a
U.S. Pool Participant in that year, shall not be less than the
aggregate interest of Marine and Phoenix as U.S. Pool
Participants in that year (determined as aforesaid) and SICH
shall (to the extent permitted by applicable laws and
regulations) retain net, and unreinsured, a participation at
least equal to such aggregate interest of Marine and Phoenix;
(iii) as to all business with an inception date
during the period from 12:00 a.m. New York Time on January 1,
1997 until 12:00 p.m. New York Time on December 31, 1997, the
aggregate interest of Marine and Phoenix as Pool Participants
in respect of the U.S. Pool related to Participants in that
year shall be not more than 12% of the U.S. Pool and not less
than 6% of the U.S. Pool, such aggregate interest (and the
individual interests of each of Marine and Phoenix, in each
case so long as it is a Subsidiary of Sun) to be determined by
Orion in its sole discretion and to be set forth in a written
notice delivered by Orion to each of Marine and Phoenix not
later than October 31, 1996; and the interest of SICH, as a
Pool Participant in respect of the U.S. Pool related to that
year, shall not at any time prior to December 31, 1997 be less
than the aggregate interest of Marine and Phoenix as Pool
Participants in respect of the U.S. Pool related to that year
(determined as aforesaid) and SICH shall (to the extent
permitted by applicable laws and regulations) retain net, and
unreinsured, a participation at least equal to such aggregate
interest of Marine and Phoenix;
(iv) any "contingent" or "profit" commissions as
defined in the Pool Agreement otherwise due to McGee from any
of London, Marine or Phoenix in respect of the operations of
the Pool subsequent to the Pool Transfer Time and prior to
12:00 p.m. New York Time on December 31, 1997 shall not be
payable or paid by any of them; and
(v) Sun and Orion shall be liable for, and entitled
to share in, any contingent commissions payable to or from
McGee or from or to any reinsurer of Pool exposures in respect
of operations of the Pool prior to the Closing Date, such
sharing to be in proportion to the interest of each of London,
Marine, Phoenix and any other Subsidiary or former Subsidiary
of Sun and SICH as a Pool Participant during the year in
respect of which the reinsurance which shall have given rise
to the contingent commissions liability or entitlement was
- 38 -
<PAGE>
ceded (and assuming for purposes of this calculation that
there are no other Pool Participants), such proportional
allocations to be carried out separately in respect of the
U.S. Pool and the Canadian Pool; and
(vi) as to all business with an inception date on or
after 12:00 a.m. New York Time on January 1, 1998 the
interest as Pool Participants of London, Marine and Phoenix in
respect of any Pool related to periods after that time
shall be as Orion and Sun shall have further agreed in writing
between them by not later than December 31, 1996.
(b) At the Closing, Phoenix will cede to SICH (which
may, in turn, retrocede to one or more insurance Subsidiaries of
Orion (which, in turn, shall retain the same net and unreinsured
(except to the extent it may retrocede it to one or more other
Subsidiaries of Orion on the same basis) until December 31, 1997)
a further participation in the U.S. Pool equal to 7-1/2% of the
aggregate amount of all participations in the U.S. Pool pursuant to
a quota share retrocession agreement in the form attached as
Exhibit B, with respect to the period from 12:00 a.m. New York Time
on January 1, 1995 to 12:00 p.m. New York Time on December 31,
1995; and the interest of SICH as a U.S. Pool Participant, as
increased by the reinsurance agreement referred to in this Section
6.1(b) shall be 14.5%. Effective with respect to all business
having an inception date during the period January 1, 1996 through
December 31, 1997, SICH shall become and shall remain the "Clearing
Company" as defined in the Inter Office ReinsuranceAgreement
referred to in the definition of Pool Agreement for all purposes of
the U.S. Pool.
(c) Effective as of the Pool Transfer Time, the
participations of London, Marine and SICH in the Canadian Pool will
be as follows:
(i) the aggregate percentage interest of London and
Marine, collectively as Pool Participants in the Canadian
Pool, with respect to business having an inception date during
the calendar year beginning at 12:00 a.m. New York Time on
January 1, 1995 shall be as set forth in the definition of
"Pool" in Article XI hereof, and with respect to business
having an inception date during the calendar year 1996 and
1997, respectively, shall be equivalent to the aggregate
percentage interests of Marine and Phoenix, collectively, as
Pool Participants in the U.S. Pool, with respect to such
respective years;
- 39 -
<PAGE>
(ii) the percentage interest of SICH, as a Pool
Participant in the Canadian Pool, with respect to business
having an inception date during the calendar year 1995 shall
be 10% and for business having an inception date during the
calendar years 1996 and 1997 shall be at least equal to the
aggregate percentage interest of SICH, as a Pool Participant
in the U.S. Pool, with respect to such respective years;
(iii) SICH shall (to the extent permitted by
applicable laws and regulations) at all times retain net and
unreinsured (except to the extent that SICH may retrocede such
interest to one or more insurance Subsidiaries of Orion (which
in turn shall (subject to its right to retrocede such interest
to one or more other insurance Subsidiaries of Orion on the
same basis) retain the same net and unreinsured until December
31, 1997) a percentage interest as a Pool Participant in the
Canadian Pool at least equal to the aggregate percentage
interests of Marine and London for the respective calendar
years as provided above; and
(iv) as to all business with an inception date on or
after 12:00 a.m. New York Time on January 1, 1998, the
interests of London and Marine as Pool Participants in respect
of any Canadian Pool shall be as Orion and Sun may further
agree in writing between them by not later than December 31,
1996.
Section 5.2 UNDERWRITING OPERATIONS OF THE POOL.
(a) From the date hereof through the Closing Date:
(i) Sun will cause McGee to use commercially
reasonable best efforts to conduct the underwriting operations
of the Pool in the ordinary course and in a manner consistent
with prior practice and otherwise in accordance with this
Agreement; and
(ii) Sun will not, and will not cause or permit
McGee to, introduce or commence on behalf of the Pool or for
its account the offering of any new product or service or the
underwriting of any type of risk or any line of insurance not
currently written by or through the Pool.
- 40 -
<PAGE>
(b) (i) From and after the Closing and through 12:00
p.m. New York Time on December 31, 1996, McGee shall, and Orion
shall use commercially reasonable best efforts to cause McGee to,
manage the affairs of the Pool on behalf of the Pool Participants
and undertake on behalf of the Pool only such insurance risks as
shall in the judgment of McGee be appropriate and consistent with
prior practices of the Pool and otherwise be in accordance with
this Agreement and the Ancillary Agreements. From and after the
Closing, pursuant to the Management Agreement referred to below,
Phoenix, London and Marine will issue such policies of insurance as
are placed by McGee on behalf of the Pool; provided that Orion
shall not cause or permit McGee to introduce or commence, on behalf
of the Pool, the offering of any new product or service or the
underwriting of any type of risk or any line of insurance not
written by or through the Pool prior to the Closing Date and
provided further that except as may be necessary to update and
maintain existing policy forms and filings, none of Phoenix, London
or Marine shall be obliged to file or qualify any new form of
policy.
(ii) At the Closing, Sun will cause each of Phoenix,
London, Sun Bermuda and Marine to enter into one or more Management
Agreements with McGee, McGee Bermuda or Wm. H. McGee & Co. of
Canada, Ltd., as appropriate in the form attached as Exhibit C. In
the event that at any time during the term of the Management
Agreement Sun shall receive any notice or inquiry from any
insurance regulatory authority with respect to the Management
Agreement or Sun's participation as a party thereto, Sun shall give
prompt notice thereof to Orion and McGee. Sun and McGee will use
their best efforts to cooperate in the resolution of any regulatory
issues which may exist and to that end (i) each may, in
coordination with the other, make formal and informal appearances
before and presentations to such regulatory authority and (ii) each
shall cooperate in good faith in negotiating changes necessary to
resolve any regulatory concern to the satisfaction of the
regulatory authority concerned. In the event that such authority
shall determine that appropriate amendments are not possible and
that the Management Agreement must be terminated in light of the
facts and applicable law at the time of such determination then
Orion shall cause McGee to agree to the termination of the
Management Agreement within the time period required by such
regulatory authority.
<PAGE>
(c) Orion shall, or shall cause McGee to, deliver to Sun
a written business plan for the Pool for each of 1995 and 1996
which shall address in reasonable detail the topics set forth in
Schedule 6.2 and which shall be delivered, in the case of the 1995
business plan, not later than 60 days following the Closing and, in
the case of the 1996 business plan, not later than February 29,
1996. At all times prior to December 31, 1997, Sun shall have the
right, at its own expense, to visit the headquarters office of
McGee at reasonable times and on a reasonable number of occasions
during normal business hours to discuss the business and affairs of
McGee with officers of McGee reasonably designated by McGee for
such purpose and to make copies of relevant corporate records;
provided that each of Orion and McGee shall have received at least
ten days' notice of each such visit.
(d) From and after the Closing Date, Orion shall take,
and shall use commercially reasonable best efforts to cause McGee
and the insurance Subsidiaries of Orion to take, all steps
necessary to enable McGee to manage, after 12:00 p.m. New York Time
on December 31, 1995, the Pool in accordance with the business plan
of McGee. To that end, Orion will proceed or will use commercially
reasonable best efforts to cause McGee and the Subsidiaries of
Orion to proceed, in a manner consistent with reasonable commercial
practice, to:
(i) form or acquire, if the same shall not
theretofore have been formed or acquired pursuant to Section
5.5, an insurance company organized and existing under the
laws of Bermuda and qualified to issue insurance policies of
a type and in a manner and amount consistent with prior
practices of Sun Bermuda; provided that Orion may, at its
election in its sole discretion, satisfy its obligation under
this clause (i) by acquiring from Sun at any time prior to
December 31, 1997 all of the outstanding capital stock of Sun
Bermuda pursuant to an Option Agreement in the form attached
as Exhibit D;
(ii) make with all necessary insurance regulatory
authorities such policy-form and rate filings as shall be
necessary so that one or more insurance Subsidiaries of Orion
is able to issue all forms of policies now being issued on
behalf of the Pool by one or more of London, Phoenix and
Marine; and
- 41 -
<PAGE>
(iii) reduce the gross direct written premiums of
Phoenix in respect of insurance policies issued for the U.S.
Pool and having an inception date during the separate periods
from July 1, 1995 to December 31, 1995, from January 1, 1996
to December 31, 1996 and from January 1, 1997 to December 31,
1997 to be in an amount less than five percent of the
policyholder surplus of Phoenix at December 31, 1994, December
31, 1995 and December 31, 1996, respectively. For purposes of
the immediately foregoing provision, all gross direct written
premiums of Phoenix having inception dates during the period
July 1, 1995 through December 31, 1995 but attributable to
policies for which quotes were made by McGee prior to the
Closing shall be disregarded.
(e) From and after the Closing Date and until December
31, 1995 and 1996, respectively, Sun shall not take or allow
Phoenix to take any voluntary action to reduce policyholder surplus
of Phoenix to an amount less than $65,000,000 in the case of
December 31, 1995 and $50,000,000 in the case of December 31, 1996.
From and after the Closing Date and until December 31, 1995, Sun
shall not take or allow Marine to take any voluntary action to
reduce policyholder surplus of Marine to an amount less than the
minimum amount required for Marine to be an authorized surplus
lines insurer in the State of Texas but not in an amount in excess
of $15,250,000.
(f) From and after the Closing Date, neither Sun nor any
Subsidiary or Affiliate of Sun shall have or threaten or assert any
claim against the Pool, or against McGee or any Subsidiary of McGee
in respect of the operation of the Pool subsequent to September 8,
1987 and prior to the Closing Date, except to the extent that such
person may be entitled to share in the experience of the Pool
during any year as set forth in the financial statements of the
Pool furnished to such person, and Sun shall indemnify and hold
each of Orion and McGee harmless from all losses, costs and
expenses (including but not limited to legal fees and all costs of
investigation and defense) incurred by either in the event any such
claim is threatened or asserted.
(g) At all times prior to December 31, 1997 McGee shall
maintain errors and omissions coverage in an amount not less than
$6,500,000 per occurrence and a deductible of not more than
$100,000 per occurrence with one or more insurers rated "A" or
better by A.M. Best Company; provided that any insurance Subsidiary
of Orion shall be presumed to be approved by Sun and provided
- 42 -
<PAGE>
further that if the annual premiums for such coverage (pro-rated
for the period from the Closing Date to March 30, 1996) shall
exceed in the year beginning April 1, 1996, 103% of such 1994
premiums or in the year beginning April 1, 1997 shall be more than
106% of such 1995 premiums then McGee shall maintain coverage in
such amount and with such deductibles as may be obtained by McGee
within the premium-amount limits set forth above.
VII.
CONDITIONS TO OBLIGATIONS
OF ORION
-------------------------
The obligations of Orion under this Agreement are, at its
option, subject to the fulfillment, on or before the Closing Date,
of each of the following conditions precedent:
Section 6.1 COVENANTS. Sun and each Subsidiary of Sun
shall have performed and complied with all the terms, covenants and
conditions required by this Agreement to be performed or complied
with by Sun on or before the Closing Date, and Orion shall have
received from Sun, at the Closing, a certificate executed by an
officer of Sun to that effect, dated the Closing Date.
Section 6.2 REPRESENTATIONS AND WARRANTIES. The
representations and warranties made by Sun in this Agreement shall
be true and correct as of the Closing Date as though such
representations and warranties were made at and as of such time,
and Orion shall have received from Sun one or more certificates,
dated the Closing Date, to that effect executed by one or more
officers of Sun.
Section 6.3 ABSENCE OF LITIGATION AND REQUIRED
REGULATORY APPROVALS. Every consent of or approval by any
governmental authority which is required in connection with the
transactions contemplated by this Agreement shall have been
obtained and be in full force and effect and there shall not be in
effect any injunction, writ, preliminary restraining order or any
order, ruling or request of any nature issued by a court or
governmental agency of competent jurisdiction directing that any
transactions provided for herein not be consummated as so provided
and no suit, action, proceeding or investigation shall be pending
or threatened before any court or governmental agency, which
relates to or asserts (i) the illegality of any of the transactions
- 43 -
<PAGE>
contemplated by this Agreement, or which seeks the restraint or
prohibition of the consummation of any of the transactions
contemplated by this Agreement or (ii) that material misleading
statements or omissions have been made in connection with the
consummation of any of the transactions contemplated by this
Agreement or (iii) a claim for damages in a material amount, or
other material relief against McGee or any of McGee's Subsidiaries,
or against Orion, if such claim shall arise from or relate to this
Agreement or the transactions contemplated hereby.
Section 6.4 PREMERGER NOTIFICATION. Any applicable
period of time necessary before the transactions contemplated
hereby can be consummated, as provided by the Hart-Scott-Rodino Act
or the Investment Canada Act, shall have expired, all required
clearances thereunder shall have been obtained and no action or
proceeding shall have been instituted by any of the Premerger
Notification Agencies or any similar agency claiming to have
jurisdiction for the purpose of enjoining or delaying the
consummation of the transactions contemplated hereby.
Section 6.5 NO MATERIAL ADVERSE EFFECT. Sun shall have
furnished to Orion a certificate of an officer of Sun to the effect
that no act, omission or event has occurred between the date hereof
and the Closing Date which could reasonably be expected to have a
Material Adverse Effect.
Section 6.6 EMPLOYMENT AND CONSULTING AGREEMENTS. McGee
shall have entered into an Agreement With Respect to Employment and
Unfair Competition dated the Closing Date and substantially in the
form of Exhibit E-1 with each of the key management employees of
McGee identified therein and one or more Consulting Agreements in
the form of Exhibit E-2 with the individuals identified therein.
Such agreements shall not have been terminated, rescinded,
cancelled, revoked, amended, modified or superseded, and no agree-
ment or understanding to do any of the foregoing in the future
shall exist, nor shall there have been any breach of any term or
condition of either such agreement by any party thereto, whether or
not consented to or waived by the other party nor shall any act or
omission have occurred which with the passage of time or the giving
of notice or both would constitute a breach of either thereof.
Section 6.7 MANAGEMENT AND REINSURANCE AGREEMENTS.
Management and Reinsurance Agreements in the forms of Exhibits B
and C shall have been entered into and shall be in full force and
effect.
- 44 -
<PAGE>
Section Unfair Competition and Confidentiality Agreements. Sun,
Phoenix, Marine, London and Sun Bermuda shall have entered into an
Agreement With Respect to Confidentiality and Unfair Competition in
the form of Exhibit F.
Section 6.8 OPINION OF COUNSEL FOR SUN AND MCGEE.
Orion shall have received an opinion from Dewey Ballantine, special
counsel for Sun, with respect to matters relating to Sun, its
Subsidiaries and its and their obligations under this Agreement and
the other Opinion Documents referred to below, and (ii) an opinion
of John P. Iacono, Esq., Senior Vice President and General Counsel
of McGee, with respect to matters relating to McGee and its
Subsidiaries and their obligations under the Opinion Documents,
each dated the Closing Date, in the form attached as Exhibit 7.9
and in form and substance satisfactory to Orion and its counsel.
VIII.
CONDITIONS TO OBLIGATIONS OF SUN
---------------------------------
The obligations of Sun under this Agreement are, at its
option, subject to the fulfillment, on or before the Closing Date
of each of the following conditions precedent:
Section 7.1 COVENANTS. Orion shall have performed or
complied with all the terms, covenants and conditions required by
this Agreement to be performed or complied with by it on or before
the Closing Date, and Sun shall have received from Orion, at the
Closing, a certificate executed by an officer of Orion to that
effect, dated the Closing Date.
Section 7.2 REPRESENTATIONS AND WARRANTIES. The
representations and warranties made by Orion in this Agreement
shall be true and correct as of the Closing Date as though such
representations and warranties were made at and as of such time and
Sun shall have received from Orion a certificate, dated the Closing
Date, to that effect executed by an officer of Orion.
Section 7.3 ABSENCE OF LITIGATION AND REQUIRED
REGULATORY APPROVALS. Every consent of or approval by any
governmental authority which is required in connection with the
transactions contemplated by this Agreement shall have been
obtained and be in full force and effect and there shall not be in
effect any injunction, writ, preliminary restraining order or any
- 45 -
<PAGE>
order, ruling or request of any nature issued by a court or
governmental agency of competent jurisdiction directing that any
transactions provided for herein not be consummated as so provided
and no suit, action, proceeding or investigation shall be pending
or threatened before any court or governmental agency, which
relates to or asserts (i) the illegality of any of the transactions
contemplated by this Agreement, or which seeks the restraint or
prohibition of the consummation of any of the transactions
contemplated by this Agreement or (ii) that material misleading
statements or omissions have been made in connection with the
consummation of any of the transactions contemplated by this
Agreement or (iii) a claim for damages in a material amount, or
other material relief against McGee or any of McGee's Subsidiaries,
or against Sun or any of its Subsidiaries, if such claim shall
arise from or relate to this Agreement or the transactions
contemplated hereby.
Section 7.4 PREMERGER NOTIFICATION. Any applicable
period of time necessary before the transactions contemplated
hereby can be consummated, as provided by the Hart-Scott-Rodino Act
or the Investment Canada Act, shall have expired, all required
clearances thereunder shall have been obtained and no action or
proceeding shall have been instituted by any of the Premerger
Notification Agencies or any similar agency claiming to have
jurisdiction for the purpose of enjoining or delaying the
consummation of the transactions contemplated hereby.
Section 7.5 MANAGEMENT AND REINSURANCE AGREEMENTS.
Management and Reinsurance Agreements in the forms of Exhibit B and
C shall have been entered into and shall be in full force and
effect.
Section 7.6 OPINION OF COUNSEL FOR ORION. Sun shall
have received an opinion of Donovan Leisure Newton & Irvine,
counsel for Orion, dated the Closing Date, in the form attached as
Exhibit 8.6 and in form and substance satisfactory to Sun and its
counsel.
IX.
TERMINATION
------------
Section 8.1 TERMINATION. At any time prior to the
Closing Date, this Agreement may be terminated and the transactions
provided for herein abandoned, whether before or after adoption and
approval thereof by Sun and Orion:
- 46 -
<PAGE>
(a) by mutual written consent of the parties hereto;
(b) by Orion, if on the Closing Date any of the
conditions set forth in Article VII hereof shall not have been met;
(c) by Sun, if on the Closing Date any of the conditions
set forth in Article VIII hereof shall not have been met;
(d) by Sun or Orion, if the Closing shall not have
occurred on or before August 15, 1995.
Section 8.2 EFFECT OF TERMINATION. In the event of any
termination pursuant to this Article IX, the parties hereto shall
be released from all liabilities and obligations arising under this
Agreement with respect to matters contemplated by this Agreement,
other than for damages to the extent arising from a prior breach of
this Agreement and other than as provided in Section 5.1 (last
sentence only), 12.1 and 12.8.
Section 8.3 CONDUCT FOLLOWING TERMINATION. If this
Agreement is terminated pursuant to Section 9.1(b) or Section
9.1(d), until a date ninety days after such termination, Sun will
not, nor will it cause, direct or authorize its Subsidiaries or any
officers, directors, affiliates, employees or agents of Sun or any
Subsidiaries of Sun to, initiate, solicit or engage in negotiations
or discussions with any third party for the purpose of assisting,
inducing or soliciting such party to make a proposal for or in
respect of (i) any offer to purchase, or any invitation to tender
for purchase, any or all of the capital stock of McGee or any
Subsidiary of McGee; (ii) any proposed merger or other form of
business combination with McGee or any Subsidiary of McGee; or
(iii) any purchase of any substantial asset or liability of McGee
or any Subsidiary of McGee or any interest in any substantial asset
or liability of McGee or any Subsidiary of McGee or provide
information to any third party in respect of or in furtherance of
such a proposal and will notify Orion promptly if any solicitations
are received subsequent to the date hereof with respect to any such
proposal.
- 47 -
<PAGE>
X.
AMENDMENT; WAIVERS
--------------------
Section 9.1 AMENDMENTS, MODIFICATIONS, ETC. At any time
prior to the Closing, this Agreement and the Exhibits hereto may be
amended, modified, superseded or supplemented to the extent
permitted by applicable law only by an instrument in writing
executed and delivered on behalf of each of the parties hereto,
which instrument when so executed and delivered shall thereupon
become a part of this Agreement and the provisions thereof shall be
given effect as if contained in this Agreement as of the date
hereof.
Section 9.2 WAIVERS. The representations, warranties,
covenants and conditions of this Agreement may be waived only by a
written instrument executed by the party so waiving. The failure
of any party at any time or times to require performance of any
provision hereof shall not affect the right of such party at a
later time to enforce the same. No waiver by any party of any
condition, or breach of any term, covenant, agreement,
representation or warranty contained in this Agreement, in any one
or more instances, shall be deemed to be or construed as a waiver
of any other condition or of the breach of any other term,
covenant, agreement, representation or warranty contained in this
Agreement.
XI.
DEFINED TERMS
--------------
When used as defined terms in this Agreement, the
following terms shall have the meanings set forth herein:
"ACCREDITED INVESTOR" shall have the meaning given to it
in Section 4.6.
"ANCILLARY AGREEMENTS" shall mean the Management
Agreements, the Reinsurance Agreements, and the Agreement with
Respect to Confidentiality and Competition in the respective forms
attached as Exhibits hereto.
"BENEFIT PLAN" shall have the meaning set forth in
Section 3.14.
- 48 -
<PAGE>
"BERMUDA MANAGEMENT AGREEMENT" shall have the meaning set
forth in Section 5.5.
"COMMON STOCK" shall have the meaning set forth in the
third recital paragraph.
"CLOSING" shall each have the meaning set forth in
Section 2.1.
"CLOSING DATE" shall have the meaning set forth in
Section 2.1.
"CODE" shall mean the Internal Revenue Code of 1986, as
amended.
"CONSOLIDATED GROUP" shall have the meaning set forth in
Section 3.11(a).
"EMPLOYMENT CONTINUATION AGREEMENTS" shall mean and
include the ag reements, forms of which are attached as Exhibit
E-1.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
"ERISA AFFILIATE" shall have the meaning set forth in
Section 3.14.
"HART-SCOTT-RODINO ACT" shall have the meaning set forth
in Section 5.4.
"IRS" shall mean the Internal Revenue Service.
"LONDON" shall mean the Canadian Branch of The London
Assurance, an English corporation.
"MANAGEMENT AGREEMENT" shall mean the Bermuda Management
Agreement and the management agreements referred to in Section
6.2(b).
"MARINE" shall mean Marine Indemnity Insurance Company of
America, a New York corporation.
- 49 -
<PAGE>
"MATERIAL ADVERSE EFFECT" shall have the meaning set
forth in Section 3.1.
"MCGEE" shall mean Wm. H. McGee & Co., Inc., a New York
corporation.
"MCGEE BERMUDA" shall have the meaning set forth in
Section 5.5.
"NEW YORK TIME" shall mean time, whether Eastern Standard
or Daylight Saving as may be the case, as determined in the City of
New York.
"ORION" shall mean Orion Capital Corporation, a Delaware
corporation.
"PBGC" shall mean the Pension Benefit Guaranty
Corporation.
"PHOENIX" shall mean Phoenix Assurance Company of New
York, a New Hampshire corporation.
"POOL" shall mean those insurance underwriting and
management arrangements which have been in effect from time to time
between and among one or more of McGee, Wm. H. McGee & Co. of
Canada Ltd. and Wm. H. McGee & Co. (Bermuda) Ltd. and the insurers
participating in such arrangements as set forth in the Pool
Agreements and among them, the present participants in the Canadian
Pool and United States Pool being as follows:
UNITED STATES POOL CANADIAN POOL
POOL PARTICIPANTS % POOL PARTICIPANTS %
- -------------------- -------------------
Phoenix 45% London 35.0%
Taisho Marine & Fire
Insurance Co. of America 15.0% Marine 28.5%
Marine 7.5% Providence Washington
Insurance Company 15.0%
Continental Casualty
Company (CNA) 7.5% SICH 15.0%
SICH 7.0% Mitsui Marine and Fire 6.5%
Insurance Company
- 50 -
<PAGE>
UNITED STATES POOL CANADIAN POOL
POOL PARTICIPANTS % POOL PARTICIPANTS %
- -------------------- -------------------
The Providence Washington
Insurance Company 7.0%
Lucky Insurance Company,
Ltd. (United States Branch) 6.0%
The Baloise Insurance Co.
of America 5.0%
Each reference to the "Pool" shall, unless the context
otherwise requires, be deemed to include both the Canadian
Pool and the United States Pool and each annual renewal of the
Pool so long as there shall be outstanding assets or
liabilities of the Pool in respect of that year and shall
further be deemed to include the participation of the Pool
Participants in the Syndicates.
"POOL AGREEMENTS" means (i) the Inter-Office Reinsurance
Agreement dated as of January 1, 1975, as amended by the related
Addenda Nos. 1-4 and supplemented by annual Schedules of
Participations thereto, among McGee and the Pool Participants (the
"Inter-Office Reinsurance Agreement"), and (ii) the Underwriting
Management Agreements, General Agency & Management Agreements,
Management Agreements and related Ancillary Agreements, each as
amended, between or among McGee and the Pool Participants, which
are listed in Schedule 3.15 as being entered into in connection
with the Pool.
"POOL PARTICIPANTS" shall mean those insurers and
reinsurers who, from time to time, have participated or may
participate in the Pool in respect of any year.
"POOL TRANSFER TIME" shall have the meaning set forth in
Section 6.1.
"PREMGERGE NOTIFICATION AGENCIES" shall have the meaning
set forth in Section 5.4.
"REINSURANCE AGREEMENT" shall mean the quota share
retrocession agreement referred to in Section 6.1(b).
- 51 -
<PAGE>
"SICH" shall mean Security Insurance Company of Hartford,
a Connecticut corporation and a wholly owned Subsidiary of Orion.
"SUBSIDIARY" means any corporation of which a
corporation or one or more Subsidiaries of such corporation owns or
controls, directly or indirectly, more than fifty percent (50%) of
the outstanding stock having by its terms ordinary voting power to
elect a majority of the Board of Directors of such corporation,
irrespective of whether or not at the time stock of any one class
or classes of such corporation shall have or might have voting
power by reason of the happening of any contingency.
"SUN" shall mean Sun Alliance USA Inc., a New York
corporation.
"SUN BERMUDA" shall mean Sun Insurance Company (Bermuda)
Limited, a Bermuda corporation and an affiliate of Sun.
"SUN'S KNOWLEDGE" shall mean, when used to qualify a
representation or warranty of Sun, that such is being made or given
only on the basis of and to the extent of the knowledge of Sun and
its officers and directors, reasonable inquiry having been made by
them or on their behalf in respect of the subject matter of the
representation or warranty.
"SYNDICATES" shall mean and include the American Hull
Syndicate, the Water Quality Insurance Syndicate, the American
Offshore Syndicate and the other insurance and reinsurance
syndicates listed in Schedule 11 hereto.
"TAXES" shall have the meaning set forth in Section
3.11(a).
"TAX RETURN" shall have the meaning set forth in Section
3.11(a).
XII.
MISCELLANEOUS PROVISIONS
-------------------------
Section 11.1 EXPENSES. Whether or not the Closing shall
have occurred and regardless of whether this Agreement is
terminated, each party hereto shall pay all of the costs and
expenses incurred by it in connection with this Agreement and the
- 52 -
<PAGE>
other transactions contemplated hereby (including, without
limitation, disbursements and expenses of its attorneys,
accountants and advisors, and printing and filing costs and fees).
Section 11.2 NOTICES. All notices or other
communications required or permitted under this Agreement shall be
in writing and sufficient if delivered personally or sent by
confirmed telecopy or by registered or certified mail, postage
prepaid, addressed as follows:
If to Orion, to
Orion Capital Corporation
600 Fifth Avenue
New York, New York 10020-2302
Attn: Treasurer
Fax: (212) 247-4824
with a copy to
Donovan Leisure Newton & Irvine
30 Rockefeller Plaza
New York, N.Y. 10112
Attn: John J. McCann, Esq.
Fax: (212) 632-3315
If to Sun or to McGee, to
Sun Alliance USA Inc.
10 East 50th Street
27th Floor
New York, New York 10022
Attn: John A. Moore
President
Fax: (212) 753-8552
with copies to
Dewey Ballantine
1301 Avenue of the Americas
New York, N.Y. 10019-6092
Attn: James A. FitzPatrick, Jr., Esq.
Fax: (212) 259-6333
- 53 -
<PAGE>
Any party may change the person and addresses to which notices or
other communications are to be sent to it by giving written notice
of any such change in the manner provided herein for giving notice.
Section 11.3 ENTIRE AGREEMENT. This Agreement, together
with the schedules and exhibits hereto and the documents and
instruments referred to herein, sets forth the entire agreement and
understanding of the parties hereto in respect of the transactions
contemplated hereby, and supersedes all prior agreements,
arrangements and understandings relating to the subject matter
hereof. No party hereto has relied upon any oral or written
statement, representation, warranty, covenant, condition,
understanding or agreement made by any other party or any
representative, agent or employee thereof, except for those
expressly set forth in this Agreement or in the schedules or
exhibits hereto or the documents or instruments referred to herein.
Section 11.4 NO ASSIGNMENT. This Agreement shall inure
to the benefit of, and be binding upon, the respective successors
and assigns of the parties hereto. No assignment of any rights or
delegation of any obligations provided for herein shall be made by
any party hereto without the express prior written consent of each
other party except that Orion may assign its rights (but not
delegate its duties except as permitted herein) hereunder to any
wholly-owned Subsidiary of Orion.
Section 11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES
AND COVENANTS. All representations and warranties of the parties
hereto which are contained in this Agreement shall remain operative
and in full force and effect until December 31, 1997, regardless of
any investigation made by or on behalf of any of the parties
hereto, following the Closing. Notwithstanding anything herein to
the contrary, neither party hereto shall be liable to the other (or
any affiliate thereof) for any damages, liabilities, losses, costs
or other obligations arising from any inaccuracy or breach of any
representation or warranty or breach or nonfulfillment of any
covenant or agreement hereunder unless and until the aggregate
amount of all such damages, liabilities, losses, costs or other
obligations exceeds $500,000 in which event such party shall be
liable to the other for the full amount thereof, up to a maximum
aggregate payment of $22,000,000, except that liability described
in Section 5.7(d) of this Agreement shall not be subject to such
maximum aggregate payment. This Section 12.5 shall not apply to
Taxes or matters with respect thereto, which shall be governed
exclusively under Section 5.8.
- 54 -
<PAGE>
Section 11.6 GOVERNING LAW. This Agreement shall be
governed by, and construed in accordance with, the laws of the
State of New York applicable to agreements made and to be performed
entirely within such State, except (a) matters related to the
validity of corporate action, which shall be governed by the laws
of the state or other jurisdiction of incorporation of the relevant
corporation and (b) matters related to compliance of the
transactions contemplated by the Agreement with applicable
insurance regulatory statutes.
Section 11.7 DISPUTE RESOLUTION. If a dispute arises
out of or relates to this Agreement, or the performance or an
asserted breach thereof, the parties agree first to try in good
faith to settle the dispute and further agree that, to that end:
(a) A meeting shall be held promptly between Orion and
Sun attended by individuals with decision-making authority
regarding the dispute, to attempt in good faith to negotiate a
resolution of the dispute.
(b) If within fifteen days of the first meeting of such
individuals they have not succeeded in negotiating a resolution of
the dispute or agreed to extend the time within which to do so, the
parties agree to submit the dispute to mediation in accordance with
the Commercial Mediation Rules of the American Arbitration
Association. Orion and Sun shall bear their own costs and share
equally the costs of the mediation.
(c) Orion and Sun will jointly appoint a mutually-
acceptable mediator, seeking assistance in such regard from the
American Arbitration Association if they have been unable to agree
on such appointment within a period of twenty days from the
conclusion of the negotiation period.
(d) The parties agree to participate in good faith in
the mediation, and negotiations related thereto or arising
therefrom, for a period of 30 days after appointment of a mediator.
If the parties are not successful in solving the dispute through
mediation within that period of time (or, if sooner, within 60 days
from the conclusion of the negotiation period), then the dispute
shall be resolved by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, with
each of Orion and Sun selecting one arbitrator of a panel of three
and the two arbitrators so selected designating the third member of
the panel of arbitrators. In the event that such two arbitrators
- 55 -
<PAGE>
cannot agree on a third arbitrator within thirty days, one shall be
designated by the American Arbitration Association upon application
by either of the two arbitrators. The decision of the arbitrators
shall be binding upon the parties and judgment upon the award
entered by the arbitrators may be entered in any court having
jurisdiction thereof. Orion and Sun shall each bear its own costs
and the costs of the arbitrator appointed by each of them and they
shall share equally the costs of the third arbitrator and the
administrative costs of the arbitration.
Section 11.8 PRESS RELEASES. Orion and Sun will each
consult with the other in advance of making any public announcement
or press release, releasing any publicity or otherwise disclosing
any information related to the execution of this Agreement or any
transactions contemplated hereby, and each of Orion and Sun will
obtain the consent of the other with respect to the form, content
and timing thereof, which consent shall not unreasonably be
withheld, except in the case of such disclosure as may be required
by applicable law or securities exchange requirements.
Section 11.9 COUNTERPARTS. This Agreement may be
executed in any number of separate counterparts, each of which
shall be deemed to be an original, but which together shall
constitute one and the same instrument.
Section 11.10 HEADINGS. The section and article
headings contained in this Agreement are inserted for convenience
of reference only and shall not affect the meaning or
interpretation of this Agreement.
- 56 -
<PAGE>
IN WITNESS WHEREOF, each party hereto has caused this
Agreement to be duly executed on the date first above written.
ORION CAPITAL CORPORATION
By:
-----------------------
Attest:
By:
-----------------
Secretary
SUN ALLIANCE USA INC.
By:
--------------------
Attest:
By:
-----------------
Secretary
- 57 -
<PAGE>
EXHIBIT B
QUOTA SHARE RETROCESSION AGREEMENT
BETWEEN
MARINE INDEMNITY INSURANCE COMPANY OF AMERICA
(Hereinafter called the "Reinsured")
AND
SECURITY INSURANCE COMPANY OF HARTFORD
(Hereinafter called the "Retrocessionaire")
In consideration of the premium and terms and conditions
hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
---------
Business Covered:
- -----------------
The Reinsured obligates itself to cede to the
Retrocessionaire and the Retrocessionaire obligates itself to
accept as reinsurance from the Reinsured, a 16 2/3% quota share
interest of the Reinsured's Net Retention, as hereinafter defined,
of its 45% participation of insurance or reinsurance, or other
evidences of liability ceded or retroceded to the Reinsured under
the Wm. H. McGee & Co., Inc. Inter-Office Reinsurance Agreement
("Inter-Office Reinsurance Agreement").
Net Retention:
- -------------
The term Net Retention shall mean the gross amount of the
Reinsured's liabilities and obligations on insurance and
reinsurance assumed under the Inter-Office Reinsurance Agreement
less any reinsurance effected by Wm. H. McGee & Co., Inc. on behalf
of the Inter-Office Reinsurance Pool or by the Reinsured. It is
also understood and agreed that this Agreement shall apply to the
Reinsured's Net Retention after deduction of all per risk
reinsurances.
<PAGE>
ARTICLE II
----------
Commencement and Termination:
- ----------------------------
This Agreement shall take effect 12:01 a.m. Eastern
Standard Time, January 1, 1995 [and shall apply to all losses
occurring on and after this date in respect of new and renewal
business written on and after this date.] or [and shall apply to
all risks attaching on or after that date regardless of the date of
the issue of the insurance policy or policies concerned.] This
Agreement shall remain in force and effect until 12:00 p.m. Eastern
Standard Time, December 31, 1995 at which time it shall
automatically terminate without any notice required by the parties
hereto.
Special Termination:
- -------------------
It is especially understood and agreed that should at any
time the Reinsured or the Retrocessionaire lose the whole or part
of its paid up capital, become insolvent, or be placed in
conservation, rehabilitation or liquidation, or have a receiver
appointed, or be acquired or controlled by, merged with, or
reinsure its entire business with any other company or corporation,
the other party shall have the right to terminate this Agreement
forthwith upon the giving of (30) thirty days notice in writing,
which shall be in accordance with the termination provisions of
this Article.
If any law or regulation of the federal or state or local
government of any jurisdiction in which the Company is doing
business shall render illegal the arrangements made in this
Agreement, the Agreement can be terminated immediately insofar as
it applies to such jurisdiction by the Reinsured giving notice to
the Retrocessionaire to such effect.
ARTICLE III
------------
Territory:
- ----------
The liability of the Retrocessionaire under this
Agreement shall be limited to losses in connection with property
located in the United States of America, its territories,
possessions, dependencies, Puerto Rico and Canada, except that the
Retrocessionaire's liability shall also apply to properties,
- 2 -
<PAGE>
wherever located, which are protected under extraterritorial
provisions of the Company's original contracts.
ARTICLE IV
----------
Exclusions:
- ----------
This Agreement does not cover:
1. Life, Accident and Health and all Casualty business
including Third Party Bodily Injury Liability and Medical Payments;
2. Loss under Third Party Property Damage Liability
Coverage, except Legal Liability pursuant to a care, custody or
control exposure such as, but not limited to, Warehousemen's Legal
Liability, Garagekeeper's Legal Liability and Fire Legal Liability;
3. Fidelity and Surety, except when written as part of
and included as an incidental part of Multiple Peril Policies;
4. Hail and/or Rain on growing, standing and/or drying
crops;
5. War, as per North American War Exclusion Clause;
6. Offshore Oil and Gas Drilling Rigs;
7. Livestock Mortality;
8. Aviation business, including satellites, but not to
exclude land transit or temporary location risks on aircraft hulls
when covered under Inland Marine Transportation policies, nor
location coverage on aircraft stocks and parts;
9. Financial Guarantee which shall for the purpose of
this Agreement be construed to mean policies guaranteeing payment
of indebtedness, insolvency or financial credit;
10. Residual Value Insurance;
11. Flood and Earthquake, except when written in
conjunction with other perils;
- 3 -
<PAGE>
12. Nuclear Incidents as per the following clauses:
-Nuclear Incident Exclusion Clauses - Physical Damage -
Reinsurance, U.S.A. and Canada;
-Nuclear Incident Exclusion Clauses - Physical Damage and
Liability (Boiler and Machinery Policies) Reinsurance - U.S.A. and
Canada;
-Nuclear Energy Risks Exclusion Clause (Reinsurance) 1984
(Worldwide, excluding U.S.A. and Canada);
13. Treaty Reinsurance Assumed;
14. Insolvency Funds as per Insolvency Funds Exclusion
Clause attached hereto; and
15. See page and Pollution as per I.S.O. Exclusion Clause
or so deemed.
ARTICLE V
----------
Premium:
- -------
The Retrocessionaire shall receive its share of the net
premiums received by the Reinsured after deductions for all
brokerage and/or Agency and/or General Agency commissions paid or
payable, any contingent or profit commissions paid or payable to
Agents and Reinsured's General Agents, any overriding commission
payable to the Reinsured's manager and any contingent or profit
commission upon the net profits payable to the Reinsured's manager.
ARTICLE VI
----------
Follow the Fortunes:
- --------------------
The Retrocessionaire shall be subject to the same
conditions as the original insurance and reinsurance policies and
shall follow, subject to the terms of this Agreement, the fortunes
of the Reinsured in respect of all business ceded hereunder. The
Reinsured shall not be prejudiced in any way by any involuntary
omission, delay or error, it being understood that such omission,
delay or error shall be corrected as soon as possible.
- 4 -
<PAGE>
ARTICLE VII
------------
Accounts:
- --------
The Reinsured shall render an account for all business
written as nearly as possible on the twentieth day of each month
for the preceding month's business and shall remit balances due the
Retrocessionaire not later than 90 days from the close of the month
in which the business is written.
The Reinsured shall likewise render an account for all
loss settlements, reinsurance recoveries due thereon as well as
salvages, refunds and/or other recoveries. All accounts and
settlements between the parties shall be made in U.S. Dollars.
Remittances or settlements are not to prejudice the right
of the Reinsured to charge back to the Retrocessionaire any premium
or other credits made by the Reinsured's manager which may prove
uncollectible for any reason.
ARTICLE VIII
-------------
Claims, Taxes and Other Expenses:
- --------------------------------
The Retrocessionaire shall pay its proportionate share of
all (i) losses and/or loss adjustment expenses as well as legal or
other expenses in connection with the adjustment or resistance of
claims (ii) expenses charged by Reinsured's manager in the handling
of claims and for inspection, survey or audit of insureds records;
and (iii) premium and franchise taxes payable by the Reinsured to
any municipal, provincial, state, federal or regulatory authority.
It is understood and agreed that in consideration of the
terms under which this Agreement is issued, the Reinsured
undertakes not to claim any deduction with respect to the premium
hereon when making premium tax returns to the appropriate tax
authorities.
- 5 -
<PAGE>
ARTICLE IX
-----------
Seven Year Roll-Over:
- --------------------
The Retrocessionaire agrees to assume responsibility for
its share of unearned premiums, outstanding and incurred but not
reported losses recorded by the Reinsured for a period of seven (7)
years following the close of the Accounting Year in which the
premiums were written. At that point any balance of premiums or
losses are to be transferred and distributed by the Reinsured's
Managers under a Reinsurance Portfolio arrangement among the
companies who are then members of the Manager's Group during the
succeeding Accounting year.
ARTICLE X
----------
Insolvency:
- ----------
In the event of the insolvency of the Reinsured, this
Reinsurance shall be payable by the Retrocessionaire directly to
the Company or its liquidator, receiver, conservator or statutory
successor on the basis of the liability of the Reinsured without
diminution because of the insolvency of the Reinsured or because
the liquidator, receiver, conservator or statutory successor of the
Reinsured has failed to pay all or a portion of any claim.
It is agreed, however, that the liquidator, receiver,
conservator or statutory successor of the Reinsured shall give
written notice to the Retrocessionaire of the pendency of a claim
against the insolvent Reinsured indicating the policy or bonds
reinsured which claim would involve a possible liability on the
part of the Retrocessionaire within a reasonable time after such
claim is filed in the conservation or liquidation proceeding or in
the receivership and that during the pendency of such claim, the
Retrocessionaire may investigate such claim and interpose, at its
own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses which it may deem available to
the Reinsured or its liquidator, receiver, conservator or statutory
successor. The expense thus incurred against the insolvent
Reinsured as part of the expense of liquidation to the extent of a
proportionate share of the benefit which may accrue to the
Reinsured solely as a result of the defense undertaken by the
Retrocessionaire.
- 5 -
<PAGE>
The reinsurance under this Agreement shall be payable by
the Retrocessionaire directly to the Reinsured, or to its
liquidator, receiver, conservator or statutory successor, except as
provided by Section 4118(a) of the New York Insurance Law or except
(a) where the agreement specifically provides another payee of such
reinsurance in the event of the insolvency of the Company and (b)
where the Retrocessionaire with the consent of the direct insured
or insureds and with the prior approval of the Superintendent of
Insurance of the State of New York to the certificate of assumption
on New York risks has assumed such policy obligations of the
Reinsured as direct obligations of the Retrocessionaire to the
payees under such policies and in substitution for the obligations
of the Reinsured to such payees.
ARTICLE XI
-----------
Arbitration:
- ------------
As a precedent to any right of action hereunder, if any
differences shall arise between the contracting parties with
reference to the interpretation of this Agreement or their rights
with respect to any transaction involved, whether arising before or
after termination of this Agreement, such differences shall be
submitted to arbitration upon the written request of one of the
contracting parties.
Each party shall appoint an arbitrator within thirty days
of being requested to do so, and the two named shall select a third
arbitrator before entering upon the arbitration. If either party
refuses or neglects to appoint an arbitrator within the time
specified, the other party may appoint the second arbitrator. If
the two arbitrators fail to agree on a third arbitrator within
thirty days of their appointment, each of them shall name three
individuals, of whom the other shall decline two, and the choice
shall be made by drawing lots. All arbitrators shall be active or
retired disinterested officers of insurance or reinsurance
companies or Underwriters at Lloyd's, London not under the control
of either party to this Agreement.
Each party shall submit its case to its arbitrator within
thirty days of the appointment of the third arbitrator or within
such period as may be agreed by the arbitrators. All arbitrators
shall interpret this Agreement as an honorable engagement rather
- 6 -
<PAGE>
than as merely a legal obligation. They are relieved of all
judicial formalities and may abstain from following the strict
rules of law. They shall make their award with a view to effecting
the general purpose of this Agreement in a reasonable manner rather
than in accordance with a literal interpretation of the language.
The decision in writing of any two arbitrators, when
filed with the contracting parties, shall be final and binding on
both parties. Judgment upon the award rendered may be entered in
any Court having jurisdiction thereof. Each party shall bear the
expense of its own arbitrator and shall jointly and equally bear
with the other party the expense of the third arbitrator and of the
arbitration. In the event that two arbitrators are chosen by one
party as above provided, the expense of the arbitrators and the
arbitration shall be equally divided between the two parties. Any
arbitration shall take place in the city in which the ceding
Company's Head Office is located unless some other place is
mutually agreed upon by the contracting parties.
ARTICLE XII
-----------
Alterations:
- -----------
1. This Agreement may be altered at any time by mutual
consent of the parties either by Addendum or by correspondence.
Such Addendum or correspondence shall be deemed to form an integral
part of this Agreement.
2. This Agreement may be executed in any number of
copies each of which shall be deemed to be an original and shall be
binding upon all parties.
- 7 -
<PAGE>
IN WITNESS WHEREOF the parties have executed this
Agreement this day of , 1995.
MARINE INDEMNITY INSURANCE COMPANY
OF AMERICA
------------------------------------
SECURITY INSURANCE COMPANY OF HARTFORD
----------------------------------------
- 8 -
<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,
---------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Computation of weighted average
number of common and equivalent
shares outstanding:
PRIMARY -
Weighted average number of shares
outstanding ............................. 14,055 14,249 14,461
Dilutive effect of stock options .......... 132 99 137
------- ------- -------
Weighted average number of common and
equivalent shares ....................... 14,187 14,348 14,598
======= ======= =======
Net earnings before preferred dividend
requirements ............................ $67,622 $55,245 $68,813
Preferred dividends ....................... - - 409
------- ------- -------
Net earnings attributable to common
stockholders ............................ $67,622 $55,245 $68,404
======= ======= =======
Net earnings per common share ............. $ 4.77 $ 3.85 $ 4.69
======= ======= =======
FULLY DILUTED -
Weighted average number of shares
outstanding ............................. 14,055 14,249 14,461
Dilutive effect of stock options .......... 139 118 137
Conversion of $2.125 Preferred Stock ...... - - 57
------- ------- -------
Weighted average number of common and
equivalent shares ....................... 14,194 14,367 14,655
======= ======= =======
Net earnings before preferred dividend
requirements ............................ $67,622 $55,245 $68,813
Adjustable rate preferred stock dividends.. - - 407
------- ------- -------
Net earnings attributable to common
stockholders ............................ $67,622 $55,245 $68,406
======= ======= =======
Net earnings per common share ............. $ 4.76 $ 3.85 $ 4.67
======= ======= =======
</TABLE>
<PAGE>
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
Dimock & Associates, Inc. Insurance Brokers California
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
Wm. H. McGee & Co., Inc. New York
Wm. H. McGee & Co. (Bermuda) Ltd Bermuda
Wm. H. McGee & Co. of Canada, Ltd. Canada
Wm. H. McGee & Co. of Puerto Rico, Inc. Puerto Rico
Wm. H. McGee Services, Inc. New York
Nations' Care, Inc. Connecticut
Orion Capital Companies, Inc. Connecticut
Orion Properties Corporation Delaware
Peninsula Excess Insurance Brokers, Inc. 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, 1995. The
Company owns slightly less than 50% of Guaranty National
Corporation of Englewood, Colorado and approximately 20% of
Intercargo Corporation of Schaumburg, Illinois.
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. 33-59847
on Form S-8 of our report dated February 21, 1996, appearing in this
Annual Report on Form 10-K of Orion Capital Corporation for the year
ended December 31, 1995.
Deloitte & Touche LLP
Hartford, Connecticut
March 15, 1996
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,
1995 of our reports dated February 20, 1996, appearing in the Annual
Report on Form 10-K of Guaranty National Corporation for the year ended
December 31, 1995.
Deloitte & Touche LLP
Denver, Colorado
March 15, 1996
<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,
1995, 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-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 782,869
<DEBT-CARRYING-VALUE> 265,169
<DEBT-MARKET-VALUE> 276,282
<EQUITIES> 304,885
<MORTGAGE> 1,979
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,602,861
<CASH> 3,584
<RECOVER-REINSURE> 291,527
<DEFERRED-ACQUISITION> 77,673
<TOTAL-ASSETS> 2,473,588
<POLICY-LOSSES> 1,274,982
<UNEARNED-PREMIUMS> 302,105
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 18,946
<NOTES-PAYABLE> 209,148
<COMMON> 161,996
0
0
<OTHER-SE> 328,907
<TOTAL-LIABILITY-AND-EQUITY> 2,473,588
749,003
<INVESTMENT-INCOME> 99,040
<INVESTMENT-GAINS> 11,885
<OTHER-INCOME> 14,352
<BENEFITS> 512,233
<UNDERWRITING-AMORTIZATION> 195,481
<UNDERWRITING-OTHER> 43,352
<INCOME-PRETAX> 88,035
<INCOME-TAX> 20,413
<INCOME-CONTINUING> 67,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,622
<EPS-PRIMARY> 4.77
<EPS-DILUTED> 4.76
<RESERVE-OPEN> 891,542
<PROVISION-CURRENT> 500,514
<PROVISION-PRIOR> 11,719
<PAYMENTS-CURRENT> 146,540
<PAYMENTS-PRIOR> 263,257
<RESERVE-CLOSE> 993,978
<CUMULATIVE-DEFICIENCY> 11,719
</TABLE>
