FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1997
( ) TRANSITION REPORT, PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 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, New York 10020 - 2302
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 332-8080
--------------
Former name, former address and former fiscal year if changed since
last report.
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
---- ----
13,760,551 shares of Common Stock, $1.00 par value, of the registrant
were outstanding on May 5, 1997.
Page 1 of 27
Exhibit Index Appears at Page 23
<PAGE>
ORION CAPITAL CORPORATION
FORM 10-Q INDEX
For the Quarter Ended March 31, 1997
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet at March 31, 1997 (Unaudited)
and December 31, 1996 .................................. 3 - 4
Consolidated Statement of Earnings for the three-months
ended March 31, 1997 and 1996 (Unaudited) .............. 5
Consolidated Statement of Stockholders' Equity for the
three-months ended March 31, 1997 and 1996 (Unaudited),
and for the year ended December 31, 1996 ............... 6
Consolidated Statement of Cash Flows for the three-months
ended March 31, 1997 and 1996 (Unaudited) .............. 7 - 8
Notes to Consolidated Financial Statements (Unaudited) ... 9 - 11
Independent Accountants' Review Report ................... 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............. 13 - 20
PART II. OTHER INFORMATION .................................. 21
Page 2
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(000s omitted)
March 31, 1997 December 31,
(Unaudited) 1996
-------------- ------------
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $331,541 - 1997 and $334,755 -
1996) .................................. $ 328,279 $ 326,841
Fixed maturities at market (amortized
cost $1,352,446 - 1997 and
$1,169,812 - 1996) ..................... 1,361,948 1,205,308
Common stocks at market (cost $143,258 -
1997 and $136,631 - 1996) .............. 201,158 209,281
Non-redeemable preferred stocks at
market (cost $159,764 - 1997 and
$151,439 - 1996) ....................... 162,828 152,312
Other long-term investments .............. 85,110 90,129
Short-term investments ................... 311,441 325,896
---------- ----------
Total investments ..................... 2,450,764 2,309,767
Cash ....................................... 5,606 11,607
Accrued investment income .................. 28,212 25,724
Investment in affiliate .................... 22,616 22,170
Accounts and notes receivable .............. 182,068 181,495
Reinsurance recoverables and prepaid
reinsurance .............................. 506,912 517,209
Deferred policy acquisition costs .......... 139,478 136,168
Property and equipment ..................... 66,981 68,763
Excess of cost over fair value of net
assets acquired .......................... 80,449 81,198
Deferred federal income taxes .............. 38,527 23,554
Other assets ............................... 86,843 86,702
---------- ----------
Total assets .......................... $3,608,456 $3,464,357
========== ==========
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
Page 3
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(000s omitted - except for share data)
March 31, 1997 December 31,
(Unaudited) 1996
-------------- ------------
<S> <C> <C>
Liabilities:
Policy liabilities -
Losses ...................................... $1,422,149 $1,421,920
Loss adjustment expenses .................... 372,652 363,744
Unearned premiums ........................... 497,114 496,249
Policyholders' dividends .................... 20,780 22,489
---------- ----------
Total policy liabilities .................. 2,312,695 2,304,402
Notes payable ................................. 310,734 310,904
Other liabilities ............................. 237,163 227,087
---------- ----------
Total liabilities ......................... 2,860,592 2,842,393
---------- ----------
Contingencies (Note F)
Minority interest in subsidiary ................ 45,435 45,231
---------- ----------
Company-obligated mandatorily redeemable
capital securities of subsidiary trust
holding solely the Junior Subordinated
Debentures of Orion ......................... 125,000 -
---------- ----------
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 ............................... 158,592 158,587
Net unrealized investment gains, net of
federal income taxes of $18,811 - 1997 and
$31,674 - 1996 .............................. 48,164 72,260
Net unrealized foreign exchange translation
losses, net of federal income taxes of
$217 - 1997 and $414 - 1996 ................. (2,530) (2,164)
Retained earnings ............................. 396,414 370,793
Treasury stock, at cost (1,580,099 shares -
1997 and 1,569,115 shares - 1996) ........... (35,668) (34,980)
Deferred compensation on restricted stock ..... (2,881) (3,101)
---------- ----------
Total stockholders' equity ................ 577,429 576,733
---------- ----------
Total liabilities and stockholders' equity. $3,608,456 $3,464,357
========== ==========
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
Page 4
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(000s omitted-except for per common share data)
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues:
Premiums earned ............................. $323,963 $302,402
Net investment income ....................... 40,221 34,502
Realized investment gains ................... 15,789 5,365
Other income ................................ 4,939 5,522
-------- --------
Total revenues ............................ 384,912 347,791
-------- --------
Expenses:
Losses incurred ............................. 170,015 168,800
Loss adjustment expenses .................... 48,987 43,177
Amortization of deferred policy acquisition
costs ..................................... 94,798 78,439
Other insurance expenses .................... 6,119 8,836
Dividends to policyholders .................. 5,064 3,946
Interest expense ............................ 6,123 6,175
Other expenses .............................. 11,029 10,704
-------- --------
Total expenses ............................ 342,135 320,077
-------- --------
Earnings before equity in earnings (loss) of
affiliate, federal income taxes and minority
interest expense ............................ 42,777 27,714
Equity in earnings (loss) of affiliate ........ 587 (840)
-------- --------
Earnings before federal income taxes and
minority interest expense ................... 43,364 26,874
Federal income taxes .......................... 9,921 6,066
Minority interest expense:
Subsidiary earnings ......................... 1,599 2,921
Subsidiary trust preferred securities ....... 2,366 -
-------- --------
Net earnings ................................ $ 29,478 $ 17,887
======== ========
Net earnings per common share ............... $ 2.12 $ 1.28
======== ========
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
Page 5
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(000s omitted)
Three Months Ended
March 31, Year Ended
(Unaudited) December 31,
------------------- ------------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Common stock ............................. $ 15,338 $ 15,338 $ 15,338
======== ======== ========
Capital surplus:
Balance, beginning of period ........... $158,587 $146,658 $146,658
Exercise of stock options and issuance /
cancellation of restricted stock ..... 5 (328) 29
Recognition of pre-reorganization
federal income tax benefits .......... - - 11,900
-------- -------- --------
Balance, end of period ................. $158,592 $146,330 $158,587
======== ======== ========
Net unrealized investment gains (losses):
Balance, beginning of period ........... $ 72,260 $ 63,255 $ 63,255
Change in unrealized investment gains
(losses), net of taxes ............... (24,096) (14,368) 9,005
-------- -------- --------
Balance, end of period ................. $ 48,164 $ 48,887 $ 72,260
======== ======== ========
Net unrealized foreign exchange
translation losses:
Balance, beginning of period ........... $ (2,164) $ (3,935) $ (3,935)
Change in unrealized foreign exchange
translation losses, net of taxes ..... (366) 250 1,771
-------- -------- --------
Balance, end of period ................. $ (2,530) $ (3,685) $ (2,164)
======== ======== ========
Retained earnings:
Balance, beginning of period ........... $370,793 $298,452 $298,452
Net earnings ........................... 29,478 17,887 86,631
Dividends declared ..................... (3,857) (3,472) (14,290)
-------- -------- --------
Balance, end of period ................. $396,414 $312,867 $370,793
======== ======== ========
Treasury stock:
Balance, beginning of period ........... $(34,980) $(26,534) $(26,534)
Exercise of stock options and issuance /
cancellation of restricted stock ..... 24 453 2,702
Acquisition of treasury stock .......... (712) (3,886) (11,148)
-------- -------- --------
Balance, end of period ................. $(35,668) $(29,967) $(34,980)
======== ======== ========
Deferred compensation on restricted stock:
Balance, beginning of period ........... $ (3,101) $ (2,331) $ (2,331)
Issuance / cancellation of restricted
stock ................................ 43 124 (1,827)
Amortization of deferred compensation on
restricted stock ..................... 177 229 1,057
-------- -------- --------
Balance, end of period ................. $ (2,881) $ (1,978) $ (3,101)
======== ======== ========
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
Page 6
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000s omitted)
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Premiums collected ........................... $ 338,054 $ 317,222
Net investment income collected .............. 31,585 33,053
Losses and loss adjustment expenses paid ..... (206,694) (192,435)
Policy acquisition costs paid ................ (108,608) (100,789)
Dividends paid to policyholders .............. (6,773) (4,665)
Interest paid ................................ (10,280) (10,322)
Federal income tax refunds (payments) ........ 139 (1,368)
Other payments ............................... (13,406) (2,502)
--------- ---------
Net cash provided by operating activities .. 24,017 38,194
--------- ---------
Cash flows from investing activities:
Maturities of fixed maturity investments ..... 31,429 26,489
Sales of fixed maturity investments .......... 67,614 86,280
Sales of equity securities ................... 49,527 28,128
Investments in fixed maturities .............. (272,297) (100,378)
Investments in equity securities ............. (49,379) (25,765)
Effect on cash of consolidating Guaranty
National ................................... - 6,794
Net sales (purchases) of short-term
investments ................................ 15,068 (25,179)
Other receipts (payments) .................... 9,324 (4,378)
--------- ---------
Net cash used in investing activities ...... (148,714) (8,009)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of trust preferred
securities ................................. 123,242 -
Proceeds from exercise of stock options ...... 195 -
Repayment of notes payable ................... (188) (750)
Dividends paid to stockholders ............... (3,856) (3,213)
Dividends paid to minority stockholders ...... (363) (954)
Purchases of common stock .................... (315) (3,417)
Other payments ............................... - (12)
--------- ---------
Net cash provided by (used in) financing
activities ............................... 118,715 (8,346)
--------- ---------
Effect of foreign exchange rate changes on
cash ......................................... (19) (163)
--------- ---------
Net increase (decrease) in cash ............ (6,001) 21,676
Cash balance, beginning of period .............. 11,607 3,584
--------- ---------
Cash balance, end of period .................... $ 5,606 $ 25,260
========= =========
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
Page 7
<PAGE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
(UNAUDITED)
(000s omitted)
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Reconciliation of net earnings to net
cash provided by operating activities:
Net earnings .................................. $ 29,478 $ 17,887
-------- --------
Adjustments:
Depreciation and amortization ............... 3,140 2,638
Amortization of excess of cost over fair
value of net assets acquired .............. 749 769
Deferred federal income taxes ............... (1,353) 546
Amortization of fixed maturity investments .. (166) (497)
Non-cash investment income .................. (4,835) (3,214)
Equity in (earnings) loss of affiliates ..... (587) 840
Dividends received from affiliates .......... 171 137
Realized investment gains ................... (15,789) (5,365)
Minority interest in subsidiary earnings .... 1,599 2,921
Foreign exchange translation adjustment ..... 142 544
Other ....................................... (160) (11)
Change in assets and liabilities:
Decrease (increase) in accrued investment
income .................................... (2,478) 1,313
Increase in accounts and notes receivable ... (573) (2,170)
Decrease (increase) in reinsurance
recoverables and prepaid reinsurance ...... 10,297 (20,765)
Increase in deferred policy acquisition costs (3,310) (7,544)
Decrease (increase) in other assets ......... (1,058) 4,348
Increase in losses .......................... 229 27,325
Increase in loss adjustment expenses ........ 8,908 2,876
Increase in unearned premiums ............... 865 26,681
Decrease in policyholders' dividends ........ (1,709) (719)
Increase (decrease) in other liabilities .... 457 (10,346)
-------- --------
Total adjustments and changes ............. (5,461) 20,307
-------- --------
Net cash provided by operating activities ..... $ 24,017 $ 38,194
======== ========
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
Page 8
</TABLE>
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended March 31, 1997 and 1996
Note A - Basis of Financial Statement Presentation
The consolidated financial statements and notes thereto are prepared in
accordance with generally accepted accounting principles for property and
casualty insurance companies. The consolidated financial statements include
Orion Capital Corporation ("Orion") and its majority-owned subsidiaries
(collectively the "Company"). The Company's investment in its unconsolidated
affiliate is accounted for using the equity method. All material intercompany
balances and transactions have been eliminated.
The Company completed a tender offer for Guaranty National Corporation
("Guaranty National") common stock in July 1996, and increased its ownership
of Guaranty National from 49.5% to 81%. The Company's interest in Guaranty
National was included on an equity basis in financial statements previously
issued for the first quarter of 1996. Results for the first quarter of 1996
have been restated to reflect the consolidation of Guaranty National in the
Company's financial statements. A minority interest charge has been recorded
for the portion of Guaranty National's earnings attributable to the shares not
owned by the Company for both the 1997 and 1996 periods.
In the opinion of management, the accompanying consolidated financial
statements reflect all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly the Company's results of operations,
financial position and cash flows for all periods presented. Although these
consolidated financial statements are unaudited, they have been reviewed by
the Company's independent accountants, Deloitte & Touche LLP, for conformity
with accounting requirements for interim financial reporting. Their report on
such review is included herein. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1996 annual report on Form 10-K.
Note B - Investment in Affiliate
As of March 31, 1997 the Company owned 24.8% of the common stock of
Intercargo Corporation ("Intercargo"), a publicly-held company. The Company
records its share of Intercargo's operating results in the subsequent quarter,
after Intercargo has reported its financial results. Summarized financial
information of Intercargo for the three months ended March 31, 1997 and 1996
is as follows:
Page 9
<PAGE>
Three Months Ended
March 31,
------------------
1997 1996
---- ----
(000s omitted)
Revenues:
Premiums earned ................................. $ 16,357 $ 21,628
Investment and other income ..................... 3,751 2,251
-------- --------
20,108 23,879
-------- --------
Expenses:
Insurance expenses .............................. 17,701 27,865
Interest ........................................ 265 282
-------- --------
17,966 28,147
-------- --------
Earnings (loss) before equity in earnings of
affiliate and federal income taxes .............. 2,142 (4,268)
Equity in earnings of affiliate ................... 985 -
Federal income (taxes) benefit .................... (264) 629
-------- --------
Net earnings (loss) ............................. $ 2,863 $ (3,639)
======== ========
The Company's proportionate share, including
amortization of goodwill ........................ $ 587 $ (840)
======== ========
Note C - 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 to limit exposure to losses. Reinsurance does not discharge
the primary liability of the original insurer. The table below summarizes
certain reinsurance information:
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
(000s omitted)
Direct premiums written .................. $371,511 $347,859
Reinsurance assumed ...................... 25,242 47,044
-------- --------
Gross premiums written ................... 396,753 394,903
Reinsurance ceded ........................ (62,528) (73,957)
-------- --------
Net premiums written ..................... $334,225 $320,946
======== ========
Direct premiums earned ................... $362,119 $328,210
Reinsurance assumed ...................... 33,522 41,375
-------- --------
Gross premiums earned .................... 395,641 369,585
Reinsurance ceded ........................ (71,678) (67,183)
-------- --------
Net premiums earned ...................... $323,963 $302,402
======== ========
Loss and loss adjustment expenses incurred
recoverable from reinsurers ............ $ 32,576 $ 23,420
======== ========
Page 10
<PAGE>
Note D - Trust Preferred Securities
On January 13, 1997 Orion issued $125,000,000 of 8.73% Junior
Subordinated Deferrable Interest Debentures due January 1, 2037 (the
"Debentures") to Orion Capital Trust I (the "Trust"), a Delaware statutory
business trust sponsored by Orion. The Trust simultaneously sold $125,000,000
of 8.73% Capital Securities (the "Trust Preferred Securities") which have
substantially the same terms as the Debentures. The Trust Preferred
Securities are subordinate to all liabilities of the Company, and may be
redeemed without premium on or after January 1, 2007. Orion registered the
Trust Preferred Securities under the Securities Act of 1933 in April 1997.
The Trust is wholly owned by Orion and the sole assets of the Trust are
the Debentures issued by Orion. Orion has provided a full and unconditional
guaranty of the Trust's obligations under the Trust Preferred Securities,
including all costs, expenses, debts and liabilities of the Trust.
Note E - Stockholders' Equity and Earnings Per Common Share
The Company repurchased 11,396 shares of its common stock at an aggregate
cost of $712,000 in the first three months of 1997. The remaining
authorization from the Company's Board of Directors was $4,017,000 as of March
31, 1997.
Earnings per common share was computed using the weighted average common
and dilutive common equivalent shares outstanding for the three months ended
March 31, 1997 and 1996. The weighted average common and equivalent shares
amounted to 13,899,000 and 13,997,000 shares for the quarters ended March 31,
1997 and 1996, respectively.
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share" which establishes new guidelines for the computation and disclosure of
earnings per share. SFAS No. 128 is required to be adopted at the end of
1997. Current earnings per share ("EPS") disclosures will be replaced by
Basic EPS and Diluted EPS as defined in SFAS No. 128. Pro forma Basic EPS and
Diluted EPS computed in accordance with SFAS No. 128 would be $2.16 and $2.12
for the first quarter of 1997 and $1.29 and $1.28 for the first quarter of
1996, respectively.
Note F - Contingencies
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.
Page 11
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors
Orion Capital Corporation
New York, New York
We have reviewed the accompanying consolidated balance sheet of Orion
Capital Corporation and subsidiaries (the "Company") as of March 31, 1997,
and the related consolidated statements of earnings, stockholders' equity,
and cash flows for the three-month periods ended March 31, 1997 and 1996.
These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying analytical
procedures to financial data and of making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to such consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Orion Capital
Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of earnings, stockholders' equity and cash flows
for the year then ended; and in our report dated February 14, 1997, we
expressed an unqualified opinion on those consolidated financial
statements. The consolidated statements of earnings and cash flows for the
year ended December 31, 1996 are not presented herein. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1996 and related consolidated statement of stockholders'
equity for the year then ended is fairly stated, in all material respects,
in relation to the consolidated financial statements from which it has been
derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
April 23, 1997
Page 12
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended March 31, 1997 and 1996
RESULTS OF OPERATIONS
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. In addition, the miscellaneous income and expenses
(primarily interest, general and administrative expenses and other
consolidating elimination entries) of the parent company are reported as a
fourth segment. The three insurance segments are as follows:
Regional Operations - this segment includes the workers
compensation insurance products and services sold by the EBI
Companies.
Special Programs - this segment is comprised of several parts
- DPIC Companies, which markets professional liability
insurance;
- Connecticut Specialty, which writes specialty insurance programs;
- Wm. H. McGee, an underwriting management company that specializes
in ocean marine, inland marine and commercial property insurance;
and
- the Company's 24.8% interest in Intercargo Corporation, which
sells insurance coverages for international trade.
Guaranty National - this segment specializes primarily in non-standard
automobile insurance and other property insurance.
Page 13
<PAGE>
Earnings (loss) by segment before federal income taxes and minority
interest expense are summarized as follows for the quarterly periods ended
March 31, 1997 and 1996:
Three Months Ended
March 31,
------------------
1997 1996
---- ----
(000s omitted)
Regional Operations ............................... $20,698 $12,815
Special Programs .................................. 16,905 11,947
Guaranty National ................................. 11,054 7,241
------- -------
48,657 32,003
Other ............................................. (5,293) (5,129)
------- -------
Total ........................................... $43,364 $26,874
======= =======
The Company completed a tender offer for Guaranty National common
stock in July 1996, and increased its ownership of Guaranty National from
49.5% to 81%. This has enabled the Company to share in a larger percentage
of Guaranty National's earnings in the first quarter of 1997 as compared to
the 1996 period, and to benefit from its inclusion in Orion's federal
income tax return. Guaranty National's improved operating performance has
also favorably impacted the Company's earnings for the 1997 quarter. The
Company's interest in Guaranty National was included on an equity basis in
financial statements previously issued for the first quarter of 1996.
Results for the first quarter of 1996 have been restated to reflect the
consolidation of Guaranty National in Orion's financial statements. A
minority interest charge has been recorded for the portion of Guaranty
National's earnings attributable to the shares not owned by the Company for
both the 1997 and 1996 periods.
REVENUES
Premiums written and premiums earned
- ------------------------------------
Net premiums written for the Company by segment are as follows:
Three Months Ended
March 31,
------------------
1997 1996
---- ----
(000s omitted)
Regional Operations ............. $ 87,782 $ 91,605
Special Program ................. 108,146 105,728
Guaranty National ............... 138,297 123,613
-------- --------
$334,225 $320,946
======== ========
Page 14
<PAGE>
Regional Operations' net premiums written decreased 4.2% in the first
quarter of 1997 as compared to the first quarter of 1996 due to lower
premium rates. Legislative reforms in certain states have led to an
increasingly competitive workers compensation marketplace with lower
premium rates commensurate with reduced benefit levels. Commission
expenses were proportionately reduced by the lower rates. The rate
reductions were partially offset by increased premiums written from EBI
Companies' selective geographic expansion and penetration, including the
opening of three branch offices in 1997 and seven in 1996 in territories
where the Company believes it will benefit from its service oriented
approach.
Special Programs' net premiums written during the first quarter of
1997 increased 2.3% from the first quarter of 1996, or 16.4% excluding
premiums from the Company's assumed reinsurance business that is being run
off. Premiums written by DPIC Companies for professional liability
insurance decreased .7% to $43,921,000 in 1997's first quarter from
$44,228,000 for the first quarter of 1996. The decrease is primarily
attributable to a very competitive market offset in large part by the
continuation of a high level of policy renewals. Premium volume for
Connecticut Specialty increased 30.9% to $45,819,000 in the first quarter
of 1997 from $35,013,000 in the 1996 period. The increase in premiums was
primarily from transportation programs, including truck liability and
physical damage coverages, as well as increases in low exposure
professional liability programs. Also, premiums written for most
Connecticut Specialty programs increased in 1997 over the 1996 first
quarter from higher retentions after a change in reinsurance effective May
1996. Premiums written by Wm. H. McGee increased 45.2% to $12,731,000 in
1997's first quarter from $8,770,000 in 1996's first quarter. The increase
is principally the result of the Company's greater participation in the
underwriting pools managed by McGee.
Guaranty National's net premiums written for the first quarter of 1997
increased 11.9% over the first quarter of 1996. Net premiums written for
personal lines increased 26.9% to $82,120,000 in 1997's first quarter from
$64,703,000 in the same period of 1996. The increase for personal lines
was primarily attributable to legislation in California which requires all
drivers to have liability insurance, which significantly increased our one-
month policy business. Commercial lines premiums decreased 14.4% to
$33,573,000 in 1997 from $39,201,000 during 1996's first quarter. The
majority of the decrease for commercial lines was from lower production in
the commercial auto and umbrella programs, increased competition by
standard carriers in the nonstandard marketplace, and the effect of both
agent and program cancellations during 1996. Premiums written by the
collateral protection unit were $22,604,000 for the first quarter of 1997,
up 14.7% from $19,709,000 for the comparable period in 1996. The premium
volume growth for this unit comes from increased writing in new programs
for automobile financing GAP and mortgage fire coverages, and from a new
warranty program.
Page 15
<PAGE>
Premiums earned increased 7.1% to $323,963,000 in the first quarter of
1997 compared to $302,402,000 in the first quarter of 1996. Premiums
earned reflects the recognition in income of the changing levels of net
premium writings.
Net investment income
- ---------------------
Pre-tax net investment income increased 16.6% to $40,221,000 for the
first quarter of 1997 from $34,502,000 for the first quarter of 1996. The
pre-tax yields on the average investment portfolio were 7.3% for the first
quarter of 1997 and 6.5% for the first quarter of 1996 and the after-tax
yields were 5.6% and 5.2%, respectively. The increase in net investment
income results from increased earnings both on a higher investment base and
from investments in limited partnerships. The higher investment base
includes the proceeds related to the issuance of $125,000,000 of trust
preferred securities in January 1997 and our positive operating cash flow.
Limited partnership earnings increased to $4,617,000 in the first quarter
of 1997 from $2,955,000 for the 1996 period.
Fixed maturity investments which 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. The carrying value of fixed maturity and short-term
investments amounted to $2,001,668,000 and $1,858,045,000, or approximately
81.5% and 80.0% of the Company's cash and investments at March 31, 1997 and
December 31, 1996, respectively.
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. At March 31,
1997 and December 31, 1996, the Company's investments in non-investment
grade and unrated fixed maturity securities were carried at $273,284,000
and $219,473,000, respectively. These investments represented 11.1% and
9.5% of cash and investments and 7.6% and 6.3% of total assets at March 31,
1997 and December 31, 1996, respectively.
Realized investment gains
- -------------------------
Net realized investment gains increased $10,424,000 to $15,789,000 in
the first quarter of 1997 from $5,365,000 in the first quarter of 1996.
Realized investment gains in the first quarters of 1997 and 1996 are net of
$1,778,000 and $1,168,000, respectively, of provisions for losses on
securities deemed to be other than temporarily impaired. Realized gains
(losses) vary from period to period, depending on market conditions
relative to the Company's investment holdings, the timing of investment
sales generating gains and losses, the occurrence of events which give rise
to other than temporary impairment of investments, and other factors.
Page 16
<PAGE>
EXPENSES AND OTHER
Operating ratios
- ----------------
The following table sets forth certain ratios of insurance operating
expenses to premiums earned for the Company and the ratio of loss and loss
adjustment expenses to premiums earned (the "loss ratio") by segment.
Three Months Ended
March 31,
------------------
1997 1996
---- ----
Loss and loss adjustment expenses ................. 67.6% 70.1%
Policy acquisition costs and other insurance
expenses ........................................ 31.1 28.9
----- -----
Total before policyholders' dividends ......... 98.7 99.0
Policyholders' dividends .......................... 1.6 1.3
----- -----
Total after policyholders' dividends .......... 100.3% 100.3%
===== =====
Loss and loss adjustment expense ratio by segment:
Regional Operations ............................ 58.5% 65.8%
Special Programs ................................ 73.0% 70.0%
Guaranty National ............................... 69.1% 73.5%
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. Adverse development of
prior years' losses amounted to $1,542,000 in the first quarter of 1997,
compared with $1,359,000 in the 1996 period.
The improvement in the loss ratio for the Regional Operations segment
results from favorable loss experience achieved by EBI Companies through
its service oriented approach of working with its customers to prevent
losses and reduce claim costs.
The increase in the loss ratio for the Special Programs segment is
attributable in large part to losses from certain programs cancelled by
Connecticut Specialty, and higher initial reserving by DPIC Companies.
Each of Guaranty National's units had lower loss ratios in 1997's
first quarter versus the comparable 1996 period. The largest impact was
from lower losses from personal lines during 1997.
Page 17
<PAGE>
The increase in the ratio of deferred policy acquisition costs and
other insurance expenses to premiums earned (the "expense ratio") is
attributable to the Company's continued investment in building its loss
prevention and claims management competencies as well as the costs of
opening EBI Companies offices in new territories. The increase for 1997
was also the result of the change in Connecticut Specialty's reinsurance in
May 1996, which provides for lower ceding commissions.
Interest expense
- ----------------
Interest expense was $6,123,000 in the first quarter of 1997 versus
$6,175,000 in 1996, reflecting consistent levels of debt outstanding and
interest rates on the Company's debt for the first quarter of both years.
Equity in earnings (loss) of affiliate
- --------------------------------------
Equity in earnings (loss) of affiliate includes the Company's portion
of earnings from the Intercargo investment of $587,000 in 1997's first
quarter versus a loss of $840,000 recorded in the first quarter of 1996.
The Company records its share of Intercargo's results in the subsequent
quarter.
Federal income taxes
- --------------------
Federal income taxes on pre-tax operating results and the related
effective tax rates amounted to $9,921,000 (22.9%) and $6,066,000 (22.6%)
in the first quarters of 1997 and 1996, respectively. The Company's
effective tax rate is less than the statutory tax rate of 35% primarily
because of income derived from tax-advantaged securities. The effective
tax rate in the first quarter of 1997 is also reduced by the deduction
allowable for the interest on Orion's Junior Subordinated Deferrable
Interest Debentures held by its subsidiary trust.
Minority interest expense
- -------------------------
Minority interest in subsidiary earnings of $1,599,000 and $2,921,000
for the first quarters of 1997 and 1996, respectively, represent the
portion of Guaranty National's earnings, net of federal income taxes,
attributable to Guaranty National's minority shareholders. This expense
was lower in 1997 after the Company increased its ownership of Guaranty
National in July 1996, partially offset by the higher earnings of Guaranty
National in the first quarter of 1997.
Minority interest in subsidiary trust of $2,366,000 for the first
quarter of 1997 represents the financing cost before the federal income tax
deduction on Orion's $125,000,000 of 8.73% trust preferred securities
issued in January 1997.
Page 18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities decreased by $14,177,000 to
$24,017,000 in 1997 from $38,194,000 in 1996. The decrease in operating
cash flow for 1997 was the result of higher payments for losses, policy
acquisition costs and policyholders' dividends, offset in part by an
increase in premiums collected.
Cash used in investment activities increased to $148,714,000 in 1997
from $8,009,000 in 1996. 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 from positive operating
cash flows after cash provided by or used in financing activities. Cash
invested in 1997 includes the investment of the net proceeds from the
issuance of $125,000,000 of trust preferred securities.
Cash provided by financing activities was $118,715,000 in the first
quarter of 1997 and cash used in financing activities was $8,346,000 for
the first quarter of 1996. Cash was provided from the net proceeds of
$125,000,000 of trust preferred securities issued by Orion in January 1997.
Cash was used for dividend payments and the Company's stock repurchase
program in both 1997 and 1996. Orion increased its quarterly dividend rate
by 8.7% and 12.0% in the first and fourth quarters of 1996, respectively.
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 received in lieu of federal
income taxes from Orion's insurance subsidiaries. Payments of dividends by
Orion's insurance subsidiaries must comply with insurance regulatory
limitations concerning stockholder dividends and capital adequacy.
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 $152,687,000 and $293,477,000 at March 31, 1997 and December 31, 1996,
respectively. Orion's insurance subsidiaries had combined policyholders'
surplus of $679,936,000 at March 31, 1997 and $670,572,000 at December 31,
1996, and statutory operating leverage ratios of trailing twelve months'
net premiums written to policyholders' surplus of 2.0:1 at both March 31,
1997 and December 31, 1996.
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 guaranties 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 March 31, 1997, the Company was in compliance
Page 19
<PAGE>
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 January 13, 1997 Orion issued $125,000,000 of 8.73% Junior
Subordinated Deferrable Interest Debentures due January 1, 2037 (the
"Debentures") to Orion Capital Trust I (the "Trust"), a Delaware statutory
business trust sponsored by Orion. The Trust simultaneously sold
$125,000,000 of 8.73% Capital Securities (the "Trust Preferred Securities")
which have substantially the same terms as the Debentures. The net
proceeds from the sale of the Trust Preferred Securities will be used for
general corporate purposes. The Trust Preferred Securities are subordinate
to all liabilities of the Company, and may be redeemed without premium on
or after January 1, 2007. The Company may defer interest distributions on
the Trust Preferred Securities, however, during any period when such
cumulative distributions have been deferred, Orion may not declare or pay
any dividends or distributions on its common stock. Orion registered the
Trust Preferred Securities under the Securities Act of 1933 in April 1997.
The Company repurchased 11,396 shares of its common stock at an
aggregate cost of $712,000 in the first three months of 1997. The
Company's remaining stock purchase authorization from its Board of
Directors amounted to $4,017,000 at March 31, 1997.
FORWARD-LOOKING STATEMENTS
All statements made in this Quarterly Report on Form 10-Q that do not
reflect historical information are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by the forward-
looking statements. Such risks, uncertainties and other factors include,
among other things, (i) general economic and business conditions; (ii)
interest rate and financial market changes; (iii) competition and the
regulatory environment in which we operate; (iv) claims frequency; (v)
claims severity; (vi) medical cost inflation; (vii) increases in the cost
of property repair; (viii) the number of new and renewal policy
applications submitted to us; and (ix) other factors over which we have
little or no control. The Company disclaims any obligation to update or to
publicly announce the impact of any such factors or any revisions to any
forward looking statements to reflect future events or developments.
Page 20
<PAGE>
PART II OTHER INFORMATION
Items 1 - 5.
- ------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
Exhibit 11: Computation of Earnings Per Common Share.
Exhibit 15: Deloitte & Touche LLP Letter re unaudited
interim financial information.
Exhibit 27: Financial Data Schedule.
(b) Reports on Form 8-K.
The registrant filed a Current Report on Form 8-K on
January 9, 1997 to report that it agreed to sell $125
million of its 8.73% Capital Securities to be issued by
Orion Capital Trust I, a Delaware statutory business trust
sponsored by registrant.
Page 21
<PAGE>
SIGNATURES
-----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ORION CAPITAL CORPORATION
Date: May 6, 1997 By: /s/ W. Marston Becker
----------------------------
Chairman of the Board
and Chief Executive Officer
Date: May 6, 1997 By: /s/ Daniel L. Barry
--------------------------------
Senior Vice President and
Chief Financial Officer
Page 22
<PAGE>
EXHIBIT INDEX
Page No.
Exhibit 11: Computation of Earnings 24
Per Common Share
Exhibit 15: Deloitte & Touche LLP Letter 25
re unaudited interim financial
information
Exhibit 27: Financial Data Schedule 26
Page 23
EXHIBIT 11
ORION CAPITAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(UNAUDITED)
(000s omitted-except for per common share data)
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
Computation of weighted average
number of common and equivalent
shares outstanding:
PRIMARY -
Weighted average number of shares
outstanding ............................. 13,652 13,815
Dilutive effect of stock options and stock
awards .................................. 247 182
------- -------
Weighted average number of common and
equivalent shares ....................... 13,899 13,997
======= =======
Net earnings attributable to common
stockholders ............................ $29,478 $17,887
======= =======
Net earnings per common share ............. $ 2.12 $ 1.28
======= =======
FULLY DILUTED -
Weighted average number of shares
outstanding ............................. 13,652 13,815
Dilutive effect of stock options and stock
awards .................................. 247 182
------- -------
Weighted average number of common and
equivalent shares ....................... 13,899 13,997
======= =======
Net earnings attributable to common
stockholders ............................ $29,478 $17,887
======= =======
Net earnings per common share ............. $ 2.12 $ 1.28
======= =======
Page 24
EXHIBIT 15
April 23, 1997
Orion Capital Corporation
600 Fifth Avenue
New York, New York
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited
interim financial information of Orion Capital Corporation and subsidiaries
for the periods ended March 31, 1997 and 1996, as indicated in our report
dated April 23, 1997; because we did not perform an audit, we expressed no
opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, is
incorporated 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 relating to the Orion Capital
Corporation 1994 Stock Option Plan for Non-Employee Directors.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that
Act.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
Page 25
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
EXHIBIT 27
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ORION CAPITAL CORPORATION'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 1,361,948
<DEBT-CARRYING-VALUE> 328,279
<DEBT-MARKET-VALUE> 331,541
<EQUITIES> 363,986
<MORTGAGE> 1,307
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,450,764
<CASH> 5,606
<RECOVER-REINSURE> 414,233
<DEFERRED-ACQUISITION> 139,478
<TOTAL-ASSETS> 3,608,456
<POLICY-LOSSES> 1,794,801
<UNEARNED-PREMIUMS> 497,114
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 20,780
<NOTES-PAYABLE> 310,734
<COMMON> 173,930
0
0
<OTHER-SE> 403,499
<TOTAL-LIABILITY-AND-EQUITY> 3,608,456
323,963
<INVESTMENT-INCOME> 40,221
<INVESTMENT-GAINS> 15,789
<OTHER-INCOME> 4,939
<BENEFITS> 219,002
<UNDERWRITING-AMORTIZATION> 94,798
<UNDERWRITING-OTHER> 11,183
<INCOME-PRETAX> 43,364
<INCOME-TAX> 9,921
<INCOME-CONTINUING> 29,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,478
<EPS-PRIMARY> 2.12
<EPS-DILUTED> 2.12
<RESERVE-OPEN> 1,368,420
<PROVISION-CURRENT> 217,460
<PROVISION-PRIOR> 1,542
<PAYMENTS-CURRENT> 81,395
<PAYMENTS-PRIOR> 125,299
<RESERVE-CLOSE> 1,380,728
<CUMULATIVE-DEFICIENCY> 1,542
</TABLE>
