<PAGE>
CONFORMED
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 September 30, 1998
( ) TRANSITION REPORT, PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7801
ORION CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-6069054
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9 Farm Springs Road, Farmington, Connecticut 06032
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 674-6600
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 ( )
27,092,000 shares of Common Stock, $1.00 par value, of the registrant were
outstanding on October 30, 1998.
Exhibit Index Appears at Page 32
<PAGE>
ORION CAPITAL CORPORATION
FORM 10-Q INDEX
For the Quarter Ended September 30, 1998
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet at September 30, 1998 (Unaudited)
and December 31, 1997 3 - 4
Consolidated Statement of Earnings for the three and nine-
months ended September 30, 1998 and 1997 (Unaudited) 5
Consolidated Statement of Stockholders' Equity for the
nine-months ended September 30, 1998 and 1997 (Unaudited),
and for the year ended December 31, 1997 6
Consolidated Statement of Cash Flows for the nine-months
ended September 30, 1998 and 1997 (Unaudited) 7 - 8
Notes to Consolidated Financial Statements (Unaudited) 9 -13
Independent Accountants' Review Report 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 29
PART II. OTHER INFORMATION 30
2
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<CAPTION>
September 30, 1998 December 31,
(In millions) (Unaudited) 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments: -
Fixed maturities, at amortized cost
(market $271.9 - 1998 and $322.4 - 1997) $ 260.0 $ 312.8
Fixed maturities, at market (amortized cost
$1,330.0 - 1998 and $1,395.4 - 1997) 1,394.3 1,469.8
Common stocks, at market (cost $163.3 -
1998 and $163.0 - 1997) 195.3 245.4
Non-redeemable preferred stocks, at market
(cost $228.9 - 1998 and $183.6 - 1997) 227.4 193.1
Other long-term investments 107.9 94.3
Short-term investments 292.8 228.3
--------- ---------
Total investments 2,477.7 2,543.7
Cash 38.5 9.3
Accrued investment income 20.3 29.6
Investment in affiliate 30.5 31.3
Accounts and notes receivable 226.1 189.3
Reinsurance recoverables and prepaid reinsurance 820.2 622.2
Deferred policy acquisition costs 154.6 147.1
Property and equipment 89.1 70.8
Excess of cost over fair value of net assets acquired 168.6 140.0
Other assets 177.3 100.8
--------- ---------
Total assets $ 4,202.9 $ 3,884.1
========= =========
</TABLE>
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
3
<PAGE>
<TABLE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
September 30, 1998 December 31,
(In millions, except for share data) (Unaudited) 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Policy liabilities: -
Losses $ 1,589.6 $ 1,476.4
Loss adjustment expenses 416.9 395.3
Unearned premiums 605.7 551.6
Policyholders' dividends 20.8 20.5
--------- ---------
Total policy liabilities 2,633.0 2,443.8
Notes payable 219.9 310.2
Other liabilities 384.6 282.0
--------- ---------
Total liabilities 3,237.5 3,036.0
--------- ---------
Contingencies (Note 8)
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
the junior subordinated debentures of the Company 250.0 125.0
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares; issued
and outstanding - none
Common stock, $1 par value; authorized 50,000,000
shares; issued 30,675,300 shares 30.7 30.7
Capital surplus 149.7 152.1
Retained earnings 538.0 469.5
Accumulated other comprehensive income 62.9 109.2
Treasury stock, at cost (3,497,737 shares -
1998 and 3,069,756 shares - 1997) (58.2) (34.3)
Deferred compensation on restricted stock (7.7) (4.1)
--------- ---------
Total stockholders' equity 715.4 723.1
--------- ---------
Total liabilities and stockholders' equity $ 4,202.9 $ 3,884.1
========= =========
</TABLE>
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
4
<PAGE>
<TABLE>
ORION CAPITAL CORPORATON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
(In millions, except for per share data) 1998 1997 1998 1997
- -------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $ 396.5 $ 347.4 $ 1,115.7 $ 1,006.6
Net investment income 22.3 40.8 106.2 122.3
Realized investment gains 0.4 5.2 52.1 29.3
Other income 2.1 5.0 14.7 15.2
------- ------- --------- ---------
Total revenues 421.3 398.4 1,288.7 1,173.4
------- ------- --------- ---------
Expenses:
Losses incurred 223.0 177.3 600.7 520.8
Loss adjustment expenses 57.7 51.8 163.0 153.0
Amortization of deferred policy acquisition costs 101.7 99.5 305.6 287.6
Other insurance expenses 24.4 9.5 39.1 26.1
Dividends to policyholders 9.7 7.9 23.3 17.8
Interest expense 6.0 6.2 14.9 18.5
Other expenses 6.4 8.5 29.9 30.1
Restructuring expenses and other (Note 3) (15.3) - (15.3) -
------- ------- --------- ---------
Total expenses 413.6 360.7 1,161.2 $ 1,053.9
------- ------- --------- ---------
Earnings before equity in earnings (loss) of
affiliate, federal income taxes and minority
interest expense 7.8 37.7 127.5 119.5
Equity in earnings (loss) of affiliate 0.2 0.4 (0.4) 1.3
------- ------- --------- ---------
Earnings before federal income taxes and
minority interest expense 8.0 38.1 127.1 120.8
Federal income taxes 2.3 9.7 35.0 30.5
Minority interest expense:
Subsidiary trust preferred securities, net
of federal income taxes 3.4 1.8 9.4 5.1
Subsidiary net earnings - 2.1 - 5.8
------- ------- --------- ---------
Net earnings $ 2.3 $ 24.5 $ 82.7 $ 79.4
======= ======= ========= =========
Net earnings per basic common share $ 0.08 $ 0.90 $ 3.02 $ 2.91
======= ======= ========= =========
Net earnings per diluted common share $ 0.08 $ 0.88 $ 2.95 $ 2.85
======= ======= ========= =========
</TABLE>
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
5
<PAGE>
<TABLE>
ORION CAPITAL CORPORATON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Nine Months Ended Nine Months Ended Year Ended
September 30, 1998 September 30, 1997 December 31, 1997
(In millions) (Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock:
Balance, beginning of period $ 30.7 $ 15.3 $ 15.3
Stock issued in 2-for-1
common stock split - 15.4 15.4
------- ------- -------
Balance, end of period $ 30.7 $ 30.7 $ 30.7
======= ======= =======
Capital Surplus:
Balance, beginning of period $ 152.1 $ 158.6 $ 158.6
Exercise of stock options and net
issuance of restricted stock (2.4) 0.5 0.5
Acquisition of Guaranty National - - 8.4
Stock issued in 2-for-1
common stock split - (15.4) (15.4)
------- ------- -------
Balance, end of period $ 149.7 $ 143.7 $ 152.1
======= ======= =======
Retained Earnings:
Balance, beginning of period $ 469.5 $ 370.8 $ 370.8
Net earnings 82.7 $ 82.7 79.4 $ 79.4 115.8 $ 115.8
------- ------- -------
Dividends declared (14.2) (12.7) (17.1)
------- ------- -------
Balance, end of period $ 538.0 $ 437.5 $ 469.5
======= ======= =======
Accumulated Other
Comprehensive Income:
Balance, beginning of period $ 109.2 $ 70.1 $ 70.1
Unrealized investment
gains (losses), net of taxes (46.5) 42.7 41.3
Unrealized foreign exchange
translation gains (losses), net of taxes 0.2 (1.1) (2.2)
------- ------- -------
Other comprehensive income (loss) (46.3) (46.3) 41.6 41.6 39.1 39.1
------- ------- ------- ------- ------- -------
Comprehensive income $ 36.4 $ 121.0 $ 154.9
======= ======= =======
Balance, end of period $ 62.9 $ 111.7 $ 109.2
======= ======= =======
Treasury Stock:
Balance, beginning of period $ (34.3) $ (35.0) $ (35.0)
Exercise of stock options and net
issuance of restricted stock 11.4 1.7 3.2
Acquisition of treasury stock (35.3) (1.5) (2.5)
------- ------- -------
Balance, end of period $ (58.2) $ (34.8) $ (34.3)
======= ======= =======
Deferred Compensation on
Restricted Stock:
Balance, beginning of period $ (4.1) $ (3.1) $ (3.1)
Net issuance of restricted stock (4.8) (1.6) (1.9)
Amortization of deferred
compensation on restricted stock 1.2 0.7 0.9
------- ------- -------
Balance, end of period $ (7.7) $ (4.0) $ (4.1)
======= ======= =======
</TABLE>
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
6
<PAGE>
<TABLE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(In millions) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Premiums collected $ 1,144.4 $ 1,034.6
Net investment income collected 111.4 104.4
Losses and loss adjustment expenses paid (728.5) (658.4)
Policy acquisition costs paid (343.2) (307.2)
Dividends paid to policyholders (23.1) (19.0)
Interest paid (18.3) (22.2)
Payments on trust preferred securities (12.8) (5.1)
Federal income tax payments (43.6) (23.2)
Other payments (61.7) (26.1)
--------- ---------
Net cash provided by operating activities 24.6 77.8
--------- ---------
Cash flows from investing activities:
Maturities of fixed maturity investments 170.4 107.4
Sales of fixed maturity investments 613.1 231.9
Sales of equity securities 337.6 134.1
Investments in fixed maturities (595.3) (509.4)
Investments in equity securities (338.3) (135.9)
Net purchases of short-term investments (73.3) (26.5)
Acquisition of businesses, net of cash acquired (61.6) -
Sale of business, net of cash sold 13.4 -
Purchases of property and equipment (20.9) (11.6)
Other receipts (payments) (17.5) 13.7
--------- ---------
Net cash provided by (used in) investing activities 27.6 (196.3)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of trust preferred securities 121.9 123.0
Net repayments of notes payable (99.5) (0.6)
Dividends paid to stockholders (13.6) (13.2)
Purchases of common stock (32.9) (1.4)
Proceeds from exercise of stock options 1.1 0.4
Other receipts - 1.3
--------- ---------
Net cash provided by (used in) financing activities (23.0) 109.5
--------- ---------
Net increase (decrease) in cash 29.2 (9.1)
Cash balance, beginning of period 9.3 11.6
--------- ---------
Cash balance, end of period $ 38.5 $ 2.5
========= =========
</TABLE>
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
7
<PAGE>
<TABLE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
(UNAUDITED)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(In millions) 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $ 82.7 $ 79.4
------ ------
Adjustments:
Depreciation and amortization 12.5 9.4
Amortization of excess of cost over fair
value of net assets acquired 4.6 2.3
Deferred federal income taxes (7.5) 0.3
Amortization of fixed maturity investments (1.1) (1.7)
Non-cash investment loss (income) 4.0 (13.4)
Equity in (earnings) loss of affiliate,
net of dividends received 0.8 (1.0)
Realized investment gains (52.1) (29.3)
Restructuring expenses and other (Note 3) (15.3) -
Minority interest in subsidiary earnings - 5.8
Changes in assets and liabilities, net of acquisitions,
divestiture and restructuring:
Decrease (increase) in accrued investment income 9.5 (2.3)
Increase in accounts and notes receivable (40.8) (2.8)
Increase in reinsurance recoverable
and prepaid reinsurance (66.5) (4.7)
Increase in deferred policy acquisition costs (12.3) (9.2)
Increase in other assets (28.5) (8.2)
Increase (decrease) in losses 42.6 (14.1)
Increase in loss adjustment expenses 24.1 33.5
Increase in unearned premiums 40.7 12.7
Increase (decrease) in policyholders' dividends 0.2 (1.2)
Increase in other liabilities 27.0 22.3
------ ------
Total adjustments and changes (58.1) (1.6)
------ ------
Net cash provided by operating activities $ 24.6 $ 77.8
====== ======
</TABLE>
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
8
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nine Months Ended September 30, 1998 and 1997
Note 1 - 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 wholly-owned subsidiaries
(collectively the "Company"). The Company's investment in its unconsolidated
affiliate (Intercargo Corporation) is accounted for using the equity method. All
material intercompany balances and transactions have been eliminated.
The Company completed a tender offer that increased its ownership of
Guaranty National Corporation ("Guaranty National") from 81% to 100% in December
1997. A minority interest charge was recorded by the Company for the portion of
Guaranty National's earnings attributable to the shares not owned by the Company
in 1997 until it became a wholly-owned subsidiary.
As of January 1, 1998 the Company adopted Financial Accounting Standard No.
130, "Reporting Comprehensive Income". This statement establishes standards for
the reporting and presentation of comprehensive income and its components in
financial statements. Comprehensive income encompasses all changes in
shareholders' equity (except those arising from transactions with shareholders)
and includes net income, net unrealized capital gains or losses on
available-for-sale securities and foreign currency translation adjustments. This
standard requires additional disclosures and does not affect the Company's
financial position or results of operations.
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 1997 Annual Report on Form 10-K.
Note 2 - Acquisitions
On April 30, 1998 the Company completed the acquisition of the
non-standard personal automobile insurance business of North Carolina - based
Strickland Insurance Group, Inc. ("Strickland"). The acquisition included two
insurance companies, a premium finance company, a claim adjusting company and a
general agency in Florida. In 1997, Strickland reported approximately $99
million of personal automobile gross premiums written and $46 million of net
premiums written. The purchase price was $44.0 million in cash, subject to
adjustment, and included acquisition expenses of $0.2 million. The Company made
cash payments of $38.5 million to Strickland on April 30, 1998 and $2.0 million
in 1997, with $3.3 million of the purchase price retained by the Company in part
9
<PAGE>
to secure obligations of Strickland. Simultaneous with the acquisition, the
Company repaid $9.4 million of Strickland bank debt. The acquisition includes a
purchase price contingency for loss development incurred by the acquired
business during the period from the acquisition date to December 31, 2000
relating to accident years prior to the acquisition date. The Company used cash
and short-term investments to fund the acquisition and debt payments. The
acquisition was accounted for as a purchase and accordingly, the acquired
business has been included in the Company's consolidated financial statements
from the date of acquisition. The total consideration exceeded the fair value of
the net assets acquired by approximately $28.9 million, subject to adjustment,
and is being amortized over 25 years.
On July 9, 1998 the Company completed the acquisition of Grocers Insurance Group
("Grocers") from United Grocers, Inc ("United"). Grocers is an Oregon-based
specialty insurance holding company serving the grocery and food service
industry. In 1997, Grocers reported approximately $23 million of net premiums
written, principally general liability, property and workers compensation with
the majority of its volume concentrated in the Northwestern states. The purchase
price was $36.7 million in cash including acquisition expenses of $ 0.4 million.
The Company paid approximately $32.3 million to United at closing. The Company
retained $4.0 million of the purchase price to secure obligations of United and
Grocers. The Company used cash and short-term investments to fund the purchase.
The acquisition was accounted for as a purchase and accordingly, Grocers has
been included in the Company's consolidated financial statements from the date
of acquisition. The total consideration exceeded the fair value of the net
assets acquired by approximately $7.7 million, subject to adjustment , and is
being amortized over 25 years.
Note 3 - Orion Specialty Realignment
In the third quarter of 1998, the Company announced the realignment of its
Orion Specialty unit because it has not met the Company's profitability
expectations. The realignment will result in Orion Specialty's continued shift
away from commodity business, primarily commercial auto and transportation, to a
smaller number of more client-focused programs and specialty niches. The
realignment includes the cancellation of approximately $100 million in
annualized net written premiums of unprofitable commodity and marginal lines of
business, the reduction of approximately 90 employees related to the cancelled
business, and the sale of Colorado Casualty. Colorado Casualty produced
approximately $55 million in annual net premiums but consists largely of
business that does not fit the Company's specialization strategy. The Company
expects to complete the realignment in 1999.
The Company recorded severance and program termination expenses of $7.0
million and asset write downs of $1.9 million related to the cancelled business
in the third quarter of 1998. On September 29, 1998, the Company sold Colorado
Casualty to Liberty Mutual Insurance Company resulting in a pre-tax gain of
approximately $24.2 million. Charges for severance and program termination
expenses and asset write-offs, and the gain from the sale of Colorado Casualty,
representing a pre-tax gain of $15.3 million, are reflected as "Restructuring
expenses and other" in the consolidated statement of earnings. The liability for
severance and program termination expenses was reduced to $6.8 million at
September 30, 1998 for cash payments related to program terminations.
In connection with the realignment, in the third quarter of 1998, the
Company completed a detailed actuarial analysis for the business to be
10
<PAGE>
cancelled. As a result of this actuarial study, the Company recorded a provision
for losses and loss adjustment expenses of $27.8 million in the third quarter of
1998.
Note 4 - Investment in Affiliate
As of September 30, 1998 the Company owned 24.7% of the common stock of
Intercargo Corporation ("Intercargo"), a publicly held company. The Company
records its share of Intercargo's operating results on a quarterly lag basis,
after Intercargo has reported its financial results. Summarized financial
information of Intercargo as reflected by the Company for the three and nine
months ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ----------------------
(In millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums earned $ 13.1 $ 13.8 $ 41.7 $ 43.9
Investment and other income 3.0 1.3 6.7 6.3
Equity in earnings of affiliate - 1.4 - 3.4
------------------------- ----------------------
Total revenues 16.1 16.5 48.4 53.6
Expenses 14.5 14.2 46.2 46.0
------------------------- ----------------------
Earnings before federal income taxes 1.6 2.3 2.2 7.6
Federal income taxes (0.3) (0.3) (2.6) (0.9)
------------------------- ----------------------
Net earnings (losses) $ 1.3 $ 2.0 $ (0.4) $ 6.7
========================= ======================
Company's proportionate share,
including goodwill amortization $ 0.2 $ 0.4 $ (0.4) $ 1.3
========================= ======================
</TABLE>
Note 5 - 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
(In millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct premiums written $ 485.2 $ 394.3 $1,395.7 $1,142.6
Reinsurance assumed 20.0 18.8 65.7 74.0
------------------------ ----------------------
Gross premiums written 505.2 413.1 1,461.4 1,216.6
Reinsurance ceded (97.9) (61.6) (300.3) (190.6)
------------------------ ----------------------
Net premiums written $ 407.3 $ 351.5 $1,161.1 $1,026.0
======================== ======================
Direct premiums earned $ 464.2 $ 379.0 $1,342.3 $1,113.2
Reinsurance assumed 38.9 27.0 79.1 89.6
------------------------ ----------------------
Gross premiums earned 503.1 406.0 1,421.4 1,202.8
Reinsurance ceded (106.6) (58.6) (305.7) (196.2)
------------------------ ----------------------
Net premiums earned $ 396.5 $ 347.4 $1,115.7 $1,006.6
======================== ======================
Loss and loss adjustment expenses
incurred recoverable from reinsurers $ 143.0 $ 56.5 $ 308.8 $ 130.7
======================== ======================
</TABLE>
11
<PAGE>
Note 6 - Trust Preferred Securities
The Company-obligated mandatorily redeemable preferred capital securities of
subsidiary trusts holding solely the junior subordinated debentures of the
Company ("Trust Preferred Securities") comprise the following:
September 30, December 31,
(In millions) 1998 1997
- -------------------------------------------------------------------------------
8.73% Trust Preferred Securities
due January 1, 2037 $ 125.0 $ 125.0
7.701% Trust Preferred Securities
due April 15, 2028 125.0 -
------- -------
$ 250.0 $ 125.0
======= =======
On February 2, 1998 Orion issued $125 million of 7.701% Junior Subordinated
Deferrable Interest Debentures due April 15, 2028 to Orion Capital Trust II, a
Delaware statutory business trust sponsored by the Company. Orion Capital Trust
II then sold $125 million of 7.701% capital securities, which mature on April
15, 2028 ("Capital Securities"), in a private placement. Approximately $100
million of the net proceeds from the sale of the junior subordinated debentures
were used to retire bank indebtedness of Guaranty National. Orion registered the
Capital Securities under the Securities Act of 1933 pursuant to an exchange
offer which expired on June 4, 1998. On January 13, 1997 Orion issued $125
million of 8.73% Trust Preferred Securities which may be redeemed without
premium on or after January 1, 2007.
The Trust Preferred Securities are subordinate to all liabilities of
the Company. 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. The Trusts are consolidated in the Company's financial
statements because they are wholly-owned by the Company. The sole assets of the
Trusts are the Debentures issued by Orion. Orion has given its partial
guarantee, which when taken together with the Company's obligations under the
declaration of the Trusts, the Debentures, and the indentures pursuant to which
the Trust Preferred Securities are issued including its obligations to pay
costs, expenses, debts and liabilities of the Trusts (other than with respect to
the Trust Preferred Securities), provides a full and unconditional guarantee of
amounts due on the Trust Preferred Securities.
Note 7 - Stockholders' Equity and Earnings Per Common Share
In the nine months ended September 30, 1998 the Company repurchased 750,300
shares of its common stock at an aggregate cost of $32.9 million under the
Company's stock repurchase program and 45,153 shares at an aggregate cost of
$2.4 million relating to the Company's employee benefit plans. The Company's
Board of Directors increased authorization for purchases of its common stock by
an additional $50 million on August 4, 1998. The remaining stock purchases
authorization was $42.5 million at October 30, 1998.
Basic earnings per share computations are based on the weighted average
number of shares of common stock outstanding during the period excluding
12
<PAGE>
dilution. Diluted earnings per share reflects the potential decrease that could
occur if all stock options and other stock-based awards were exercised and
converted into common stock, if their effect is dilutive. The weighted average
common shares were 27,215,000 and 27,335,000 for the three months ended, and
27,357,000 and 27,313,000 for the nine months ended September 30, 1998 and 1997,
respectively. The weighted average common and diluted equivalent shares were
27,853,000 and 27,881,000 for the three months ended, and 28,051,000 and
27,828,000 for the nine months ended September 30, 1998 and 1997, respectively.
Note 8 - 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.
Note 9 - Accumulated Other Comprehensive Income
Accumulated other comprehensive income balances, net of taxes, are as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Foreign Accumulated Other
Investment Gains Exchange Translation Comprehensive
(Losses) Gains (Losses) Income (Loss)
(In millions)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nine Months ended Sept. 30, 1998:
Balance, beginning of period $ 113.6 $ (4.4) $ 109.2
Current period change (46.5) 0.2 (46.3)
------- ------- -------
Balance, end of period $ 67.1 $ (4.2) $ 62.9
======= ======= =======
Nine Months ended Sept. 30, 1997:
Balance, beginning of period $ 72.3 $ (2.2) $ 70.1
Current period change 42.7 (1.1) 41.6
------- ------- -------
Balance, end of period $ 115.0 $ (3.3) $ 111.7
======= ======= =======
Year ended December 31, 1997:
Balance, beginning of year $ 72.3 $ (2.2) $ 70.1
Current year change 41.3 (2.2) 39.1
------- ------- -------
Balance, end of year $ 113.6 $ (4.4) $ 109.2
======= ======= =======
</TABLE>
The pretax unrealized investment gains (losses) were $(71.5) million and
$65.0 million for the nine months ended September 30, 1998 and 1997,
respectively, and $62.9 million for the year ended December 31, 1997. The
pre-tax unrealized foreign exchange translation gains (losses) were $0.3 million
and $(1.7) million for the nine months ended September 30, 1998 and 1997,
respectively, and $(3.4) million for the year ended December 31, 1997.
13
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Orion Capital Corporation
Farmington, Connecticut
We have reviewed the accompanying consolidated balance sheet of Orion
Capital Corporation and subsidiaries (the "Company") as of September 30, 1998,
and the related consolidated statements of earnings for the three-month and
nine-month periods ended September 30, 1998 and 1997, and the statements of
stockholders' equity and cash flows for the nine-month periods ended September
30, 1998 and 1997. 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, 1997, and the related consolidated
statements of earnings, stockholders' equity and cash flows for the year then
ended; and in our report dated February 11, 1998, we expressed an unqualified
opinion on those consolidated financial statements. The consolidated statements
of earnings and cash flows for the year ended December 31, 1997 are not
presented herein. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1997 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
October 23, 1998
14
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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. 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. As
a result of the acquisition of Guaranty National, the 1997 segment disclosures
have been revised to conform with the current basis of presentation. The three
insurance segments as of September 30, 1998 are as follows:
Regional Operations - this segment includes the workers compensation insurance
products and services sold by the EBI Companies ("EBI").
Special Programs - this segment comprises the following:
DPIC Companies ("DPIC"), which markets professional liability insurance;
Orion Specialty, which writes client-focused specialty insurance programs;
Wm. H. McGee ("McGee"), an underwriting management company that specializes
in ocean marine, inland marine and commercial property insurance; and
The Company's 24.7% interest in Intercargo Corporation ("Intercargo"),
which sells insurance coverages for international trade.
Guaranty National Companies ("Guaranty National") - this segment specializes in
non-standard personal automobile insurance.
The Company increased its ownership of Guaranty National to 100% in December
1997. The Company increased its ownership in Guaranty National, in part, to
provide Guaranty National with additional financing options, on terms that may
not be available to it as an independent entity, so that it can continue its
expansion in the non-standard personal automobile insurance business. Beginning
in 1998, the commercial business lines of Guaranty National were consolidated
with Connecticut Specialty to form a new company named Orion Specialty.
Following the formation of Orion Specialty, Guaranty National became a personal
non-standard automobile insurance operation. Orion Specialty focuses on
specialty commercial insurance.
On April 30, 1998 the Company completed the acquisition of the non-standard
personal automobile insurance business of North Carolina - based Strickland
Insurance Group, Inc. ("Strickland"). The acquisition included two insurance
companies, a premium finance company, a claim adjusting company and a general
agency in Florida. In 1997, Strickland reported approximately $99 million of
15
<PAGE>
personal automobile gross premiums written and $46 million of net premiums
written. The purchase price was $44.0 million in cash subject to adjustment. The
acquisition was accounted for as a purchase and accordingly, the acquired
business has been included in the Company's consolidated financial statements
from the date of acquisition. The total consideration exceeded the fair value of
the acquired net assets by approximately $28.9 million, subject to adjustment,
and is being amortized over 25 years.
On July 9, 1998 the Company completed the acquisition of Grocers Insurance Group
("Grocers") from United Grocers, Inc. for $36.7 million in cash including
acquisition expenses of $0.4 million. Grocers is an Oregon-based specialty
insurance holding company serving the grocery and food service industry. In
1997, Grocers wrote approximately $23 million of net premiums, principally
general liability, property and workers compensation with the majority of its
volume concentrated in the Northwestern states. The acquisition was accounted
for as a purchase and accordingly, Grocers has been included in the Company's
consolidated financial statements from the date of acquisition. The total
consideration exceeded the fair value of the net assets acquired by
approximately $7.7 million and is being amortized over 25 years.
In the third quarter of 1998, the Company announced the realignment of its
Orion Specialty unit because it has not met the Company's profitability
expectations. The realignment will result in Orion Specialty's continued shift
away from commodity business, primarily commercial auto and transportation, to a
smaller number of more client-focused programs and specialty niches. The
realignment includes the cancellation of approximately $100 million in
annualized net written premiums of unprofitable commodity and marginal lines of
business, the reduction of approximately 90 employees related to the cancelled
business, and the sale of Colorado Casualty. Colorado Casualty produced
approximately $55 million in annual net premiums but consists largely of
business that does not fit the Company's specialization strategy. The Company
expects to complete the realignment in 1999.
The Company recorded severance and program termination expenses of $7.0
million and asset write downs of $1.9 million related to the cancelled business
in the third quarter of 1998. On September 29, 1998, the Company sold Colorado
Casualty to Liberty Mutual Insurance Company resulting in a pre-tax gain of
approximately $24.2 million.
In connection with the realignment, in the third quarter of 1998, the
Company completed a detailed actuarial analysis for the business to be
cancelled. As a result of this actuarial study, the Company recorded a provision
for losses and loss adjustment expenses of $27.8 million in the third quarter of
1998.
16
<PAGE>
RESULTS OF OPERATIONS
Overview
Earnings (loss) by segment before federal income taxes and minority interest
expense are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
(In millions) 1998 1997 % Change 1998 1997 % Change
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Regional Operations $ 10.8 $ 22.9 -52.9% $ 63.7 $ 60.4 5.6%
Special Programs (9.1) 9.6 -194.1% 48.3 47.2 2.4%
Guaranty National 7.3 9.8 -25.2% 25.6 26.4 -3.2%
---------------------------------- ----------------------------------
9.0 42.3 -78.7% 137.6 134.0 2.7%
Other (1.0) (4.2) -75.7% (10.5) (13.2) -20.3%
---------------------------------- ----------------------------------
$ 8.0 $ 38.1 -79.0% $127.1 $ 120.8 5.2%
================================== ==================================
</TABLE>
<TABLE>
Operating earnings, after-tax realized investment gains, net earnings and per
diluted common share amounts are summarized as follows:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ -------------------------------------
(In millions, except share data) 1998 1997 % Change 1998 1997 % Change
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating earnings $ 2.0 $ 21.6 -90.9% $ 48.8 $ 61.3 -20.4%
After-tax realized investment
gains 0.3 2.9 -88.5% 33.9 18.1 87.1%
---------------------------------- -----------------------------------
Net earnings $ 2.3 $ 24.5 -90.6% $ 82.7 $ 79.4 4.1%
================================== ===================================
Per diluted common share:
Operating earnings $0.07 $ 0.78 -90.9% $ 1.74 $ 2.20 -21.1%
After-tax realized investment
gains 0.01 0.10 -88.5% 1.21 0.65 85.6%
---------------------------------- -----------------------------------
Net earnings $0.08 $ 0.88 -90.6% $ 2.95 $ 2.85 3.3%
================================== ===================================
</TABLE>
Operating earnings represents earnings after taxes, excluding net realized
investment gains. Operating earnings of $2.0 million in the third quarter of
1998 reflects the realignment of Orion Specialty and losses from the Company's
limited partnership investments. The Company recorded a $12.5 million net
pre-tax charge, or $.35 per diluted share on an after-tax basis, in connection
with the realignment of Orion Specialty and related reserve strengthening for
cancelled business. Furthermore, the Company reported pre-tax investment losses
of $14.1 million, or $.33 per diluted share on an after-tax basis, related to
declines in the value of the Company's limited partnership investments which are
accounted for on an equity basis. These charges and losses have offset the
continued strong operating performance from the Company's insurance operations,
in particular EBI, DPIC and Guaranty National, and are combined with significant
17
<PAGE>
increases in year-to-date after-tax realized investment gains to arrive at net
earnings. Weighted average common shares and diluted equivalents outstanding
were 27,853,000 for the third quarter of 1998 and 28,051,000 for the nine months
ended September 30, 1998 and 27,881,000 and 27,828,000, for the corresponding
1997 periods, respectively.
REVENUES
Revenues are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
(In millions) 1998 1997 % Change 1998 1997 % Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net premiums written $ 407.3 $ 351.5 15.9% $ 1,161.1 $ 1,026.0 13.2%
================================= ==================================
Net premiums earned $ 396.5 $ 347.4 14.1% $ 1,115.7 $ 1,006.6 10.8%
Net investment income 22.3 40.8 -45.3% 106.2 122.3 -13.2%
Realized investment gains 0.4 5.2 -91.8% 52.1 29.3 77.8%
Other 2.1 5.0 -58.3% 14.7 15.2 -2.7%
--------------------------------- ----------------------------------
$ 421.3 $ 398.4 5.8% $ 1,288.7 $ 1,173.4 9.8%
================================= ==================================
</TABLE>
Premiums Written
The Company's net premiums written by segment are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
(In millions) 1998 1997 % Change 1998 1997 % Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Regional Operations $ 132.0 $ 99.2 33.1% $ 349.4 $ 277.0 26.2%
Special Programs 168.1 168.3 -0.1% 501.9 500.5 0.3%
Guaranty National 107.2 84.0 27.6% 309.8 248.5 24.7%
--------------------------------- -----------------------------------
$ 407.3 $351.5 15.9% $1,161.1 $1,026.0 13.2%
================================= ===================================
</TABLE>
In November 1996, the Company sold the renewal book of business of its assumed
reinsurance operation to concentrate on businesses where the Company can better
service its specialized niche markets. Excluding premiums from this operation,
the Company's net premiums written increased by 16.3% in the third quarter of
1998 and 14.3% in the first nine months of 1998 over the same 1997 periods.
Regional Operations
Net premiums written for Regional Operations increased by 33.1% in the third
quarter of 1998 and 26.2% in the first nine months of 1998 from the comparable
1997 periods largely due to new business written through EBI's multi-state
program established last year and continued geographic expansion and
penetration, partly offset by the impact of statutory rate reductions of last
year.
18
<PAGE>
<TABLE>
Special Programs
Net premiums written from Special Programs are as follows:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
(In millions) 1998 1997 % Change 1998 1997 % Change
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Orion Specialty $ 83.4 $ 101.4 -17.7% $ 288.7 $ 305.1 -5.4%
DPIC 46.6 51.1 -8.8% 138.5 142.0 -2.4%
McGee 38.2 14.7 160.4% 75.1 43.3 73.5%
--------------------------------- ---------------------------------
168.2 167.2 0.7% 502.3 490.4 2.4%
Assumed reinsurance (0.1) 1.1 -109.4% (0.4) 10.1 -104.3%
--------------------------------- ---------------------------------
$ 168.1 $ 168.3 -0.1% $ 501.9 $ 500.5 0.3%
================================= =================================
</TABLE>
Net premiums written by DPIC for professional liability insurance decreased in
1998 compared to 1997 primarily as a result of rate reductions in a very
competitive professional liability insurance market offset in part by continual
high levels of policy renewals and growth in project policies.
Orion Specialty's net premiums written decreased in 1998 compared to 1997 due to
the cancellation of unprofitable commodity and marginal lines of business
primarily related to the realignment of Orion Specialty. Cancelled programs with
the largest year-over-year impact on net premiums written were truck liability,
ocean marine, coal mine, and non-standard automobile personal injury protection.
Net premiums written also reflect lower premiums from Orion Specialty's
collateral protection business. These decreases were partly offset by higher
premiums from Colorado Casualty, which was sold on September 29, 1998 as part of
the realignment of Orion Specialty, and from the acquisition of Grocers
Insurance on July 9, 1998.
McGee's net premiums written increased in 1998 compared to 1997 due to the
Company's greater participation in the underwriting pools managed by McGee and
increased premium retention reflecting a change in McGee's reinsurance programs.
The Company's participation in McGee's United States pool is approximately 71%
and 52% in 1998 and 1997, respectively. Participation in McGee's Canadian pool
is approximately 72% and 61% in 1998 and 1997, respectively.
Guaranty National
The net premiums written growth in 1998 over the comparable 1997 periods is
primarily due to the acquisitions of Strickland and Unisun Insurance Company,
modest year-to-date growth in the monthly product business in California, and
increases in premiums from the Northwestern states, offset in part by modest
rate reductions due from a very competitive market. Premium growth in California
is primarily attributed to enacted legislation requiring all drivers to maintain
liability insurance.
19
<PAGE>
Premiums Earned
The Company's premiums earned increased 14.1% and 10.8% in the third quarter and
first nine months of 1998 compared to the same 1997 periods, respectively.
Premiums earned reflect the recognition of income from the changing levels of
net premium writings.
Net Investment Income
Pre-tax net investment income was $106.2 million and $122.3 million for the nine
months of 1998 and 1997, and $22.3 million and $40.8 million for the
corresponding third quarter periods, respectively. Net investment income in the
third quarter of 1998 was negatively impacted by losses of $14.1 million on the
Company's limited partnership investments which are accounted for on an equity
basis. The pre-tax yields on the average investment portfolio were 5.9% for the
nine months of 1998 and 7.0% for the nine months of 1997, with after-tax yields
of 4.5% and 5.3%, respectively. Excluding equity earnings (losses) in limited
partnership investments, the pre-tax yields on the average investment portfolio
were 6.3% and 6.5% in the nine months of 1998 and 1997, respectively. The
pre-tax investment yields have also been impacted by a shifting of the Company's
investment portfolio from taxable to tax-advantage securities during 1998. Net
investment income was favorably affected by a modestly higher average investment
base in 1998 as compared to 1997, reflecting positive operating cash flow and
net cash provided by investing activities.
Net investment income reflects equity losses in limited partnership investments
of $14.1 million and $5.1 million for the third quarter and nine months of 1998,
respectively, and equity earnings of $3.8 million and $12.3 million in the same
1997 periods. As a result of recent volatility and declines in the financial
markets, three of the Company's limited partnership investments significantly
declined in value in the third quarter of 1998. Earnings (losses) from limited
partnership investments can vary considerably from year-to-year. The Company's
long-term experience with limited partnership investments has been quite
favorable. The Company plans to reduce its proportion of limited partnership
investments to total investments from 4.2% at September 30, 1998 by exiting some
of the more volatile partnerships in 1999.
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 is $1,947.2 million at
September 30, 1998 and $2,010.9 million at December 31, 1997, or approximately
77.4% and 78.8% of the Company's cash and investments, 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. 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 September 30, 1998 and December 31, 1997, the Company's
20
<PAGE>
investments in non-investment grade and non-rated fixed maturity securities were
carried at $225.9 million and $256.7 million, respectively. These investments
represented a total of 9.0% and 10.1% of cash and investments and 5.4% and 6.6%
of total assets at September 30, 1998 and December 31, 1997, respectively.
Realized Investment Gains
Net realized investment gains are $52.1 million and $29.3 million for the nine
months of 1998 and 1997, and $0.4 million and $5.2 million for corresponding
third quarter periods, respectively. Approximately 25% of the year-to-date 1998
net realized investment gains resulted from the sale of two investments in
entities which were acquired or taken public during the first quarter. Realized
investment gains may be reduced by provisions for losses on securities deemed to
be other-than-temporarily impaired. Impairment provisions of $2.5 million and
$1.8 million were recognized in the nine months ended September 30, 1998 and
1997, respectively. Any such provision is based on available information at the
time and is made in consideration of the decline in the financial condition of
the issuers of such securities. Realized investment 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. Net unrealized investment gains, after taxes,
recorded in stockholders' equity were $67.1 million and $113.6 million at
September 30, 1998 and December 31, 1997. Such amounts can vary significantly
depending upon fluctuations in the financial markets.
EXPENSES AND OTHER
Operating Ratios
The following table sets forth certain ratios of insurance operating expenses to
premiums earned:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss and loss adjustment expenses 70.8% 65.9% 68.5% 66.9%
Policy acquisition costs and other
insurance expenses 31.7% 31.4% 30.8% 31.2%
---------------------- ---------------------
Total before policyholders' dividends 102.5% 97.3% 99.3% 98.1%
Policyholders' dividends 2.5% 2.3% 2.1% 1.8%
---------------------- ---------------------
Combined ratio 105.0% 99.6% 101.4% 99.9%
====================== =====================
Loss and loss adjustment expenses
ratio by segment:
Regional Operations 56.2% 49.4% 56.9% 55.5%
Special Programs 83.7% 73.2% 75.8% 71.2%
Guaranty National 67.1% 70.1% 69.2% 70.9%
</TABLE>
Excluding reserve strengthening related to the cancellation of Orion Specialty
business in the third quarter of 1998, the consolidated combined ratio would
have been 98.0% and 98.9% for three months ended and nine months ended September
30, 1998, respectively.
21
<PAGE>
The higher loss ratio for Regional Operations is attributed to the effects of
competitive pricing pressure and less favorable loss development relating to
prior accident years, partly offset by lower loss expenses achieved by EBI
through its service-oriented approach. EBI's service-oriented approach is to
work with its customers to prevent losses and reduce claim costs. Guaranty
National's loss ratio improved in 1998 compared to 1997 primarily due to a
decline in claims frequency and claims severity partly offset by higher loss
expenses.
The increased loss ratio for Special Programs in 1998 compared to 1997 is
primarily attributable to $27.8 million of loss reserve strengthening recorded
in the third quarter of 1998 related to business being canceled in connection
with the Orion Specialty realignment. Excluding this charge, the loss ratio for
Special Programs would be 67.2% in third quarter of 1998 and 70.1% in nine
months of 1998. Additionally, the loss ratio for Special Programs was negatively
impacted by assumed reinsurance business exited in late 1996 because net earned
premiums from this business declined at a greater rate than losses in 1998
compared to 1997. These increases were partly offset by an improvement in DPIC's
loss ratio in 1998 as compared to 1997 from its loss prevention competencies.
The ratios of policy acquisition costs and other insurance expenses to premiums
earned (the "expense ratio") are 31.7% and 30.8% for the three months and nine
months ended September 30, 1998, respectively, and 31.4% and 31.2% for the
respective 1997 periods. Policy acquisition costs include direct costs, such as
commissions, premium taxes, and salaries that relate to and vary with the
production of new business. These costs are deferred and amortized as the
related premiums are earned, subject to a periodic test for recoverability.
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. Provisions for losses and loss adjustment expenses include
development of loss and loss adjustment expense reserves relating to prior
accident years, which increased the calendar year combined ratio by 2.5
percentage points in the first nine months of 1998 and 0.7 percentage points in
the same period of 1997. In the third quarter of 1998, the Company recorded
$17.0 million of loss reserves pertaining to prior accident years for
business being canceled in connection with the Orion Specialty realignment.
Excluding this charge, adverse development of prior accident years increased the
calendar year combined ratio by 1.0 percentage points in 1998. Variability in
claim emergence and settlement patterns and other trends in loss experience can
result in future development patterns different than expected. After considering
the additional reserve strengthening recorded for Orion Specialty, the Company
believes that any such variability or development will generally continue at the
low levels experienced in recent years, considering actions that have been taken
to increase reserving levels, improve underwriting standards and emphasize loss
prevention and control.
The Company limits both current losses 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.
22
<PAGE>
Interest Expense
Interest expense is $6.0 million and $6.2 million for the third quarters of 1998
and 1997, and $14.9 million and $18.5 million for the first nine months of 1998
and 1997, respectively. Interest expense declined in 1998 as a result of the
repayment of the $100 million bank indebtedness of Guaranty National in February
1998 with proceeds from the issuance of the Company's 7.701% Trust Preferred
Securities.
Equity in Earnings (Loss) of Affiliate
Equity in earnings (loss) of affiliate consists of earnings (loss) from the
Company's 24.7% investment in Intercargo. The Company records its share of
Intercargo's results in the subsequent quarter as Intercargo reports its
quarterly earnings after the Company reports its earnings.
Federal Income Taxes
Federal income taxes (including tax benefits from subsidiary trust preferred
securities) and the related effective tax rates are $29.9 million (26.6%) and
$27.8 million (24.6%) for the nine months of 1998 and 1997, respectively. The
Company's effective tax rates for 1998 and 1997 are less than the statutory tax
rate of 35% primarily because of income derived from tax-advantaged securities.
Minority Interest Expense
Minority interest expense in subsidiary Trust Preferred Securities was $3.4
million and $9.4 million for three months and nine months ended September 30,
1998, and $1.8 million and $5.1 million for corresponding 1997 periods,
respectively. Minority interest expense in subsidiary Trust Preferred Securities
represents the financing cost, after the federal income tax benefit, on Orion's
8.73% and 7.701% Trust Preferred Securities. The increase in 1998 reflects
minority interest expense associated with the issuance of $125 million 7.701%
Trust Preferred Securities in February 1998.
Minority interest expense of $2.1 million and $5.8 million was recorded for the
after-tax portion of Guaranty National's 1997 third quarter and nine month
earnings attributable to stockholders of Guaranty National other than the
Company, respectively. Guaranty National became a wholly owned subsidiary of the
Company in December 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities decreased by $53.2 million to $24.6
million in the first nine months of 1998 from $77.8 million in the same 1997
period. The decrease in operating cash flow for 1998 is primarily the result of
higher payments for losses, policy acquisition costs, federal income taxes,
minority interest from subsidiary trust preferred securities and an increase in
funds due from others. The higher loss payments in 1998 reflect both an
acceleration of claims settlement in two of our operations and loss payments
related to the assumed reinsurance business exited by the Company in 1996.
Higher payments for policy acquisition costs are related to the Company's
current rate of growth. Federal tax payments are higher in part due to increased
realized investment gains in 1998. Funds due from others related to a commuted
23
<PAGE>
reinsurance agreement executed in the third quarter of 1998 to be settled in the
fourth quarter of 1998. Partially offsetting these increased cash outflows are
higher premiums collected, reflective of the Company's current rate of growth,
as well as higher investment income collected.
The Company's investment activities provided $27.6 million of cash in the first
nine months of 1998 and used $196.3 million of cash in the 1997 period. Cash is
used in or provided by investment activities primarily for purchases or from
sales/maturities of investments and for acquisition activities. Investment
purchases are funded by maturities and sales of investments, as well as by the
net cash from operating cash flows after cash provided by or used in financing
activities. Cash used for acquisitions totaled $79.1 million (excluding acquired
cash of $17.5 million) in the first nine months of 1998. The Company paid $38.5
million to Strickland for the purchase of its non-standard personal automobile
insurance business on April 30,1998 and $2.0 million in 1997 with $3.3 million
of the purchase price retained by the Company in part to secure obligations of
Strickland. On July 9, 1998 the Company paid approximately $32.3 million to
United Grocers, Inc. for the purchase of Grocers Insurance with $4.0 million of
the purchase price retained by the Company to secure obligations of United and
Grocers. On September 29, 1998, the Company sold Colorado Casualty which
provided cash proceeds to the Company (net of cash sold with Colorado Casualty
and before taxes) of approximately $13.4 million.
The Company's financing activities used $23.0 million of cash for the first nine
months of 1998 and provided $109.5 million of cash for the same 1997 period. The
net proceeds from the issuance of trust preferred securities by the Company
provided $121.9 million and $123.0 million of cash in 1998 and 1997,
respectively. Approximately $100 million of net proceeds from the issuance of
the 7.701% Trust Preferred Securities were used to repay bank indebtedness of
Guaranty National in February 1998. Simultaneous with the acquisition of
Strickland's non-standard personal automobile business, the Company repaid $9.4
million of assumed bank debt in the acquisition. Cash used in financing
activities also includes dividend payments, scheduled debt repayments and
payments related to the Company's common stock repurchase program. During the
third quarter of 1998, the Company used $10 million from unsecured borrowings
under its bank credit facility to fund uses of cash. Orion increased the
quarterly dividend rate on its common stock by 12.5% and 14.3% in the second
quarters of 1998 and 1997, 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 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. 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 $320.3 million
and $160.4 million at September 30, 1998 and December 31, 1997, respectively.
The consolidated policyholders' surplus of Orion's insurance subsidiaries is
24
<PAGE>
$755.4 million and $789.0 million at September 30, 1998 and December 31, 1997,
respectively. The Company's statutory operating leverage ratios of trailing
twelve months net premiums written to policyholders' surplus is 2.0:1 at
September 30, 1998 and 1.8:1 at December 31, 1997.
On July 8, 1998 the Company entered into a credit agreement with a group of
banks which provides for unsecured borrowings up to $150 million. The credit
agreement expires on July 8, 2003 and provides for two one-year extension
periods. The Company intends to use the credit facility for general corporate
purposes that may include acquisitions. The credit agreement carries an annual
facility fee on the unused amounts of the credit facility. Borrowings under the
credit agreement bear interest at LIBOR (London Interbank Offerred Rate) plus a
margin based upon the Company's credit ratings. The credit agreement requires
the Company to maintain certain financial covenants including a maximum debt to
total capitalization ratio of 0.4 to 1.0, as defined, and a minimum combined
statutory surplus of $650 million plus 30% of the Company's aggregate combined
annual statutory net income. The credit agreement limits the Company's ability
to incur secured indebtedness or certain contingent obligations except for
indebtedness secured by liens specifically permitted by the credit agreement and
additional secured indebtedness with a principal amount not exceeding 10% of the
Company's consolidated net worth, as defined. Borrowings of $10.0 million are
outstanding under this credit agreement at September 30, 1998. Management does
not believe that the credit agreement's covenants or limitations unduly restrict
the Company's operations or limit Orion's ability to acquire additional
indebtedness.
The terms of Orion's indentures for its $100 million of 7.25% Senior Notes due
2005 and its $110 million of 9.125% Senior Notes due 2002 limit the amount of
liens and guarantees by the Company and its 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 September 30, 1998
the Company is 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 January 13, 1997 Orion issued $125 million of 8.73% Junior Subordinated
Deferrable Interest Debentures due January 1, 2037 (the "8.73% Debentures") to
Orion Capital Trust I ("Trust I"), a Delaware statutory business trust sponsored
by Orion. Trust I simultaneously sold $125 million of 8.73% capital securities
(the "8.73% Trust Preferred Securities") which have substantially the same terms
as the 8.73% Debentures. The net proceeds from the sale of the 8.73% Trust
Preferred Securities were used in part for the acquisition of Guaranty National
common stock in December 1997. The 8.73% Trust Preferred Securities may be
redeemed without premium on or after January 1, 2007.
On February 2, 1998 Orion issued $125 million of 7.701% Junior Subordinated
Deferrable Interest Debentures due April 15, 2028 (the "7.701% Debenture") to
Orion Capital Trust II ("Trust II"), a Delaware statutory business trust
sponsored by Orion. Trust II then sold $125 million of 7.701% capital securities
(the "7.701% Trust Preferred Securities"), which have substantially the same
terms as the 7.701% Debentures, in a private placement. Approximately $100
million of net proceeds from the sales of the 7.701% Trust Preferred Securities
were used to repay bank indebtedness of Guaranty National in February 1998.
25
<PAGE>
The 8.73% and 7.701% capital securities are subordinated to all liabilities of
the Company. The Company may defer interest distributions on these capital
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.
For the year-to-date period to October 30, 1998 the Company has repurchased
750,300 shares of its common stock at an aggregate cost of $32.9 million under
the Company's stock repurchase program . The Company's Board of Directors
increased authorization for purchases of its common stock by an additional $50
million on August 4, 1998. The remaining stock purchase authorization was $42.5
million at October 30, 1998.
LEGAL PROCEEDINGS
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.
YEAR 2000 COMPLIANCE
The "Year 2000 problem" exists because many computer programs which companies
use rely on only the last two digits to refer to a particular year. As a result,
these computer programs may interpret the year 2000 as 1900. If not corrected,
computer software may fail or create erroneous results. The potential impact of
the Year 2000 problem on business, financial and governmental entities
throughout the world is not known and, if not timely corrected, may broadly
affect the national economy in which we operate.
The Company concluded that as an extensive user of technology, it has a material
exposure to the Year 2000 problem and has taken steps to assess and address that
exposure. In response to this issue, the Company has inventoried and assessed,
for all its operations and locations, its insurance policy issuance, billing and
collection, claims paying, and other operational systems, along with the
hardware and software used in its computing facilities, embedded chips used in
its physical structures, third party data-exchanges, and reliance on external
business relations. This work has been carried out by the Company through
central coordination supported by dedicated teams working at each Company site.
Progress has been reviewed regularly by senior management. The process by which
the Company is managing its Year 2000 efforts has also been reviewed by
independent consultants.
The Company began addressing its computer programs in 1996 at the locations
where its most significant technology concentration exists. Similar work
commenced shortly thereafter at other locations.
As of September 30, 1998, the Company had completed approximately 75% of its
scheduled remediation of its critical production systems for processing Year
2000 dates. This places the Company on or ahead of its plan for meeting Year
2000 processing needs. Non-critical systems will be tested and critical systems
will be re-tested during 1999. The total costs to test or modify these existing
systems, which include both internal and external costs of programming and
26
<PAGE>
testing, is estimated to be approximately $19.8 million, of which $13.4 million
has been expensed ($2.4 million in 1997 and $11.0 million in the nine months
ended September 30, 1998).
With a timely start on correcting the Year 2000 problem, the Company has been
able to address this potential exposure without delaying other important
projects. This has allowed the Company to continue replacement of outdated
systems with newer versions offering greater functionality and cost
efficiencies. The Company will complete replacing its financial, personnel, and
payroll systems in 1998 and begin phasing in new integrated processing systems
for certain of its operations in 1999. The total estimated cost for these major
technology improvement projects are estimated at $11.5 million of which $8.1
million has been capitalized through September 30, 1998. All costs are being
funded through operating cash flows.
In addition to addressing its own hardware, software and processing exposure,
the Company has been engaged since 1996 in a process of identifying and
prioritizing critical suppliers and customers at the direct interface level, and
communicating with them about their plans and progress in addressing the Year
2000 problem.
The Company has mailed letters to its significant vendors and service providers
and has verbally communicated with many strategic customers to determine the
extent to which interfaces with such entities are vulnerable to Year 2000
problems and whether the products and services purchased from or by such
entities are Year 2000 compliant. As of September 30, 1998, the Company had
received responses from approximately 70% of such third parties and 95% of the
companies that have responded have provided written assurances that they expect
to address all their significant Year 2000 problems on a timely basis. A
follow-up mailing to significant vendors and service providers that did not
initially respond, or whose responses were deemed unsatisfactory by the Company,
will be completed by March 31, 1999.
Evaluations of the most critical third parties have been initiated. These
evaluations will be followed by the development of contingency plans, which have
been prepared for third parties having near term Year 2000 impact or are being
developed for other third parties, with completion during the first quarter of
1999. The Company estimates that this aspect of its Year 2000 effort was on
schedule at September 30, 1998.
The Company presently believes that the Year 2000 problems will not pose
significant operational problems for the Company. However, if all Year 2000
problems are not properly identified, or assessment, remediation and testing are
not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, or others.
The Company is unable to determine at this time whether the consequences of
counter-parties Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The possibility exists
that a portion of its third-party distribution channels may not be ready, that
communications with its agents could be disrupted, that underwriting data, such
as motor vehicle reports, could be unobtainable, that the claim settling process
could be delayed or that the frequency and severity of losses may increase due
to external factors. When concern appears justified about an aspect of
27
<PAGE>
readiness, contingency plans have been prepared or are being developed. However,
there can be no assurance that unanticipated Year 2000 issues of other entities
will not have a material adverse impact on the Company's systems or results of
operations.
This is a Year 2000 Readiness Disclosure statement. Readers are cautioned that
forward-looking statements contained in "Year 2000 Compliance" should be read in
conjunction with the company's disclosures under the heading: "Forward-Looking
Statements".
ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of
an Enterprise and Related Information", which changes the way public companies
report information about segments. This statement will be adopted by the Company
in the fourth quarter of 1998. Financial statement disclosures for prior periods
are required to be restated. The Company is in the process of evaluating the
disclosure requirements and presently expects that the adoption of this standard
will have no impact on the Company's consolidated results of operation,
financial position or cash flows.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 requires that derivatives be reported on
the balance sheet at fair value. Changes in fair value are recognized in net
income or, for derivatives that are hedging market risk related to future cash
flows, in the accumulated other comprehensive income section of shareholders'
equity. Implementation is required by the first quarter of 2000, with the
cumulative effect of adoption reflected in net income and accumulated other
comprehensive income, as appropriate. Orion has not determined the effect or
timing of implementation of this pronouncement.
FORWARD-LOOKING STATEMENTS
All statements made in this quarterly report 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 factors include, among other
things, (i) general economic and business conditions; (ii) interest rate
changes; (iii) competition and regulatory environment in which the Company
operates; (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 the Company; (ix) Year 2000
problems and (x) other factors over which the Company has little or no control.
The Company's expectation that it's plan for Year 2000 Compliance will be
completed on schedule depends, in large part, on the Company's own efforts and
expenditures on hardware, software and systems, which is on schedule as to those
exposures which the Company has been able to identify. However, Year 2000
problems could also arise because of unanticipated non-compliance on the part of
vendors, agents, customers and other third parties including governmental
entities. Significant Year 2000 problems could materially and adversely affect
future performance and results of operations. The Company disclaims any
28
<PAGE>
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.
29
<PAGE>
PART II. OTHER INFORMATION
Items 1-5. - None
Item 6. Exhibits and reports on Form 8-K
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.
Report on Form 8-K
None.
30
<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: November 12, 1998 By: /s/ W. Marston Becker
--------------------------
Chairman of the Board and
Chief Executive Officer
Date: November 12, 1998 By: /s/ Donald W. Ebbert, Jr.
-----------------------------
Executive Vice President and
Chief Financial Officer
31
<PAGE>
EXHIBIT INDEX
Exhibit 11: Computation of Earnings Per Common Share
Exhibit 15: Deloitte & Touche LLP Letter
re: unaudited interim financial information
Exhibit 27: Financial Data Schedule
Exhibits have been omitted in the conformed copy.
32
Exhibit 11
<TABLE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
(In thousands, except per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of shares outstanding 27,215 27,335 27,357 27,313
===================== =====================
Net earnings attributable to common stockholders $ 2,308 $ 24,526 $ 82,655 $ 79,385
===================== =====================
Net earnings per basic common share $ 0.08 $ 0.90 $ 3.02 $ 2.91
===================== =====================
Diluted:
Computation of weighted average number of
common and diluted equivalent shares
outstanding:-
Weighted average number of shares outstanding 27,215 27,335 27,357 27,313
Dilutive effect of stock options and stock awards 638 546 694 515
--------------------- ---------------------
Weighted average number of common and
diluted equivalent shares 27,853 27,881 28,051 27,828
===================== ====================
Net earnings attributable to common stockholders $ 2,308 $ 24,526 $ 82,655 $ 79,385
===================== ====================
Net earnings per diluted common share $ 0.08 $ 0.88 $ 2.95 $ 2.85
===================== ====================
</TABLE>
Exhibit 15
November 10, 1998
Orion Capital Corporation
Farmington, Connecticut
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
September 30, 1998 and 1997, as indicated in our report dated October 23, 1998;
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 September 30, 1998, is
incorporated by reference in Registration Statements No. 2-80636 and No.
333-58941 on Form S-8 relating to the Orion Capital Corporation 1982 Long-Term
Performance Incentive Plan, No. 333-58905 on Form S-8 relating to Orion Capital
Corporation Equity Incentive Plan, No. 2-63344 and No. 333-58889 on Form S-8
relating to the Orion Capital 401(K) and Profit Sharing Plan, No. 33-59847 and
No. 333-58939 on Form S-8 relating to the Orion Capital Corporation 1994 Stock
Option Plan for Non-Employee Directors, No. 333-44901 on Form S-8 relating to
the Wm. H. McGee & Co., Inc. 401(K) and Profit Sharing Plan, No. 333-55671 on
Form S-8 relating to Orion Capital Corporation Employees' Stock Purchase Plan,
and No.333-62951 on Form S-8 relating to Retirement Savings Plan for Employees
of Guaranty National Insurance Company.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, 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
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ORION CAPITAL CORPORATION'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 1,394,335
<DEBT-CARRYING-VALUE> 259,994
<DEBT-MARKET-VALUE> 271,898
<EQUITIES> 422,659
<MORTGAGE> 2,227
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,477,654
<CASH> 38,502
<RECOVER-REINSURE> 666,179
<DEFERRED-ACQUISITION> 154,607
<TOTAL-ASSETS> 4,202,867
<POLICY-LOSSES> 2,006,487
<UNEARNED-PREMIUMS> 605,650
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 20,808
<NOTES-PAYABLE> 219,911
<COMMON> 180,436
0
0
<OTHER-SE> 534,967
<TOTAL-LIABILITY-AND-EQUITY> 4,202,867
1,115,716
<INVESTMENT-INCOME> 106,209
<INVESTMENT-GAINS> 52,079
<OTHER-INCOME> 14,717
<BENEFITS> 763,712
<UNDERWRITING-AMORTIZATION> 305,578
<UNDERWRITING-OTHER> 62,427
<INCOME-PRETAX> 127,077
<INCOME-TAX> 35,018
<INCOME-CONTINUING> 82,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,655
<EPS-PRIMARY> 3.02
<EPS-DILUTED> 2.95
<RESERVE-OPEN> 1,390,727
<PROVISION-CURRENT> 735,757
<PROVISION-PRIOR> 27,955
<PAYMENTS-CURRENT> 246,746
<PAYMENTS-PRIOR> 481,767
<RESERVE-CLOSE> 1,449,644
<CUMULATIVE-DEFICIENCY> 27,955
</TABLE>
