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 June 30, 1999
( ) 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 ( )
Approximately 27.4 million shares of Common Stock, $1.00 par value, of the
registrant were outstanding on August 1, 1999.
Page 1 of 36
Exhibit Index Appears at Page 36
<PAGE>
ORION CAPITAL CORPORATION
FORM 10-Q INDEX
For the Quarter Ended June 30, 1999
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet at June 30, 1999 (Unaudited)
and December 31, 1998 3 - 4
Consolidated Statement of Operations for the three and six months
ended June 30, 1999 and 1998 (Unaudited) 5
Consolidated Statement of Stockholders' Equity for the
six months ended June 30, 1999 and 1998 (Unaudited),
and for the year ended December 31, 1998 6
Consolidated Statement of Cash Flows for the six months
ended June 30, 1999 and 1998 (Unaudited) 7 - 8
Notes to Consolidated Financial Statements (Unaudited) 9 - 15
Independent Accountants' Review Report 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17 - 32
PART II. OTHER INFORMATION 33
2
<PAGE>
PART I. FINANCIAL INFORMATION
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
June 30, 1999 December 31,
(In millions) (Unaudited) 1998
- -------------------------------------------------------------------------------
Assets:
Investments: -
Fixed maturities, at amortized cost
(market $265.6 - 1999 and $272.7 - 1998) $ 260.4 $ 260.6
Fixed maturities, at market (amortized cost
$1,434.0 - 1999 and $1,305.5 - 1998) 1,424.7 1,349.9
Common stocks, at market (cost $158.5 -
1999 and $200.3 - 1998) 194.0 242.4
Non-redeemable preferred stocks, at market
(cost $198.4 - 1999 and $269.1 - 1998) 194.5 268.5
Other long-term investments 87.2 116.2
Short-term investments 214.4 248.7
--------- ---------
Total investments 2,375.2 2,486.3
Cash 15.8 18.0
Accrued investment income 27.8 27.0
Investment in affiliate - 22.8
Accounts and notes receivable 190.9 217.2
Reinsurance recoverables and prepaid reinsurance 926.5 801.5
Deferred policy acquisition costs 138.9 155.6
Property and equipment 102.1 95.4
Excess of cost over fair value of net assets acquired 144.9 167.7
Federal income taxes receivable 38.4 22.4
Deferred federal income taxes 57.9 26.7
Other assets 96.7 123.8
--------- ---------
Total assets $ 4,115.1 $ 4,164.4
========= =========
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
3
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 1999 December 31,
(In millions, except for share data) (Unaudited) 1998
- -------------------------------------------------------------------------------
Liabilities:
Policy liabilities: -
Losses $ 1,621.1 $ 1,602.1
Loss adjustment expenses 479.7 415.6
Unearned premiums 567.0 564.0
Policyholders' dividends 18.2 17.9
--------- ---------
Total policy liabilities 2,686.0 2,599.6
Notes payable 209.4 217.4
Other liabilities 339.6 370.1
--------- ---------
Total liabilities 3,235.0 3,187.1
--------- ---------
Contingencies (Note 6)
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
the junior subordinated debentures of the Company 250.0 250.0
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 146.6 149.6
Retained earnings 493.5 553.2
Accumulated other comprehensive income 17.4 58.5
Treasury stock, at cost (3,364,941 shares -
1999 and 3,505,091 shares - 1998) (52.2) (57.8)
Deferred compensation on restricted stock (5.9) (6.9)
--------- ---------
Total stockholders' equity 630.1 727.3
--------- ---------
Total liabilities and stockholders' equity $ 4,115.1 $ 4,164.4
========= =========
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
4
<PAGE>
<TABLE>
<CAPTION>
ORION CAPITAL CORPORATON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
(In millions, except for per share data) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Premiums earned $ 343.5 $ 370.4 $ 642.7 $ 719.2
Net investment income 34.6 42.5 69.0 83.9
Realized investment gains 2.7 22.7 4.4 51.7
Other income 1.2 7.0 2.2 12.6
------- ------- ------- -------
Total revenues 382.0 442.6 718.3 867.4
------- ------- ------- -------
Expenses:
Losses incurred and loss adjustment expenses 233.6 250.7 599.2 483.0
Amortization of deferred policy acquisition costs 96.4 103.1 177.0 203.9
Other insurance expenses 10.7 7.8 19.7 14.7
Dividends to policyholders 4.2 7.2 10.2 13.6
Interest expense 4.5 3.1 9.1 8.9
Other expenses 5.7 12.5 12.9 23.5
Other (Note 2) (40.2) - (40.2) -
------- ------- ------- -------
Total expenses 314.9 384.4 787.9 747.6
------- ------- ------- -------
Earnings (loss) before equity in loss of
affiliate, federal income taxes, minority
interest expense and cumulative effect of adoption
of new accounting principle 67.1 58.2 (69.6) 119.8
Equity in loss of affiliate - - - (0.7)
------- ------- ------- -------
Earnings (loss) before federal income taxes, minority
interest expense and cumulative effect of
adoption of new accounting principle 67.1 58.2 (69.6) 119.1
Federal income tax expense (benefit) 21.3 16.7 (30.8) 32.7
Minority interest expense of subsidiary trust
preferred securities, net of taxes 3.3 3.3 6.6 6.1
------- ------- ------- -------
Earnings (loss) before cumulative effect of adoption
of new accounting principle 42.5 38.2 (45.4) 80.3
Cumulative effect of adoption of new accounting
principle, net of tax - - (4.6) -
------- ------- ------- -------
Net earnings (loss) $ 42.5 $ 38.2 $ (50.0) $ 80.3
======= ======= ======= =======
Net earnings (loss) per common share:
Earnings (loss) before cumulative effect of adoption
of new accounting principle $ 1.57 $ 1.39 $ (1.68) $ 2.93
Cumulative effect of adoption of new accounting
principle - - (0.17) -
------- ------- ------- -------
Basic $ 1.57 $ 1.39 $ (1.85) $ 2.93
======= ======= ======= =======
Earnings (loss) before cumulative effect of adoption
of new accounting principle $ 1.56 $ 1.36 $ (1.68) $ 2.85
Cumulative effect of adoption of new accounting
principle - - (0.17) -
------- ------- ------- -------
Diluted $ 1.56 $ 1.36 $ (1.85) $ 2.85
======= ======= ======= =======
</TABLE>
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
5
<PAGE>
<TABLE>
<CAPTION>
ORION CAPITAL CORPORATON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended Six Months Ended Year Ended
June 30, 1999 June 30, 1998 December 31, 1998
(In millions) (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock $ 30.7 $ 30.7 $ 30.7
======= ======= =======
Capital Surplus:
Balance, beginning of period $ 149.6 $ 152.1 $ 152.1
Exercise of stock options and net
issuance of restricted stock (3.0) (2.5) (2.5)
------- ------- -------
Balance, end of period $ 146.6 $ 149.6 $ 149.6
======= ======= =======
Retained Earnings:
Balance, beginning of period $ 553.2 $ 469.5 $ 469.5
Net earnings (loss) (50.0) $ (50.0) 80.3 $ 80.3 102.8 $ 102.8
------- ------- -------
Dividends declared (9.7) (9.4) (19.1)
------- ------- -------
Balance, end of period $ 493.5 $ 540.4 $ 553.2
======= ======= =======
Accumulated Other
Comprehensive Income:
Balance, beginning of period $ 58.5 $ 109.2 $ 109.2
Unrealized investment
losses, net of taxes (41.7) (14.1) (52.4)
Unrealized foreign exchange
translation gains, net of taxes 0.6 - 1.7
------- ------- -------
Other comprehensive income (loss) (41.1) (41.1) (14.1) (14.1) (50.7) (50.7)
------- ------- ------- ------- ------- -------
Comprehensive income (loss) $ (91.1) $ 66.2 $ 52.1
======= ======= =======
Balance, end of period $ 17.4 $ 95.1 $ 58.5
======= ======= =======
Treasury Stock:
Balance, beginning of period $ (57.8) $ (34.3) $ (34.3)
Exercise of stock options and net
issuance of restricted stock 4.6 6.6 13.4
Common stock issued pursuant to
employee stock purchase plan 1.0 - 1.1
Acquisition of treasury stock - (8.5) (38.0)
------- ------- -------
Balance, end of period $ (52.2) $ (36.2) $ (57.8)
======= ======= =======
Deferred Compensation on
Restricted Stock:
Balance, beginning of period $ (6.9) $ (4.1) $ (4.1)
Net (issuance) cancellation of
restricted stock 0.4 (1.6) (4.3)
Amortization of deferred
compensation on restricted stock 0.6 0.8 1.5
------- ------- -------
Balance, end of period $ (5.9) $ (4.9) $ (6.9)
======= ======= =======
</TABLE>
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
6
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-------------------------
(In millions) 1999 1998
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Premiums collected $ 663.0 $ 741.6
Net investment income collected 64.0 82.0
Losses and loss adjustment expenses paid (575.0) (501.0)
Policy acquisition costs paid (173.8) (228.8)
Dividends paid to policyholders (9.9) (13.1)
Interest paid (8.6) (11.3)
Payments on trust preferred securities (10.3) (7.3)
Federal income tax refunds (payments) 11.7 (31.6)
Other payments (31.5) (17.7)
-------- --------
Net cash (used in) provided by operating activities (70.4) 12.8
-------- --------
Cash flows from investing activities:
Maturities of fixed maturity investments 59.7 63.3
Sales of fixed maturity investments 291.7 526.8
Sales of equity securities 251.9 258.7
Investments in fixed maturities (492.2) (502.2)
Investments in equity securities (127.5) (205.0)
Net sales (purchases) of short-term investments 38.8 (76.6)
Acquisition and divestiture activities 47.2 (36.0)
Purchase of property and equipment, net (20.5) (12.8)
Other receipts (payments) 33.9 (14.7)
-------- --------
Net cash provided by (used in) investing activities 83.0 1.5
-------- --------
Cash flows from financing activities:
Proceeds from stock issued under employee benefit plans 2.9 0.8
Net proceeds from issuance of trust preferred securities - 121.9
Repayment of notes payable (8.0) (109.5)
Dividends paid to stockholders (9.7) (8.9)
Purchases of common stock - (6.6)
-------- --------
Net cash (used in) provided by financing activities (14.8) (2.3)
-------- --------
Net increase (decrease) in cash (2.2) 12.0
Cash balance, beginning of period 18.0 9.3
-------- --------
Cash balance, end of period $ 15.8 $ 21.3
======== ========
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
7
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
(UNAUDITED)
Six Months Ended June 30,
-------------------------
(In millions) 1999 1998
- ------------------------------------------------------------------------------
Reconciliation of net earnings (loss)
to net cash provided by operating
activities:
Net earnings (loss) $ (50.0) $ 80.3
-------- --------
Adjustments:
Net gain on divestiture (26.3) -
Deferred federal income taxes (7.8) (4.0)
Non-cash investment income (5.7) (9.0)
Realized investment gains (4.4) (51.6)
Depreciation and amortization 10.8 9.0
Cumulative effect of adoption of new
accounting principle 4.6 -
Amortization of excess of cost over fair
value of net assets acquired 3.0 2.7
Amortization of fixed maturity investments 1.4 (0.5)
Other - 0.8
Changes in assets and liabilities,
net of acquisition and divestiture
activities:
Decrease (increase) in accrued investment income (0.8) 4.2
Decrease (increase) in accounts and notes receivable 0.6 (12.4)
Increase in reinsurance recoverable
and prepaid reinsurance (129.8) (84.3)
Decrease (increase) in deferred policy acquisition costs 4.1 (10.1)
Increase in federal income taxes receivable (32.1) -
Decrease (increase) in other assets 48.3 (3.0)
Increase in losses and loss adjustment expenses 119.6 32.6
Increase in unearned premiums 42.9 43.2
Increase in policyholders' dividends 0.3 0.5
Increase (decrease) in other liabilities (49.1) 14.4
-------- --------
Total adjustments and changes (20.4) (67.5)
-------- --------
Net cash (used in) provided by operating activities $ (70.4) $ 12.8
======== ========
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
8
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six Months Ended June 30, 1999 and 1998
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"). All material intercompany balances and
transactions have been eliminated. See note 9 for discussion of the tender
offer to acquire all of the shares of common stock of Orion by Royal &
SunAlliance USA, Inc. ("RSA").
As of January 1, 1999, the Company adopted Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, issued by the American Institute of Certified Public Accountants ("AICPA").
This Statement requires that certain costs incurred in developing internal-use
computer software be capitalized, and provides guidance for determining whether
computer software is considered to be for internal use. The Company will
amortize these costs over the software's useful life, which is generally a
period of 3 to 6 years. Previously, the Company expensed internal cost of
computer software as incurred. The adoption of this statement resulted in an
after-tax benefit of $1.8 million, or $0.07 per common share, for the six months
ended June 30, 1999.
On January 1, 1999, the Company adopted SOP 97-3, Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments, which provides guidance for
determining when an insurance or other enterprise should recognize a liability
for guaranty-fund and other insurance-related assessments and guidance for
measuring the liability. This Statement requires recognition of a liability when
it is probable that an assessment will be imposed, the amount of the assessment
can be reasonably estimated, and the event obligating a company to pay has
occurred. Previously, the Company expensed guaranty-fund and other
insurance-related assessments as reported to the Company. The cumulative effect
recorded at January 1, 1999, as if this new accounting standard was applied
retroactively for all periods, resulted in an after-tax charge of $4.6 million,
or $0.17 per common share.
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 1998 Annual Report on Form 10-K.
Note 2 - Realignment Events
As part of the final steps in a two-year reshaping of Orion Capital, the Company
completed a detailed study of its loss and loss adjustment expense reserve
position as of March 31, 1999. The loss reserve study, performed with the
assistance of independent actuarial advisors, focused on the businesses that the
Company has exited. As a result of this study, the Company recorded a net pre-
9
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
tax charge of $164.5 million in the first quarter of 1999 primarily related to
the Specialty Commercial and Workers Compensation segments. The net charge
included a provision for loss and loss adjustment expenses of $139.0 million
relating to 1998 and prior accident years, which was net of reinsurance, and a
$25.5 million net ceded premium adjustment based upon the Company's loss
experience. Approximately $123.4 million of the loss reserve provision was
attributed to exited businesses. The study also reviewed the reserve position
for the Company's ongoing business in light of current industry conditions. The
Company recorded loss reserve strengthening of approximately $15.6 million
relating to its ongoing businesses including $8.4 million for EBI, $4.2 million
for DPIC and $3.0 million for OrionAuto in the first quarter of 1999. Further,
the Company has adjusted loss ratios for the 1999 accident year in consideration
of the reserve study findings.
As part of the Company's reshaping to more narrowly focus its resources, on
April 9, 1999 the Company sold Wm. H. McGee & Co. ("McGee") for $59.4 million in
cash resulting in a pre-tax gain of $40.2 million and an after-tax gain of $26.3
million. The pre-tax gain on the sale of McGee is reported as "Other" in the
Company's consolidated statement of operations. In connection with the sale, the
Company entered into reinsurance agreements with the buyer transferring the
Company's participation in McGee's United States and Canadian pools effective as
of January 1, 1999, resulting in negative net premiums written of $40.0 million
in the first quarter of 1999. These transfers have resulted in a $23.5 million
cash payment to the buyer on the sale date for the transfer of the Company's net
liabilities and assets of the McGee pools. Additionally, the buyer was
designated as the clearing company for McGee pools effective January 1, 1999
under McGee's Inter-Office Reinsurance Agreements. At December 31, 1998 and for
the year then ended, the Company reflected net premiums written and total
revenue of approximately $104.4 million and $100.2 million, respectively, and
total assets of approximately $112.0 million related to sold business of McGee.
In the third quarter of 1998, the Company established a restructuring reserve in
connection with a realignment of Orion Specialty resulting in exiting of
approximately $100 million of unprofitable commodity business, primarily
commercial automobile and transportation. This restructuring included the
reduction of approximately 90 employees related to exited business. Activity for
the six months ended June 30, 1999 within this restructuring reserve was as
follows:
(In millions)
- -----------------------------------------------------------
Balance at December 31, 1998 $ 5.1
Actions taken:
Severance and program termination costs (1.7)
-----------
Balance at June 30, 1999 $ 3.4
===========
Note 3 - Investment in Affiliate
In May 1999, the Company sold its investment in Intercargo for $22.8 million in
cash pursuant to the terms of the merger agreement between Intercargo and a
subsidiary of XL Capital, Ltd. The sale of Intercargo resulted in no gain or
loss during 1999 because the Company adjusted its investment in Intercargo to
its net realizable value in the fourth quarter of 1998.
10
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 1998, the Company recorded its share of Intercargo's operating results on a
quarterly lag basis, after Intercargo has reported its financial results. For
the three and six months ended June 30, 1998, Intercargo reported $13.5 million
and $32.3 million of revenues and $0.4 million and $(1.7) million of net
earnings (loss), respectively. The Company's proportionate share of Intercargo
net loss including goodwill amortization was $0.7 million for the six months
ended June 30, 1998.
Note 4 - 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 its 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 June 30, Six Months Ended June 30,
---------------------------------------------------------
(In millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct premiums written ............... $ 525.6 $ 445.5 $ 1,006.4 $ 887.3
Reinsurance assumed ................... 13.8 54.8 46.3 68.9
---------- ---------- ---------- ----------
Gross premiums written ................ 539.4 500.3 1,052.7 956.2
Reinsurance ceded ..................... (207.0) (115.5) (445.4) (202.4)
---------- ---------- ---------- ----------
Net premiums written .................. $ 332.4 $ 384.8 $ 607.3 $ 753.8
========== ========== ========== ==========
Direct premiums earned ................ $ 523.6 $ 442.5 $ 1,018.0 $ 878.1
Reinsurance assumed ................... 42.9 29.3 58.3 40.2
---------- ---------- ---------- ----------
Gross premiums earned ................. 566.5 471.8 1,076.3 918.3
Reinsurance ceded ..................... (223.0) (101.4) (433.6) (199.1)
---------- ---------- ---------- ----------
Net premiums earned ................... $ 343.5 $ 370.4 $ 642.7 $ 719.2
========== ========== ========== ==========
Loss and loss adjustment expenses
incurred recoverable from reinsurers $ 150.7 $ 95.5 $ 309.2 $ 165.8
========== ========== ========== ==========
</TABLE>
Note 5 - Stockholders' Equity and Earnings per Share
In the first half of 1999, the Company repurchased approximately 6,600 shares at
an aggregate cost of approximately $0.3 million related to its employee benefit
plans. In the first half of 1998, the Company repurchased 132,000 shares of its
common stock at an aggregate cost of $6.6 million under the stock repurchase
program authorized by the Board of Directors and repurchased 34,744 shares at an
aggregate cost of $1.9 million related to its employee benefit plans.
Orion declared dividends on its common stock of $9.7 million and $9.4 million or
$0.36 and $0.34 per common share for the six months ended June 30, 1999 and
1998, respectively.
As of June 30, 1999, the Company issued 26,992 shares of its common stock at an
aggregate purchase price of $0.9 million under the Employees' Stock Purchase
Plan.
Basic earnings per share computations are based on the weighted average number
of shares of common stock outstanding during the period excluding dilution.
Diluted earnings per share reflects
11
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 27.0 million and
27.5 million for the three months ended, and 27.0 million and 27.4 million for
the six months ended June 30, 1999 and 1998, respectively. The weighted average
common and diluted equivalent shares were 27.2 million and 28.2 million for the
three months ended, and 27.0 million and 28.1 million for the six months ended
June 30, 1999 and 1998, respectively.
Note 6 - Contingencies
In general, other than described below, 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 therefore, 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.
On July 12-14, 1999, five lawsuits were filed against the Company in Delaware
Chancery Court in Wilmington, Delaware alleging, among other things, violations
of breach of fiduciary duty on the part of the Board of Directors of the Company
as a result of RSA's agreement to acquire all of the common stock of Orion
Capital Corporation for $50 per share in cash (see note 9 to the Company's
financial statements). The plaintiffs in each lawsuit seek to bring a class
action representing the common stockholders of the Company. The lawsuits
generally allege that the terms of the proposed transaction are intrinsically
unfair and inadequate from the standpoint of the Orion shareholders. The
plaintiffs seek injunctive relief and unspecified monetary damages and
attorney's fees and expenses. The Company intends to defend these actions
vigorously, and believes that the outcome will not have a material adverse
effect on its financial position or earnings.
12
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7 - Accumulated Other Comprehensive Income
Accumulated other comprehensive income balances, net of taxes, are as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Foreign Accumulated Other
Investment Gains Translation Comprehensive
(In millions) (Losses) Gains (Losses) Income (Loss)
- --------------------------------------------------------------------------------------
Six Months ended June 30, 1999:
<S> <C> <C> <C>
Balance, beginning of period .. $ 61.2 $ (2.7) $ 58.5
Current period change ......... (41.7) 0.6 (41.1)
--------- --------- ---------
Balance, end of period ........ $ 19.5 (2.1) $ 17.4
========= ========= =========
Six Months ended June 30, 1998:
Balance, beginning of period .. $ 113.6 $ (4.4) $ 109.2
Current period change ......... (14.1) - (14.1)
--------- --------- ---------
Balance, end of period ........ $ 99.5 (4.4) $ 95.1
========= ========= =========
Year ended December 31, 1998:
Balance, beginning of year .... $ 113.6 $ (4.4) $ 109.2
Current year change ........... (52.4) 1.7 (50.7)
--------- --------- ---------
Balance, end of year .......... $ 61.2 (2.7) $ 58.5
========= ========= =========
</TABLE>
The pretax unrealized investment losses arising during the period were $64.2
million and $21.7 million for the six months ended June 30, 1999 and 1998,
respectively, and $80.4 million for the year ended December 31, 1998. The pretax
unrealized foreign exchange translation gains arising during the period were
$0.9 million for the six months ended June 30, 1999 and $2.6 million for the
year ended December 31, 1998.
Note 8 - Segment Information
The Company reports its insurance operations in three segments at June 30, 1999.
These reportable segments comprise operating units of the Company that have
different insurance products and services, market focus and operational
structure. The Company's reportable segments comprise:
Workers Compensation - this segment provides workers compensation insurance
products and services sold by the EBI Companies ("EBI") and includes package
commercial insurance policies that are no longer written by the Company.
Nonstandard Automobile - this segment specializes in nonstandard personal
automobile insurance sold by OrionAuto (formerly known as Guaranty National
Corporation).
Specialty Commercial - this segment markets various client-focused specialty
commercial products and services to targeted customer groups through Orion
Specialty (see page 17 for description of business units that comprise Orion
Specialty); and also includes the run-off
13
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
operations of the Company's assumed reinsurance business, SecurityRe, which was
sold in late 1996. The Company exited the marine business by selling McGee and
its 26% interest in Intercargo in the second quarter of 1999 (see notes 2 and
3).
Financial information for the Company's segments is shown below and discussed in
detail in "Results of Operations" on page 19:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(In millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Revenues:
Workers Compensation ...... $ 110.8 $ 124.8 $ 204.5 $ 244.0
Nonstandard Automobile .... 127.8 109.4 249.2 209.1
Specialty Commercial ...... 142.7 205.8 261.1 409.6
Other ..................... 0.7 2.6 3.5 4.7
-------- -------- -------- --------
Consolidated ........... $ 382.0 $ 442.6 $ 718.3 $ 867.4
======== ======== ======== ========
Pre-tax Earnings (Loss) before
Minority Interest (a):
Workers Compensation ...... $ 9.4 $ 24.5 $ (29.7) $ 52.9
Nonstandard Automobile .... 8.5 10.4 14.3 18.3
Specialty Commercial ...... 13.1 27.7 (85.8) 57.4
Other ..................... 36.1 (4.4) 31.6 (9.5)
-------- -------- -------- --------
Consolidated ........... $ 67.1 $ 58.2 $ (69.6) $ 119.1
======== ======== ======== ========
[FN]
(a) Excludes cumulative effect of adoption of new accounting principle in 1999
(see note 1).
</FN>
The miscellaneous income and expenses (primarily interest, general and
administrative expenses and other consolidating elimination entries) of the
parent company are reported as "Other" in the above table. In the second quarter
of 1999, a pre-tax gain of $40.2 million related to the sale of McGee is also
included in Other.
Note 9 - Subsequent Event
On July 12, 1999 the Company announced that Orion and RSA have signed a
definitive agreement providing for the acquisition of Orion for $50 per share in
cash, or approximately $1.4 billion. The transaction has been unanimously
approved by the boards of both companies. Pursuant to the terms of the
agreement, affiliates of RSA have commenced an offer to purchase any and all
outstanding shares of Orion's common stock together with the associated
preferred stock purchase rights issued under the Company's Stockholder Rights
Plan. On July 16, 1999 affiliates of RSA filed a tender offer statement on Sche-
- -dule 14D-1 with the Securities and Exchange Commission. Due to the need for
certain state insurance regulatory approvals, it is currently expected that the
tender offer will not be completed until the fourth quarter of 1999.
RSA's tender offer is conditioned on, among other things, the valid
tendering of at least a majority of Orion's outstanding shares. The
tender offer is also conditioned upon the expiration or termination of any
applicable antitrust
14
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
waiting period, and the receipt of any required state insurance regulatory
approvals and other customary conditions. The Company and RSA have recieved
verbal notification that the waiting period under the Hart-Scott-Rodino Anti-
trust Improvements Act has been terminated. Following the tender offer, the
acquisition of Orion will be completed by merging it with a subsidiary of RSA,
and all of Orion's shares not owned by RSA will be converted into the right to
receive $50 per share in cash. The agreement and plan of merger provides for
the payment to RSA of a fee of $45 million if the agreement is terminated in
certain circumstances. Orion has also granted to RSA an irrevocable option to
purchase up to 5,443,697 (or approximately 19.9%) Orion shares upon
the same circumstances.
15
<PAGE>
INDEPENDENT ACCOUNTANT'S 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 June 30, 1999, and the
related consolidated statements of operations for the three month and six month
periods ended June 30, 1999 and 1998, and the statements of stockholders' equity
and cash flows for the six-month periods ended June 30, 1999 and 1998. 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, 1998, and the related consolidated statements of
earnings, stockholders' equity and cash flows for the year then ended; and in
our report dated February 22, 1999 (except for Note 20, as to which the date is
March 11, 1999), we expressed an unqualified opinion on those consolidated
financial statements. The consolidated statements of earnings and cash flows for
the year ended December 31, 1998 are not presented herein. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1998 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
August 3, 1999
16
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
GENERAL
Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries
(collectively the "Company") operate principally in the property and casualty
insurance business. As described in note 9 to the Company's financial statements
and below on page 18 in "Recent Activities," the Company has entered into an
agreement and plan of merger with certain affiliates of Royal & SunAlliance
USA, Inc. ("RSA").
The Company reports its insurance operations in three segments as of June 30,
1999 as follows:
Workers Compensation - this segment markets the workers compensation insurance
products and services sold by the EBI Companies ("EBI") and includes package
commercial insurance policies that are no longer written by the Company.
Nonstandard Automobile - this segment specializes in nonstandard personal
automobile insurance sold by OrionAuto, formerly known as Guaranty National
Corporation.
Specialty Commercial - this segment markets various client-focused specialty
commercial products and services to target customer groups through the new Orion
Specialty (as described below), and also includes the run-off operations of the
Company's assumed reinsurance business, SecurityRe, which was sold in late 1996.
Over the past two years, Orion has been reshaping its business to focus its
resources on high potential lines of business. Business in Orion's workers
compensation segment is conducted through EBI, a specialty monoline workers
compensation operation. Orion has been reshaping EBI from a regional to a
national monoline workers compensation specialist.
In Orion's nonstandard automobile segment, Orion increased its ownership in
Guaranty National Corporation ("Guaranty National") to 100% in December 1997 and
then transformed Guaranty National (OrionAuto) into a focused personal
nonstandard automobile company. The commercial lines business of Guaranty
National was shifted to a newly-formed unit, Orion Specialty Group, Inc. and
integrated with Connecticut Specialty Insurance Group, Inc. Guaranty National
was recently renamed OrionAuto, Inc. The Company added scale to its nonstandard
automobile operation by acquiring two businesses, Unisun Insurance Company in
December 1997 and portions of Strickland Insurance Group in April 1998 expanding
its geographic market to 35 states.
The Company continued its reshaping of the specialty commercial segment to focus
resources on more profitable lines of business. In the second quarter of 1999,
the Company formed a new Orion Specialty that was configured from the existing
business units within the Specialty Commercial segment. The new Orion Specialty,
which serves targeted commercial customer groups, includes:
- professional liability insurance through DPIC Companies ("DPIC");
- specialty insurance programs serving the independent grocery industry
through Grocers Insurance Group ("Grocers"), which was acquired in July
1998;
17
<PAGE>
- collateral protection insurance and financial insurance
programs through Orion Financial (formerly Intercon);
- alternative risk insurance programs through ARTIS, which was formed in
June 1997; and
- specialty commercial programs and binding authority business through the
P&C Division. As a result of the proposed merger of the Company with
Royal, Orion Specialty's program binding authority business is no longer
under strategic review.
As described below, during the second quarter of 1999, the Company exited the
marine business by selling Wm. H. McGee & Co ("McGee") and its 26% interest in
Intercargo Corporation. In September 1998, the Company sold a unit of Orion
Specialty, Colorado Casualty Insurance Company. During the third quarter of
1998, the Company took steps to exit a $100 million block of commercial
automobile and transportation business at Orion Specialty's P&C Division and
restructured Orion Specialty's operations related to the exited business (see
note 2 to the Company's financial statements).
In November 1996, the Company exited the assumed reinsurance business when it
sold the ongoing operations of SecurityRe. As a result of the sale, SecurityRe
ceased actively writing business and became an inactive company.
RECENT ACTIVITIES
As part of its final reshaping initiatives, in early May the Company completed a
reserve study focused on business that has been exited or previously subject to
strategic review. The reserve study was performed with the assistance of
independent actuarial advisors. In the first quarter of 1999, the Company
strengthened its loss and loss adjustment reserves by recording a net charge of
$164.5 million on a pre-tax basis and $106.9 million on an after-tax basis, or
$3.96 per diluted common share, in connection with the reserve study. The net
charge is substantially related to exited business. See section "Expense and
Other - Operating Ratios" on page 25.
On April 9, 1999, the Company sold McGee for $59.4 million in cash resulting in
a pre-tax gain of $40.2 million and an after-tax gain of $26.3 million, or $0.97
per common share. In connection with the sale, the Company entered into
reinsurance agreements with the buyer transferring the Company's participation
in McGee's United States and Canadian pools effective January 1, 1999 resulting
in negative net premiums written of $40.0 million in the first quarter of 1999.
Additionally, the buyer was designated as the clearing company of the McGee
pools effective as of January 1, 1999 under McGee's Inter-Office Reinsurance
Agreements. The Company reflected net premiums written and total revenue of
approximately $104.4 million and $100.2 million, respectively, for the year
ended December 31, 1998 and total assets of approximately $112.0 million at
December 31, 1998 related to McGee.
On May 7, 1999, the Company sold its investment in Intercargo for $22.8 million,
or $12 per share, in cash pursuant to the terms of Intercargo's merger with a
subsidiary of XL Capital, Ltd. The sale of Intercargo resulted in no gain or
loss during 1999 because the Company adjusted its investment in Intercargo to
its net realizable value in the fourth quarter of 1998.
On July 12, 1999 the Company and certain affiliates of RSA entered into an agree
- -ment and plan of merger. Pursuant to the agreement, certain affiliates of RSA
commenced a tender offer for all of Orion's outstanding common stock,
together with associated preferred stock purchase rights, at $50 per share
in cash (see note 9 to the Company's financial
18
<PAGE>
statements). Upon successful completion of the merger of the Company into an
RSA subsidiary, Orion Capital's common stock will be delisted from the New
York Stock Exchange.
RESULTS OF OPERATIONS
OVERVIEW
Earnings (loss) by segment before federal income taxes, minority interest
expense and cumulative effect of adoption of a new accounting principle are
summarized as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(In millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Workers Compensation . $ 9.4 $ 24.5 $ (29.7) $ 52.9
Nonstandard Automobile 8.5 10.4 14.3 18.3
Specialty Commercial . 13.1 27.7 (85.8) 57.4
Other ................ 36.1 (4.4) 31.6 (9.5)
------- ------- ------- -------
Consolidated ...... $ 67.1 $ 58.2 $ (69.6) $ 119.1
======= ======= ======= =======
Miscellaneous income and expenses (primarily interest, general and
administrative expenses and other consolidating elimination entries) of the
parent company are reported as "Other" in the above table. In the second quarter
of 1999, a pre-tax gain of $40.2 million related to the sale of McGee is also
included in Other.
Operating earnings (loss), after-tax realized investment gains, net earnings
(loss) and per diluted common share amounts are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(In millions, except for --------------------------- -------------------------
per share amounts) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating earnings (loss) $ 40.8 $ 23.4 $ (48.3) $ 46.7
After-tax investment gains 1.7 14.8 2.9 33.6
Cumulative effect of adoption of
new accounting principle - - (4.6) -
--------- --------- --------- ---------
Net earnings (loss) $ 42.5 $ 38.2 $ (50.0) $ 80.3
========= ========= ========= =========
Per diluted common share:
Operating earnings (loss) $ 1.50 $ 0.83 $ (1.79) $ 1.66
After-tax investment gains 0.06 0.53 0.11 1.19
Cumulative effect of adoption of
new accounting principle - - (0.17) -
--------- --------- --------- ---------
Net earnings (loss) $ 1.56 $ 1.36 $ (1.85) $ 2.85
========= ========= ========= =========
Weighted average common shares 27.0 27.5 27.0 27.4
Weighted average common shares
and diluted equivalents 27.2 28.2 27.2 28.1
</TABLE>
19
<PAGE>
Operating earnings (loss) represents earnings (loss) after taxes, excluding net
realized investment gains and the cumulative effect of an accounting change. In
the first quarter of 1999, operating earnings includes an after-tax charge of
$106.9 million, or $3.96 per share, related to an increase in loss reserves in
connection with a loss reserve study. In the second quarter of 1999, operating
earnings includes an after-tax gain on the sale of McGee of $ 26.3 million, or
$0.97 per share, partially offset by a $0.09 per share impact from a bad faith
claim settlement related to a discontinued program. Excluding these items, the
Company's after-tax operating earnings would be $34.6 million, or $1.28 per
share, for the first half of 1999 and $16.8 million, or $0.62 per share, for the
second quarter of 1999.
The Company's results of operations for 1999 reflects a $4.6 million after-tax
charge, or $0.17 per diluted common share, for the cumulative effect of adoption
of a new accounting principle, AICPA Statement of Position 97-3 "Accounting by
Insurance and Other Enterprises for Insurance Related Assessments." See note 1
to the Company's financial statements for discussion of new accounting
principles adopted by the Company in 1999.
The average shares for the six months ended June 30, 1999 excludes equivalent
shares of 238,000 in the computation of diluted earnings per common share
because to include them would have been antidilutive.
REVENUES
Revenues are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
(In millions, except for %) 1999 1998 % Change 1999 1998 % Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross Premiums Written $ 539.4 $ 500.3 7.8% $1,052.7 $ 956.2 10.1%
======== ======== ===== ======== ======== =====
Net Premiums Written $ 332.4 $ 384.8 (13.6)% $ 607.3 $ 753.8 (19.4)%
======== ======== ===== ======== ======== =====
Premiums earned $ 343.5 $ 370.4 (7.3)% $ 642.7 $ 719.2 (10.6)%
Net investment income 34.6 42.5 (18.7) 69.0 83.9 (17.8)
Realized investment gains 2.7 22.7 (88.2) 4.4 51.7 (91.4)
Other 1.2 7.0 (82.5) 2.2 12.6 (82.4)
-------- -------- ----- -------- -------- -----
Total revenues $ 382.0 $ 442.6 (13.7)% $ 718.3 $ 867.4 (17.2)%
======== ======== ===== ======== ======== =====
PREMIUMS
The Company's gross premiums written by segment are as follows:
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
(In millions, except for %) 1999 1998 % Change 1999 1998 % Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Workers Compensation $ 140.3 $ 112.5 24.6% $ 287.3 $ 228.2 25.9%
Nonstandard Automobile 139.8 145.5 (3.9) 292.2 273.1 7.0
Specialty Commercial 259.3 242.3 7.0 473.2 454.9 4.0
-------- -------- ----- -------- -------- -----
Consolidated $ 539.4 $ 500.3 7.8% $1,052.7 $ 956.2 10.1%
======== ======== ===== ======== ======== =====
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
The Company's net premiums written by segment are as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
(In millions, except for %) 1999 1998 % Change 1999 1998 % Change
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Workers Compensation $ 94.2 $ 106.8 (11.8)% $ 188.8 $ 217.4 (13.2)%
Nonstandard Automobile 119.4 106.5 12.2 244.2 202.6 20.5
Specialty Commercial 118.8 171.5 (30.7) 174.3 333.8 (47.8)
-------- -------- ----- -------- -------- -----
Consolidated $ 332.4 $ 384.8 (13.6)% $ 607.3 $ 753.8 (19.4)%
======== ======== ===== ======== ======== =====
Consolidated, excluding McGee $ 332.4 $ 364.6 (8.8)% $ 647.3 $ 717.0 (9.7)%
======== ======== ===== ======== ======== =====
</TABLE>
In connection with the sale of McGee in April 1999, the Company transferred its
participation in McGee's United States and Canadian pools effective January 1,
1999, resulting in negative net written premiums of $40.0 million and no effect
on premiums earned in the first quarter of 1999. In the first quarter of 1999,
based on the Company's loss experience, the Company ceded an additional $35.2
million of premiums under a corporate-wide aggregate stop loss reinsurance
agreement entered into in 1998 related to the 1998 accident year.
WORKERS COMPENSATION
Net premiums written for Workers Compensation decreased in 1999 compared to 1998
reflecting lower premium retention of $39.4 million and $86.0 million in the
second quarter and first half of 1999, respectively, primarily from a change in
EBI's reinsurance programs effective October 1998. The effect of this change was
partly offset by gross premium growth of $27.7 million and $59.2 million in the
second quarter and first half of 1999, respectively, from new business written
through EBI's multi-state accounts program and continued geographic expansion
and penetration. To improve profitability, EBI has instituted rate increases
which have substantially offset statutory rate decreases, and may reduce the
growth of EBI's gross premiums written for the remainder of 1999.
NONSTANDARD AUTOMOBILE
Net premiums written for Nonstandard Automobile increased in 1999 compared to
1998 primarily due to higher net premiums of $15.8 million in South Carolina,
$6.7 million in California, and $9.1 million in North Carolina for the first
half of 1999 and $6.8 million, $4.2 million and $0.2 million, respectively, for
the corresponding second quarter of 1999. Additionally, OrionAuto generated net
premium growth in 21 of the 35 states where it writes business in the first half
of 1999 compared to the same 1998 period. The increase in net premiums written
in South Carolina is attributed to transition to a voluntary market environment
in that state on March 1, 1999. Higher year-to-date premiums in North Carolina
are due to the acquisition of Strickland on April 30, 1998. Excluding the
effects of the acquisitions of Strickland and Unisun, Nonstandard Automobile's
gross premiums written and net premiums written growth was 10.7% and 11.6%,
respectively, in the first half of 1999 and 16.1% for both gross and net
premiums written in the second quarter of 1999 compared to the same 1998
periods.
21
<PAGE>
<TABLE>
<CAPTION>
SPECIALTY COMMERCIAL
Net premiums written of Specialty Commercial are as follows:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ----------------------------
(In millions, except for %) 1999 1998 % Change 1999 1998 % Change
- ---------------------------------------------------------------------------------------------
Net Written Premiums:
<S> <C> <C> <C> <C> <C> <C>
DPIC $ 52.5 $ 49.7 5.6% $ 90.9 $ 92.0 (1.2)%
Grocers 8.0 - (a) 17.6 - (a)
Orion Financial 23.5 19.5 20.5 40.3 42.5 (5.2)
ARTIS 1.2 - (a) 1.8 (0.1) (a)
P&C Division 33.5 82.3 (59.3) 63.6 162.9 (61.0)
-------- -------- ----- -------- -------- -----
Total Orion Specialty 118.7 151.5 (21.7) 214.2 297.3 (28.0)
McGee - 20.2 (a) (40.0) 36.8 (a)
Assumed Reinsurance 0.1 (0.2) (a) 0.1 (0.3) (a)
-------- -------- ----- -------- -------- -----
$ 118.8 $ 171.5 (30.7)% $ 174.3 $ 333.8 (47.8)%
======== ======== ===== ======== ======== =====
</TABLE>
[FN]
(a) Not meaningful.
</FN>
The modest change in net premiums written generated by DPIC for professional
liability insurance, the largest special program of Orion Specialty, reflects
continued high levels of policy renewals offset by increased use of reinsurance
in its lawyers and accountants programs.
Grocers was acquired by the Company in July 1998. The decrease in year-to-date
net written premiums at Orion Financial, which primarily writes collateral
protection insurance, is primarily due to higher ceded premiums partially offset
by growth in gross premiums written from that unit. ARTIS, the alternative risk
business of Orion Specialty formed in June 1997, generated significant growth in
gross premiums written reflecting a move from the status of a start-up operation
in 1998 to a profitable operating unit in 1999. ARTIS generated gross premiums
written of $44.4 million and $71.1 million for the second quarter and first six
months of 1999 and $13.0 million and $18.7 million for the corresponding 1998
periods, respectively.
Net premiums written by Orion Specialty's P&C Division decreased in 1999
compared to 1998 primarily due to the effect of exiting unprofitable commodity
business in connection with the third quarter 1998 realignment of this unit,
$23.9 million of ceded premiums in the first quarter of 1999 under the
corporate-wide reinsurance agreement previously mentioned and lower net premiums
of $12.3 million in second quarter and $25.6 million year-to-date from the sale
of Colorado Casualty Insurance Company in September 1998.
As part of the sale of McGee, the Company is fronting business for the buyer
until such time that the buyer receives various state regulatory approvals to
issue marine insurance policies, resulting in gross written premiums of $64.5
million in the second quarter of 1999 and $92.8 million in the first half of
1999, as compared to $56.3 million and $104.8 million for the corresponding 1998
periods, respectively. In the first quarter of 1999, McGee recorded negative net
premiums written of $40.0 million reflecting the unearned premium portfolio
transferred as of January 1, 1999 in connection with its sale.
22
<PAGE>
PREMIUMS EARNED
The Company's premiums earned decreased 7.3% to $343.5 million and 10.6% to
$642.7 million in the second quarter and the first half of 1999 from $370.4
million and $719.2 million ($354.7 million and $689.3 million excluding McGee)
in the corresponding 1998 periods. Premiums earned reflect the recognition of
income from the changing levels of net premium writings.
OTHER INCOME
Other income is $2.2 million and $12.6 million for the first half of 1999 and
1998, and $1.2 million and $7.0 million in the corresponding second quarter
periods, respectively. The decrease is primarily due to lower commission income
resulting from the sale of McGee.
INVESTMENT PERFORMANCE
The Company manages its investment portfolio on a total return basis, which
emphasizes both current net investment income and realized investment gains as
well as unrealized investment results. The pre-tax performance and carrying
value of the Company's investments portfolio is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
(In millions, except for %) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $ 34.6 $ 42.5 $ 69.0 $ 83.9
Realized investment gains 2.7 22.7 4.4 51.7
Unrealized depreciation (43.8) (30.4) (71.2) (22.3)
-------- -------- -------- --------
$ (6.5) $ 34.8 $ 2.2 $ 113.3
======== ======== ======== ========
Investment yields on average portfolio:
Pre-tax 5.9% 6.9% 5.8% 7.0%
======== ======== ======== ========
After-tax 4.4% 5.1% 4.5% 5.3%
======== ======== ======== ========
Equity earnings in limited
partnership investments (a) $ 3.5 $ 3.8 $ 5.5 $ 9.0
======== ======== ======== ========
</TABLE>
[FN]
(a) Included in net investment income.
</FN>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------------------------------------------------
Fixed maturities and short-term investments:
<S> <C> <C> <C> <C>
Investment grade $1,735.9 72.6% $1,650.5 65.9%
Non-investment grade and non-rated 163.6 6.8 208.7 8.3
-------- ------ -------- ------
1,899.5 79.4 1,859.2 74.2
Equity securities 388.5 16.2 510.9 20.4
Limited partnerships and other 87.2 3.7 116.2 4.6
-------- ------ -------- ------
2,375.2 99.3 2,486.3 99.2
Cash 15.8 0.7 18.0 0.8
-------- ------ -------- ------
Total investments and cash $2,391.0 100.0% $2,504.3 100.0%
======== ====== ======== ======
</TABLE>
23
<PAGE>
NET INVESTMENT INCOME
Pre-tax net investment income for the second quarter and first six months of
1999 was lower than comparable 1998 periods primarily due to lower earnings on
limited partnership investments accounted for on an equity basis, the effect of
previous shifting in the fixed income portfolio from taxable to tax-advantaged
securities and most significantly the impact of lower reinvestment rates in
recent quarters resulting in reduced investment yields of the Company's fixed
income portfolio.
Equity earnings in limited partnership investments, which are included in net
investment income, were lower in 1999 compared to same 1998 periods in part due
to planned reductions in these investments. Earnings 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.
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 Company manages its total investments, so that at all times, there are fixed
income securities that are adequate in amount and duration to meet the cash
requirements of current operations and longer term liabilities, as well as to
meet insurance regulatory requirements with respect to investments under
specific state insurance laws. The Company invests primarily in investment grade
securities and additionally invests a portion of its portfolio in a diversified
group of non-investment grade fixed maturity securities or securities that are
not rated to increase the portfolio average return. 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.
REALIZED AND UNREALIZED INVESTMENT RESULTS
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.
Approximately 25% of the first half 1998 net realized investment gains resulted
from the sale of two investments in entities which were acquired or taken public
during the first quarter of 1998. Realized investment gains may be reduced by
provisions for losses on securities deemed to be other-than-temporarily
impaired. 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.
Net unrealized investment appreciation (depreciation) for equity securities and
fixed maturities classified as available-for-sale are recorded in stockholders'
equity, net of federal taxes, and included as a component of other comprehensive
income (see note 7 to condensed financial statements). Unrealized investment
appreciation (depreciation) can vary significantly depending upon fluctuations
in interest rates, changes in credit spreads and in equity prices. Unrealized
investment depreciation in 1999 primarily results from the impact of higher
market interest rates on the Company's fixed maturity investments.
24
<PAGE>
EXPENSES AND OTHER
OPERATING RATIOS
The following table sets forth certain ratios of insurance operating expenses to
premiums earned:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss and loss adjustment expenses 68.0% 67.7% 93.2% 67.2%
Policy acquisition costs and other
insurance expenses 31.2 30.0 30.6 30.3
----- ----- ----- -----
Total before policyholders' dividends 99.2 97.7 123.8 97.5
Policyholders' dividends 1.2 1.9 1.6 1.9
----- ----- ----- -----
Combined ratio 100.4% 99.6% 125.4% 99.4%
===== ===== ===== =====
Loss and loss adjustment expenses ratio by segment:
Workers Compensation 61.1% 58.1% 86.0% 57.3%
Nonstandard Automobile 71.4% 68.9% 72.1% 70.4%
Specialty Commercial 70.3% 73.2% 122.0% 71.5%
</TABLE>
In the third quarter of 1998, the Company announced a realignment of Orion
Specialty to address lines of business that had not met growth and profitability
expectations. The realignment continued Orion Specialty's shift away from
commodity business. The Company's recent trends in the loss development of the
previously cancelled program business at Orion Specialty indicated a
deterioration of claims experience and prompted a loss reserve study in the
first quarter of 1999.
The year-to-date 1999 ratio of loss and loss adjustment expenses to premiums
earned (the "loss ratio") of 93.2% reflects significant strengthening of the
Company's reserve position as of March 31, 1999 based upon the first quarter
loss reserve study.
Excluding the first quarter provision for loss and loss adjustment expenses
recorded in connection with the loss reserve study, the loss and loss adjustment
expenses ratio by segment for the six months ended June 30, 1999 would have been
61.6% for Workers Compensation, 70.9% for Nonstandard Automobile, and 69.8% for
Specialty Commercial. The Company's year-to-date 1999 combined ratio would have
been 99.3% excluding the first quarter reserve charge and the previously
mentioned bad faith claim settlement.
The Company made the decision to conduct a review of its loss reserves for
exited business and to review strategic alternatives for Orion Specialty's
remaining program and binding authority business in the first quarter of 1999 as
part of the final steps in an aggressive two-year reshaping of the Company's
business. The Company expanded the analysis to a full-scale review of all
reserves and elected to add the perspective of an independent actuarial review.
As a result of this study, in the first quarter of 1999, the Company recorded a
provision for loss and loss adjustment expenses of $139.0 million related to the
1998 and prior accident years, which was net of reinsurance, and included a
25
<PAGE>
$25.5 million net ceded premium adjustment based upon the Company's loss
experience. The loss reserve study focused on the business that the Company has
exited or plans to exit and the provision included costs of settling outstanding
claims for exited business. Approximately 89% of the net provision was
attributed to businesses that the Company has exited.
The loss reserve study also reviewed the reserve positions for the Company's
ongoing business in light of current market conditions and industry trends.
Approximately 11% of the 1999 first quarter loss reserve strengthening is
related to ongoing business, including $8.4 million for EBI, $4.2 million for
DPIC and $3.0 million for OrionAuto. Further, the Company has adjusted loss
ratios for the 1999 accident year in consideration of the reserve study
findings.
The 1999 year-to-date loss ratio for Workers Compensation reflects first quarter
reserve strengthening of $31.9 million related to non-workers compensation lines
that originated in this segment, but are no longer written by the Company.
Additionally, EBI strengthened its net reserves in the first quarter 1999 by
recording a loss and loss adjustment expense provision of $8.4 million primarily
relating to the 1998 accident year as a result of the loss reserve study. The
benefit of EBI's service-oriented approach, working with its customers to
prevent losses and reduce claim costs, has allowed EBI to report better than
industry results.
The 1999 loss ratio for Nonstandard Automobile reflects an increase in loss
costs resulting from the loss reserve study substantially offset by a decrease
in loss adjustment expenses from continued efficiencies.
In connection with the loss reserve study, in the first quarter of 1999,
Specialty Commercial strengthened its loss reserve positions by recording a net
provision for loss and loss adjustment expenses of $95.7 million related to 1998
and prior accident years. Approximately $47.1 million of this net charge is
related to the assumed reinsurance business that the Company exited in late
1996, $44.4 million is related to the exited P&C Division business at Orion
Specialty, and $4.2 million is related to the ongoing business at DPIC.
The ratio of policy acquisition costs and other insurance expenses to premiums
earned (the "expense ratio") slightly increased in 1999 compared to 1998 on a
year-to-date basis. 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.
The Company regularly evaluates its reserves for loss and loss adjustment
expenses. Loss reserve amounts are based on management's informed estimates and
judgements, using data currently available. As part of the evaluation of its
first quarter loss reserve position, the Company took the additional action of
having an independent actuarial review of its loss reserves. The results of
which were considered in the increases in loss reserves during the first quarter
of 1999. 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. Although there can be no assurance that
changes in loss trends will not result in additional development of prior years'
reserves in the future, the Company believes that the current and prospective
loss reserving reflects an increased level of conservatism. Variability in claim
emergence and settlement patterns and other trends in loss experience can result
in future development patterns different than expected. The Company believes
that any such variability or development will generally be at low levels,
considering actions that have been taken to increase loss reserving levels,
improve underwriting standards and emphasize loss prevention and control. The
26
<PAGE>
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.
OTHER EXPENSES
Other expenses are $5.7 million and $12.5 million for the second quarters of
1999 and 1998, and $12.9 million and $23.5 million for the corresponding six
month periods, respectively. The decrease is primarily due to the elimination of
McGee agency expense resulting from the sale of this unit.
EQUITY IN LOSS OF AFFILIATE
Equity in loss of affiliate was $0.7 million in the first half of 1998 from the
Company's 26% investment in Intercargo. In May 1999, the Company sold its
investment in Intercargo for $22.8 million in cash pursuant to the terms of the
merger agreement between Intercargo and a subsidiary of XL Capital, Ltd. The
sale of Intercargo resulted in no gain or loss during 1999 because the Company
adjusted its investment in Intercargo to its net realizable value in the fourth
quarter of 1998.
FEDERAL INCOME TAX EXPENSE (BENEFIT)
The Company's federal income taxes and effective tax rate is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(In millions, except for %) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax expense (benefit) (a) $ 19.5 $ 14.9 $ (34.4) $ 29.4
Effective tax rate (a) 31.5% 28.1% (43.1)% 26.8%
</TABLE>
[FN]
(a) includes tax benefits from trust preferred securities and excludes tax
benefits from an accounting change.
</FN>
The Company's effective tax rates for 1999 and 1998 are different than the
statutory tax rate of 35% primarily because of income derived from
tax-advantaged securities. The 1999 effective tax rate has been calculated on a
discrete period basis giving effect of expected tax benefits to be realized
during the year. Excluding the gain on the sale of McGee, the effective tax rate
would have been 25.8% in the second quarter of 1999.
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows is as follows:
Six Months Ended June 30,
-------------------------
(In millions) 1999 1998
- ---------------------------------------------------
Cash flows:
Operating activities $ (70.4) $ 12.8
Investing activities 83.0 1.5
Financing activities (14.8) (2.3)
--------- ---------
$ (2.2) $ 12.0
========= =========
Cash provided by operating activities decreased by $83.2 million in the first
half of 1999 compared to the corresponding 1998 period. The decrease in
operating cash flow in 1999 is primarily the result of reduction in premiums,
higher payments for losses and loss adjustment expenses, largely influenced by
the runoff of exited business, and lower investment income collections as well
as an increased use of reinsurance. Partially offsetting these cash flow changes
were declines in policy acquisition costs and federal income tax payments, as
well as a $20.0 million federal tax refund received by the Company. The sale of
McGee resulted in a $5.0 million reduction to operating cash flow in the first
half of 1999 as compared to the same 1998 period, and will result in $15.6
million for the year. Due to the anticipated level of claim payments from exited
business, operating cash flow for 1999 is expected to be lower than 1998. The
Company's existing cash and expected investment maturities are anticipated to be
adequate to cover any additional operating cash flow needs in 1999.
Cash is used in or provided by investment activities primarily for purchases or
sales and maturities of investments, for acquisition and from divestiture
activities, and for purchases of property and equipment. 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. In the second quarter of 1999, the Company received approximately
$28.8 million and $22.8 million, of net cash in connection with the sale of
McGee and Intercargo, respectively. Cash used for acquisitions in the first six
months of 1998 was primarily related to purchase of Strickland's non-standard
automobile insurance business.
Cash used in financing activities in 1999 includes the repayment of the
outstanding balance of $8.0 million under the Company's bank credit agreement in
the first quarter of 1999. The issuance of 7.701% trust preferred securities by
the Company provided $121.9 million of cash from financing activities in the
first quarter of 1998. Net proceeds from that issuance were used to repay the
$100 million bank indebtedness of Guaranty National in February 1998. The
Company repaid $9.4 million of assumed bank debt in the Strickland acquisition
in the second quarter of 1998.
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, debt service costs from loans due from subsidiaries, 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 stockholders' 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.
28
<PAGE>
Orion's insurance subsidiaries maintain liquidity in their investment portfolios
substantially in excess of that required to pay claims and expenses. The
Company's insurance subsidiaries have:
June 30, December 31,
(In millions, except for ratio) 1999 1998
- ------------------------------------------------------------------------
Cash and short-term investments held
by insurance subsidiaries $ 200.1 $ 242.4
Consolidated policyholders' surplus $ 662.1 $ 732.1
Statutory operating leverage ratio (a) 2.0:1 2.1:1
[FN]
(a) based upon trailing 12 months of net premiums written to policyholders'
surplus.
</FN>
In July 1998, the Company entered into a five year credit agreement with a group
of banks which provides for unsecured borrowings up to $150 million. No
borrowings are outstanding at June 30, 1999. Borrowings under the credit
agreement bear interest at LIBOR (London Interbank Offered Rate) plus a margin
based upon the Company's credit ratings. The credit agreement, as amended,
requires the Company to maintain certain defined financial covenants and may
limit the Company's ability to incur secured indebtedness or certain contingent
obligations. The Company is in compliance with the terms of this credit
agreement. 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 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 June 30, 1999 the
Company is in compliance with the terms of its senior note indentures.
In February 1998, Orion issued $125 million of 7.701% Trust Preferred Securities
due April 15, 2028. In January 1997, Orion issued $125 million of 8.73% Trust
Preferred Securities due January 1, 2037. The 8.73% and 7.701% Trust Preferred
Securities are subordinated to all liabilities of the Company. The Company may
defer interest distributions on these Trust Preferred Securities. During any
period when such cumulative distributions have been deferred, Orion may not
declare or pay any dividends or distributions on its common stock.
Management believes that the Company continues to have substantial sources of
capital and liquidity from the capital markets and bank borrowings.
There were no stock repurchases made in 1999 under the stock repurchase program
authorized by the Company's Board of Directors.
29
<PAGE>
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
therefore, 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. Also, see note 6 to the Company's
financial statements.
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 June 30, 1999, the
Company had completed approximately 99% of its scheduled remediation of 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 testing, is estimated to be approximately
$20.1 million, of which $1.3 million has been expensed in the first half of 1999
and $15.8 million in 1998 and prior periods.
With a timely start on correcting the Year 2000 problem, the Company has been
able to address this potential exposure while continuing to replace outdated
systems with newer versions offering greater functionality and cost
efficiencies. The Company completed replacing its financial, personnel, and
payroll systems in 1998 and began phasing in new integrated processing systems
for certain other operations in 1999. Those major technology improvement
projects, which were substantially completed in 1998, totaled approximately
$13.0 million and have been or will be capitalized as fixed assets. The Company
does not expect to incur any significant Year 2000 capital expenditures in 1999.
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.
30
<PAGE>
The Company has mailed letters to 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 June 30, 1999, the Company had received responses from
approximately 93% of the most critical third parties of whom it has inquired.
The companies that have responded have provided written assurances that they
plan to address all their significant Year 2000 problems by year-end 1999.
Evaluations of the most critical third parties have been initiated. These
evaluations will be followed by the development of contingency plans, which have
already been prepared for third parties having near term Year 2000 impact.
During the first quarter of 1999, contingency plans were finalized for all
critical production systems. Focus has been shifting to third parties and
non-technical functions. During the third quarter of 1999, appropriate
contingency plans will be completed for all critical third party relationships
and business functions. The Company believes that this aspect of its Year 2000
effort was on schedule at June 30, 1999.
A follow-up mailing to significant vendors and service providers that did not
initially respond, or whose responses were deemed unsatisfactory by the Company,
was completed by March 31, 1999. The Company also expanded its survey to vendors
and service providers who do not directly interface with the Company's systems.
In the third quarter of 1999, the Company plans to re-survey all critical third
parties.
The Company presently believes that the Year 2000 problems will not pose
significant operational problems for the Company. However, if a Year 2000
problem is not properly identified so that assessment, remediation and testing
can be effected timely, 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. Where concern appears justified about an aspect of
readiness, contingency plans have been and will be prepared. 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."
31
<PAGE>
ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This standard, as
amended, requires companies to record all derivatives on the balance sheet as
either assets or liabilities and measure those instruments at fair value. The
manner in which companies are to record gains or losses resulting from changes
in the values of those derivatives depends on the use of the derivative and
whether it qualifies for hedge accounting. This standard is effective for the
Company's financial statements beginning January 1, 2001, with early adoption
permitted. The Company is currently evaluating the impact of the adoption of
this statement and the potential effect on its financial position or results of
operations.
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 its 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
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.
32
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 12-14, 1999, five lawsuits were filed against the Company in Delaware
Chancery Court in Wilmington, Delaware alleging, among other things, violations
of breach of fiduciary duty on the part of the Board of Directors of the Company
as a result of RSA's agreement to acquire all of the common stock of Orion
Capital Corporation for $50 per share in cash. The plaintiffs in each lawsuit
seek to bring a class action representing the common stockholders of the
Company. The lawsuits generally allege that the terms of the proposed
transaction are intrinsically unfair and inadequate from the standpoint of the
Orion stockholders. The plaintiffs seek injunctive relief and unspecified
monetary damages and attorney's fees and expenses. The Company intends to defend
these actions vigorously, and believes that the outcome will not have a material
adverse effect on its financial position or earnings.
ITEMS 2 & 3.
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Orion Annual Meeting of Stockholders held on May 25, 1999 ("Annual
Meeting"), 27,278,483 shares of Orion Common stock were outstanding and entitled
to vote (the "Outstanding Common Stock"), and 24,659,432 shares of Outstanding
Common Stock (90.399%), consisting of a quorum, were represented at the Annual
Meeting in person or by proxy, and voted on the following proposals:
PROPOSAL 1
At the Annual Meeting, the directors nominated were elected by the following
votes:
Number of Shares Voted For Number of Shares Withheld
W. Marston Becker 23,998,134 661,298
Gordon F. Cheesbrough 23,998,134 661,298
David H. Elliott 23,998,134 661,298
Victoria R. Fash 23,998,134 661,298
Robert H. Jeffrey 23,998,134 661,298
Warren R. Lyons 23,998,134 661,298
James K. McWilliams 23,998,134 661,298
Ronald W. Moore 23,998,134 661,298
William B. Weaver 23,998,134 661,298
As stated in the chart above, all director nominees received 23,998,134 votes
for election, or 87.975% of the Outstanding Common Stock (or 97.318% of
the shares voted at the Annual Meeting). There were no broker non-votes on
this proposal.
PROPOSAL 2
At the Annual Meeting, the approval of the adoption of an amendment to the Orion
Capital Corporation Equity Incentive Plan ("Equity Incentive Plan") to increase
the number of shares of common stock available for issuance under the Equity
Incentive Plan was ratified by a vote of 21,682,458 shares or 79.486% of the
33
<PAGE>
Outstanding Common Stock (or 87.928% of the shares voted at the Annual
Meeting). Holders of 2,914,028 shares or 10.682% of the Outstanding
Common Stock voted against the ratification of the amendments to the Equity
Incentive Plan and holders of 62,946 shares or 0.231% of the Outstanding
Common Stock abstained from voting. There were no broker non-votes on
the Equity Incentive Plan proposal.
PROPOSAL 3
At the Annual Meeting, the selection of Deloitte & Touche LLP, independent
certified public accountants, as auditors for the Corporation for the year 1999
was ratified by a vote of 24,292,855 shares or 89.055% of the Outstanding Common
Stock (or 98.513% of the shares voted at the Annual Meeting). Holders of 322,561
shares or approximately 1.183% of the Outstanding Common Stock voted against the
ratification of Deloitte and Touche LLP as auditors and holders of 44,016 shares
or approximately 0.161% of the Outstanding Common Stock abstained from voting.
There were no broker non-votes on this proposal.
ITEM 5. OTHER INFORMATION
On July 16, 1999 the Company filed a Schedule 14D-9 Solicitation/Recommendation
Statement with the Securities and Exchange Commission. The Schedule 14D-9 was
filed by the Company pursuant to a definitive merger agreement reached between
it and RSA providing for the acquisition of Orion Capital Corporation for
$50 per common share in cash. The Company's Board of Directors has recommended
in the Schedule 14D-9 that the stockholders accept RSA's tender offer, and
tender their shares in the offer pursuant to the definitive agreement.
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.
34
<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: August 10, 1999 By: /s/ W. Marston Becker
Chairman of the Board and
Chief Executive Officer
Date: August 10, 1999 By: /s/ Michael L. Pautler
Senior Vice President and
Chief Financial Officer
35
<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
36
Exhibit 15
August 9, 1999
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
June 30, 1999 and 1998, as indicated in our report dated August 3, 1999; because
we did not perform an audit, we expressed no opinion on that information.
We consent to the incorporation 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. 333-55671 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, of our report dated August 3, 1999,
appearing in this quarterly report on Form10-Q of Orion Capital Corporation for
the quarter ended June 30, 1999.
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
<TABLE> <S> <C>
<ARTICLE>7
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ORION CAPITAL CORPORATION'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE
30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 1,425
<DEBT-CARRYING-VALUE> 260
<DEBT-MARKET-VALUE> 266
<EQUITIES> 389
<MORTGAGE> 2
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,375
<CASH> 16
<RECOVER-REINSURE> 759
<DEFERRED-ACQUISITION> 139
<TOTAL-ASSETS> 4,115
<POLICY-LOSSES> 2,101
<UNEARNED-PREMIUMS> 567
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 18
<NOTES-PAYABLE> 209
<COMMON> 177
0
0
<OTHER-SE> 453
<TOTAL-LIABILITY-AND-EQUITY> 4,115
643
<INVESTMENT-INCOME> 69
<INVESTMENT-GAINS> 4
<OTHER-INCOME> 2
<BENEFITS> 599
<UNDERWRITING-AMORTIZATION> 177
<UNDERWRITING-OTHER> 30
<INCOME-PRETAX> (70)
<INCOME-TAX> (31)
<INCOME-CONTINUING> (45)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (5)
<NET-INCOME> (50)
<EPS-BASIC> (1.85)
<EPS-DILUTED> (1.85)
<RESERVE-OPEN> 1,418
<PROVISION-CURRENT> 460
<PROVISION-PRIOR> 139
<PAYMENTS-CURRENT> 190
<PAYMENTS-PRIOR> 385
<RESERVE-CLOSE> 1,406
<CUMULATIVE-DEFICIENCY> 139
</TABLE>
<TABLE>
<CAPTION>
Exhibit 11
ORION CAPITAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
(In millions, except for per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
Basic:
<S> <C> <C> <C> <C>
Weighted average number of shares outstanding 27.0 27.5 27.0 27.4
========= ========= ========= =========
Net earnings attributable to common stockholders $ 42.5 $ 38.2 $ (50.0) $ 80.3
========= ========= ========= =========
Net earnings per basic common shares $ 1.57 $ 1.39 $ (1.85) $ 2.93
========= ========= ========= =========
Diluted:
Computation of weighted average number of
common and diluted equivalent shares
outstanding:-
Weighted average number of shares outstanding 27.0 27.5 27.0 27.4
Dilutive effect of stock options and stock awards 0.2 0.7 0.0 0.7
--------- --------- --------- ---------
Weighted average number of common and
diluted equivalent shares 27.2 28.2 27.0 28.1
========= ========= ========= =========
Net earnings attributable to common stockholders $ 42.5 $ 38.2 $ (50.0) $ 80.3
========= ========= ========= =========
Net earnings per diluted common shares $ 1.56 $ 1.36 $ (1.85) $ 2.85
========= ========= ========= =========
</TABLE>
The average shares for the six months ended June 30, 1999 excludes equivalent
shares of 0.2 million in the computation of diluted earnings per common share
because to include them would have been antidilutive.
