-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Rb5U+SAJKrWQWxAsZf4X0cKg/iRS32b4ymlWCuAH7+ZGQLw4HsPpSX6x27gtQLEN AWa0YnGUCszX9G02FIO6sg== 0000074931-95-000006.txt : 19950615 0000074931-95-000006.hdr.sgml : 19950615 ACCESSION NUMBER: 0000074931-95-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950316 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORION CAPITAL CORP CENTRAL INDEX KEY: 0000074931 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 956069054 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07801 FILM NUMBER: 95521305 BUSINESS ADDRESS: STREET 1: 600 FIFTH AVENUE STREET 2: 24TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10020-2302 BUSINESS PHONE: 212-332-8080 MAIL ADDRESS: STREET 1: 600 FIFTH AVENUE STREET 2: 24TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10020-2302 FORMER COMPANY: FORMER CONFORMED NAME: EQUITY FUNDING CORP OF AMERICA DATE OF NAME CHANGE: 19760518 FORMER COMPANY: FORMER CONFORMED NAME: TONGOR CORP OF AMERICA DATE OF NAME CHANGE: 19670330 FORMER COMPANY: FORMER CONFORMED NAME: TONGOR CORP DATE OF NAME CHANGE: 19661024 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1994 1-7801 ---------------- ORION CAPITAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-6069054 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 600 Fifth Avenue, New York, NY 10020-2302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 212-332-8080 ------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, $1 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: 9 1/8% Senior Notes due September 1, 2002 (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] The aggregate market value of the voting stock of the registrant held by non-affiliates was $474,852,697 as of March 13, 1995. As of March 13, 1995, 14,046,635 shares of Common Stock, $1.00 par value, of registrant were outstanding exclusive of shares held by registrant and its subsidiaries. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III is incorporated by reference from registrant's definitive proxy statement for its Annual Meeting to be held on May 31, 1995. Registrant intends to file the proxy material, which involves the election of directors, not later than 120 days after the close of its fiscal year. PART I ITEM 1. BUSINESS Orion Capital Corporation ("Orion") is a property and casualty insurance holding company. Although Orion's insurance subsidiaries and affiliates are authorized to underwrite and sell most types of property and casualty insurance, their businesses are concentrated in niche insurance markets, particularly workers compensation, professional liability and nonstandard automobile insurance. (Orion and its wholly-owned subsidiaries are referred to collectively as the "Company.") The Company provides workers compensation insurance products through the EBI Companies and Nations' Care. The Company sells its professional liability insurance through the DPIC Companies and writes assumed reinsurance through SecurityRe Companies and other specialty property and casualty insurance, principally through the Connecticut Specialty Insurance Group ("Connecticut Specialty"). The Company participates in the nonstandard commercial and personal automobile insurance business through its slightly less than 50% interest in Guaranty National Corporation ("Guaranty National"). (Guaranty National and its wholly-owned subsidiaries are referred to collectively as the "Guaranty National Companies.") Guaranty National operates as an independent publicly- held company and, except for certain services contractually provided, is not managed by the Company. Five of the eleven members of Guaranty National's board of directors are also members of the Orion board of directors. The Company also owns approximately 20% of the outstanding common stock of Intercargo Corporation ("Intercargo"), an insurance holding company whose subsidiaries specialize in international trade and transportation coverages. In February, 1995, the Company and Intercargo reached an agreement which, subject to appropriate regulatory approvals, permits the Company to purchase additional shares in the open market, from time to time, to bring its ownership up to 24.9% of Intercargo's outstanding common stock. Intercargo operates as an independent company. One member of Intercargo's seven-member board of directors is selected by Orion. The Company's insurance subsidiaries are licensed to transact business throughout the United States and in several Canadian provinces. They obtain substantially all of their business from approximately 830 independent insurance agents and brokers. The Company has approximately 1,500 employees, substantially all of whom are employed in the Company's insurance operations. During the past three years, Orion has reconfigured and simplified its debt and capital structure. In March 1993, Orion entered into a bank loan agreement ("Bank Loan") that provided initial borrowings of up to $50,000,000 as a term loan and $10,000,000 as a line of credit; in September 1992 it issued $110,000,000 of 9 1/8% Notes due September 1, 2002 ("9 1/8% Senior Notes") and in late 1992 and early 1993 Orion called for redemption of all three of its then outstanding preferred stocks and both issues of its outstanding debentures. Most holders of its two convertible exchangeable preferred stocks opted to convert their shares of preferred stock into shares -2- of common stock at or prior to the redemption date. The conversions resulted in the issuance of 3,982,000 shares of common stock. As a result of those actions, the only securities of Orion currently outstanding are its common stock and its 9 1/8% Senior Notes. The reconfiguration and simplification of its debt and capital structure enabled the Company to take advantage of generally lower interest rates, decrease the cost of its capital and reduce the amount of debt and preferred stock sinking fund payments that were coming due in the next few years. In addition, in 1994 Orion filed a shelf registration statement relating to the offering of up to $100 million of debt and/or equity securities. The registration statement was declared effective by the Securities and Exchange Commission in August 1994. The shelf registration provides for Orion's securities to be issued from time to time, with specified terms of an issue of securities to be set forth in a prospectus supplement at the time of issuance. The proceeds from the sale of such securities may be used for general corporate purposes, including working capital, investment in subsidiaries, the repayment of existing bank debt, the repurchase of shares of common stock or for such other purpose as may be specified in a prospectus supplement. In November 1994, the Bank Loan was amended to increase the credit line to $30,000,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Orion was incorporated under the laws of the State of Delaware in 1960. The Company's principal executive offices are located at 600 Fifth Avenue, New York, New York 10020, and its telephone number is (212) 332-8080. The home office of all the Company's wholly-owned insurance subsidiaries is located at 9 Farm Springs Drive, Farmington, Connecticut 06032. For segment reporting purposes, the operations of the Company are reported as four segments. The insurance operations of the Company are treated as three segments, Regional Operations, Reinsurance/Special Programs and the Company's interest in the Guaranty National Companies. Guaranty National's operations were reported on a consolidated basis from 1988 through November 20, 1991 (when the Company owned 100% of Guaranty National) and have been reported on the equity accounting basis since then. The miscellaneous activities of the parent holding company and various incidental subsidiaries not involved in insurance-related activities are reported as a fourth segment under the heading "Other." Regional Operations is composed primarily of the EBI Companies and Nations' Care. These operating companies underwrite and sell workers compensation insurance through independent agents and brokers. Nations' Care offers alternative workers compensation services and products. Regional Operations' results include the declining costs associated with the run-off of the Company's commercial multiple peril insurance business, which was discontinued in 1988. Reinsurance/Special Programs includes the DPIC Companies, which markets professional liability insurance; SecurityRe Companies, which writes reinsurance; the Connecticut Specialty Insurance -3- Group, which underwrites and sells specialty insurance programs through independent agents and general agents; and Intercargo, which specializes in international trade and transportation coverages. The Guaranty National Companies write nonstandard commercial and personal automobile insurance, general liability insurance, surplus lines commercial property and casualty insurance and collateral protection insurance. The business of Orion's other subsidiaries, all of which are insubstantial, as well as the miscellaneous income and expenses (primarily interest, general and administrative expenses and other consolidating elimination entries) of Orion itself, are reported as a fourth segment. Net earnings for 1994 amounted to $55,245,000 or $3.85 per primary common share on 14,348,000 weighted average common shares outstanding as compared with net earnings of $68,813,000 or $4.69 per primary common share (after preferred dividends) in 1993 on 14,598,000 weighted average common shares outstanding. Earnings in 1993 include a benefit of $11,825,000 or $.81 per primary common share from the cumulative effect of changes in accounting principles. Common stock and per common share data have been restated to reflect Orion's 5-for-4 stock splits paid in the fourth quarters of 1992 and 1993. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following tables present condensed financial information showing revenues, pre-tax earnings (loss) and other financial data and ratios of the Company's four segments for each of the three years in the period ended December 31, 1994. Identifiable assets, by segment, are included in Note M to the Consolidated Financial Statements, "Industry Segment Information." -4-
Year Ended December 31, ------------------------------- 1994 1993 1992 ---- ---- ---- (000s omitted) REVENUES: Regional Operations - Premiums earned ....................... $278,040 $266,373 $268,145 Net investment income ................. 29,287 33,760 33,182 Realized investment gains ............. 1,246 4,153 2,077 Other income .......................... 239 - (193) -------- -------- -------- Total Regional Operations ........... 308,812 304,286 303,211 -------- ------- -------- Reinsurance/Special Programs - Premiums earned ....................... 413,183 351,031 292,060 Net investment income ................. 53,209 55,500 48,416 Realized investment gains ............. 2,191 6,706 3,027 Other income .......................... 575 915 849 -------- -------- -------- Total Reinsurance/Special Programs .. 469,158 414,152 344,352 -------- -------- -------- Other ................................... 2,977 1,717 155 -------- -------- -------- $780,947 $720,155 $647,718 ======== ======== ======== EARNINGS (LOSS): Regional Operations ..................... $ 42,514 $ 34,025 $ 4,227 Reinsurance/Special Programs ............ 34,117 44,032 50,384 Guaranty National Companies ............. 11,244 9,509 9,994 -------- -------- -------- Total property and casualty operations. 87,875 87,566 64,605 Other ................................... (16,329) (15,061) (17,891) -------- -------- -------- 71,546 72,505 46,714 Federal income taxes .................... (16,301) (15,517) (922) Cumulative effect of adoption of new accounting principles ................. - 11,825 - Extraordinary loss, net of taxes ........ - - (2,920) -------- -------- -------- Net earnings .......................... $ 55,245 $ 68,813 $ 42,872 ======== ======== ======== -5- The following table sets forth, on a consolidated basis, certain insurance ratios for the Company: Year Ended December 31, -------------------------------- 1994 1993 1992 ---- ---- ---- Loss and loss adjustment expenses to premiums earned ....................... 72.1% 74.4% 75.7% Policy acquisition and other insurance expenses to premiums earned ........... 27.0 26.8 27.3 ----- ----- ----- Total before policyholders' dividends.. 99.1 101.2 103.0 Policyholders' dividends to premiums earned ................................ 2.1 2.0 2.4 ----- ----- ----- Total after policyholders' dividends .. 101.2% 103.2% 105.4% ===== ===== =====
The Company's insurance subsidiaries include eight active wholly-owned insurance companies, as well as a wholly-owned reinsurance underwriting management company, service companies and an insurance brokerage firm. One or more of Orion's insurance subsidiaries is licensed and transacts business in each of the 50 states of the United States, the District of Columbia and several provinces of Canada. In 1994, approximately 11.5% of the direct premiums written by the insurance subsidiaries was generated in Pennsylvania, 8.7% in both California and Wisconsin and, in the aggregate, an additional 20.4% was generated in the states of Texas, Florida and Illinois. The primary line of business in Pennsylvania, Wisconsin, Texas and Illinois was workers compensation. California's primary line was architects and engineers professional liability insurance and Florida premiums were mostly in auto liability lines. The following table shows the geographical distribution of direct insurance premiums written by the Company in 1994, 1993 and 1992:
Geographical Distribution of Direct Premiums Written Year Ended December 31, ------------------------------------------------------ State 1994 Pct. 1993 Pct. 1992 Pct. - ----- ---- ---- ---- ---- ---- ---- (000s omitted - except for percentages) Pennsylvania ..... $ 79,031 11.5% $ 74,066 11.4% $ 80,392 13.0% California ....... 60,313 8.7 60,675 9.4 59,664 9.7 Wisconsin ........ 60,108 8.7 56,209 8.7 53,083 8.6 Texas ............ 53,439 7.7 45,050 7.0 46,684 7.6 Florida .......... 53,424 7.7 84,754 13.1 49,008 8.0 Illinois ......... 34,285 5.0 28,690 4.4 39,405 6.4 All others ....... 350,893(1) 50.7 297,982 46.0 287,780 46.7 -------- ----- -------- ----- -------- ----- $691,493 100.0% $647,426 100.0% $616,016 100.0% ======== ===== ======== ===== ======== ===== (1) In 1994, no other single state or country accounts for more than 5% of total direct premiums written.
-6- For 1994, 42.9% of the Company's net premiums written was derived from workers compensation insurance written primarily in twelve selected states (including all states listed in the preceding table except California and Florida), 28.0% related to liability insurance other than automobile, primarily professional liability insurance, and 19.1% came from automobile insurance (not including premiums written by Guaranty National Companies). No other line of business contributed in excess of 5% to 1994 net premiums written. The following table shows premiums written for the Company, net of reinsurance, by major statutory lines of business:
Net Premiums Written Year Ended December 31, ------------------------------------------------------ 1994 Pct. 1993 Pct. 1992 Pct. ---- ---- ---- ---- ---- ---- (000s omitted - except for percentages) Workers compensation .. $305,157 42.9% $311,150 49.0% $331,044 58.3% Liability other than automobile .......... 199,214 28.0 145,493 22.9 123,973 21.9 Commercial automobile . 73,596 10.3 61,798 9.7 43,246 7.6 Private passenger automobile .......... 62,590 8.8 72,286 11.4 36,560 6.5 Marine ................ 30,323 4.3 10,500 1.6 7,498 1.3 Commercial multiple peril ............... 8,701 1.2 9,028 1.4 9,104 1.6 All others ............ 32,474 4.5 25,331 4.0 16,005 2.8 -------- ----- -------- ----- -------- ----- $712,055 100.0% $635,586 100.0% $567,430 100.0% ======== ===== ======== ===== ======== =====
-7- REGIONAL OPERATIONS The Regional Operations segment is comprised primarily of the EBI Companies and Nations' Care. The EBI Companies provides traditional workers compensation insurance and Nations' Care focuses on providing alternative workers compensation services and products. From 1989 through 1994, the EBI Companies' and Nations' Care net premiums written have accounted for almost all of the premium volume of the Regional Operations segment. The EBI Companies devote substantially all of their resources to underwriting and selling workers compensation insurance through independent agents and brokers. EBI has a competitive edge stemming from its service oriented approach. It is among the 25 largest writers of workers compensation insurance in the United States based on net premiums written. For a variety of reasons, EBI has phased out of the workers compensation business in California, but the decrease in premium volume in California has been substantially offset by growth in other markets, such as Arizona, Illinois, Indiana, Michigan, Pennsylvania and Wisconsin. Regional Operations staffs its offices with underwriters, field production representatives, claims and loss control representatives, medical and rehabilitation experts and other technical and administrative personnel. The EBI Companies' specialized approach is founded upon a team concept under which loss control and claims management personnel have significant direct involvement in account selection and in underwriting each policy. Upon acceptance of each new account, an EBI team begins to work with the insured and its employees to identify the factors that influence their insurance costs. The EBI approach to underwriting is not merely to evaluate the risk but to attempt to reduce the risk through loss control services. During the policy term, the EBI team continues to provide services designed to reduce the frequency and severity of injuries. In late 1994, EBI introduced the concept of "Zero Accident Culture" which focuses insureds on creating an accident free work environment. Because of its desire to influence and impact the workplace environment in order to reduce losses, EBI concentrates its efforts on single-location insureds, such as small to medium-sized manufacturers and selected service businesses, such as nursing homes and hospitals. Nations' Care is designed to capitalize on the Company's expertise acquired from its service oriented and team approach to traditional workers compensation. It applies those skills to writing workers compensation for large accounts, accounts with large deductibles and other insurance products. It also offers consulting and administrative services to self-insured workers compensation programs. Nations' Care emphasizes its cost effective loss control and claims management consulting services. Nations' Care currently operates in five states but expects to expand its services more broadly throughout the United States. A workers compensation policy obligates an insurance company to pay all compensation and other benefits for injured workers as may be required by applicable state workers compensation laws. Such benefits include, among other things, payments for medical and hospital expenses and disability and vocational rehabilitation expenses. The insurance policies currently written by the EBI Companies provide workers compensation coverage with limits of liability set by the provisions of state workers compensation laws. The benefits provided by these laws vary with the nature and severity of the injury or disease, as well as with the wage level, occupation and age of the employee. Employers liability coverage is also provided to employers who may be subject to claims for damages (not workers compensation benefits) because of an injury to a worker. -8- The amount of workers compensation premiums earned is directly dependent upon wage levels as well as the number of employees on the payroll of each policyholder and the job classifications of those employees. Accordingly, premiums may be affected by the level of unemployment in general, and particularly by the level of unemployment experienced in those industries and geographic areas which represent a substantial portion of the Company's workers compensation insurance business. Premium rates are revised annually in most states in which the EBI Companies and Nations' Care do business. Rates vary with different job classifications and among different employers. The EBI Companies and Nations' Care use the rates and rating plans filed in the states where they do business. See "Industry Characteristics - Rates." Approximately 750 independent agents and brokers produced substantially all of the direct business written in 1994 by the EBI Companies and Nations' Care. All of such agents and brokers receive commissions on the sale of insurance. No single independent agent or broker contributed more than 5% of this segment's net written premiums. The agents and brokers provide a broad range of insurance services to the public within their local areas, operate as independent contractors and generally represent other insurers as well. REINSURANCE/SPECIAL PROGRAMS The Company's Reinsurance/Special Programs segment is comprised of four components: DPIC Companies, SecurityRe Companies, Connecticut Specialty and the Company's 20% equity interest in Intercargo Corporation. All of such components concentrate in highly specialized lines of business in the property and casualty insurance field. DPIC Companies writes professional liability insurance for architects, engineers, accountants and lawyers. It is the second largest underwriter of architect and engineer liability insurance in North America. On October 1, 1993, DPIC Companies substantially reorganized its operations into a structure more directly aligned to its various client groups. The single Architects and Engineers Underwriting unit was divided into three major divisions: Architects, Engineers and Special (large accounts) Risks. Each division is now staffed with underwriters and other professionals who focus on a specific discipline thus enabling them to develop programs to address the unique issues facing their clients. DPIC Companies also markets the Accountants Professional Liability System (A/PL+), a program of professional liability insurance, analogous to its architects and engineers products, for selected medium-sized certified public accounting firms. In 1994, DPIC Companies introduced the Lawyers Professional Liability System (L/PLS), a similar program for preferred law firms. -9- Professional liability insurance covers liability arising out of alleged negligent performance of professional services. Underwriting and claims management require a high level of knowledge and expertise. In an attempt to limit risk exposure, DPIC Companies' specialized underwriters evaluate a great number of factors, including the experience of an applicant firm's professional personnel, the loss history of the firm, the employees covered, the type of work performed and the firm's utilization of suggested loss prevention measures. DPIC Companies uses a premium credit incentive program to encourage insureds to participate in its liability education programs and to use other loss prevention practices, such as "limitation of liability" clauses in contracts with their clients. In most jurisdictions the coverage offered by DPIC Companies is on a "claims-made and reported" policy form, a form which generally insures only those claims reported by the insured during the policy term. DPIC Companies generally uses a policy form under which defense costs, primarily legal fees, are limited by their inclusion within the insured's stated policy limits. This policy form has had a favorable impact in controlling legal costs. DPIC Companies' specialized claims staff, located in eight offices in the United States and Canada, stresses early intervention in disputes to avoid litigation whenever possible. DPIC Companies has been a pioneer in using alternative dispute resolution ("ADR") methods to promptly resolve disputes. DPIC Companies' "Mediation Works" program has been particularly successful offering incentives to insureds who agree to mediate disputes. Currently, up to 30% of all open claims are in mediation or some other form of ADR. Management believes that the use of such methods has had a beneficial impact on DPIC Companies' operating results. DPIC Companies markets its products through 53 specialized agencies, each highly knowledgeable about risk management for the professions served and about DPIC Companies' loss prevention programs. Management believes that this "value added" approach is the reason why DPIC Companies has experienced a high customer retention rate (averaging 90%) over a long period of time and why it is less vulnerable to price competition. The agents participate in continuing education programs sponsored by DPIC Companies and are active in their clients' professional societies. Connecticut Specialty currently administers the operation of approximately 30 specialty programs written through general agents. The specialized coverages include personal lines automobile insurance, workers compensation insurance, as well as various liability coverages for the trucking industry. Connecticut Specialty finds opportunity in commercial niches, utilizing general agents not only as an efficient and ready-made means of distribution but drawing upon their established expertise and contacts. Connecticut Specialty also develops its own expertise in order to supplement the contributions of its general agents. Connecticut Specialty has developed a methodology for judging opportunities that stresses the knowledge and quality of the general agent and the unique aspects of the type of coverage or class of business being underwritten which might provide a competitive advantage. Over the past six years the use of this methodology has resulted in a conservative underwriting approach leading to an analysis of nearly 1,200 potential programs but the implementation of only 36. Connecticut Specialty defines a "program" as the writing of risks in a class of business not widely pursued, utilizing forms, coverage, pricing -10- methodologies and risk management techniques tailored to the needs of the customer. While the average program premium size is $7,500,000, a few programs are larger, such as, long-haul and intermediate truck liability, workers compensation for underground coal mines, "brownwater" marine, and multi-line coverage for volunteer firefighters. Connecticut Specialty has formed strategic alliances with what it believes are among the most knowledgeable and well respected general agents in the specialty insurance field. Each of its general agents has superior knowledge of his customers and has earned their loyalty by providing quality services and support. Connecticut Specialty utilizes a profit sharing approach in writing its special programs whereby minimal commissions are earned by the general agent until the program is profitable. Connecticut Specialty closely monitors its programs throughout their existence to ensure that profit potential is maximized. Pricing volatility for the business that Connecticut Specialty writes is generally low. The specialty nature of such business provides some insulation against the competitive pressures of the overall insurance market. Enhanced automation designed for each general agent promotes efficiency and effectiveness for both the agent and Connecticut Specialty. This exclusive relationship with the general agent creates a competitive advantage in the insurance marketplace and also directly impacts the cost of entry by competitors. Connecticut Specialty's ability to exit and enter markets rather quickly is an added competitive advantage. The Reinsurance/Special Programs segment also participates in facultative and treaty reinsurance throughout the United States through SecurityRe Companies. SecurityRe Companies underwrites a diverse book of primarily casualty business, using reinsurance intermediaries, with exposures largely concentrated in the domestic market. SecurityRe Companies' premiums in recent years have been principally concentrated in the treaty segment relating to pro-rata business with small to medium-sized regional and specialty companies in various lines of business (primarily automobile and commercial coverages). Facultative coverage is provided on an excess of loss basis for casualty and property exposures. Careful underwriting by SecurityRe ensures that only select risks are bound so that exposure to loss is minimized. The largest net amount insured by SecurityRe is $1 million. Adherence to strict underwriting guidelines and value-added services to clients make SecurityRe very competitive in the marketplace. The Reinsurance/Special Programs segment also includes the Company's 20% interest in Intercargo. Intercargo is an insurance holding company whose subsidiaries specialize in international trade and transportation coverages. Its principal product lines are U.S. Customs bonds and marine cargo insurance sold to importers and exporters through customs brokers and other service firms engaged in the international movement of goods. Intercargo operates as an independent entity and a pro rata share of any profit or loss is reflected in the Company's consolidated financial statements, based on the Company's equity interest in Intercargo. In February 1995, the Company and Intercargo reached an agreement which, subject to regulatory approval, permits the Company to purchase additional shares in the open market from time to time, to bring the Company's ownership up to 24.9% of Intercargo's outstanding common stock. -11- GUARANTY NATIONAL COMPANIES The Company participates in nonstandard commercial and personal automobile insurance and surplus lines insurance through its interest in Guaranty National. Based in Englewood, Colorado, the Guaranty National Companies underwrite and sell specialty property and casualty coverages which are not readily available in traditional insurance markets. Guaranty National became a publicly held company with its stock listed on the New York Stock Exchange when the Company sold slightly more than half of the outstanding common stock of Guaranty National it owned in a public offering in 1991. Approximately 83% of the Guaranty National Companies' net written premiums during 1994 was derived from writing automobile (both private passenger and commercial) insurance. Other types of insurance products sold by Guaranty National Companies are general liability, low hazard professional liability, commercial multi-peril, umbrella and property. Guaranty National Companies have historically focused their operations on the nonstandard markets. Nonstandard risks require specialized underwriting,claims management and other skills and experience. Guaranty National Companies' expertise and market position have allowed the Guaranty National Companies to generate an underwriting profit in each of the last seven years. Guaranty National Companies' personal lines unit principally writes nonstandard automobile insurance, insurance for drivers usually unacceptable to other insurers for, among other reasons, adverse driving or accident histories, ages or vehicle types and is sold primarily in the Rocky Mountain and Pacific Northwest regions. Guaranty National does not provide personal lines coverage in California. Guaranty National Companies' commercial lines unit writes commercial automobile insurance, which covers policyholders such as sand and gravel haulers, used car dealers, automobile repair facilities, and local log hauling and trucking firms. Other commercial lines coverage includes property (for example, motor-truck cargo), general liability (for example, contractors and fuel- convenience stores), low hazard professional liability (for example, teachers), standard umbrella insurance, standard commercial packages and other commercial coverages. Guaranty National, through its wholly-owned managing general agency, Intercon General Agency, Inc., also markets collateral protection insurance, primarily insuring automobiles pledged as security for bank loans for which the borrower has not maintained physical damage coverage as required by the bank. Such business represents 11% of Guaranty National Companies' gross written premiums for 1994. Premium levels for nonstandard risks are substantially higher than for preferred or standard risks. In personal lines, Guaranty National Companies' loss exposure is limited by the fact that its insureds typically purchase low liability limits, often a state's statutory minimum. The nonstandard insurance industry is also characterized by the insurer's ability to minimize its exposure to unprofitable business by effecting timely changes in premium rates and policy terms in response to changing loss and other experiences. In February 1994 Guaranty National's Board of Directors approved a repurchase program of its own stock. At that time the Company agreed to sell, and Guaranty National to buy, a portion of Guaranty National's common -12- stock to the extent necessary for the Company to maintain its ownership interest in Guaranty National at approximately its present level of slightly under 50%. Under that program, as of December 31, 1994, Guaranty National has repurchased 139,600 of its shares from the Company at an aggregate cost of $2,041,000. Guaranty National and its subsidiaries have entered into a series of agreements with the Company. One of these agreements is a shareholders agreement pursuant to which the Company has the right to designate three members of Guaranty National's board, including the Chairman of the Board, for so long as the Company beneficially owns 30% or more of Guaranty National. The shareholder agreement was amended in March, 1995 to permit Guaranty National to increase the size of its board of directors to eleven members. Mr. Larry D. Hollen, President and Chief Operating Officer of the Company, was elected to the Guaranty National board at that time as one of Orion's three designated directors. The shareholder agreement was also amended to permit Mr. Sanborn, a Company Director and a former Senior Officer of the Company, to remain on the Guaranty National board. Under the shareholder agreement, the Company also has a right until 1997 to require Guaranty National to register under the Securities Act of 1933 all or part of the shares of common stock it continues to hold. In addition, the Company's insurance subsidiaries and the Guaranty National Companies also entered into certain reinsurance agreements and a trade name agreement. Orion and Guaranty National have signed an investment management agreement pursuant to which the Guaranty National Companies' investment portfolio (except for a portion of the equity securities portfolio which is managed by an unaffiliated portfolio manager) is managed by Orion's investment managers (under the direction and supervision of Guaranty National) for a fee of $550,000 per year for 1994 and 1995. The investment management agreement continues for annual periods, unless terminated by either party upon 90 days prior written notice. -13- INSURANCE INDUSTRY CHARACTERISTICS Loss Reserves - ------------- The Company establishes reserve liabilities for reported losses, incurred but not reported ("IBNR") losses, and claim settlement and administration expenses. Reserves for reported losses and loss adjustment expenses are estimates of the ultimate costs of claims incurred but not settled. IBNR loss reserves are estimates for both unreported claims and additional development of previously reported claims. Reserves are primarily based on the circumstances surrounding each claim, the Company's historical experience with losses arising from claims not yet reported, the particular experience associated with the line of business and type of risk involved. Consideration is also given to expected changes in costs for property, repairs to property, medical care, litigation and other legal costs, and vocational rehabilitation. The Company regularly monitors the factors affecting its reserves to better control claim costs. Doing so also provides a base of information to reevaluate reserve estimates. The reserve estimates are regularly reviewed and adjusted to consider all pertinent information as it becomes available as to the ultimate cost of losses and claims incurred. Such reevaluation is a normal, recurring activity that is inherent in the process of loss reserves estimation. Management revises its reserve estimates as appropriate and believes that the loss and loss adjustment expense reserves of the Company's insurance subsidiaries make reasonable and sufficient provision for the ultimate cost of all losses and claims incurred. However, no assurances can be given that reserve development will not occur in the future. Accident Year Loss and Loss Adjustment Expense Analysis - ------------------------------------------------------- Accident year is a period of exposure that is used to accumulate loss and loss adjustment experience by the year in which an incident giving rise to a claim occurs. Accident year information is used for loss reserving and in establishing premium rates. Accident year loss experience is updated in subsequent calendar years until all losses and loss adjustment expenses related to that given accident year have been settled. Accident year loss ratio relates losses associated with incidents giving rise to claims occurring within a given calendar year to premiums earned during the same calendar year. Presented below are loss reserve development tables for the five years ended December 31, 1994 prepared in accident year format. For each accident year, the following table presents premiums earned, and the provision for loss and loss adjustment expenses as a percentage of premiums earned (the "loss ratios") as established in the initial accident year and cumulative as of December 31, 1994: -14-
Loss and Loss Adjustment Accident Premiums Expense Development ------------------------------- Year Earned Initial Cumulative - -------- -------- ------- ---------- (000s omitted) 1990 $687,976 67.4% 70.5% 1991 701,386 67.7 64.8 1992 560,205 71.0 70.8 1993 617,404 70.4 71.3 1994 691,223 69.6 - The table set forth below indicates premiums earned, the loss ratio, the ratio of policy acquisition costs and other insurance expenses to premiums earned (the "expense ratio"), the ratio of policyholders' dividends to premiums earned (the "policyholders' dividend ratio") and the total of the ratios (the "combined ratio") at December 31, 1994: Accident Premiums Loss Expense Policyholders' Combined Year Earned Ratio Ratio Dividend Ratio Ratio - -------- -------- ----- ------- -------------- -------- (000s omitted) 1990 $687,976 70.5% 28.7% 2.9% 102.1% 1991 701,386 64.8 30.2 2.4 97.4 1992 560,205 70.8 27.3 2.4 100.5 1993 617,404 71.3 26.8 2.0 100.1 1994 691,223 69.6 27.0 2.1 98.7 Calendar Year Loss Reserve Analysis - ----------------------------------- An analysis of the Company's calendar year loss and loss adjustment expense reserves net of reinsurance is presented below: Year Ended December 31, ------------------------------------ 1994 1993 1992 -------- -------- -------- (000s omitted) Beginning of year .................. $830,805 $746,298 $668,467 -------- -------- -------- Provision: Current year ..................... 480,826 434,840 397,551 Prior years ...................... 17,297 24,292 26,481 -------- -------- -------- 498,123 459,132 424,032 -------- -------- -------- Payments: Current year ..................... 134,120 125,042 105,883 Prior years ...................... 303,266 249,583 240,318 -------- -------- -------- 437,386 374,625 346,201 -------- -------- -------- End of year ........................ $891,542 $830,805 $746,298 ======== ======== ======== -15-
Cumulative reserve development for the Company's wholly-owned insurance subsidiaries (excluding Guaranty National Companies for all years) as of December 31, 1994 for the calendar years 1984 through 1994 is shown in the table that follows: Year Ended December 31, 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 - ----------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (000s omitted) C> Net liability for unpaid loss and loss adjustment expenses.......... $284,480 $294,427 $359,623 $401,677 $520,304 $602,519 $595,455 $668,467 $ 746,298 $ 830,805 $ 891,542 Paid (cumulative) as of: One year later .... 197,895 226,776 211,102 178,100 236,657 281,224 261,464 240,318 249,583 303,266 - Two years later.... 317,705 364,206 320,000 318,883 403,147 438,250 408,624 378,524 429,501 - - Three years later.. 396,482 436,665 409,019 414,616 488,397 526,235 493,218 484,335 - - - Four years later .. 424,881 493,399 468,971 457,182 544,449 581,880 567,068 - - - - Five years later .. 467,781 534,321 494,838 490,973 582,527 633,413 - - - - - Six years later ... 494,273 550,743 518,397 515,478 624,415 - - - - - - Seven years later.. 514,382 571,652 537,567 551,055 - - - - - - - Eight years later.. 531,036 588,050 566,205 - - - - - - - - Nine years later .. 547,286 611,700 - - - - - - - - - Ten years later ... 566,256 - - - - - - - - - - Net liability reestimated as of: One year later .... 354,216 416,208 434,056 469,137 573,632 647,585 657,100 694,948 770,590 848,102 - Two years later ... 432,944 478,093 486,631 504,814 624,337 695,154 685,692 714,953 782,348 - - Three years later.. 471,155 527,200 517,476 548,883 658,024 722,626 705,516 732,047 - - - Four years later .. 500,835 574,073 557,124 568,114 687,818 741,789 741,096 - - - - Five years later .. 533,435 605,513 577,977 597,103 705,475 770,359 - - - - - Six years later ... 555,123 623,291 604,056 610,086 733,836 - - - - - - Seven years later.. 575,438 645,114 611,108 637,322 - - - - - - - Eight years later.. 590,215 652,011 633,723 - - - - - - - - Nine years later .. 602,085 673,417 - - - - - - - - - Ten years later ... 620,583 - - - - - - - - - - Net deficiency ...... (336,103) (378,990) (274,100) (235,645) (213,532) (167,841) (145,641) (63,580) (36,050) (17,297) - Gross liability ..... $1,081,396 $1,140,403 $1,181,329 Reinsurance recoverable ....... 335,098 309,598 289,787 ---------- ---------- ---------- Net liability ....... $ 746,298 $ 830,805 $ 891,542 ========== ========== ========== Gross re-estimated liability ......... $1,094,514 $1,144,023 - Re-estimated recoverable ....... 312,166 295,921 - ---------- ---------- Net re-estimated liability ......... $ 782,348 $ 848,102 - ========== ========== Gross deficiency .... $ (13,118)$ (3,620) - ========== ========== -16-
The preceding loss reserve development table indicates the aggregate year-end liability for loss and loss adjustment expenses net of reinsurance, the cumulative amounts paid attributable to those reserves through December 31, 1994, the re-estimate of the aggregate liability as of December 31 of each subsequent year and the cumulative development of prior years' reserves. Information is also provided on a gross basis for 1992 through 1994. Consistent with industry practice, certain claims for long-term disability workers compensation benefits are carried at discounted values. At December 31, 1994 and 1993, approximately $55,986,000 and $73,215,000, respectively, of long-term disability workers compensation loss reserves are included in the consolidated financial statements at net present value using a statutory interest rate of 3.5%. The amount of long-term disability workers compensation reserves declined in 1994 as a result of the Company's efforts to minimize the severity of losses and the continued closing of older claims. The Company's IBNR loss and loss adjustment expense reserves and other bulk reserves for losses and loss adjustment expenses for which claim files have not been established, net of reinsurance, were $438,194,000, $336,446,000 and $298,653,000 as of December 31, 1994, 1993 and 1992, respectively. The following table presents the differences between loss and loss adjustment expense reserves reported in the consolidated financial statements in accordance with generally accepted accounting principles ("GAAP"), and those reported in the consolidated annual statement filed with state insurance departments in accordance with statutory accounting practices ("SAP"):
December 31, ---------------------- 1994 1993 ---- ---- (000s omitted) Liability on SAP basis ...................... $ 909,723 $ 850,418 Estimated salvage and subrogation recoveries recorded on a cash basis for SAP and on an accrual basis for GAAP .... (14,151) (15,164) GAAP Reinsurance payable included in SAP reserves ................................ (13,817) (11,244) Foreign subsidiary reserves ............... 9,787 6,795 ---------- ---------- Liability on GAAP basis, net of reinsurance.. 891,542 830,805 Reinsurance on GAAP reserves ................ 289,787 309,598 ---------- ---------- Liability on GAAP basis ..................... $1,181,329 $1,140,403 ========== ==========
During 1994, the Company strengthened loss reserves and experienced development for prior years' business based upon the Company's ongoing actuarial analysis utilizing the most current information available. The 1994 provision for prior accident year losses by major line of business is as follows: -17- (000s omitted) Reinsurance, pools and associations ....... $ 10,389 Automobile liability ...................... 9,977 Surety .................................... 5,237 Commercial multiple peril ................. 2,855 Workers compensation ...................... (13,393) Other...................................... 2,232 -------- $ 17,297 ======== Adverse development relating to reinsurance, pools and associations includes the Company's assumed reinsurance business, in which loss and loss adjustment expense experience is indicative of the ceding companies' experience. The Company's voluntary participation in various pools and associations business is generally recorded as the information is reported to the Company. The development from automobile liability primarily relates to the Company's Florida non-standard automobile program, which was discontinued in 1994, and the truck program, where reported losses in 1994 developed greater than anticipated. Losses in the surety line of business principally relates to a program that was discontinued in 1993. In prior years, the commercial multiple peril line was responsible for a greater amount of the adverse development. Starting in 1983, the Company expanded its commercial multiple peril business and then withdrew from that line of business in 1988 due to greater than expected losses. In 1993 and 1994, the commercial multiple peril line had significantly less development due to stronger reserving. The favorable development from the workers compensation line of business is the result of continued improvement from the application of risk management and loss control procedures. The other liability category includes the Company's professional liability program for architects and engineers and losses from the Company's discontinued general liability line of business. The majority of the adverse development for the other lines of business relates to strengthening reserves based on historical loss development patterns. The significantly decreased level of adverse development during more recent years is consistent with the strengthening of loss reserves and the strong performance of the Company's ongoing lines of business. Loss reserve estimates are based on forecasts of the ultimate settlement of claims and are subject to uncertainty with respect to future events. Loss reserve amounts are based on management's informed estimates and judgments, using data currently available. Reserve amounts and the underlying actuarial factors and assumptions are regularly analyzed and adjusted to reflect new information. The Company has experienced substantial development of losses from prior accident years, particularly accident years 1984 and 1985 which were the worst years in recent history for the Company and for the property/casualty insurance industry in general. The Company's adverse development primarily resulted from terminated lines of business, pools and other programs, higher than anticipated inflationary pressures, unforeseen judicial decisions (including interpretations of policy coverages beyond what was originally anticipated) and other external factors exposing the Company to risks not known when the insurance policies were priced and issued. To reduce loss development, the Company realigned certain management responsibilities in its Regional Operations segment several years ago. Key management positions were added in that segment to further strengthen loss control and prevention, and to focus more attention towards back-to-work programs for injured workers. These factors tend to reduce loss costs and -18- adverse development. For the design professionals liability line of business, the Company has increasingly used alternative dispute resolution techniques which includes the extensive use of mediation procedures to settle claims. These procedures often result in reduced litigation and other claim related expenses. The commercial multiple peril business that is being run off has a specifically designated group of claims personnel assigned who have been aggressively settling claims, resulting in an acceleration of payment patterns in more recent years. Estimates for IBNR claim reserves are based on actuarial analysis of historical loss experience and current trends. Although the reserves are deemed adequate to cover all probable claims, there is a reasonable possibility that the adverse development from prior accident years could continue into the future. Variability in claim emergence and settlement patterns, and other trends in loss experience, can result in future development patterns different than expected. The Company believes that the adverse development experienced in recent years relates to the timing of recurring claims activities that are inherent to the estimation of property/casualty reserves. Future variability cannot be accurately factored into the reserve estimations. However, management believes that past reserve strengthening and a higher level of initial reserving, together with increased stabilization in the Company's business, will continue to limit adverse loss development in the future. The Company analyzes loss reserves for its major lines of business on a regular basis. Several methods are used, including paid and incurred loss development, and incurred claim counts and average claim costs. These methods are subject to variability in reserve estimation for a number of reasons, including improved claims department operating procedures and accelerated claims settlement due to the use of alternate dispute resolution and expedited resolution of civil suits in litigation. Additionally, other factors that are analyzed and are considered in the determination of loss reserves include (i) claim emergence and settlement patterns and changes in these patterns from year to year,(ii) trends in the frequency and severity of paid and incurred losses, (iii) changes in policy limits and changes in reinsurance coverages, (iv) changes in the mix and classes of business, and (v) changes in claims handling procedures as determined by discussions with claims and operating staff and through claim audits. Current operations are more focused on underwriting risks where the Company has specialized knowledge and can provide enhanced service to reduce loss costs. This concentration, and the specialized knowledge and growing experience in its selected lines of business arising from such concentration, have enabled the Company to implement improvements in its claims administration and underwriting procedures which have enhanced the Company's ability to analyze data and project reserve trends. -19- Investments - ----------- The Company derives a significant part of its income from its investments. Investments of the Company's insurance subsidiaries are made in compliance with applicable insurance laws and regulations of the respective states in which such companies are domiciled and other jurisdictions in which they conduct business. Neither Orion nor any of its non-insurance subsidiaries is constrained by investment restrictions set forth in state insurance laws. The Company maintains a diversified portfolio representing a broad spectrum of industries and types of securities. The Company has no significant investments in real estate, although it does own the DPIC Companies' home office building in Monterey, California and has invested in several real estate limited partnerships valued at $10,769,000 at December 31, 1994. Investments are managed to achieve a superior total return, while maintaining a proper balance of safety, liquidity, maturity and marketability. Investments are made based on long-term economic value rather than short-term market conditions. Except for investments in Guaranty National and securities of the United States Government and its agencies, the Company did not have any other investments in any one issuer that exceeded $20,000,000 at December 31, 1994. During 1994 and 1993 the Company has continued the process of changing the composition of its investment portfolio toward more tax-advantaged securities. Historically, as a result of the Company's net operating tax loss carryforwards ("NOLs"), the Company invested primarily in fully taxable securities, since the income of such securities could be offset by the NOLs. Such fully taxable securities, in general, pay a higher pre-tax rate of return than tax advantaged securities. With the change in the Company's tax position, following the full utilization of its NOLs for federal income tax purposes in 1991, management began to shift the composition of the Company's investment portfolio toward the purchase of a greater percentage of tax- advantaged securities. The Company has the ability to hold its fixed maturity investments to term since its operating cash flow and its short-term investment portfolio provide the Company with substantial liquidity. Fixed maturity investments that the Company has the positive intent to hold to maturity are recorded at amortized cost. Fixed maturity investments which may be sold in response to, among other things, changes in interest rates, prepayment risk, income tax strategies, or liquidity needs are classified as available-for-sale and are carried at market value, with unrealized gains and losses reflected in stockholders' equity. Equity securities are stated at market value. Both the fixed maturities and equity investments consist primarily of readily marketable securities. The following table shows the composition of the investment portfolio of the Company as of December 31, 1994 and 1993, and the quality ratings for the Company's fixed maturity investments. The investments shown below are listed at their cost, market value and financial statement (book) values. -20-
December 31, 1994 Cost Market Value Book Value - ----------------- ------------------ ------------------ ------------------ (000s omitted - except for percentages) Fixed Maturities: AAA ............. $ 413,949 30.9% $ 390,075 29.8% $ 394,291 29.9% AA .............. 172,362 12.8 170,235 13.0 170,221 12.9 A ............... 112,923 8.4 107,677 8.2 110,051 8.3 BBB ............. 104,180 7.8 100,128 7.6 101,579 7.7 BB .............. 51,875 3.9 45,805 3.5 46,302 3.5 B and Below ..... 38,507 2.9 34,909 2.7 34,909 2.7 Not Rated ....... 39,501 2.9 40,510 3.1 40,488 3.1 ---------- ----- ---------- ----- ---------- ----- Sub-total ..... 933,297 69.6 889,339 67.9 897,841 68.1 Equity Securities.. 250,929 18.7 264,434 20.2 264,434 20.0 Other Long Term Investments ..... 52,564 3.9 52,564 4.0 52,564 4.0 Short Term Investments ..... 104,201 7.8 104,201 7.9 104,201 7.9 ---------- ----- ---------- ----- ---------- ----- $1,340,991 100.0% $1,310,538 100.0% $1,319,040 100.0% ========== ===== ========== ===== ========== ===== December 31, 1993 - ----------------- Fixed Maturities: AAA ............. $ 408,254 32.4% $ 427,448 31.9% $ 417,147 31.5% AA .............. 191,858 15.2 207,461 15.5 202,614 15.3 A ............... 101,172 8.0 105,456 7.9 103,772 7.9 BBB ............. 107,958 8.6 112,814 8.4 111,552 8.4 BB .............. 31,728 2.5 31,972 2.4 32,319 2.4 B and Below ..... 20,371 1.6 22,118 1.6 22,118 1.7 Not Rated ....... 40,777 3.3 43,216 3.2 43,216 3.3 ---------- ----- ---------- ----- ---------- ----- Sub-total ..... 902,118 71.6 950,485 70.9 932,738 70.5 Equity Securities.. 210,311 16.7 242,643 18.1 242,643 18.4 Other Long Term Investments ..... 50,682 4.0 50,682 3.8 50,682 3.8 Short Term Investments ..... 96,473 7.7 96,473 7.2 96,473 7.3 ---------- ----- ---------- ----- ---------- ----- $1,259,584 100.0% $1,340,283 100.0% $1,322,536 100.0% ========== ===== ========== ===== ========== ===== Year Ended December 31, ----------------------- 1994 1993 ---- ---- Yield on average investments: Pre-tax ......... 6.5% 7.4% === === After-tax ....... 5.0% 5.5% === === -21-
Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which establishes the "available-for-sale" category of investment securities and requires such securities to be recorded at market value, with unrealized gains and losses reported as a separate component of stockholders' equity. As a result of the adoption of this standard, the Company reclassified investments with a market value of $452,102,000 from fixed maturities recorded at amortized cost to fixed maturities recorded at market. The result of that reclassification increased unrealized appreciation on investments, a component of stockholders' equity, by $20,720,000, net of deferred income taxes, on December 31, 1993. The Company strives to enhance the average return of its portfolio by investing a small percentage of it in a diversified group of non-investment grade fixed maturity securities, or securities that are not rated. The risk of loss due to default is generally considered greater for non- investment grade securities than for investment grade securities because the former, among other things, are typically unsecured, often subordinated to other debts of the issuer and are often issued by highly leveraged companies. In the non-investment grade segment of the investment portfolio, the Company maintains a high degree of diversity, with an average investment per issuer of approximately $1,665,000 at December 31, 1994. Only six high yield investments, aggregating $41,147,000, were in excess of $5,000,000 as of December 31, 1994. The Company closely monitors the financial stability of issuers of securities that it owns. When conditions are deemed appropriate, the Company ceases to accrete discount, or accrue interest and dividends. In cases where the value of investments are deemed to be other than temporarily impaired, the Company recognizes losses. During 1994, provisions for such losses were $381,000 for equity securities and $750,000 for fixed maturity investments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Investment Income and Realized Investment Gains." Reinsurance - ----------- In the ordinary course of business, the Company's insurance subsidiaries enter into reinsurance contracts with other insurers which serve to limit the Company's maximum loss from catastrophes, large risks or unusually hazardous risks. Ceding reinsurance reduces an insurer's operating leverage ratio. A large portion of the Company's reinsurance protection is provided by reinsurance contracts known as treaties. In other instances, reinsurance is obtained by negotiation for individual risks, or facultative reinsurance. The Company's insurance subsidiaries have certain excess-of- loss and catastrophe treaties with unaffiliated insurers or reinsurers which provide protection against a specified part or all of certain types of losses over stipulated dollar amounts arising from one or more occurrences. The amount of each risk retained by an insurer is subject to maximum limits which vary by line of business and type of coverage. -22- Retention limits are periodically revised as the capacity of the Company's insurance subsidiaries to retain risk varies and as reinsurance prices change. The Company is very selective as to its reinsurers, placing reinsurance with only those reinsurers considered to be in sound financial condition and having satisfactory underwriting ability. Many of the Company's reinsurance agreements are subject to annual renewal as to coverage, limits and price. The financial strength of its reinsurers is continually monitored by the Company. The Company's insurance subsidiaries, to their knowledge, have no material exposure to potential unrecognized losses due to reinsurers that are in known financial difficulties. The Company's insurance subsidiaries have reinsurance protection for workers compensation losses in excess of $1,500,000 up to $100,000,000. DPIC Companies have reinsurance for a portion of losses from architect and engineer liability in excess of $1,000,000 up to $5,000,000, the maximum policy limit written by the DPIC Companies. Certain commercial auto and general liability policies are reinsured for a portion of losses in excess of $500,000 up to $1,000,000. The Company's reinsurance subsidiary maintains various reinsurance arrangements for its facultative and treaty exposures, including catastrophe protection above the $1,000,000 level. In addition to the foregoing, the Company's insurance subsidiaries also maintain other reinsurance arrangements in support of their specific business needs. In 1994 and 1993, the Company's insurance subsidiaries net premiums written to year-end statutory surplus were at levels of 1.6:1 and 1.4:1, respectively. Government Regulation - --------------------- The Company's insurance subsidiaries are subject to regulation by the Insurance Department of Connecticut, the state of their incorporation. In order to simplify the Company's regulatory environment, effective December 30, 1994, all of the Company's insurance subsidiaries previously incorporated in California were redomesticated into the State of Connecticut, where all of the Company's other insurance subsidiaries are incorporated. All insurance companies must file annual statements and other reports with state regulatory agencies and are subject to regular and special examinations by those agencies. A regular periodic examination of the Company's insurance subsidiaries, covering their operations and statutory financial statements through December 31, 1991, was satisfactorily completed in 1993 by the Insurance Departments of California and Connecticut. Each of the Company's insurance subsidiaries is also subject to regulation by other jurisdictions in which it sells insurance, including certain Canadian provinces. States regulate the insurance business through supervisory agencies which have broad administrative powers, including powers relating to, among other things, the standards of solvency which must be met and maintained; the licensing of insurers and their agents; restrictions on the amount of risk which may be insured under a single policy; the approval of premium rates; the form and content of the insurance policy and sales literature; the form and content of financial statements; reserve requirements; and the nature of and limitations on permitted investments. In general, such regulation is for the protection of policyholders rather than stockholders. -23- In some instances, particularly in connection with workers compensation insurance, various states routinely require deposits of assets for the protection of policyholders and their employee claimants in those states. As of December 31, 1994 and 1993, securities representing approximately 18% and 21%, respectively, of the book value of the Company's investment portfolio were on deposit with various state treasurers or custodians. Such deposits consist of securities of the types which comply with the standards that each state has established. The Company is also subject to state laws regulating insurance holding company systems. Most states have enacted legislation and adopted administrative regulations affecting insurance holding companies and the acquisition of control of insurance companies, as well as transactions between insurance companies and their affiliates. The nature and extent of such legislation and regulations currently in effect vary from state to state. Most states, including Connecticut, currently require administrative approval of the acquisition of 10% or more of the outstanding shares of an insurance company incorporated in the state or the acquisition of 10% or more of an insurance holding company whose insurance subsidiary is incorporated in the state. The acquisition of 10% of such shares (which would include securities convertible into voting securities) is deemed to be the acquisition of "control" for the purpose of most holding company statutes and requires the filing of detailed information concerning the acquiring parties and the plan of acquisition and administrative approval prior to such acquisition. Material transactions between insurance companies and affiliated members of the holding company system are generally required to be "fair and reasonable" and in some cases are subject to administrative approval. All state jurisdictions in which the Company is authorized to transact business require participation in guaranty funds. Insurers authorized to transact business in those jurisdictions can be assessed by a state guaranty fund a percentage (usually from 1% to 2%) of direct premiums written in that jurisdiction each year to pay claims on behalf of insolvent insurers. The likelihood and amount of any future assessment cannot be estimated until after an insolvency has occurred. For the years ended December 31, 1994 and 1993 the Company's insurance subsidiaries were assessed approximately $1,051,000 and $407,000, respectively (net of estimated future recoveries) as a result of known insolvencies. Insurance companies are required by certain states in which they do business to participate in automobile insurance plans and workers compensation plans. These plans provide insurance on risks which are not written in the voluntary market. Participation in these plans has usually been unprofitable for the Company. A number of state legislatures and the United States Congress have for years been considering, or have now enacted, some type of legislative proposals which alter the rules for tort claims and increase the states' authority to regulate insurance companies. These initiatives have expanded, in some instances, the states' regulation over rates (See "Rates" below) and also have increased data reporting requirements. In recent years the state insurance regulatory framework has come under federal scrutiny, and certain state legislatures have considered or enacted laws that alter, and in many cases increase, state authority to regulate insurance companies and insurance holding company systems. Further, the National Association of Insurance Commissioners ("NAIC") and state regulators are re-examining existing laws and regulations and issues -24- relating to the solvency of insurers. The NAIC has recently adopted risk based capital ("RBC") requirements for property and casualty insurers. The capital of each of the Company's insurance subsidiaries at December 31, 1994 exceeds the RBC requirements. Although the federal government generally does not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. There are various current and proposed federal measures which may significantly affect the Company's insurance business, including, among other proposals, the revocation of the antitrust exemption provided by the McCarran-Ferguson Act and reforms to the litigation system. The various proposed reforms to limit punitive damages and assess costs to the losing side in a lawsuit, if any are enacted, might have a positive impact on the Company and the insurance industry in general. Suggested changes to the nation's health care system, however, if enacted, might negatively affect the Company's workers compensation and automobile liability businesses. The economic and competitive effects of any proposals upon the Company would depend upon the final form such legislation might take. The Company is unable to predict what regulatory proposals may be adopted in the future, or the effect any such proposals might have on the Company's business if adopted. Limitations on Payments from Insurance Subsidiaries - --------------------------------------------------- The principal sources of cash available to Orion are dividends, reimbursement of various administrative charges, and tax payments from its subsidiaries. The payment of dividends to Orion by its insurance subsidiaries is subject to state regulation. No state restricts dividend payments by Orion to its stockholders. The ability of the Company's insurance subsidiaries to declare dividends is governed primarily by the insurance laws of the state of incorporation of all of the Company's insurance subsidiaries. Generally, such laws currently provide that, unless prior approval is obtained, dividends of a property and casualty insurance company in any consecutive 12-month period shall not exceed the greater of its net income for the preceding calendar year or 10% of its policyholders' surplus as of the preceding December 31, determined on a statutory accounting basis. Dividends and distributions by the Company's insurance subsidiaries are also subject to a requirement that statutory policyholders' surplus be reasonable in relation to outstanding liabilities and adequate to meet the companies' financial needs following the declaration of any dividends or distributions. State insurance regulators have, however, broad discretionary authority with respect to approving the payment of dividends by insurance companies. Under current Connecticut regulations, the maximum dividends permitted at December 31, 1994 for the ensuing twelve months, without prior approval, aggregated $52,377,000. Orion received $30,013,000 in dividends from its wholly-owned insurance subsidiaries in 1994. Since it is difficult to predict future levels of statutory policyholders' surplus or earnings, the amount of dividends that could be paid in the future without prior approval cannot be determined at this time. -25- Rates - ----- The Company's insurance subsidiaries are generally subject to regulation as to rates. Most states have insurance laws requiring that rate schedules and other information be filed with or made available to the state's regulatory authority, either directly or through a rating organization with which the insurer is affiliated. The regulatory authority may, in most states, disapprove a rate filing if it finds that the rates are inadequate, excessive or unfairly discriminatory. Rates, which are not necessarily uniform for all insurers, vary by class of business, hazard assumed and size of risk. Subject to regulatory requirements, the Company's management determines the prices charged for its policies based on a variety of factors including recent historical claims experience, inflation, competition, tax law and anticipated changes in the legal environment, both judicial and legislative. The Company's management believes that its rate outlook for its principal lines of business will remain stable during 1995. Some states have adopted open rating systems for workers compensation which permit insurers to set premium rates independently without the prior approval of the insurance commissioners. A number of other states permit insurers to deviate from standard rates for workers compensation insurance after receiving prior approval. In insuring professional liability risks the DPIC Companies are generally not limited to the standard rates of a rating organization but set their own rates because of the unique nature of the risks being underwritten. In November 1988, California voters passed an initiative known as Proposition 103 which amended the California Insurance Code to provide, among other things, that for at least one year rates for automobile and many other insurance policies issued or renewed on or after November 8, 1988, be rolled back to the levels of November 8, 1987 and then reduced by 20%. In 1989, the California Supreme Court ruled that an insurer could be compelled to make refunds for the rollback year only to the extent that it would not deprive the insurer of a fair and reasonable rate of return. Workers compensation insurance and reinsurance are excluded from the Proposition's rate rollback provisions. The Insurance Department of the State of California ("Department") subsequently issued regulations with respect to California Proposition 103. On August 18, 1994, the Supreme Court of the State of California upheld the validity of the Department's current regulations. In January 1995 the newly elected Commissioner of the Department announced that he would like to quickly resolve all Proposition 103 liability with California insurers through negotiations. On January 31, 1995, the Department advised the Company that it had an indicated rollback liability under the regulations of approximately $4,000,000, plus interest. The Department asked the Company to provide information, including California specific data, that would impact its calculation. The data used by the Department to determine the rollback liability was based on national figures and contained some inapplicable information as to the Company's California business. The regulations provide for the use of California data where available and reliable. When the calculation under the regulations is performed using the Company's California specific data, the Company has no rollback liability. The Company intends to resolve the matter with the Department during 1995. -26- In recent years, certain social, economic and political issues have led to an increased number of legislative and regulatory proposals and judicial decisions aimed at addressing the cost, benefits and availability of certain types of insurance. Initiatives attempting to freeze or roll back premium rates, similar to the California Proposition have been introduced in other states, as well as proposals to redefine or expand risk exposure, such as by increasing the amount and types of workers compensation benefits and by the expansion of the liability for employee illness caused by cumulative trauma, stress or previously unknown causes. Most of these legislative proposals have failed to date to become law. While such initiatives may continue to be proposed, it is impossible to predict whether any such proposals will be adopted. However, depending on the circumstances, the Company may be able to mitigate the longer term effects on profitability through discontinuance of the affected business and redeployment of capital into more attractive markets, as it has done in the past. Competition - ----------- The insurance industry is highly competitive. Of the nearly 3,900 property and casualty insurance companies in the United States, about 900 companies write most of the business but no single company or group has more than 10% of the market. The Company's insurance subsidiaries are in competition with numerous stock and mutual property and casualty insurance companies, as well as state run workers compensation insurance funds, many of which are substantially larger and have significantly greater resources than the Company. Competition may take the form of lower premiums, specialized products, more complete and complex product lines, greater pricing flexibility, superior service, different marketing methods or higher policyholder dividend rates. Superior service and marketing methods are of particular importance in workers compensation. Competition might also come from service organizations which administer self-insured programs. The Company's insurance subsidiaries sell their insurance principally through independent agents, brokers and general agents, who typically also represent one or more competing insurance companies. They are paid commissions based on premiums collected from insureds. Commission rates vary according to the type and amount of insurance sold. Some competitors in certain lines obtain their business at a lower direct cost through the use of salaried personnel rather than independent agents and brokers. Rating - ------ A.M. Best Company rates the Company's primary insurance subsidiaries "A (Excellent)." In general, A.M. Best Company's ratings are based on an analysis of the financial condition and operation of an insurance company as it relates to the industry. These ratings are not primarily designed for investors and do not constitute recommendations to buy, sell or hold any security. A.M. Best Company has upgraded the ratings of the Company three times in the last five years. -27- MISCELLANEOUS OPERATIONS The Company's fourth business segment consists primarily of the miscellaneous income and expense (principally interest and general and administrative expenses) of Orion itself. For financial reporting purposes, the Company applies federal income taxes and benefits, as if fully utilizable, to its segments. Any consolidating elimination entries are accounted for in this fourth segment. ITEM 2. PROPERTIES The Company's executive office is located at 600 Fifth Avenue, New York, New York. The home office of the insurance operations of the Company is located in Farmington, Connecticut. The New York office facilities consist of approximately 12,000 square feet and are leased at an average annual rental, over ten years, of $465,000. The Farmington office consists of approximately 140,000 square feet and is leased at an annual rental of $4,310,000. The DPIC Companies owns its office building, which consists of approximately 42,000 square feet, in Monterey, California. The DPIC Companies purchased the building on January 26, 1990 for approximately $11,950,000. In November 1990 the DPIC Companies mortgaged the leasehold interest in its office building to other subsidiaries of the Company and to Guaranty National Insurance Company for an aggregate of $9,000,000. All of the other insurance operations of the Company are conducted from leased premises in or adjacent to major urban centers throughout the United States and in Canada. These operations, in the aggregate, occupy approximately 245,000 square feet, at an annual rental of approximately $4,450,000. The Company believes that its current facilities are suitable and adequate for their present use and anticipated requirements. -28- ITEM 3. LEGAL PROCEEDINGS The Company is routinely engaged in litigation incidental to its businesses. In the judgment of the Company's management, there are no significant legal proceedings pending against Orion or its wholly-owned subsidiaries which, net of reserves established therefor are likely to result in judgments for amounts that are material to the financial condition, liquidity or results of operations of Orion and its consolidated subsidiaries, taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. INFORMATION CONCERNING EXECUTIVE OFFICERS OF THE COMPANY The following is a summary of certain information regarding the current executive officers of Orion. All officers of Orion and its subsidiaries serve at the pleasure of their respective Boards of Directors. Alan R. Gruber, Chairman of the Board and Chief Executive Officer of Orion since March 1976; Chairman of Orion Capital Companies, Inc. ("OC Companies"), which provides management services to the Orion Capital Companies, since October 1982; age 67. Larry D. Hollen, President and Chief Operating Officer of Orion since March 1, 1994; a director of Orion since March 20, 1992; President of the OC Companies since February 1994; Executive Vice President and Assistant Chief Operating Officer of Orion from December 1, 1992 to February 28, 1994; Senior Vice President of Orion from March 1990 to December 1992; Vice President of Orion from 1988 to March 1990; President of the EBI Companies from January 1990 to May 31, 1993; age 49. W. Marston Becker, Senior Vice President of Orion and President and Chief Executive Officer of the DPIC Companies and Senior Vice President of the OC Companies since July 1994; President and Chief Executive Officer of McDonough Caperton Insurance Group, an insurance brokerage firm, from March 1987 to July 1994; age 42. Raymond W. Jacobsen, Senior Vice President of Orion since July 1994; Vice President of Orion from March 1990 to July 1994; President and Chief Executive Officer of the EBI Companies since June 1, 1993; Executive Vice President of the EBI Companies from December 1989 to May 31, 1993; Senior Vice President of the OC Companies since March 1990; age 42. Arthur B. McHugh, Senior Vice President of Orion and Senior Vice President of the OC Companies since July 1994, President and Chief Executive Officer of the Connecticut Specialty Insurance Group since May 1994; Executive Vice President of Zurich American Insurance Group from 1987 to 1994; age 43. Daniel L. Barry, Vice President and Controller of Orion since October 1987; Senior Vice President of OC Companies since January 1989; Controller of OC Companies since October 1986; Treasurer of OC Companies from October 1987 to December 1990; age 44. Michael P. Maloney, Vice President, General Counsel and Secretary of Orion since August 1979; Senior Vice President of OC Companies since March 1987; age 50. -29- William G. McGovern, Vice President and Chief Actuary of Orion since March 1990; Senior Vice President and Chief Actuary of OC Companies since October 1989; age 42. Vincent T. Papa, Vice President and Treasurer of Orion since June 1985; Senior Vice President of OC Companies since March 1987 and Treasurer since December 1990; age 48. Raymond J. Schuyler, Vice President-Investments of Orion since June 1984; Senior Vice President of OC Companies since March 1986; age 59. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Principal Market. The principal market on which Orion's Common Stock is traded is the New York Stock Exchange. (b) Stock Price and Dividend Information. The table below presents the high and low market prices and dividend information for Orion's Common Stock for 1994 and 1993, adjusted to reflect the effect of the 5-for-4 stock split paid on November 15, 1993. Cash Stock Prices Dividends High Low Declared ---- --- --------- 1994: Quarter Ended December 31........ $35.25 $28.125 $.20 Quarter Ended September 30....... 34.625 29.75 .20 Quarter Ended June 30............ 34.75 29.875 .18 Quarter Ended March 31........... 34.00 30.00 .18 ----- Total........................ $.76 ===== 1993: Quarter Ended December 31........ $36.30 $28.625 $.18 Quarter Ended September 30....... 37.50 30.30 .18 Quarter Ended June 30............ 37.10 30.10 .16 Quarter Ended March 31........... 36.80 27.20 .16 ---- Total........................ $.68 ==== Cash dividends have been paid on Orion's Common stock in every quarter since the fourth quarter of 1978, when dividends were first commenced. (c) Approximate Number of Holders of Common Stock. The number of holders of record of Orion's Common Stock as of March 13, 1995 was 1,999. -30- ITEM 6. SELECTED FINANCIAL DATA The following table summarizes information with respect to the operations and financial condition of Orion and its subsidiaries. Common stock and per common share data have been restated to give effect to the 5-for-4 stock splits paid on both November 15, 1993 and December 7, 1992. All of the Company's $1.90 Preferred Stock, $2.125 Preferred Stock and Adjustable Rate Preferred Stock were converted into common stock or redeemed during 1992 and 1993. In November 1991, the Company sold 6,250,000 shares of Guaranty National Corporation in an initial public offering, reducing its level of ownership from 100% to slightly less than 50%. Guaranty National's financial statements have been consolidated with those of the Company through November 20, 1991. For the periods subsequent to November 20, 1991, the portion of Guaranty National's results attributable to the Company's ownership is included on an equity accounting basis. Information presented as of December 31, 1991 through 1994 excludes the accounts of Guaranty National. The consolidated financial statements and related notes thereto are furnished under Item 8 of this report.
1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (000s omitted-except for per share data) For the year ended December 31: Total revenues ................. $ 780,947 $ 720,155 $ 647,718 $ 837,294 $ 783,879 Gain on sale of common stock of Guaranty National ......... - - - 33,931 - After-tax investment gains (losses) ..................... 2,427 5,888 3,113 (1,804) (7,368) Earnings before cumulative effect of change in accounting principles and extraordinary loss ......................... 55,245 56,988 45,792 44,668 25,461 Net earnings ................... 55,245 68,813 42,872 44,668 25,461 Earnings per common share before cumulative effect of change in accounting principles and extraordinary loss ........... 3.85 3.88 3.62 3.75 1.79 Net earnings per common share ........................ 3.85 4.69 3.35 3.75 1.79 Dividends declared - Adjustable rate preferred share ...................... - 1.10 4.16 4.37 4.44 $1.90 preferred share ........ - - 1.43 1.90 1.90 $2.125 preferred share ....... - .12 2.125 2.125 2.125 Common share ................. .76 .68 .60 .59 .58 Weighted average number of common shares and equivalents outstanding .................. 14,348 14,598 10,914 9,964 10,091 As of December 31: Total cash and investments ..... $1,325,241 $1,328,969 $1,169,379 $1,087,454 $1,145,887 Total assets ................... 2,112,761 2,117,454 1,937,408 1,827,069 1,995,729 Total policy liabilities ....... 1,450,835 1,412,285 1,326,872 1,228,951 1,443,720 Notes payable and debentures ... 152,382 160,372 129,863 142,311 175,290 Adjustable rate preferred stock - - 18,705 19,125 19,505 Stockholders' equity ........... 365,088 394,195 311,287 249,829 191,958 Common shares outstanding ...... 14,041 14,372 13,100 9,905 9,928 Book value per common share .... $ 26.00 $ 27.43 $ 21.48 $ 19.00 $ 13.07 -31-
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries (collectively the "Company") operate principally in the property and casualty insurance business which is reported as three segments - Regional Operations, Reinsurance/Special Programs and Guaranty National Companies. Regional Operations provides workers compensation insurance products through EBI Companies and Nations' Care. Reinsurance/Special Programs includes (i) DPIC Companies ("DPIC"), which markets professional liability insurance, (ii) Connecticut Specialty Insurance Group ("Connecticut Specialty"), which writes specialty insurance programs, (iii) SecurityRe Companies ("SecurityRe"), a reinsurer and (iv) a 20.0% interest in Intercargo Corporation ("Intercargo") which underwrites insurance coverages for international trade. The third segment consists of the Company's interest in Guaranty National Companies, which specializes in nonstandard commercial and personal automobile insurance. The miscellaneous income and expenses (primarily interest, general and administrative expenses and other consolidating elimination entries) of the parent company are reported as a fourth segment. The Company's insurance operations have experienced favorable trends for the past several years, as indicated by its combined ratio which has improved from 109.4% in 1991, to 105.4% in 1992, 103.2% in 1993 and 101.2% in 1994. Operating earnings (defined as earnings after taxes, excluding the effects of the adoption of new accounting principles, extraordinary items and after-tax realized investment gains) were $52,818,000, $51,100,000 and $42,679,000, or $3.68, $3.47 and $3.33 per share, in 1994, 1993, and 1992, respectively, based on weighted average shares outstanding of 14,348,000 in 1994, 14,598,000 in 1993 and 10,914,000 in 1992. Preferred stock dividends of $409,000 in 1993 and $6,358,000 in 1992 were deducted from earnings in order to compute earnings per common share. RESULTS OF OPERATIONS Earnings (loss) by segment before federal income taxes, cumulative effect of the adoption of new accounting principles and extraordinary item are summarized as follows for the three years ended December 31, 1994:
Year Ended December 31, ----------------------------------- 1994 1993 1992 ---- ---- ---- (000s omitted) Regional Operations ................... $ 42,514 $ 34,025 $ 4,227 Reinsurance/Special Programs .......... 34,117 44,032 50,384 Guaranty National Corporation ......... 11,244 9,509 9,994 -------- -------- -------- Total ............................. 87,875 87,566 64,605 Other ................................. (16,329) (15,061) (17,891) -------- -------- -------- $ 71,546 $ 72,505 $ 46,714 ======== ======== ========
-32- REVENUES Premiums Net premiums written increased 12.0% ($76,469,000) to $712,055,000 in 1994 from $635,586,000 in 1993 and 12.0% ($68,156,000) in 1993 from $567,430,000 in 1992. The results by segment are as follows: - Regional Operations' net premiums written increased 5.5% ($14,656,000) to $279,738,000 in 1994 from $265,082,000 in 1993 and decreased 1.7% ($4,468,000) in 1993 from $269,550,000 in 1992. Premiums written increased in geographic areas where the Company has had favorable loss experience stemming from its service-oriented approach. The increase in 1994 was partially offset by, and the decrease in 1993 was attributable to, the impact of legislative reforms in certain states which have led to lower premium rates and a reduction in losses and expenses, resulting in higher profit margins. The increase in this segment for 1994 was also offset by a reduction in net premiums at Nations' Care, resulting from its transition toward high-deductible and fee-based workers compensation products. - Reinsurance/Special Programs' net premiums written increased 16.7% ($61,813,000) to $432,317,000 in 1994 from $370,504,000 in 1993 and 24.4% ($72,624,000) in 1993 from $297,880,000 in 1992. Net written premiums by DPIC for professional liability insurance, the largest special program, were $173,205,000, $123,637,000 and $111,837,000 in 1994, 1993 and 1992, respectively. The increase in 1994 is primarily attributable to the discontinuation on January 1, 1994 of a reinsurance contract in order to retain more of DPIC's profitable business. The premium increases in 1994 and 1993 reflect both new business and a continuation of a high level of policy renewals. Premium volume for Connecticut Specialty decreased 4.6% ($8,819,000) to $183,427,000 in 1994 from $192,246,000 in 1993 and increased 21.8% ($34,360,000) in 1993 from $157,886,000 in 1992. The decrease in 1994 is largely attributable to the cancellation of a personal injury protection program in Florida and a physical damage program in Texas, where the Company has had unfavorable loss experience, offset in part by increased premiums written in the truck liability program and the introduction of an additional marine program. The largest increases for 1993 were in the automobile personal injury protection and physical damage programs. The percentage of treaty and facultative reinsurance assumed to total net premiums written for Reinsurance/Special Programs amounted to 17.5%, 14.7% and 11.7% in 1994, 1993 and 1992, respectively. The Company's reinsurance operations are benefitting from A.M. Best Company's upgrade in 1993 of the rating applicable to the Company's principal insurance subsidiaries to "A (Excellent)". A.M. Best Company ratings are not primarily designed for investors and do not constitute recommendations to buy, sell or hold any security. Premiums earned increased 12.0% ($73,819,000) to $691,223,000 in 1994 from $617,404,000 in 1993 and 10.2% ($57,199,000) in 1993 from $560,205,000 in 1992. Premiums earned for 1994 and 1993 reflect the recognition in income of the changing levels of net premium writings. -33- Net Investment Income Pre-tax net investment income amounted to $84,915,000, $91,803,000 and $82,483,000 in 1994, 1993 and 1992, respectively. The year-to-year changes in net investment income are attributable to a decrease in equity earnings from limited partnership investments of $8,648,000 from 1993 to 1994, and an increase in limited partnership income of $5,708,000 from 1992 to 1993. The increase in 1993 stems principally from several large gains on sales of real properties by certain of these partnerships. The decrease in 1994 reflects the absence of such gains, and the poor performance of the investment markets during 1994. Net investment income was increased in both years by income generated from the employment of operating cash flow of $118,779,000 in 1994 and $123,154,000 in 1993. The pre-tax yields on the average investment portfolio were 6.5% in 1994 and 7.4% for both 1993 and 1992, reflecting the fluctuation in earnings from limited partnership investments and an increase in each year in the Company's investments in tax-advantaged securities, which generally yield less than fully taxable securities. The after-tax yields on the average investment portfolio were 5.0% in 1994, 5.5% in 1993 and 5.3% in 1992. The carrying value of the Company's investment portfolio amounted to $1,319,040,000 at December 31, 1994 and $1,322,536,000 at December 31, 1993. Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which establishes the "available-for-sale" category of investment securities and requires such securities to be recorded at market value, with unrealized gains and losses reported in a separate component of stockholders' equity. As a result of the adoption of this standard on December 31, 1993, the Company reclassified investments with a market value of $452,102,000 from fixed maturities recorded at amortized cost to fixed maturities recorded at market, and increased unrealized appreciation on investments, a component of stockholders' equity, by $20,720,000, net of deferred income taxes. Fixed maturity investments which the Company has both the positive intent and the ability to hold to maturity are recorded at amortized cost. Investments which may be sold in response to, among other things, changes in interest rates, prepayment risk, income tax strategies or liquidity needs are classified as available-for-sale and are carried at market value. The carrying value of fixed maturity and short-term investments amounted to $1,002,042,000 and $1,029,211,000 at December 31, 1994 and 1993, respectively, or approximately 75.6% and 77.4% of the Company's cash and investments. The Company's investment philosophy is to achieve a superior rate of return after taxes and maintain a high degree of safety and liquidity. The Company invests primarily in investment grade securities and strives to enhance the average return of its portfolio through limited investment in a diversified group of non-investment grade fixed maturity securities or securities that are not rated. The risk of loss due to default is generally considered greater for non-investment grade securities than for investment grade securities because the former, among other things, are often subordinated to other indebtedness of the issuer and are often issued by highly leveraged companies. At December 31, 1994 and 1993, the Company's investment in non-investment grade and unrated fixed maturity securities were carried at $119,853,000 and $97,653,000 with market values of $119,277,000 and $97,306,000, respectively. These investments represented a total of 9.0% and -34- 7.3% of cash and investments and 5.7% and 4.6% of total assets at December 31, 1994 and 1993, respectively. The increase in non-investment grade securities during 1994 reflects both net purchases of such investments as well as rating agency downgrades of securities issued by Long Island Lighting Company and Cleveland Electric Illuminating Company (which had a combined carrying value of $15,793,000, or 1.2% of total cash and investments, at December 31, 1994). The Company closely monitors the financial condition of the issuers of securities that it owns. When conditions are deemed appropriate, the Company ceases to accrete discount, or accrue interest and dividends, and, in cases where the value of such investments is deemed to be other than temporarily impaired, recognizes losses. The Company's non-investment grade investments are highly diversified, with an average investment per issuer of approximately $1,665,000 at December 31, 1994. Only six non-investment grade investments aggregating $41,147,000 were in excess of $5,000,000 at December 31, 1994. Realized Investment Gains Net realized investment gains amounted to $3,437,000 in 1994, $9,478,000 in 1993 and $3,667,000 in 1992. Sales of equity securities resulted in net gains of $3,845,000, $11,273,000 and $5,864,000 and sales of fixed maturities resulted in net gains of $723,000, $6,662,000 and $5,365,000 in 1994, 1993 and 1992, respectively. Realized investment gains were reduced by provisions for losses on securities deemed to be other than temporarily impaired. These provisions amounted to $381,000 in 1994, $6,310,000 in 1993 and $5,429,000 in 1992 for equity securities and $750,000, $2,147,000 and $2,133,000 in 1994, 1993 and 1992, respectively, for fixed maturity investments. Such provisions, based on available information at the time, were made in consideration of the decline in the financial condition of the issuers of these securities. Realized gains (losses) vary from period to period, depending on market conditions relative to the Company's investment holdings, the timing of investment sales generating gains and losses, the occurrence of events which give rise to other than temporary impairment of investments, and other factors. At December 31, 1994 the Company held equity securities with unrealized appreciation of $13,505,000, as compared to $32,332,000 for equity securities held at December 31, 1993. The amortized cost of the fixed maturities portfolio at December 31, 1994 exceeded market value by $43,958,000. This compares with an excess of market value over amortized cost of $48,367,000 for fixed maturities at December 31, 1993. Such amounts can vary significantly depending upon fluctuations in the financial markets. The decline in market values during 1994 is primarily attributable to the significant rise in interest rates during the year. The average maturity of the Company's fixed maturities has not varied significantly in recent years, and no material change in average maturity is expected in the foreseeable future. The performance of the Company's investments, including net investment income, net realized gains (losses) and unrealized appreciation (depreciation) is as follows for the three most recent years: -35- Year Ended December 31, -------------------------------- 1994 1993 1992 ---- ---- ---- (000s omitted) Net investment income ..................... $ 84,915 $ 91,803 $ 82,483 -------- -------- -------- Net realized gains (losses) - Fixed maturities ........................ (27) 4,515 3,232 Equity securities ....................... 3,464 4,963 435 -------- -------- -------- 3,437 9,478 3,667 -------- -------- -------- Net unrealized appreciation (depreciation) - Fixed maturities ........................ (92,325) 21,556 11,954 Equity securities ....................... (18,827) 16,468 22,584 -------- -------- -------- (111,152) 38,024 34,538 -------- -------- -------- $(22,800) $139,305 $120,688 ======== ======== ======== EXPENSES AND OTHER Operating Ratios The following table sets forth certain ratios of insurance operating expenses to premiums earned for the Company: Year Ended December 31, -------------------------------- 1994 1993 1992 ---- ---- ---- Loss and loss adjustment expenses ....... 72.1% 74.4% 75.7% Policy acquisition and other insurance expenses .............................. 27.0 26.8 27.3 ----- ----- ----- Total before policyholders' dividends.. 99.1 101.2 103.0 Policyholders' dividends ................ 2.1 2.0 2.4 ----- ----- ----- Total after policyholders' dividends .. 101.2% 103.2% 105.4% ===== ===== ===== The ratio of loss and loss adjustment expenses to premiums earned (the "loss ratio") was 72.1%, 74.4% and 75.7% in 1994, 1993 and 1992, respectively. The decrease in the 1994 loss ratio was attributable to improvements in both the Regional Operations and Reinsurance/Special Programs segments, while the improvement in the 1993 loss ratio was attributable to a decrease in the loss ratio for the Regional Operations segment offset by higher levels of initial reserving in the Reinsurance/Special Programs segment. The loss ratio for Regional Operations was 67.1% in 1994, 72.0% in 1993 and 80.1% in 1992. These loss ratios reflect continued improvement in workers compensation insurance, reduced losses due to the cancellation in 1992 of participation in a workers compensation loss sharing pool and decreasing levels of losses applicable to discontinued business that is being runoff, principally from closed offices and from the Company having ceased writing commercial package business. -36- Reinsurance/Special Programs' loss ratio was 75.4% in 1994, 76.1% in 1993 and 71.7% in 1992. The decrease for 1994 is attributable to increased writings in programs with lower loss ratios, offset in part by increased losses incurred in Connecticut Specialty's personal injury protection and physical damage programs which were cancelled in 1994. The increase for 1993 as compared to 1992 is primarily due to higher levels of initial reserving. The ratio of deferred acquisition costs and other insurance expenses to premiums earned (the "expense ratio") was 27.0%, 26.8% and 27.3% in 1994, 1993 and 1992, respectively. The 1994 and 1993 expense ratios reflect low levels of assessments from certain assigned risk pools. The ratio of policyholders' dividends to premiums earned (the "dividend ratio") was 2.1%, 2.0% and 2.4% in 1994, 1993 and 1992, respectively. The combined ratio was 101.2% in 1994, 103.2% in 1993 and 105.4% in 1992. Provisions for losses and loss adjustment expenses include development of loss and loss adjustment expense reserves relating to prior accident years, which increased the calendar year combined ratio by 2.5 percentage points in 1994, 3.9 percentage points in 1993 and 4.7 percentage points in 1992. The loss ratios were adversely affected by loss development in the reinsurance and pool and association businesses (including assigned risk pools) where loss reserves are established by the Company based on information provided from sources outside the Company, and where loss patterns were significantly different than in the past. Other contributing factors were higher than anticipated reported losses for automobile liability business and reserve strengthening for certain other lines of business, including discontinued programs. In 1994 adverse development was reduced by the continued improvement in workers compensation insurance from the application of risk management and loss control procedures. Management believes that the Company's reserves for loss and loss adjustment expenses make reasonable and sufficient provision for the ultimate cost of all losses on claims incurred. However, there can be no assurance that changes in loss trends will not result in additional development of prior years' reserves in the future. Variability in claim emergence and settlement patterns and other trends in loss experience can result in future development patterns different than expected. The Company believes that any such development will continue at the low levels experienced in recent years, considering actions taken to increase reserving levels, to improve underwriting standards and to emphasize loss control and prevention. The Company's loss ratios in recent years, including development of prior years' losses, have compared favorably with loss ratios experienced by the industry. The Company limits both current loss expense and future development of losses by ceding business to reinsurers (See Note D to Consolidated Financial Statements). The Company continually monitors the financial strength of its reinsurers and, to the Company's knowledge, has no material exposure with regard to potential unrecognized losses due to reinsurers having known financial difficulties. The Company's environmental claims principally relate to asbestos and hazardous waste, arising from certain liability business written prior to the mid 1980's, which business was never a major element of the Company's operations. Environmental claims are also received from certain reinsurance pools and associations where reserves are established based on information reported to the Company by the managers of those pools and associations. -37- Establishing reserve liabilities for environmental claims is subject to significant uncertainties that make reserve estimation difficult. Legal decisions have tended to expand insurance coverage beyond the intent of the original policies. The disposition of such claims often requires lengthy and costly litigation. Uncertainties as to required clean-up remedies and difficulties in identifying the responsible parties add further to the complexity of reserve estimation for these claims. In recent years, the Company has intensified its efforts to settle and close environmental claims. To help minimize the cost of losses and claims, the Company maintains a dedicated environmental claims staff which administers and continually evaluates each claim and its defense and settlement possibilities. In 1994, 1993 and 1992, the Company paid $7,233,000, $5,557,000 and $4,221,000, respectively, for the costs of defending and settling such claims. Payments in 1994, 1993 and 1992 related to 292, 216 and 117 claims, respectively, for the Company's direct business. Claim counts have been aggregated by year of coverage for each occurrence for which policyholders are being defended, and often include numerous claimants. As of December 31, 1994 and 1993, the Company has environmental claims- related loss and loss adjustment expense reserves, net of reinsurance recoverables, of $20,601,000 and $17,189,000, respectively, which include 467 and 512 claims, respectively, for direct business written by the Company. In estimating liabilities for environmental-related claims, the Company considers all pertinent information as it becomes available. Interest Expense Interest expense was $13,597,000 in 1994, $13,044,000 in 1993 and $12,754,000 in 1992. The 4.2% increase in interest expense in 1994 is primarily attributable to an increase in average interest rates. The 2.3% increase from 1992 to 1993 reflects an increase in the average amount of debt outstanding in 1993 as compared to 1992, including debt incurred to redeem the Company's Adjustable Rate Preferred Stock, offset for the most part by lower average interest rates. Equity in Earnings of Affiliates Equity in earnings of affiliates includes the Company's portion of earnings from Guaranty National and Intercargo. Earnings (loss) of $342,000 and ($122,000) were recorded from the Intercargo investment in 1994 and 1993, respectively. The Company's portion of Guaranty National's net earnings before the cumulative effect of adopting changes in accounting principles was $11,244,000 in 1994, $9,509,000 in 1993 and $9,994,000 for 1992 based on Guaranty National's earnings of $22,551,000, $19,285,000 and $20,271,000, respectively. Gross premiums written for Guaranty National increased to $364,348,000 in 1994 from $321,766,000 in 1993 and $273,400,000 in 1992. Guaranty National's combined ratios were 97.5% in 1994, 99.6% in 1993 and 97.7% in 1992. -38- Earnings From Operations Before Federal Income Taxes Operating earnings before income taxes were $71,546,000, $72,505,000 and $46,714,000 for 1994, 1993 and 1992, respectively. The 1.3% decrease in pre- tax earnings from 1993 to 1994 reflects an increase in insurance operations profitability of $5,082,000 and a decrease in realized investment gains of $6,041,000. The 55.2% increase in pre-tax earnings for 1993 over 1992 reflects an improvement in insurance operations profitability of $19,980,000 and an increase in realized investment gains of $5,811,000. Federal Income Taxes Federal income taxes on pre-tax operating results and the related effective tax rates amounted to $16,301,000 (22.8%), $15,517,000 (21.4%) and $922,000 (2.0%) in 1994, 1993 and 1992, respectively. The Company files consolidated federal income tax returns. Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." Upon adoption of SFAS No. 109, the Company recorded a benefit of $16,881,000 which was principally attributable to its deferred tax benefits that had not been recognized due to limitations under prior accounting standards. The Company's effective tax rates for 1994 and 1993 reflect both the absence of such deferred tax benefits and the benefit of income derived from tax-advantaged securities. The tax rate for 1993 reflects a tax benefit of $450,000 from the effect of the increase in the federal tax rate on the Company's deferred tax asset. The consolidated federal income tax provision for 1992 was reduced by the recognition of deferred tax benefits to the extent that the Company was able to utilize its NOL for financial reporting purposes under SFAS No. 96, "Accounting for Income Taxes." Cumulative effect of adoption of new accounting principles Effective January 1, 1993 the Company recorded the cumulative effect of adopting SFAS No. 109 (discussed above) and SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions." SFAS No. 106 requires the accrual of the estimated cost of retiree benefit payments during the years the employees provide services. Upon adoption of SFAS No. 106 the cumulative effect of the Company's accumulated obligation for providing medical benefits to retirees was $5,056,000, after a related tax benefit of $2,604,000. Included in the cumulative effects of adopting these accounting principles is the Company's portion of Guaranty National's benefit from changes in accounting principles in 1993 of $360,000, net of $185,000 of federal income taxes provided by the Company. Earnings Per Common Share Common stock and per common share data have been restated to give effect to the 5-for-4 stock splits paid on both November 15, 1993 and December 7, 1992. Primary earnings per share amounted to $3.85 in 1994, $4.69 ($3.88 before the effect of adopting new accounting principles) in 1993 and $3.35 ($3.62 before extraordinary item) in 1992. Reflected in the calculation of 1993 and 1992 earnings per common share are dividends of $409,000 and $6,358,000, respectively, on the Company's Adjustable Rate Preferred Stock, -39- (redeemed in 1993), $1.90 Preferred Stock (converted into common stock or redeemed in 1992) and $2.125 Preferred Stock (converted into common stock or redeemed in 1993). All of these conversions and redemptions were effected pursuant to the terms of the preferred stocks. The $1.90 Preferred Stock and the $2.125 Preferred Stock were assumed to be converted, if dilutive, for the purpose of computing fully-diluted earnings per common share. Fully-diluted earnings per share amounted to $3.85 in 1994, $4.67 ($3.86 before the effect of adopting new accounting principles in 1993 and $2.85 ($3.05 before extraordinary item) in 1992. Reflected in the calculation of fully-diluted earnings per share in 1993 and 1992 are Adjustable Rate Preferred Stock dividends of $407,000 and $1,581,000, respectively. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities decreased $4,375,000 to $118,779,000 in 1994 from $123,154,000 in 1993 and increased $42,621,000 in 1993 from $80,533,000 in 1992. In 1994 operating cash flow included a $10,223,000 receipt from DPIC's discontinuation of a reinsurance contract. Cash flow for 1993 included a receipt of $17,096,000 under a retrospectively rated program written by DPIC, and the benefit of an income tax overpayment of approximately $4,000,000 from 1992. Also, cash provided by operations in 1992 was decreased by an $18,410,000 payment for reinsurance applicable to a 1991 contract. Excluding these one-time items, year-to-year operating cash flows increased $6,498,000 from 1993 to 1994 and decreased $885,000 from 1992 to 1993. The increase in 1994 is primarily due to an increase in premiums collected offset by increases in paid losses, policy acquisition costs and federal income tax payments. The change in operating cash flow for 1993 is attributable to an increase in premiums collected, particularly for Connecticut Specialty, more than offset by an increase in paid losses. Cash used in investment activities decreased $38,230,000 to $86,185,000 in 1994 from $124,415,000 in 1993 and increased $65,162,000 in 1993 from $59,253,000 in 1992. Cash is used in investment activities primarily for purchases of investments, which are funded by maturities and sales of investments, as well as by the net cash remaining from positive operating cash flows after payments made to fund financing activities as described below. Cash used in financing activities increased $27,536,000 to $32,582,000 in 1994 from $5,046,000 in 1993 and decreased $16,250,000 in 1993 from $21,296,000 in 1992. Cash used in financing activities includes dividend payments, scheduled debt repayments and payments related to the Company's common stock repurchase program. Cash provided in 1993 from an increase in bank borrowings was used to fund the redemption of Orion's Adjustable Rate Preferred Stock. Dividends paid to stockholders were lower in 1994 and 1993 due to the conversions and redemptions of the $1.90 Preferred Stock and $2.125 Preferred Stock into common stock and the redemption of the Adjustable Rate Preferred Stock. Proceeds from financing activities in 1992 include $107,834,000 from the issuance of 9 1/8% Senior Notes in September 1992, $19,930,000 from the issuance of bank debt in December 1992 and proceeds of $9,497,000 from the issuance of common stock in April 1992. These sources of cash were offset by debt repayments in 1992, including repayment of the Company's bank loan and the retirement of the Company's 13 1/2% Senior Subordinated Debentures and its 12 1/2% Subordinated Debentures. -40- Orion's uses of cash consist of debt service, dividends to stockholders and overhead expenses. These cash uses are funded from existing available cash, financing transactions and receipt of dividends, reimbursement of overhead expenses and amounts in lieu of federal income taxes from Orion's insurance subsidiaries. Orion received $30,013,000, $25,512,000 and $15,645,000 in dividends, $5,735,000, $5,230,000 and $4,500,000 for overhead expenses and federal tax payments of $6,000,000, $5,600,000 and $6,250,000 from its insurance subsidiaries in 1994, 1993 and 1992, respectively. In 1993 Orion also received an extraordinary dividend of $65,470,000 (principally securities) from a California-domiciled subsidiary which was simultaneously contributed as capital to a Connecticut-domiciled subsidiary to effect a change in pooling percentages among its insurance subsidiaries. Payments of dividends by Orion's insurance subsidiaries must comply with insurance regulatory limitations concerning stockholder dividends and capital adequacy. State insurance regulators have broad discretionary authority with respect to limitations on the payment of dividends by insurance companies. Limitations under current regulations are well in excess of Orion's cash requirements. Orion's insurance subsidiaries maintain liquidity in their investment portfolios substantially in excess of that required to pay claims and expenses. The insurance subsidiaries held cash and short-term investments of $96,572,000 and $92,421,000 at December 31, 1994 and 1993, respectively. Orion's insurance subsidiaries had consolidated policyholders' surplus of $458,676,000 at December 31, 1994 and $460,986,000 at December 31, 1993, and statutory operating leverage ratios of net premiums written to policyholders' surplus of 1.6:1 and 1.4:1 at December 31, 1994 and 1993, respectively. In August 1994, Orion's shelf registration statement relating to the offering of up to $100 million of its debt and/or equity securities was declared effective by the Securities and Exchange Commission ("SEC"). The shelf registration provides for securities to be issued from time to time, with specified terms of an issue of securities set forth in a prospectus supplement at the time of issuance. The proceeds from the sale of securities may be used for general corporate purposes, including working capital, investment in subsidiaries, the repayment of existing bank debt, the repurchase of shares of common stock, or for such other purpose as may be specified in a prospectus supplement. During 1992 and 1993, Orion reconfigured its debt structure to take advantage of generally lower interest rates and the stronger capital position of the Company, and to reduce the amount of debt maturing within five years. On September 8, 1992, Orion issued 9 1/8% Senior Notes due 2002 with a face value of $110,000,000 in a public offering. The net proceeds from the offering of $107,834,000 were used to repay bank debt of $80,100,000, and to retire Orion's 13 1/2% Senior Subordinated Debentures on October 9, 1992 for $20,160,000 plus accrued interest. On November 30, 1992 Orion entered into a bridge loan facility (the "Bridge Loan") with two banks aggregating $25,000,000, under which it borrowed $20,000,000 to redeem its 12 1/2% Subordinated Debentures on December 31, 1992 for $20,500,000 plus accrued interest. In March 1993 Orion entered into a bank loan arrangement (the "Loan Agreement") that provided for initial borrowings of up to $60,000,000, consisting of a $50,000,000 term loan (reduced by $12,500,000 in scheduled -41- commitment reductions through December 31, 1994) and a $10,000,000 line of credit. These borrowings are unsecured and bear interest at or below prime. The proceeds were used to repay the Bridge Loan and to redeem Orion's Adjustable Rate Preferred Stock. In November 1994 Orion amended the Loan Agreement to increase the credit line to $30,000,000. At December 31, 1994, borrowings under the Loan Agreement amounted to $42,500,000 and the Company has available $25,000,000 in unused commitments under the line of credit. The terms of the Loan Agreement and Orion's Indenture for its 9 1/8% Senior Notes limit the amount of additional borrowings, prepayments on existing indebtedness, liens and guarantees by the Company. Management does not believe that any of these limitations unduly restrict the Company's operations or limit Orion's ability to pay dividends on its stock. At December 31, 1994 the Company was in compliance with the terms of its debt agreements. Management believes that the Company continues to have substantial sources of capital and liquidity from the capital markets and bank borrowings. On October 1, 1992 and December 21, 1992, Orion called for redemption its $1.90 Preferred Stock and $2.125 Preferred Stock on November 2, 1992 and January 21, 1993, respectively. In both cases, the market price of the shares of common stock that a holder would receive upon conversion of the preferred stock was substantially higher than the redemption price of $21.30 per share and $25.76 per share, respectively. Consequently, most holders converted into common stock prior to the redemption dates, resulting in the issuance of 2,558,173 shares of common stock prior to December 31, 1992 and 1,423,544 shares of common stock in January 1993. Holders of 2,730 shares of $1.90 Preferred Stock and 21,605 shares of $2.125 Preferred Stock, who did not elect to convert, redeemed their shares for an aggregate of $58,000 and $557,000, respectively. On April 15, 1992, Orion sold 515,625 shares of its common stock for $9,497,000, net of expenses. The sale was made in a private transaction, subject to the provisions of Regulation S of the Securities Act of 1933, as amended. The proceeds from the sale were used for general corporate purposes. The Company repurchased 442,327 shares, 177,658 shares and 22,420 shares of its common stock at an aggregate cost of $13,746,000, $5,472,000 and $554,000 in 1994, 1993 and 1992, respectively. The Company's remaining stock purchase authorization from its Board of Directors amounted to $2,135,000 at December 31, 1994. Orion and its subsidiaries are routinely engaged in litigation incidental to their businesses. Management believes that there are no significant legal proceedings pending against the Company or its subsidiaries which, net of reserves established therefor, are likely to result in judgments for amounts that are material to the financial condition, liquidity or results of operations of Orion and its consolidated subsidiaries, taken as a whole. (See also Note I to the consolidated financial statements). -42- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT The management of Orion Capital Corporation is responsible for the consolidated financial statements and the information included therein. The consolidated financial statements are fairly presented and have been prepared in accordance with generally accepted accounting principles appropriate in the circumstances, and, where necessary, include amounts based on management's informed estimates and judgments. The Company has a system of internal controls which it believes provides reasonable assurance that assets are safeguarded from loss or unauthorized use, transactions are recorded in accordance with management's policies and that the financial records are reliable for preparing financial statements. The system of internal controls includes written policies and procedures which are communicated to all appropriate personnel and updated as necessary. Compliance with the system of internal controls is continuously maintained and monitored by management. The internal audit staff of the Company evaluates and reports on the adequacy of and adherence to these controls, policies and procedures. In addition, as part of its audit of the consolidated financial statements, Deloitte & Touche LLP, the independent auditors for the Company, perform an evaluation of the system of internal controls to the extent they consider necessary to express an opinion on the consolidated financial statements. Recommendations concerning the system of internal controls are provided by both the internal auditors and Deloitte & Touche LLP, and management takes actions which are believed to be appropriate responses to these recommendations. The Audit Committee of the Board of Directors is comprised of independent directors, and has general responsibility for oversight of financial controls and audit activities of the Company and its subsidiaries. The Audit Committee, which reports to the Board, annually reviews the qualifications of the independent auditors and meets periodically with them, the internal auditors and management to review the plans and results of the audits. Both internal and independent auditors have free access to the Audit Committee, without members of management present, to discuss the adequacy of the system of internal controls and any other matters which they believe should be brought to the attention of the Committee. Alan R. Gruber Daniel L. Barry Chairman & Chief Executive Officer Vice President & Controller -43- INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders ORION CAPITAL CORPORATION New York, New York We have audited the accompanying consolidated balance sheets of Orion Capital Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a)2. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Orion Capital Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note A to the consolidated financial statements, in 1993 the Company adopted four new accounting standards required by generally accepted accounting principles. On January 1, 1993 the Company changed its method of accounting for income taxes and postretirement benefits to conform with Statement of Financial Accounting Standards Nos. 109 and 106, respectively. The Company changed its method of accounting for reinsurance to conform with Statement of Financial Accounting Standards No. 113. Also, effective December 31, 1993 the Company changed its method of accounting for investments to conform with Statement of Financial Accounting Standards No. 115. DELOITTE & TOUCHE LLP Hartford, Connecticut February 24, 1995 -44-
ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (000s omitted) ASSETS December 31, ------------------------- 1994 1993 ---- ---- Investments: Fixed maturities at amortized cost (market $358,915 - 1994 and $402,149 - 1993) .. $ 367,417 $ 384,402 Fixed maturities at market (amortized cost $565,880 - 1994 and $517,716 - 1993) ..... 530,424 548,336 Common stocks at market (cost $116,078 - 1994 and $111,325 - 1993) .......................... 141,919 139,022 Non-redeemable preferred stocks at market (cost $134,851 - 1994 and $98,986 - 1993) ..... 122,515 103,621 Other long-term investments ..................... 52,564 50,682 Short-term investments .......................... 104,201 96,473 ---------- ---------- Total investments ............................ 1,319,040 1,322,536 Cash .............................................. 6,201 6,433 Accrued investment income ......................... 17,364 17,623 Investments in and advances to affiliates ......... 108,510 111,459 Accounts and notes receivable (less allowance for doubtful accounts $1,954 - 1994 and $1,859 - 1993) .................................. 125,132 111,539 Reinsurance recoverables and prepaid reinsurance .. 336,032 393,309 Deferred policy acquisition costs ................. 70,137 57,522 Property and equipment (less accumulated depreciation $20,173 - 1994 and $19,788 - 1993).. 25,157 23,596 Excess of cost over fair value of net assets acquired (less accumulated amortization $17,586 - 1994 and $16,414 - 1993) .............. 29,415 30,587 Deferred federal income taxes ..................... 42,008 18,891 Other assets ...................................... 33,765 23,959 ---------- ---------- Total assets ................................. $2,112,761 $2,117,454 ========== ========== See Notes to Consolidated Financial Statements -45- ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (000s omitted - except for share data) LIABILITIES AND STOCKHOLDERS' EQUITY December 31, ------------------------- 1994 1993 ---- ---- Liabilities: Policy liabilities - Losses ........................................ $ 952,531 $ 937,775 Loss adjustment expenses ...................... 228,798 202,628 Unearned premiums ............................. 256,855 259,359 Policyholders' dividends ...................... 12,651 12,523 ---------- ---------- Total policy liabilities .................... 1,450,835 1,412,285 Federal income taxes payable .................... 14,829 19,294 Notes payable ................................... 152,382 160,372 Other liabilities ............................... 129,627 131,308 ---------- ---------- Total liabilities ........................... 1,747,673 1,723,259 ---------- ---------- Commitments and Contingencies (Notes H and I) Stockholders' equity: Preferred stock, authorized 5,000,000 shares - issued and outstanding - none Common stock, $1 par value; authorized 30,000,000 shares; issued 15,337,650 shares ... 15,338 15,338 Capital surplus ................................. 147,598 148,167 Net unrealized investment gains (losses), net of federal income taxes (benefit) of $(14,146) - 1994 and $18,718 - 1993 ....................... (11,498) 49,566 Net unrealized foreign exchange translation losses, net of federal income tax benefits of $553 - 1994 and $394 - 1993 ................... (3,959) (3,665) Retained earnings ............................... 242,908 198,491 Treasury stock, at cost (1,296,834 shares - 1994 and 965,442 shares - 1993) .................... (22,451) (12,182) Deferred compensation on restricted stock ....... (2,848) (1,520) ---------- ---------- Total stockholders' equity .................. 365,088 394,195 ---------- ---------- Total liabilities and stockholders' equity... $2,112,761 $2,117,454 ========== ========== See Notes to Consolidated Financial Statements -46- ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (000s omitted - except for per share data) Year Ended December 31, ------------------------------ 1994 1993 1992 ---- ---- ---- Revenues: Premiums earned ..................................... $691,223 $617,404 $560,205 Net investment income ............................... 84,915 91,803 82,483 Realized investment gains ........................... 3,437 9,478 3,667 Other income ........................................ 1,372 1,470 1,363 -------- -------- -------- Total revenues .................................... 780,947 720,155 647,718 -------- -------- -------- Expenses: Losses incurred ..................................... 386,685 366,716 332,653 Loss adjustment expenses ............................ 111,438 92,416 91,379 Amortization of deferred policy acquisition costs ... 165,108 148,440 135,670 Other insurance expenses ............................ 21,461 17,381 17,158 Dividends to policyholders .......................... 14,836 12,513 13,558 Interest expense .................................... 13,597 13,044 12,754 Other expenses ...................................... 7,862 6,527 7,826 -------- -------- -------- Total expenses .................................... 720,987 657,037 610,998 -------- -------- -------- Earnings from operations before equity in earnings of affiliates, federal income taxes, cumulative effect of adoption of new accounting principles and extraordinary item .................................. 59,960 63,118 36,720 Equity in earnings of affiliates ...................... 11,586 9,387 9,994 -------- -------- -------- Earnings from operations before federal income taxes, cumulative effect of adoption of new accounting principles and extraordinary item ................... 71,546 72,505 46,714 Federal income taxes .................................. 16,301 15,517 922 -------- -------- -------- Earnings before cumulative effect of adoption of new accounting principles and extraordinary item ........ 55,245 56,988 45,792 Cumulative effect of adoption of new accounting principles .......................................... - 11,825 - Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $60 .............. - - (2,920) -------- -------- -------- Net earnings ........................................ $ 55,245 $ 68,813 $ 42,872 ======== ======== ======== Earnings (loss) per common share: Primary - Earnings before cumulative effect of adoption of new accounting principles and extraordinary item. $ 3.85 $ 3.88 $ 3.62 Cumulative effect of adoption of new accounting principles ...................................... - .81 - Extraordinary item ................................ - - (.27) -------- -------- -------- Net earnings .................................... $ 3.85 $ 4.69 $ 3.35 ======== ======== ======== Fully diluted - Earnings before cumulative effect of adoption of new accounting principles and extraordinary item. $ 3.85 $ 3.86 $ 3.05 Cumulative effect of adoption of new accounting principles ...................................... - .81 - Extraordinary item ................................ - - (.20) -------- -------- -------- Net earnings .................................... $ 3.85 $ 4.67 $ 2.85 ======== ======== ======== See Notes to Consolidated Financial Statements -47- ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (000s omitted) Year Ended December 31, ------------------------------ 1994 1993 1992 ---- ---- ---- Convertible exchangeable preferred stock: Balance, beginning of year ................ $ - $ 28,524 $ 58,576 Conversion of preferred stock ............. - (28,524) (30,052) -------- -------- -------- Balance, end of year ...................... $ - $ - $ 28,524 ======== ======== ======== Common stock: Balance, beginning of year ................ $ 15,338 $ 11,110 $ 7,527 Conversion of preferred stock ............. - 1,139 1,667 Sale of common stock ...................... - - 330 Exercise of stock options and issuance of restricted stock ........................ - 24 14 Stock issued in 5-for-4 stock splits ...... - 3,065 1,572 -------- -------- -------- Balance, end of year ...................... $ 15,338 $ 15,338 $ 11,110 ======== ======== ======== Capital surplus: Balance, beginning of year ................ $148,167 $124,754 $ 96,345 Redemptions and conversions of preferred stock ................................... - 26,072 28,118 Sale of common stock ...................... - - 9,167 Exercise of stock options and issuance of restricted stock ..................... (569) 406 1,153 Stock issued in 5-for-4 stock splits ...... - (3,065) (10,029) -------- -------- -------- Balance, end of year ...................... $147,598 $148,167 $124,754 ======== ======== ======== Net unrealized investment gains (losses): Balance, beginning of year ................ $ 49,566 $ 18,815 $ (6,324) Cumulative effect of adoption of new accounting principle, net of taxes of $11,157 .............................. - 20,720 - Change in unrealized investment gains (losses), net of taxes in 1994 and 1993.. (61,064) 10,031 25,139 -------- -------- -------- Balance, end of year ...................... $(11,498) $ 49,566 $ 18,815 ======== ======== ======== Net unrealized foreign exchange translation gains (losses): Balance, beginning of year ................ $ (3,665) $ (2,918) $ 191 Change in unrealized foreign exchange translation gains (losses), net of taxes in 1994 and 1993 ........................ (294) (747) (3,109) -------- -------- -------- Balance, end of year ...................... $ (3,959) $ (3,665) $ (2,918) ======== ======== ======== Retained earnings: Balance, beginning of year ................ $198,491 $139,947 $110,074 Net earnings .............................. 55,245 68,813 42,872 Dividends declared ........................ (10,828) (10,269) (12,999) -------- -------- -------- Balance, end of year ...................... $242,908 $198,491 $139,947 ======== ======== ======== Treasury stock: Balance, beginning of year ................ $(12,182) $ (6,694) $(15,267) Exercise of stock options and issuance (cancellation) of restricted stock ...... 3,476 (15) 671 Acquisition of treasury stock ............. (13,745) (5,473) (555) Stock issued in 5-for-4 stock split ....... - - 8,457 -------- -------- -------- Balance, end of year ...................... $(22,451) $(12,182) $ (6,694) ======== ======== ======== Deferred compensation on restricted stock: Balance, beginning of year ................ $ (1,520) $ (2,251) $ (1,293) Issuance of restricted stock .............. (2,247) (108) (1,438) Amortization of deferred compensation on restricted stock ........................ 919 839 480 -------- -------- -------- Balance, end of year ...................... $ (2,848) $ (1,520) $ (2,251) ======== ======== ======== See Notes to Consolidated Financial Statements -48- ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (000s omitted) Year Ended December 31, ---------------------------------- 1994 1993 1992 ---- ---- ---- Cash flows from operating activities: Premiums collected ........................ $ 696,735 $ 626,678 $ 540,437 Net investment income collected ........... 83,603 81,178 72,168 Losses and loss adjustment expenses paid .. (437,386) (374,625) (346,201) Policy acquisition costs paid ............. (185,217) (162,717) (153,246) Dividends paid to policyholders ........... (14,708) (13,150) (11,728) Interest paid ............................. (12,931) (12,405) (11,032) Federal income tax payments ............... (10,860) (7,100) (6,805) Other payments ............................ (457) (14,705) (3,060) --------- --------- --------- Net cash provided by operating activities ............................ 118,779 123,154 80,533 --------- --------- --------- Cash flows from investing activities: Maturities of fixed maturities ............ - 152,442 118,301 Maturities of fixed maturities held-to-maturity ........................ 55,200 - - Maturities of fixed maturities available-for-sale ...................... 28,839 - - Sales of fixed maturities ................. - 90,720 189,282 Sale of fixed maturity held-to-maturity ... 1,155 - - Sales of fixed maturities available-for-sale ...................... 88,804 - - Sales of equity securities................. 49,881 91,144 89,799 Investments in fixed maturities ........... - (311,183) (442,633) Investments in fixed maturities held-to-maturity ........................ (53,230) - - Investments in fixed maturities available-for-sale ...................... (156,927) - - Investments in equity securities .......... (84,582) (120,609) (110,571) Investment in Intercargo Corporation ...... - (19,315) - Net sales (purchases) of short-term investments ............................. (7,505) 8,885 105,662 Other payments ............................ (7,820) (16,499) (9,093) --------- --------- --------- Net cash used in investing activities ... (86,185) (124,415) (59,253) --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of notes payable ... - 59,672 127,764 Proceeds from issuance of common stock .... 598 286 9,545 Repayment of notes payable and debentures.. (8,000) (29,500) (144,998) Dividends paid to stockholders ............ (10,609) (10,776) (13,155) Purchases of common stock and purchases and redemption of adjustable rate preferred stock ......................... (14,220) (23,615) (412) Other payments ........................... (351) (1,113) (40) --------- --------- --------- Net cash used in financing activities ... (32,582) (5,046) (21,296) --------- --------- --------- Effect of foreign exchange rate changes on cash ................................... (244) (24) 2 --------- --------- --------- Net decrease in cash .................... (232) (6,331) (14) Cash balance, beginning of year ............. 6,433 12,764 12,778 --------- --------- --------- Cash balance, end of year ................... $ 6,201 $ 6,433 $ 12,764 ========= ========= ========= See Notes to Consolidated Financial Statements -49- ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued) (000s omitted) Year Ended December 31, ------------------------------ 1994 1993 1992 ---- ---- ---- Reconciliation of net earnings to net cash provided by operating activities: Net earnings ................................. $ 55,245 $ 68,813 $ 42,872 -------- -------- -------- Adjustments: Cumulative effect of adoption of new accounting principles .................... - (11,825) - Depreciation and amortization .............. 4,936 3,939 2,970 Amortization of excess of cost over fair value of net assets acquired ............. 1,172 1,173 1,173 Deferred federal income taxes .............. 9,906 (931) (5,182) Amortization of fixed maturity investments . 1,700 128 (659) Non-cash investment income ................. (2,840) (11,586) (6,378) Equity in earnings of affiliates ........... (11,586) (9,387) (9,994) Dividends received from affiliates ......... 3,295 3,135 3,072 Realized investment gains .................. (3,437) (9,478) (3,667) Foreign exchange translation adjustment .... 257 152 (73) Extraordinary loss ......................... - - 2,920 Other....................................... (38) (34) - Changes in assets and liabilities: Decrease (increase) in accrued investment income ................................... 259 492 (1,550) Increase in accounts and notes receivable .. (13,593) (9,298) (6,245) Decrease (increase) in reinsurance recoverables and prepaid reinsurance ..... 57,277 21,326 (7,402) Decrease (increase) in deferred policy acquisition costs ........................ (12,615) (1,388) 2,737 Increase in other assets ................... (7,589) (431) (861) Increase in losses ......................... 14,756 52,695 47,043 Increase in loss adjustment expenses ....... 26,170 6,312 23,414 Increase (decrease) in unearned premiums ... (2,504) 27,043 25,634 Increase (decrease) in policyholders' dividends ................................ 128 (637) 1,830 Increase (decrease) in federal income taxes payable .................................. (4,465) 9,242 944 Increase (decrease) in other liabilities ... 2,345 (16,301) (32,065) -------- -------- -------- Total adjustments and changes ............ 63,534 54,341 37,661 -------- -------- -------- Net cash provided by operating activities .. $118,779 $123,154 $ 80,533 ======== ======== ======== See Notes to Consolidated Financial Statements -50- /TABLE ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992 Note A - Significant Accounting Policies Basis of Financial Statement Presentation - Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries (collectively the "Company") operate principally in the property and casualty insurance business. The consolidated financial statements and notes thereto are presented in accordance with generally accepted accounting principles ("GAAP") for property and casualty insurance companies and include the accounts of Orion and its majority-owned subsidiaries. The Company's investments in unconsolidated affiliates are accounted for using the equity method (See Note B). All material intercompany balances and transactions have been eliminated. Adoption of new accounting principles - In 1993 the Company adopted four new accounting standards issued by the Financial Accounting Standards Board, which had a significant impact on the Company's financial statements. The Company was required to adopt these standards, which are more fully discussed in the notes that follow: SFAS No. 106 - Employers' Accounting for Postretirement Benefits Other Than Pensions SFAS No. 109 - Accounting for Income Taxes SFAS No. 113 - Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts SFAS No. 115 - Accounting for Certain Investments in Debt and Equity Securities Regulation - The Company's insurance subsidiaries are subject to comprehensive regulation by various state insurance departments including regulations limiting dividend payments to Orion and intercompany transactions. Under these regulations, the maximum dividends permitted at December 31, 1994 for the ensuing twelve months, without prior approval, aggregated $52,377,000. However, state insurance regulators have broad discretionary authority with respect to approving the payment of dividends by insurance companies. Policyholders' surplus of Orion's wholly-owned insurance subsidiaries determined in accordance with prescribed statutory accounting practices amounted to $458,676,000 at December 31, 1994 and $460,986,000 at December 31, 1993. Statutory net income amounted to $61,518,000, $66,862,000 and $43,733,000 for 1994, 1993 and 1992, respectively. Cash - For purposes of the consolidated statement of cash flows, the Company considers only demand deposit accounts to be cash. -51- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Investments - Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which establishes the "available- for-sale" category of investment securities and requires such securities to be recorded at market value, with unrealized gains and losses reported in a separate component of stockholders' equity. As a result of the adoption of this standard on December 31, 1993, the Company reclassified investments with a market value of $452,102,000 from fixed maturities recorded at amortized cost to fixed maturities recorded at market, and increased unrealized appreciation on investments, a component of stockholders' equity, by $20,720,000, net of deferred income taxes. Fixed maturity investments include bonds, preferred stocks with mandatory redemption features, and certificates of deposit that mature more than one year after the balance sheet date. Fixed maturity investments that the Company has both the positive intent and the ability to hold to maturity are recorded at amortized cost. Fixed maturity investments which may be sold in response to, among other things, changes in interest rates, prepayment risk, income tax strategies or liquidity needs, are classified as `available-for-sale' and are carried at market value. Common stocks and non-redeemable preferred stocks are stated at market value. Fluctuations in the market value of these equity securities are recorded as unrealized investment gains or losses and credited or charged to stockholders' equity. Other long-term investments include equity ownership interests in limited partnerships which are recorded using the equity method of accounting, and mortgage loans which are stated at their unpaid balance. Short-term investments include certificates of deposit and commercial paper which mature within one year of the balance sheet date, money market accounts and United States Treasury Bills. Estimates of market values are generally based on quoted market prices or dealer quotes, if available, or otherwise on an evaluation of the issuers' financial statements. Realized investment gains and losses, including provision for other than temporary impairment of investment securities, are recognized on the specific identification method. Deferred Policy Acquisition Costs - Costs that vary with, and are directly related to, the production of new and renewal business are deferred and amortized as the related premiums are earned. The test for recoverability of such deferred costs includes the consideration of net investment income. Excess of Cost Over Fair Value of Net Assets Acquired - The excess of the cost of acquiring subsidiaries over the fair value of their net assets ("goodwill") is amortized on a straight-line basis over periods of 25 to 40 years. Revenue Recognition - Premiums are earned on a daily pro rata basis over the policy period. A provision is made for anticipated retrospective premium adjustments and audit premiums. Direct and assumed premiums are reduced for reinsurance ceded to other insurers. -52- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Policy Liabilities and Reinsurance - Loss and loss adjustment expense liabilities are established in consideration of individual cases for reported losses and past experience for incurred but not yet reported losses ("IBNR"). The Company adopted SFAS No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" on January 1, 1993. The statement establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance, and amends SFAS No. 60, "Accounting and Reporting by Insurance Enterprises", to require reinsurance receivables and prepaid reinsurance premiums to be reported as assets rather than to be offset against the related liabilities. Estimated reinsurance receivables are recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts. At December 31, 1994 and 1993, approximately $55,986,000 and $73,215,000, respectively, of long-term disability workers compensation loss reserves are included in the consolidated financial statements at net present value using a statutory interest rate of 3.5%. Policyholders' dividends on participating policies are accrued at estimated payment rates as the related premiums are earned. Participating business represented 21% of premiums in-force at both December 31, 1994 and 1993. As a percent of premiums earned, participating business amounted to 21% in 1994 and 1993, and 28% in 1992. Federal Income Taxes - As of January 1, 1993 the Company prospectively adopted SFAS No. 109, "Accounting for Income Taxes," replacing the previous standard for accounting for income taxes, SFAS No. 96. The objectives of SFAS No. 109 are to recognize taxes payable or refundable for the current year, and deferred tax assets or liabilities for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The new standard provides for the recognition of deferred tax assets that were not recognized under SFAS No. 96, and resulted in the recognition of a cumulative tax benefit of $16,881,000 ($1.16 per share) in the Company's consolidated statement of earnings for the year ended December 31, 1993. Postretirement Benefits - Effective January 1, 1993 the Company adopted SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" which requires the Company to accrue the estimated cost of retiree benefits during the years the employees provide services. The Company previously expensed the cost of medical benefits provided to retirees as they were paid. The cumulative effect of adopting SFAS No. 106 as of January 1, 1993 was a decrease in net earnings of $5,056,000 ($.35 per share), after a tax benefit of $2,604,000, which has been included in the Company's consolidated statement of earnings for the year ended December 31, 1993. Stock Splits - Common stock and per common share data have been restated, as required, to give effect to the 5-for-4 stock splits paid on November 15, 1993 to stockholders of record on October 15, 1993 and on December 7, 1992 to stockholders of record on November 20, 1992. Earnings Per Common Share - Primary and fully-diluted earnings per common share are computed using the weighted average common and dilutive common equivalent shares outstanding. -53- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note B - Investments in Affiliates On November 20, 1991 the Company sold 6,250,000 shares of common stock of its wholly-owned subsidiary, Guaranty National Corporation ("Guaranty National"), in a public offering, and reduced its ownership to slightly less than fifty percent. Just prior to the sale, Guaranty National issued 9 1/2% subordinated notes, with a final maturity in January 1998, to the Company aggregating $20,896,000. The principal of the notes was refinanced on August 1, 1993 at 7.85%, with the terms extended to semi-annual installments beginning January 1, 1998 through July 1, 2003. During 1994 Guaranty National purchased 319,600 shares of its common stock in the open market and 139,600 shares were purchased from the Company to maintain the Company's ownership percentage at just under fifty percent. On September 13, 1993 the Company acquired 700,000 shares of common stock of Intercargo Corporation ("Intercargo"), a publicly held corporation. On December 28, 1993 the Company purchased an additional 826,484 shares which increased its ownership of Intercargo to 20.0%. The aggregate purchase price, including expenses, was $19,314,000. The excess of cost over the fair value of the underlying equity in net assets acquired was $11,158,000, which is being amortized over a 25 year period. The Company's financial statements include the portion of Guaranty National's and Intercargo's results attributable to the Company's ownership on an equity accounting basis. The Company records its share of Intercargo's operating results in the subsequent quarter, after Intercargo has reported its financial results. The Company's share of the undistributed earnings of Guaranty National after November 20, 1991, and Intercargo after September 13, 1993, were, in the aggregate, $22,874,000 as of December 31, 1994 and $14,926,000 as of December 31, 1993. Transactions with Guaranty National for 1994, 1993 and 1992 reported in the consolidated statement of earnings include interest income on the subordinated notes of $1,640,000, $1,843,000 and $2,004,000, investment management fee income of $550,000, $550,000 and $700,000, respectively, and interest expense on a mortgage participation loan of $407,000 in each year. -54-
ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Summarized financial information for the Company's affiliates is set forth below: Year Ended December 31, ------------------------------ 1994 1993 1992 ---- ---- ---- (000s omitted) Revenues: Premiums earned ...................... $376,444 $272,636 $220,033 Realized investment gains ............ 3,007 5,996 2,342 Investment and other income .......... 28,090 21,813 23,125 -------- -------- -------- 407,541 300,445 245,500 -------- -------- -------- Expenses: Insurance expenses ................... 367,501 274,377 214,927 Interest and other ................... 5,428 3,447 3,241 -------- -------- -------- 372,929 277,824 218,168 -------- -------- -------- Earnings before federal income taxes and cumulative effect of change in accounting principles ................ 34,612 22,621 27,332 Federal income taxes ................... 8,734 4,481 7,061 -------- -------- -------- Earnings before cumulative effect of change in accounting principles .... $ 25,878 $ 18,140 $ 20,271 ======== ======== ======== The Company's proportionate share: Earnings before cumulative effect of change in accounting principles .... $ 11,586 $ 9,387 $ 9,994 ======== ======== ======== Cumulative effect of change in accounting principles (SFAS Nos. 106 and 109) ............ $ 545 ======== December 31, ------------------- 1994 1993 ---- ---- (000s omitted) Cash and investments ................................. $461,203 $460,779 Other assets ......................................... 268,872 228,803 -------- -------- 730,075 689,582 Policy liabilities ................................... (426,997) (387,783) Notes payable ........................................ (56,383) (49,844) Other liabilities .................................... (62,405) (60,915) -------- -------- Stockholders' equity ................................. $184,290 $191,040 ======== ======== -55- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, ------------------- 1994 1993 ---- ---- (000s omitted) The Company's investment in and advances to affiliates were as follows: Book value ......................................... $108,510 $111,459 Market value ....................................... 138,786 143,255 Guaranty National shares held ...................... 6,004 6,143 - Book value of shares held ...................... $ 72,564 $ 75,394 - Market value of shares held .................... 110,320 107,510 Intercargo shares held ............................. 1,526 1,526 - Book value of shares held ...................... $ 18,750 $ 18,869 - Market value of shares held .................... 12,593 17,936 Note C - Investments Net investment income for the three years ended December 31, 1994 was as follows: Year Ended December 31, --------------------------------- 1994 1993 1992 ---- ---- ---- (000s omitted) Net investment income: Fixed maturities ...................... $ 67,305 $ 69,565 $ 63,739 Equity securities ..................... 14,964 10,495 9,842 Other long-term investments ........... 685 9,130 3,499 Short-term investments ................ 2,902 3,276 5,919 Accounts and notes receivable ......... 134 179 105 Other ................................. 411 712 467 -------- -------- -------- Total investment income ............. 86,401 93,357 83,571 Less investment expenses .............. 1,486 1,554 1,088 -------- -------- -------- Net investment income ............... $ 84,915 $ 91,803 $ 82,483 ======== ======== ======== -56- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Certain information concerning realized and unrealized gains (losses) for fixed maturities and equity securities is set forth below: Year Ended December 31, --------------------------------- 1994 1993 1992 ---- ---- ---- (000s omitted) Fixed maturities (only available-for-sale securities for 1994) Gross realized gains .................. $ 4,774 $ 10,817 $ 10,273 Gross realized losses ................. (4,267) (4,155) (4,908) Provision for other than temporary impairment .......................... (750) (2,147) (2,133) $ (243) $ 4,515 $ 3,232 ======== ======== ======== Change in unrealized gains (losses) recorded in stockholders equity ..... $(66,076) $ 29,131 $ 1,489 ======== ======== ======== Equity securities Gross realized gains .................. $ 5,319 $ 15,163 $ 8,394 Gross realized losses ................. (1,474) (3,890) (2,530) Provision for other than temporary impairment .......................... (381) (6,310) (5,429) $ 3,464 $ 4,963 $ 435 ======== ======== ======== Change in unrealized gains (losses) recorded in stockholders equity ..... $(18,827) $ 16,468 $ 22,584 ======== ======== ======== In 1994 the Company transferred securities of two issuers with an amortized cost of $11,469,000 and a market value of $10,122,000 from the held- to-maturity portfolio to the available-for-sale category due to a deterioration in the creditworthiness of these issuers. The Company sold only one security with an amortized cost of $991,000 from the held-to-maturity portfolio during 1994, resulting in a realized gain of $164,000. -57- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The amortized cost and estimated market values of investments in fixed maturities, equity securities and short-term investments are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Market December 31, 1994 Cost Gains Losses Value - ----------------- ---------- ---------- ---------- --------- (000s omitted) Held-to-maturity securities: United States Government and government agencies and authorities ........... $ 124,176 $ 242 $ (4,084) $ 120,334 States, municipalities and political subdivisions .... 137,736 1,848 (3,062) 136,522 Foreign governments ......... 50 - - 50 Corporate securities ........ 105,455 1,020 (4,466) 102,009 ---------- -------- -------- ---------- $ 367,417 $ 3,110 $(11,612) $ 358,915 ========== ======== ======== ========== Available-for-sale securities: United States Government and government agencies and authorities ........... $ 168,022 $ 1,016 $(18,083) $ 150,955 States, municipalities and political subdivisions .... 180,145 955 (5,738) 175,362 Foreign governments ......... 7,678 113 (133) 7,658 Corporate securities ........ 193,909 2,884 (15,553) 181,240 Mortgage-backed securities (exclusive of government agencies) ................ 16,126 102 (1,019) 15,209 Equity securities ........... 250,929 37,345 (23,840) 264,434 Short-term investments....... 104,201 - - 104,201 ---------- -------- -------- ---------- $ 921,010 $ 42,415 $(64,366) $ 899,059 ========== ======== ======== ========== December 31, 1993 - ----------------- Held-to-maturity securities: United States Government and government agencies and authorities ........... $ 140,784 $ 8,224 $ (627) $ 148,381 States, municipalities and political subdivisions .... 123,852 7,528 (202) 131,178 Foreign governments ......... 7,270 308 - 7,578 Corporate securities ........ 112,496 3,704 (1,188) 115,012 ---------- -------- -------- ---------- $ 384,402 $ 19,764 $ (2,017) $ 402,149 ========== ======== ======== ========== Available-for-sale securities: United States Government and government agencies and authorities ........... $ 145,511 $ 10,156 $ (4,573) $ 151,094 States, municipalities and political subdivisions .... 144,839 15,183 (180) 159,842 Foreign governments ......... 7,381 923 - 8,304 Corporate securities ........ 175,853 10,540 (2,126) 184,267 Mortgage-backed securities (exclusive of government agencies) ................ 44,132 1,020 (323) 44,829 Equity securities ........... 210,311 38,568 (6,236) 242,643 Short-term investments....... 96,473 - - 96,473 ---------- -------- -------- ---------- $ 824,500 $ 76,390 $(13,438) $ 887,452 ========== ======== ======== ========== -58- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The amortized cost and estimated market values of fixed maturity and short-term investments at December 31, 1994, by contractual fiscal maturity, are shown below. Expected maturities will differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties. Fixed Maturities Fixed Maturities Held-to-Maturity Available-for-Sale -------------------- -------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value --------- --------- --------- --------- (000s omitted) Due in one year or less .......... $ 16,590 $ 16,648 $107,470 $107,074 Due after one year through five years .......................... 191,684 186,080 55,991 53,012 Due after five years through ten years .......................... 59,973 58,773 83,234 80,088 Due after ten years .............. 99,170 97,414 253,651 242,618 -------- -------- -------- -------- 367,417 358,915 500,346 482,792 Mortgage-backed securities ....... - - 169,735 151,833 -------- -------- -------- -------- $367,417 $358,915 $670,081 $634,625 ======== ======== ======== ========
Other long-term investments had aggregate carrying values of $52,564,000 at December 31, 1994 and $50,682,000 at December 31, 1993 including mortgage loans on real estate of $1,764,000 and $1,690,000, respectively. Estimated market values of mortgage loans and other long-term investments approximate their carrying values. The carrying value of the Company's investments in principal-only securities and interest-only securities totalled approximately $14,038,000, or 1.1% of total invested assets at December 31, 1994. The Company does not have any derivative financial instruments and does not actively engage in hedging its investment positions or its foreign currency and/or interest rate exposures. The carrying value of securities on deposit with state regulatory authorities in accordance with statutory requirements totalled $234,265,000 and $283,537,000 at December 31, 1994 and 1993, respectively. Excluding investments in Guaranty National and securities of the United States Government and its agencies, the Company did not have any investments in securities of any one issuer that exceeded $20,000,000. The Company had $1,344,000 and $226,000 of fixed maturity investments for which it was not accruing income for the years ended December 31, 1994 and 1993, respectively. -59- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note D - Reinsurance In the normal course of business, the Company's insurance subsidiaries reinsure certain risks, generally on an excess-of-loss or pro rata basis, with other companies in order to limit losses. Reinsurance does not discharge the primary liability of the original insurer. As of December 31, 1994 and 1993, recoverables for reinsurance ceded to the Company's three largest reinsurers were an aggregate of $82,679,000 and $106,414,000, respectively. At December 31, 1994 and 1993, these reinsurers provided qualified trust accounts for the benefit of the Company of $43,526,000 and $46,167,000 and letters of credit totalling $1,770,000 and $4,372,000, respectively. The table below illustrates the effect of reinsurance on premiums written and premiums earned:
Year Ended December 31, ------------------------------------- 1994 1993 1992 ---- ---- ---- (000s omitted-except for percentages) Direct premiums written ................ $ 691,493 $ 647,426 $ 616,016 Reinsurance assumed .................... 120,851 132,702 74,726 --------- --------- --------- Gross premiums written ................. 812,344 780,128 690,742 Reinsurance ceded ...................... (100,289) (144,542) (123,312) --------- --------- --------- Net premiums written ................... $ 712,055 $ 635,586 $ 567,430 ========= ========= ========= Percentage of amount assumed to net .... 17.0% 20.9% 13.2% ========= ========= ========= Direct premiums earned ................. $ 685,110 $ 635,374 $ 589,570 Reinsurance assumed .................... 129,737 117,711 75,540 --------- --------- --------- Gross premiums earned .................. 814,847 753,085 665,110 Reinsurance ceded ...................... (123,624) (135,681) (104,905) --------- --------- --------- Net premiums earned .................... $ 691,223 $ 617,404 $ 560,205 ========= ========= ========= Loss and loss adjustment expenses incurred recoverable from reinsurers.. $ 56,778 $ 70,297 $ 75,521 ========= ========= =========
Reinsurance recoverables and prepaid reinsurance includes prepaid reinsurance of $31,708,000 at December 31, 1994 and $55,043,000 at December 31, 1993. -60- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note E - Loss and Loss Adjustment Expense Reserves An analysis of the Company's calendar year loss and loss adjustment expense reserves is summarized as follows:
Year Ended December 31, ------------------------------------- 1994 1993 1992 ---- ---- ---- (000s omitted) Net balance, beginning of year ....... $ 830,805 $ 746,298 $ 668,467 ---------- ---------- ---------- Provision: Current year ....................... 480,826 434,840 397,551 Prior years ........................ 17,297 24,292 26,481 ---------- ---------- ---------- 498,123 459,132 424,032 ---------- ---------- ---------- Payments: Current year ....................... 134,120 125,042 105,883 Prior years ........................ 303,266 249,583 240,318 ---------- ---------- ---------- 437,386 374,625 346,201 ---------- ---------- ---------- Net balance, end of year ............. 891,542 830,805 746,298 Add reinsurance recoverables ....... 289,787 309,598 335,098 ---------- ---------- ---------- Balance, end of year ................. $1,181,329 $1,140,403 $1,081,396 ========== ========== ==========
Loss reserve estimates are based on forecasts of the ultimate settlement of claims and are subject to uncertainty with respect to future events. Loss reserve amounts are based on management's informed estimates and judgments, using data currently available. Reserve amounts and the underlying actuarial factors and assumptions are regularly analyzed and adjusted to reflect new information. A substantial portion of the loss development experienced by the Company during the three years ended December 31, 1994 results from pools and associations and other reinsurance, where development is related to the ceding companies' experience, and from discontinued programs or lines of business. Reserve strengthening, higher initial reserving and increased stabilization in the Company's business has resulted in a decreasing level of loss development. An analysis of the Company's loss and loss adjustment expense environmental reserves and related claim counts for 1994 and 1993 is presented below: -61- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended December 31, ---------------------------------- 1994 1993 --------------- --------------- Claim Claim Amount Counts Amount Counts ------ ------ ------ ------ (000s omitted for dollar amounts) Net balance, beginning of year ........ $17,189 512 $15,184 335 Provision ........................... 10,645 7,562 Payments ............................ (7,233) (5,557) ------- ------- Net balance, end of year .............. 20,601 467 17,189 512 Add reinsurance recoverables ........ 11,391 4,699 ------- ------- Balance, end of year .................. $31,992 $21,888 ======= =======
Establishing reserve liabilities for environmental claims is subject to significant uncertainties that make reserve estimation difficult. Legal decisions have tended to expand insurance coverage beyond the intent of the original policies. The Company does not use discounting in determining its reserves for environmental claims. IBNR of $13,791,000 and $6,680,000 is included in net reserves for environmental claims at December 31, 1994 and 1993, respectively. The Company's environmental claims principally relate to asbestos and hazardous waste, arising from certain liability business written prior to the mid 1980's, which business was never a major element of the Company's operations. Environmental claims are also received from certain reinsurance pools and associations where reserves are established based on information reported to the Company by the managers of those pools and associations. In view of the lines of insurance that the Company has traditionally written, environmental claims have not represented, and are not expected to represent in the future, a material portion of the Company's total claims. Such claims were not specifically segregated in the Company's claims systems prior to 1993. The information above is not presented for 1992 due to the relative insignificance of the Company's exposure to environmental liability and the cost of obtaining the data. -62- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note F - Notes Payable Orion issued 9 1/8% Senior Notes due 2002 (the "9 1/8% Senior Notes") in a public offering on September 8, 1992. The proceeds were used to extinguish the Company's debt under its loan agreement with various banks at that date, and to redeem its 13 1/2% Senior Subordinated Debentures on October 9, 1992. The Company entered into a loan agreement (the "Bridge Loan") with two banks on November 30, 1992, and borrowed $20,000,000 under this agreement in December 1992, the proceeds of which were used to redeem the Company's 12 1/2% Subordinated Debentures on December 31, 1992. The costs of the early extinguishment of the Company's bank debt and debentures in 1992 were approximately $2,980,000. These costs are reported as an extraordinary item in the Company's financial statements, net of a $60,000 tax benefit. Debt extinguishment costs include the premiums required to call the debentures, the unamortized discount of the debentures and unamortized deferred financing costs of the debentures and bank debt. Orion entered into a bank loan agreement (the "Loan Agreement") in March 1993 which was amended in 1994 to increase the credit line. The proceeds were used to repay the Bridge Loan and to redeem the Company's Adjustable Rate Preferred Stock. As of December 31, 1994, the Company had $42,500,000 outstanding under the Loan Agreement, and $25,000,000 in unused commitments available under the line of credit. There is a commitment fee of 1/4% of 1% per annum on the unused portion of the revolving credit facility. The Company can elect to borrow at the prime rate, or at certain other short-term borrowing rates. The rates for notes payable under the Loan Agreement were between 6.71% and 6.90% at December 31, 1994 and between 4.59% and 4.90% at December 31, 1993. The terms of the Loan Agreement limit the amount of additional borrowings, prepayments on existing indebtedness, liens and guarantees by the Company, and require the Company to meet minimum net worth and certain financial ratio tests. The 9 1/8% Senior Notes Indenture limits the Company's ability to incur secured indebtedness without equally and ratably securing the 9 1/8% Senior Notes. Notes payable are recorded at face value less unamortized discount. The carrying value and estimated market value of notes payable consists of the following:
Estimated Carrying Value Market Value ------------------ ------------------ December 31, 1994 1993 1994 1993 ------------ ---- ---- ---- ---- (000s omitted) Borrowings under loan agreement with various banks (various interest rates) .............. $ 42,500 $ 50,500 $ 42,500 $ 50,500 $110,000,000 face amount, 9 1/8% Senior Notes, due September 1, 2002 ....................... 109,882 109,872 111,815 119,053 -------- -------- -------- -------- $152,382 $160,372 $154,315 $169,553 ======== ======== ======== ======== -63- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company's debt is scheduled to be repaid as follows: (000s omitted) 1995 ................................... $ 10,000 1996 ................................... 12,000 1997 ................................... 12,000 1998 ................................... 3,500 1999 ................................... 5,000 2002 ................................... 110,000 -------- 152,500 Less unamortized discount .............. 118 -------- $152,382 ========
Note G - Federal Income Taxes Orion and its wholly-owned subsidiaries file consolidated federal income tax returns. The consolidated federal income tax current provision for 1994 was based on the alternative minimum tax method. The current provisions for 1993 and 1992 were computed by the regular tax method. The 1993 tax provision reflects a tax benefit of $450,000 from the effect of the increase in the federal tax rate on the Company's deferred tax asset. The Company adopted SFAS No. 109 effective January 1, 1993. The new standard provides for the recognition of deferred tax assets that were not recognized under the prior standard, SFAS No. 96. The cumulative effect of adopting SFAS No. 109 was a benefit of $16,881,000. Substantially all federal income taxes incurred by the Company and its subsidiaries relate to domestic operations.
Total income taxes on income from operations and allocations of taxes (benefits) to other items for the years ended December 31, 1994 and 1993 are as follows: Year Ended December 31, ----------------------- 1994 1993 ---- ---- (000s omitted) Taxes on income from continuing operations .................................... $ 16,301 $ 15,517 Taxes allocated to other items: Cumulative effect of change in accounting for postretirement benefits ..................... - (2,604) Stockholders' equity, for unrealized appreciation (depreciation) of securities ... (32,864) 18,718 Stockholders' equity, for foreign exchange translation losses .......................... (159) (394) -------- -------- $(16,722) $ 31,237 ======== ======== -64- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The tax effects of the temporary differences comprising the Company's net deferred tax asset as of December 31, 1994 and 1993 are as follows: December 31, ---------------------- 1994 1993 ---- ---- (000s omitted) Deferred tax assets: Loss reserve discounting ...................... $52,940 $55,479 Unearned premium reserves ..................... 16,145 14,675 Policyholders' dividends ...................... 4,188 4,348 Realized investment losses .................... 3,672 4,054 Unrealized investment losses .................. 8,975 - Deferred income ............................... 2,659 2,836 Retiree medical benefits ...................... 3,097 2,726 Other ......................................... 8,426 6,717 ------- ------- 100,102 90,835 ------- ------- Deferred tax liabilities: Deferred policy acquisition costs ............. 24,548 20,133 Investment in affiliates ...................... 19,091 15,800 Investment income ............................. 10,375 6,853 Unrealized investment gains ................... - 23,899 Other ......................................... 4,080 5,259 ------- ------- 58,094 71,944 ------- ------- $42,008 $18,891 ======= ======= The components of the provision (benefit) for federal income taxes are as follows: Year Ended December 31, ----------------------------- 1994 1993 1992 ---- ---- ---- (000s omitted) Current ...................... $ 6,395 $16,448 $ 6,104 Deferred .................... 9,906 (931) (5,182) ------- ------- ------- $16,301 $15,517 $ 922 ======= ======= ======= -65- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A reconciliation of expected federal income tax expense on pre-tax earnings before cumulative effect of adoption of new accounting principles and extraordinary item at regular corporate rates to actual tax expense is as follows: Year Ended December 31, ------------------------------------------------ 1994 1993 1992 ---- ---- ---- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- (000s omitted-except for percentages) Expected income tax expense.. $25,041 35.0% $25,377 35.0% $15,883 34.0% Utilization of NOLs ......... - - - - (6,135) (13.1) Change in enacted tax rate .. - - (905) (1.3) - - Dividends-received deduction (5,830) (8.2) (4,019) (5.5) (3,504) (7.5) Tax-exempt interest ......... (5,362) (7.5) (4,929) (6.8) (2,652) (5.7) Amortization of goodwill .... 410 .6 410 .6 399 .9 Other ....................... 2,042 2.9 (417) (.6) (3,069) (6.6) ------- ----- ------- ----- ------- ----- Actual income tax expense ... $16,301 22.8% $15,517 21.4% $ 922 2.0% ======= ===== ======= ===== ======= =====
Note H - Commitments Minimum lease commitments at December 31, 1994, with the majority having initial lease periods from one to twenty-five years, are as follows: (000s omitted) 1995 ....................................... $10,894 1996 ....................................... 9,072 1997 ....................................... 7,951 1998 ....................................... 5,725 1999 ....................................... 4,960 2000 and thereafter ........................ 40,983 ------- Minimum rental commitments ............... $79,585 ======= Rent expense amounted to $11,519,000, $11,976,000 and $12,224,000 net of sublease rentals of $9,000, $419,000 and $765,000 in 1994, 1993 and 1992, respectively. Substantially all leases are for office space and equipment. A number of lease commitments contain renewal options ranging from one to thirty years. Note I - Contingencies In November 1988, California voters passed an initiative known as Proposition 103 which amended the California Insurance Code to provide, among other things, that for at least one year rates for automobile and many other insurance policies issued or renewed on or after November 8, 1988, be rolled back to the levels of November 8, 1987 and then reduced by 20%. In 1989, the California Supreme Court ruled that an insurer could be compelled to make -66- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) refunds for the rollback year only to the extent that it would not deprive the insurer of a fair and reasonable rate of return. Workers compensation insurance and reinsurance are excluded from the California Proposition's rate rollback provisions. The Insurance Department of the State of California ("Department") subsequently issued regulations with respect to California Proposition 103. On August 18, 1994, the Supreme Court of the State of California upheld the validity of the Department's current regulations. In January 1995 the newly elected Commissioner of the Department announced that he would like to quickly resolve all Proposition 103 liability with California insurers through negotiation. On January 31, 1995, the Department advised the Company that it had an indicated rollback liability under the regulations of approximately $4,000,000, plus interest. The Department asked the Company to provide information, including California specific data, that would impact its calculation. The data used by the Department to determine the rollback liability was based on national figures and contained some inapplicable information as to the Company's California business. The regulations provide for the use of California data where available and reliable. When the calculation under the regulations is performed using the Company's California specific data, the Company has no rollback liability. The Company intends to resolve the matter with the Department during 1995. Orion and its subsidiaries are routinely engaged in litigation incidental to their businesses. Management believes that there are no significant legal proceedings pending against the Company or its subsidiaries which, net of reserves established therefor, are likely to result in judgments for amounts that are material to the financial condition, liquidity or results of operations of Orion and its consolidated subsidiaries, taken as a whole. Note J - Stockholders' Equity and Earnings Per Common Share During 1994, the Company repurchased 442,327 shares of its common stock at an aggregate cost of $13,746,000. The Company repurchased 177,658 shares for $5,472,000 in 1993 and 22,420 shares for $554,000 in 1992. Orion declared a 5-for-4 split of its common stock which was paid on November 15, 1993 to shareholders of record on October 15, 1993. The Company had also paid a 5-for-4 common stock split on December 7, 1992 to shareholders of record on November 20, 1992. All common stock and per common share data presented in the financial statements give effect to these stock splits. On April 15, 1992, Orion sold 515,625 shares of its common stock for $9,497,000, net of expenses. The sale was made in a private transaction, subject to the provisions of Regulation S of the Securities Act of 1933. On December 21, 1992, Orion called for redemption its $2.125 Convertible Exchangeable Preferred Stock (the "$2.125 Preferred Stock") on January 21, 1993. The market price of the shares of common stock that a holder would receive upon conversion of the preferred stock was substantially higher than the redemption price of $25.76 per share. Consequently, most holders converted into common stock prior to the redemption date, resulting in the -67- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) issuance of 3,579 shares of common stock in December 1992 and 1,423,544 shares of common stock in January 1993. Holders of 21,605 shares of $2.125 Preferred Stock, who did not elect to convert, redeemed their shares for an aggregate of $557,000. Orion issued 2,601,050 shares of common stock for conversions elected by holders of 1,581,470 shares of its $1.90 Convertible Exchangeable Preferred Stock (the "$1.90 Preferred Stock"), in 1992. These conversions were primarily the result of Orion calling this issue on November 2, 1992 at the redemption price of $21.30 per share including accrued dividends. The remaining 2,730 shares of $1.90 Preferred Stock were redeemed for approximately $58,000. On April 7, 1993, the Company redeemed all of the outstanding shares of its Adjustable Rate Preferred Stock for $18,520,000 in cash. The redemption was funded with borrowings under the Loan Agreement. Dividends declared on Orion's common and preferred stock for 1994, 1993 and 1992 were as follows:
Year Ended December 31, ------------------------------------------------------- 1994 1993 1992 ----------------- ----------------- ----------------- Per Share Amount Per Share Amount Per Share Amount --------- ------- --------- ------- --------- ------- (000s omitted - except for per share data) Common Stock .......... $ .76 $10,828 $ .68 $ 9,860 $ .60 $ 6,641 Adjustable Rate Preferred Stock ..... - - 1.10 407 4.16 1,581 $1.90 Preferred Stock.. - - - - 1.43 2,227 $2.125 Preferred Stock. - - .12 2 2.13 2,550 ------- ------- ------- $10,828 $10,269 $12,999 ======= ======= =======
The weighted average common shares outstanding for purposes of computing earnings per share amounted to 14,348,000, 14,598,000 and 10,914,000 shares for 1994, 1993 and 1992, respectively. Dividends on preferred stock were deducted from earnings in 1993 and 1992 to compute primary earnings per common share. The $2.125 Preferred Stock for 1993 and 1992, and the $1.90 Preferred Stock for 1992, were assumed to be converted for the full year, if dilutive, for the purpose of computing fully-diluted earnings per common share. The weighted average common shares, on a fully-diluted basis, amounted to 14,367,000, 14,655,000 and 14,474,000 shares for 1994, 1993 and 1992, respectively. Orion has a Stockholder Rights Plan (the "Rights Plan") under which each outstanding share of common stock includes 64% of one preferred stock purchase right (the "Rights"). The Rights Plan is designed to assure stockholders that they will receive equitable treatment in the event of a proposed takeover. Under the Rights Plan, each holder of a Right is entitled to buy one-hundredth of a share of Series A Participating Junior Preferred Stock. The Rights -68- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) become exercisable if an acquiror gains a 20% or greater beneficial ownership interest in Orion's common stock, on other than fair and favorable terms to all stockholders. Each Right not owned by such acquiror will enable the holder to purchase, at an initial exercise price of $80, common stock having a value of twice the Right's exercise price. In addition, under certain circumstances if Orion is involved in a merger each Right will entitle its holder to purchase, at the Right's then current exercise price, common shares of such other company having a value of twice the Right's exercise price. Note K - Employee Benefit Plans The Company maintains a Stock Savings and Retirement Plan (the "Plan"), qualified under Internal Revenue Code Section 401(k), for eligible employees of the Company. Employee and employer matched contributions to the savings funds are limited to the extent allowable under the Plan and federal income tax law. The Plan also provides for defined contribution savings and retirement benefits that allow the Company to make annual contributions to the Plan based on a percentage of employees' compensation. Employees vest in the Company's contributions over a six-year period with vesting credit given for prior service with the Company. The Company has adopted a Surplus Benefit Plan which provides deferred benefits for those employees who received less than the full employer contribution to the Company's 401(k) plan as a result of federal tax limitations on participation in the Plan. The Company maintains a number of incentive plans for key employees. Under the Company's 1982 Long-Term Performance Incentive Plan, shares of restricted stock as well as stock options may be granted by Orion. Orion granted 70,015, 5,688 and 66,016 shares of restricted stock to key employees during 1994, 1993 and 1992, respectively. Restricted stock is considered issued and outstanding when awarded, and is recorded as deferred compensation. There are restrictions as to its transferability, which restrictions lapse proportionately from the second to the fifth anniversaries of grant date. As of December 31, 1994, the restrictions have not lapsed on 148,459 shares of restricted stock. All stock options granted by Orion, at fair market value at date of grant, are intended to qualify as incentive stock options becoming exercisable from the first through fourth anniversaries of the date of grant, expiring ten years after the date of grant. As of December 31, 1994, the number of shares of stock reserved under all plans is 530,011 of which 348,802 are for outstanding stock options and 173,064 of these stock options are exercisable. A summary of the option transactions is as follows:
Year Ended December 31, --------------------------------------------------------------------- 1994 1993 1992 ---- ---- ---- Price Price Price Options Range Options Range Options Range ------- ----- ------- ----- ------- ----- Balance - January 1 ... 284,337 $10.16-32.40 305,860 $10.16-23.92 257,422 $ 8.64-9.20 Granted ............... 129,800 32.50-33.75 3,438 32.40 92,969 23.92 Cancelled ............. (19,531) 14.56-23.92 - - Exercised ............. (45,804) 10.16-23.92 (24,961) 10.16-14.56 (44,531) 8.64-9.04 ------- ------- ------- Balance - December 31.. 348,802 10.16-33.75 284,337 10.16-32.40 305,860 10.16-23.92 ======= ======= =======
-69- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Orion also maintains a non-qualified defined benefit retirement plan for members of the Board of Directors who are not employees. Benefits are based on years of service and director fee levels at retirement. The Board of Directors approved a stock option plan for non-employee directors in 1994. The total expense for 1994, 1993 and 1992 for the above pension benefit plans for employees and directors amounted to $4,659,000, $3,277,000 and $2,694,000, respectively. Note L - Postretirement Medical Benefits The Company provides postretirement medical benefits to full-time employees who have worked for 10 years and attained age 55 while in service with the Company. The Company's postretirement health care plan is not funded. The accumulated postretirement benefit obligation of the plan included in other liabilities in the consolidated balance sheet is as follows: December 31, ---------------- 1994 1993 ---- ---- (000s omitted) Retirees ................................. $2,143 $2,260 Fully eligible active plan participants .. 976 1,425 Other active plan participants ........... 3,234 4,104 Unrecognized net gains ................... 2,496 - ------ ------ $8,849 $7,789 ====== ====== Net postretirement benefit cost for the years ended December 31, 1994 and 1993 was $1,243,000 and $598,000 consisting of service cost benefits earned of $813,000 and $130,000 and interest on the accumulated postretirement benefit obligation of $539,000 and $468,000, respectively, and amortization of unrecognized net gain of $109,000 in 1994. The expected health care cost trend rate used as of December 31, 1994 was 10.25% for 1995, and 9.5% in 1996 decreasing linearly each year until it reaches 6% for 2003 and future years. At December 31, 1993 the expected health care cost trend rates used were 16% for 1994 and 10% for 1995. A one- percentage-point increase in the assumed health care cost trend rate for each year would increase the aggregate service cost and interest cost for 1994 and 1993 by $289,000 and $145,000, respectively, and increase the accumulated postretirement benefit obligation as of December 31, 1994 and 1993 by $953,000 and $1,325,000, respectively. A one-percentage-point decrease in the health care cost rate would decrease service and interest costs and the accumulated post retirement benefit obligation by similar amounts. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 8.5% at December 31, 1994 and 7.0% at December 31, 1993. -70- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note M - Industry Segment Information The Company's insurance operations are organized and reported as three business segments: Regional Operations, Reinsurance/Special Programs and Guaranty National Companies. Regional Operations provides workers compensation insurance products through EBI Companies and Nations' Care. Reinsurance/Special Programs includes DPIC Companies (which markets professional liability insurance), Connecticut Specialty Insurance Group (which writes specialty insurance programs), SecurityRe Companies (a reinsurer), and a 20% interest in Intercargo (which underwrites international trade). The third segment consists of the Company's interest in Guaranty National Companies, which specializes in nonstandard commercial and personal automobile insurance. The Company includes its share of Guaranty National's earnings using the equity method of accounting. The miscellaneous income and expenses (primarily interest, general and administrative expenses and other consolidating elimination entries) of the parent company are reported as a fourth segment. Identifiable assets of the Regional Operations and Reinsurance/Special Programs segments are primarily allocated based on the cash flows of these segments. Financial information for the Company's segments for 1994, 1993 and 1992 is shown below: -71-
Earnings (Loss) from Operations Before Federal Income Taxes, Cumulative Effect Realized of Accounting Net Investment Changes and Premiums Investment Gains Other Total Extraordinary Identifiable Earned Income (Losses) Income Revenues Item Assets -------- ---------- ---------- -------- -------- ----------------- ------------ (000s omitted) 1994: Regional Operations ... $278,040 $ 29,287 $ 1,246 $ 239 $308,812 $ 42,514 $ 748,680 Reinsurance/Special Programs ............ 413,183 53,209 2,191 575 469,158 34,117 1,213,026 Guaranty National Companies ........... - - - - - 11,244 89,760 Other ................. - 2,419 - 558 2,977 (16,329) 61,295 -------- -------- -------- -------- -------- -------- ---------- Total ............... $691,223 $ 84,915 $ 3,437 $ 1,372 $780,947 $ 71,546 $2,112,761 ======== ======== ======== ======== ======== ======== ========== 1993: Regional Operations ... $266,373 $ 33,760 $ 4,153 $ - $304,286 $ 34,025 $ 758,596 Reinsurance/Special Programs ............ 351,031 55,500 6,706 915 414,152 44,032 1,234,033 Guaranty National Companies ........... - - - - - 9,509 92,590 Other ................. - 2,543 (1,381) 555 1,717 (15,061) 32,235 -------- -------- -------- -------- -------- -------- ---------- Total ............... $617,404 $ 91,803 $ 9,478 $ 1,470 $720,155 $ 72,505 $2,117,454 ======== ======== ======== ======== ======== ======== ========== 1992: Regional Operations.... $268,145 $ 33,182 $ 2,077 $ (193) $303,211 $ 4,227 $ 774,030 Reinsurance/Special Programs ............ 292,060 48,416 3,027 849 344,352 50,384 1,055,679 Guaranty National Companies ........... - - - - - 9,994 81,632 Other ................. - 885 (1,437) 707 155 (17,891) 26,067 -------- -------- -------- -------- -------- -------- ---------- Total ............... $560,205 $ 82,483 $ 3,667 $ 1,363 $647,718 $ 46,714 $1,937,408 ======== ======== ======== ======== ======== ======== ==========
ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note N - Selected Quarterly Financial Data (Unaudited) Quarterly results of operations and earnings per common share for 1994 and 1993 are summarized as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (000s omitted-except for per share data) 1994: Premiums earned ......................... $167,095 $162,443 $180,703 $180,982 Net investment income ................... 20,768 20,601 22,550 20,996 Realized investment gains ............... 533 178 1,197 1,529 Other income ............................ 302 415 341 314 -------- -------- -------- -------- Total revenues ...................... $188,698 $183,637 $204,791 $203,821 ======== ======== ======== ======== Net earnings ........................ $ 13,240 $ 11,567 $ 15,329 $ 15,109 ======== ======== ======== ======== Net earnings per common share - Primary ............................... $ .91 $ .80 $ 1.07 $ 1.07 ======== ======== ======== ======== Fully diluted ......................... $ .91 $ .80 $ 1.07 $ 1.06 ======== ======== ======== ======== 1993: Premiums earned ........................ $149,272 $157,404 $151,641 $159,087 Net investment income .................. 21,677 21,170 22,218 26,738 Realized investment gains .............. 4,812 1,755 1,131 1,780 Other income ........................... 303 464 428 275 -------- -------- -------- -------- Total revenues ..................... $176,064 $180,793 $175,418 $187,880 ======== ======== ======== ======== Earnings before cumulative effect of change in accounting principles .. $ 14,328 $ 13,907 $ 12,868 $ 15,885 ======== ======== ======== ======== Net earnings ....................... $ 26,153 $ 13,907 $ 12,868 $ 15,885 ======== ======== ======== ======== Net earnings per common share - Primary: Earnings before cumulative effect of change in accounting principles .. $ .97 $ .95 $ .88 $ 1.09 ======== ======== ======== ======== Net earnings ....................... $ 1.78 $ .95 $ .88 $ 1.09 ======== ======== ======== ======== Fully diluted: Earnings before cumulative effect of change in accounting principles .. $ .95 $ .95 $ .88 $ 1.09 ======== ======== ======== ======== Net earnings ....................... $ 1.75 $ .95 $ .88 $ 1.09 ======== ======== ======== ======== The sum of quarterly per common share amounts may not agree with the corresponding annual amounts due to rounding or antidilution during certain quarters. -72-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Pursuant to General Instruction G(3) to this form, the information required by Part III (Items 10, 11, 12 and 13) hereof is incorporated by reference from the Company's definitive proxy statement for its Annual Meeting to be held on May 31, 1995. The Company intends to file the proxy material, which involves the election of directors, not later than 120 days after the close of the Company's fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 Financial Statements: The following financial statements are included in Part II, Item 8. Page ---- Report of Management................................. 43 Independent Auditors' Report......................... 44 Orion Capital Corporation and Subsidiaries: December 31, 1994 and 1993 Consolidated Balance Sheet................. 45-46 For the years ended December 31, 1994, 1993 and 1992 Consolidated Statement of Earnings......... 47 Consolidated Statement of Stockholders' Equity................................... 48 Consolidated Statement of Cash Flows....... 49-50 Notes to the Consolidated Financial Statements.. 51-72 (a) 2. Financial Statement Schedules: Selected Quarterly Financial Data - for the years ended December 31, 1994, and 1993 - Included in Part II, Item 8. -73- Page ---- Schedule I Consolidated Summary of Investments - Other than Investments in Related Parties - December 31, 1994........................ S-1 II Condensed Financial Information of Registrant - S-2, S-3, December 31, 1994, 1993 S-4, S-5, and 1992.................... S-6 III Supplementary Insurance Information - December 31, 1994, 1993 and 1992............. S-7 V Valuation and Qualifying Accounts - December 31, 1994, 1993 and 1992................... S-8 VI Supplemental Information For Property - Casualty Insurance Underwriters - December 31, 1994, 1993 and 1992............................ S-10 Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the Financial Statements or notes thereto. (a) 3. Exhibits: Exhibit 3(i) Restated Certificate of Incorporation of Orion, as amended on June 3, 1993; filed as Exhibit 3(i) to the Company's Annual Report on Form 10-K for 1993. Exhibit 3(ii) By-Laws of Orion, as amended on May 7, 1993; filed as Exhibit 3(ii) to the Company's Annual Report on Form 10-K for 1993. Exhibit 4(i) Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Orion, dated March 23, 1989; filed as Exhibit 4(xi) to the Company's Annual Report on Form 10-K for 1988. -74- Exhibit 4(ii) Specimen certificate representing shares of Orion's Common Stock (proof of March 27, 1989); filed as Exhibit 4(xii) to the Company's Annual Report on Form 10-K for 1988. Exhibit 4(iii) Indenture, dated as of September 8, 1992, between Orion and the Connecticut National Bank (now known as Shawmut Bank Connecticut, National Association), as Trustee of Orion's 9 1/8% Senior Notes due September 1, 2002; filed as Exhibit 4(v) to the Company's Annual Report on Form 10-K for 1992. Exhibit 4(iv) Specimen certificate representing Orion's 9 1/8% Senior Notes; filed as Exhibit 4(vi) to the Company's Annual Report on Form 10-K for 1992. Exhibit 10(i)* Orion's Deferred Compensation Plan, as amended; filed as Exhibit 10(i) to the Company's Annual Report on Form 10-K for 1991. Exhibit 10(ii)* Orion's 1982 Long-Term Performance Incentive Plan, as amended; filed as Exhibit 10(iii) to the Company's Annual Report on Form 10-K for 1992. Exhibit 10(iii)* Orion's 1994 Stock Option Plan for Non- Employee Directors. Exhibit 10(iv)* Employment Agreement between Alan R. Gruber and Orion, dated as of March 19, 1993; filed as Exhibit 10(v) to the Company's Annual Report on Form 10-K for 1992. Exhibit 10(v)* Employment Agreement between Robert B. Sanborn and Orion, dated as of March 19, 1993; filed as Exhibit 10(vi) to the Company's Annual Report on Form 10-K for 1992. Exhibit 10(vi)* Employent Agreement between Larry D. Hollen and Orion, dated as of December 1, 1992; filed as Exhibit 10(viii) to the Company's Annual Report on Form 10-K for 1992. *Management contract or compensatory plan or arrangement. -75- Exhibit 10(vii)* Employment Agreement between Raymond W. Jacobsen and Orion, dated as of July 19, 1994. Exhibit 10(viii) Lease Agreement between Connecticut UTF, Inc., as lessor, and Security Insurance Company of Hartford ("Security"), as lessee, dated as of December 19, 1984; filed as Exhibit 10(xxxiii) to the Company's Annual Report on Form 10-K for l984. Exhibit 10(ix) Second Assignment of Lease and Agreement from Connecticut UTF, Inc. to Security, dated as of December 19, 1984; filed as Exhibit 10(xxxiv) to the Company's Annual Report on Form 10-K for 1984. Exhibit 10(x) Purchase Money Second Mortgage from Connecticut UTF, Inc., as mortgagor, to Security, as mortgagee, dated as of December 19, 1984; filed as Exhibit 10(xxxvi) to the Company's Annual Report on Form 10-K for 1984. Exhibit 10(xi) Purchase Money Note, in the face amount of $2,800,000, from Connecticut UTF, Inc. to Security, dated December 19, 1984; filed as Exhibit 10(xxxvi) to the Company's Annual Report on Form 10-K for l984. Exhibit 10(xii) Guarantee from Orion to Connecticut UTF, Inc., dated as of December 19, 1984, guaranteeing the performance of Security under its lease with Connecticut UTF, Inc.; filed as Exhibit 10(xxxvii) to the Company's Annual Report on Form 10-K for 1984. Exhibit 10(xiii) Form of Indemnification Agreement, dated as of June 3, 1987, between Orion and each of its Directors and Executive Officers; filed as Exhibit 10(xl) to the Company's Annual Report on Form 10-K for l987. Exhibit 10(xiv) Rights Agreement, dated as of March 15, 1989, between Orion and Manufacturers Hanover Trust Company, Rights Agent; filed as Exhibit 1 to the Company's Form 8-A filed March 28, 1989. *Management contract or compensatory plan or arrangement. -76- Exhibit 10(xv) Specific Excess Reinsurance Agreement, effective January 1, 1990, by and among several of the Company's wholly-owned insurance subsidiaries and Cologne Reinsurance Company (Dublin) Ltd.; filed as Exhibit 10(xxiv) to the Company's Annual Report on Form 10-K for 1990. Exhibit 10(xvi)* Retirement Plan for Directors of Orion, as amended (September, 1994). Exhibit 10(xvii)* Orion Supplemental Benefits Plan, filed as Exhibit 10(xxv) to the Company's Annual Report on Form 10-K for 1991. Exhibit 10(xviii) Shareholder Agreement, dated as of November 7, 1991 by and among the Company, Guaranty National Corporation and certain wholly-owned subsidiaries of the Company; filed as Exhibit 10(xxv) to the Company's Annual Report on Form 10-K for 1991. Exhibit 10(xix) Amendments to the Shareholder Agreement by and among the Company, Guaranty National Corporation and certain wholly-owned subsidiaries of the Company made as of February 2, 1994 and March 2, 1995. Exhibit 10(xx) Loan Agreement, dated March 8, 1993, by and among Orion, the banks signatory thereto and National Westminster Bank USA, as Agent; filed as Exhibit 10(xxvi) to the Company's Annual Report on Form 10-K for 1992. Exhibit 10(xxi) Amendment No. 1 and Amendment No. 2 to the Loan Agreement, by and among Orion, the banks signatory thereto and National Westminster Bank USA, as Agent, dated February 22, 1994 and Novem- ber 9, 1994, respectively. Exhibit 10(xxii) Letter Agreement, dated September 13, 1993, by and between Orion and Intercargo Corporation; filed as Exhibit 10(xxii) to the Company's Annual Report on Form 10-K for 1993. Exhibit 10(xxiii) Amendment, dated February 14, 1995, to the Letter Agreement by and between Orion Capital Corporation and Intercargo Corporation. Exhibit 10(xxiv) Agreement, dated September 13, 1993, by and between Orion and The Harper Group, Inc.; filed as Exhibit 10(xxiii) to the Company's Annual Report on Form 10-K for 1993. *Management contract or compensatory plan or arrangement. -77- Exhibit 11 Statement re: computation of earnings per common share. Exhibit 21 Subsidiaries of Orion. Exhibit 23 Consents of Deloitte & Touche LLP Exhibit 27 Financial Data Schedule. Exhibit 28 Information from reports furnished to state insurance regulatory authorities. Copies of exhibits may be obtained upon payment of a $.50 per page fee. Such requests should be made in writing to: Corporate Secretary, Orion Capital Corporation, 600 Fifth Avenue, New York, New York 10020. (b) Reports on Form 8-K: None. (c) Filed exhibits: See Exhibit Index (d) Financial statements of non-consolidated subsidiaries: The Audited Consolidated Financial Statements of Guaranty National Corporation and subsidiaries, Consolidated Balance Sheet at December 31, 1994 and 1993, Consolidated Statement of Earnings, State- ment of Changes in Shareholders' Equity and Statement of Cash Flows for the years ended December 31, 1994, 1993 and 1992, the Related Notes to the Consolidated Financial Statements and Financial Statement Schedules included in Guaranty National Corporation's Annual Report on Form 10-K for the 1994 fiscal year are incorporated herein by reference ("Guaranty National 1994 Form 10-K"). In addition, the information set forth under the caption "Reserves" (on pages 11 through 15) of the Guaranty National 1994 Form 10-K is in- corporated by reference herein. The Company currently holds a slightly less than 50% interest in Guaranty National's outstanding common stock. Since November 1991, Guaranty National's operations have been reported by the Company on the equity accounting basis. -78- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORION CAPITAL CORPORATION By: /s/ Alan R. Gruber March 16, 1995 ------------------ Alan R. Gruber Chairman of the Board (Principal Executive) and Financial Officer) By: /s/ Daniel L. Barry March 16, 1995 ------------------- Daniel L. Barry Vice President and Controller (Principal Accounting Officer) -79- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons (including a majority of the members of the Board of Directors of the Registrant) in the capacities and on the dates indicated: Signature and Title Date - ------------------------- -------------- /s/ Alan R. Gruber March 16, 1995 - ------------------------- Alan R. Gruber Chairman of the Board /s/ Bertram J. Cohn March 16, 1995 - ------------------------- Bertram J. Cohn Director /s/ John C. Colman March 16, 1995 - ------------------------- John C. Colman Director /s/ Larry D. Hollen March 16, 1995 - ------------------------- Larry D. Hollen Director - ------------------------- Robert H. Jeffrey Director /s/ Warren R. Lyons March 16, 1995 - ------------------------- Warren R. Lyons Director /s/ James K. McWilliams March 16, 1995 - ------------------------- James K. McWilliams Director /s/ R. W. Moore March 16, 1995 - ------------------------- Ronald W. Moore Director -80- Signature and Title Date - ---------------------- -------- /s/ Robert B. Sanborn March 16, 1995 - ---------------------- Robert B. Sanborn Director /s/ William J. Shepherd March 16, 1995 - ----------------------- William J. Shepherd Director /s/ John R. Thorne March 16, 1995 - ----------------------- John R. Thorne Director /s/ Roger Ware March 16, 1995 - ----------------------- Roger B. Ware Director -81-
SCHEDULE I ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1994 (000s omitted) ============================================================================== Column A Column B Column C Column D -------- -------- -------- -------- Amount Shown on Balance Type of Investment Cost Value Sheet ______________________________________________________________________________ Fixed maturities held-to-maturity: Bonds - United States Government and government agencies and authorities ................ $ 124,176 $120,334 $ 124,176 States, municipalities and political subdivisions .... 137,736 136,522 137,736 Foreign governments ......... 50 50 50 Public utilities ............ 1,440 1,539 1,440 All other corporate bonds ... 39,984 38,714 39,984 Redeemable preferred stocks ... 64,031 61,756 64,031 ---------- -------- ---------- Total fixed maturities .... 367,417 358,915 367,417 ---------- ======== ---------- Fixed maturities available-for-sale: Bonds - United States Government and government agencies and authorities ................ 168,022 150,955 150,955 States, municipalities and political subdivisions .... 180,145 175,362 175,362 Foreign governments ......... 7,678 7,658 7,658 Public utilities ............ 13,197 11,480 11,480 All other corporate bonds ... 175,959 166,889 166,889 Redeemable preferred stocks ... 20,879 18,080 18,080 ---------- -------- ---------- Total fixed maturities .... 565,880 530,424 530,424 ---------- ======== ---------- Equity securities: Common stocks - Public utilities ............ 8,591 8,555 8,555 Banks, trusts and insurance companies ................. 40,491 54,254 54,254 Industrial, miscellaneous and all other ................. 66,996 79,110 79,110 Non-redeemable preferred stocks 134,851 122,515 122,515 ---------- -------- ---------- Total equity securities ... 250,929 264,434 264,434 ---------- ======== ---------- Mortgage loans on real estate ... 1,764 1,764 Other long-term investments ..... 50,800 50,800 Short-term investments .......... 104,201 104,201 ---------- ---------- Total investments ......... $1,340,991 $1,319,040 ========== ========== S-1 SCHEDULE II ORION CAPITAL CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT ORION CAPITAL CORPORATION BALANCE SHEET (000s omitted) ASSETS December 31, -------------------- 1994 1993 ---- ---- Fixed maturities held at market (cost $1,344 - 1994) .. $ 1,344 $ - Short-term investments ................................ 12,838 8,527 Cash .................................................. 180 446 Notes receivable and other assets ..................... 4,078 2,911 Deferred federal income taxes ......................... 42,008 18,891 Investment in subsidiaries ............................ 497,024 556,240 Excess of cost over fair value of net assets acquired.. 28,140 29,250 -------- -------- Total assets ........................................ $585,612 $616,265 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities ..................................... $ 27,325 $ 23,960 Due to affiliates ..................................... 25,988 18,444 Federal income taxes payable .......................... 14,829 19,294 Notes payable ......................................... 152,382 160,372 -------- -------- Total liabilities ................................... 220,524 222,070 Stockholders' equity .................................. 365,088 394,195 -------- -------- Total liabilities and stockholders' equity .......... $585,612 $616,265 ======== ======== See Notes to Condensed Financial Information of Registrant S-2 SCHEDULE II ORION CAPITAL CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT ORION CAPITAL CORPORATION STATEMENT OF EARNINGS (000s omitted) Year Ended December 31, ---------------------------- 1994 1993 1992 ---- ---- ---- Revenues: Net investment income ....................... $ 396 $ 458 $ 325 Realized investment gains (losses) .......... - (13) 13 Other income ................................ 550 550 700 -------- -------- -------- 946 995 1,038 -------- -------- -------- Expenses: Interest .................................... 13,190 12,670 12,192 General and administrative .................. 3,676 1,629 3,801 Amortization of excess of cost over fair value of net assets acquired .............. 1,110 1,111 1,111 -------- -------- -------- 17,976 15,410 17,104 -------- -------- -------- Loss before federal income taxes (benefit), equity in net earnings of subsidiaries, cumulative effect of adoption of new accounting principles and extraordinary item ........................................ (17,030) (14,415) (16,066) -------- -------- -------- Federal income taxes (benefit): Current ..................................... 6,395 16,448 6,104 Deferred .................................... 9,906 (931) (5,182) -------- -------- -------- 16,301 15,517 922 -------- -------- -------- Loss before equity in net earnings of subsidiaries, cumulative effect of change in accounting principles and extraordinary item. (33,331) (29,932) (16,988) Equity in net earnings of subsidiaries ........ 88,576 86,920 62,780 -------- -------- -------- Earnings before cumulative effect of change in accounting principles and extraordinary item. 55,245 56,988 45,792 Cumulative effect of change in accounting principles .................................. - 11,825 - Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $60 .............................. - - (2,920) -------- -------- -------- Net earnings .................................. $ 55,245 $ 68,813 $ 42,872 ======== ======== ======== See Notes to Condensed Financial Information of Registrant S-3 SCHEDULE II ORION CAPITAL CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT ORION CAPITAL CORPORATION STATEMENT OF CASH FLOWS (000s omitted) Year Ended December 31, ------------------------------ 1994 1993 1992 ---- ---- ---- Cash flows from operating activities: Dividends received from subsidiaries ...... $ 30,013 $ 25,512 $ 15,645 Net investment income collected ........... 212 156 326 Federal income taxes received from subsidiaries ............................ 6,000 5,600 6,250 Interest paid ............................. (12,524) (11,998) (10,362) Other expenses paid ....................... (2,454) (2,249) (2,486) Other receipts ............................ 3,230 634 7,331 -------- -------- -------- Net cash provided by operating activities. 24,477 17,655 16,704 -------- -------- -------- Cash flows from investing activities: Sales of equity securities ................ - 426 188 Purchase of fixed maturities .............. (1,344) - - Net sales (purchases) of short-term investments ............................. (4,313) (4,793) (1,603) Investments in subsidiaries ............... 763 (6,983) (3,578) Other receipts (payments) ................. (795) (17) 94 -------- -------- -------- Net cash used in investing activities ... (5,689) (11,367) (4,899) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of notes payable ... - 59,672 127,764 Proceeds from issuance of common stock .... 598 286 9,545 Repayment of notes payable and debentures.. (8,000) (29,500) (134,123) Dividends paid to stockholders ............ (11,263) (11,598) (14,539) Purchases of common stock and purchases and redemption of adjustable rate preferred stock ......................... (38) (23,615) (412) Other payments ............................ (351) (1,113) (40) -------- -------- -------- Net cash used in financing activities ... (19,054) (5,868) (11,805) -------- -------- -------- Net increase (decrease) in cash ......... (266) 420 - Cash balance, beginning of year ........... 446 26 26 -------- -------- -------- Cash balance, end of year ................. $ 180 $ 446 $ 26 ======== ======== ======== See Notes to Condensed Financial Statements of Registrant S-4 SCHEDULE II ORION CAPITAL CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT ORION CAPITAL CORPORATION STATEMENT OF CASH FLOWS - (Continued) (000s omitted) Year Ended December 31, ------------------------------ 1994 1993 1992 ---- ---- ---- Reconciliation of net earnings to net cash provided by operating activities: Net earnings ................................ $ 55,245 $ 68,813 $ 42,872 -------- -------- -------- Adjustments: Cumulative effect of change in accounting principles .............................. - (11,825) - Equity in net earnings of subsidiaries .... (88,576) (86,920) (62,780) Consolidating elimination of subsidiaries income taxes ............................ 10,576 18,962 11,631 Dividends received from subsidiaries ...... 30,013 25,512 15,645 Depreciation and amortization ............. 2,064 1,966 1,603 Deferred federal income taxes (benefit) ... 9,906 (931) (5,182) Realized investment (gains) losses ........ - 13 (13) Amortization of discount on debt .......... 10 9 292 Extraordinary loss ........................ - - 2,920 Change in assets and liabilities: Decrease (increase) in notes receivable and other assets ............................ (520) 470 276 Increase (decrease) in taxes payable and other liabilities ....................... (1,668) 9,952 1,361 Increase (decrease) in due to affiliates .. 7,427 (8,366) 8,079 -------- -------- -------- Total adjustments and changes ........... (30,768) (51,158) (26,168) -------- -------- -------- Net cash provided by operating activities.. $ 24,477 $ 17,655 $ 16,704 ======== ======== ======== Non-cash transaction: As a result of a change in pooling by the Registrant's insurance subsidiaries, the Registrant received an extraordinary dividend of $65,470,000 (principally securities) in 1993 which it simultaneously contributed to another insurance subsidiary. See Notes to Condensed Financial Information of Registrant S-5
SCHEDULE II ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT Years Ended December 31, 1994, 1993 and 1992 Note A - Notes Payable Notes payable consist of the following:
Estimated Carrying Value Market Value ----------------- ----------------- 1994 1993 1994 1993 ---- ---- ---- ---- (000s omitted) Borrowings under loan agreement with various banks (various interest rates). $ 42,500 $ 50,500 $ 42,500 $ 50,500 $110,000,000 face amount, 9 1/8% Senior Notes, due September 1, 2002 .......... 109,882 109,872 111,815 119,053 -------- -------- -------- -------- $152,382 $160,372 $154,315 $169,553 ======== ======== ======== ======== The Registrant's debt is scheduled to be repaid as follows: (000s omitted) 1995 ................................. $ 10,000 1996 ................................. 12,000 1997 ................................. 12,000 1998 ................................. 3,500 1999 ................................. 5,000 2002 ................................. 110,000 -------- 152,500 Less unamortized discount ............ 118 -------- $152,382 ========
Note B - Expense Reimbursement and Management Fees During 1992 through 1994, the Registrant was reimbursed for payroll, office rental and other expenses incurred by it to support the operations of its insurance subsidiaries. This reimbursement of $5,735,000, $5,230,000 and $4,500,000 in 1994, 1993 and 1992, respectively, is accounted for as a reduction of general and administrative expenses. The Registrant received an investment management fee from Guaranty National of $550,000 in 1994 and 1993 and $700,000 in 1992. S-6
SCHEDULE III ORION CAPITAL CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION (000s omitted) - ----------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column J Column K -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Reserve For Unpaid Dividends Amortization Deferred Losses Payable Losses and of Deferred Policy- Policy and Loss to Net Loss Policy Other holders' Acquisition Adjustment Unearned Policy- Premiums Investment Adjustment Acquisition Insurance Dividends Premiums Segment Costs Expenses Premiums Holders Earned Income Expenses Costs Expenses Expenses Written (a) (a) (b) ___________________________________________________________________________________________________________________________________ 1994: Regional Operations $21,313 $ 463,360 $ 62,431 $11,179 $278,040 $ 29,287 $186,437 $ 55,986 $ 9,871 $12,404 $279,738 Reinsurance/ Special Programs. 48,824 717,969 194,424 1,472 413,183 53,209 311,686 109,122 11,590 2,432 432,317 Other ............. - - - - - 2,419 - - - - - ------- ---------- -------- ------- -------- -------- -------- -------- ------- ------- -------- $70,137 $1,181,329 $256,855 $12,651 $691,223 $ 84,915 $498,123 $165,108 $21,461 $14,836 $712,055 ======= ========== ======== ======= ======== ======== ======== ======== ======= ======= ======== 1993: Regional Operations $19,326 $ 474,903 $ 67,310 $10,581 $266,373 $ 33,760 $191,826 $ 59,596 $ 8,144 $ 9,232 $265,082 Reinsurance/ Special Programs. 38,196 665,500 192,049 1,942 351,031 55,500 267,306 88,844 9,237 3,281 370,504 Other ............. - - - - - 2,543 - - - - - ------- ---------- -------- ------- -------- -------- -------- -------- ------- ------- -------- $57,522 $1,140,403 $259,359 $12,523 $617,404 $ 91,803 $459,132 $148,440 $17,381 $12,513 $635,586 ======= ========== ======== ======= ======== ======== ======== ======== ======= ======= ======== 1992: Regional Operations $21,481 $ 510,836 $ 67,791 $ 9,919 $268,145 $ 33,182 $214,692 $ 62,704 $10,595 $ 9,366 $269,550 Reinsurance/ Special Programs. 34,653 570,560 164,525 3,241 292,060 48,416 209,340 72,966 6,563 4,192 297,880 Other ............. - - - - - 885 - - - - - ------- ---------- -------- ------- -------- -------- -------- -------- ------- ------- -------- $56,134 $1,081,396 $232,316 $13,160 $560,205 $ 82,483 $424,032 $135,670 $17,158 $13,558 $567,430 ======= ========== ======== ======= ======== ======== ======== ======== ======= ======= ======== (a) Balances for 1992 have been restated to reflect the adoption of SFAS No. 113, which requires reinsurance recoverables to be reported as assets rather than offsetting liabilities. (b) Net investment income for Regional Operations and Reinsurance/Special Programs is allocated on the basis of cash flow. S-7 /TABLE
SCHEDULE V ORION CAPITAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (000s omitted) =============================================================================== Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions ---------------------- (1) (2) Balance at Charged to Charged to Balance at Beginning of Costs and Other Deductions End of Description Period Expenses Accounts (a) Period _______________________________________________________________________________ 1994: Allowance for doubtful accounts- Accounts and notes receivable $1,859 $1,030 $ $ 935 $1,954 ====== ====== ====== ====== ====== 1993: Allowance for doubtful accounts- Accounts and notes receivable $1,959 $2,337 $ - $2,437 $1,859 ====== ====== ====== ====== ====== 1992: Allowance for doubtful accounts- Accounts and notes receivable $2,636 $2,327 $ - $3,004 $1,959 ====== ====== ====== ====== ====== (a) Accounts written off
S-8
SCHEDULE VI ORION CAPITAL CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION FOR PROPERTY-CASUALTY INSURANCE UNDERWRITERS (000s omitted) =================================================================================================================================== Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Reserve for Losses and Loss Unpaid Adjustment Expenses Amortization Paid Deferred Losses Discount Incurred Related to of Deferred Losses Policy and Loss Deducted Net (1) (2) Policy and Loss Affiliation with Acquisition Adjustment in Column Unearned Premiums Investment Current Prior Acquisition Adjustment Premiums Registrant Costs Expenses (C) Premiums Earned Income Year Year Costs Expenses Written (a) (b) (a) ___________________________________________________________________________________________________________________________________ 1994: Consolidated property and casualty entities $ 70,137 $1,181,329 $ 4,100 $256,855 $691,223 $ 82,496 $480,826 $ 17,297 $165,108 $437,386 $712,055 ======== ========== ======== ======== ======== ======== ======== ======== ======== ======== ======== 1993: Consolidated property and casualty entities $ 57,522 $1,140,403 $ 4,100 $259,359 $617,404 $ 89,260 $434,840 $ 24,292 $148,440 $374,625 $635,586 ======== ========== ======== ======== ======== ======== ======== ======== ======== ======== ======== 1992: Consolidated property and casualty entities $ 56,134 $1,081,396 $ 4,100 $232,316 $560,205 $ 81,598 $397,551 $ 26,481 $135,670 $346,201 $567,430 ======== ========== ======== ======== ======== ======== ======== ======== ======== ======== ======== (a) Balances for 1992 have been restated to reflect the adoption of SFAS No. 113, which requires reinsurance recoverables to be recorded as assets rather than offsetting liabilities. (b) Discount deducted in Column C is computed using a statutory interest rate of 3.5% for certain workers compensation losses. S-9 /TABLE EXHIBIT INDEX Exhibit 10(iii)* Orion's 1994 Stock Option Plan for Non- Employee Directors. Exhibit 10(vii)* Employment Agreement between Raymond W. Jacobsen and Orion, dated as of July 19, 1994. Exhibit 10(xvi) Retirement Plan for Directors of Orion, as amended (September, 1994). Exhibit 10(xix) Amendments to the Shareholder Agreement by and among the Company, Guaranty National Corporation and certain wholly-owned sub- sidiaries of the Company made as of February 2, 1994 and March 2, 1995. Exhibit 10(xxi) Amendment No. 1 and Amendment No. 2 to the Loan Agreement, by and among Orion, the banks signatory thereto and National Westminster Bank USA, as Agent, dated February 22, 1994 and November 9, 1994, respectively. Exhibit 10(xxiii) Amendment, dated February 14, 1995, to the Letter Agreement by and between Orion Capital Corporation and Intercargo Corporation. Exhibit 11 Statement re: computation of earnings per common share. Exhibit 21 Subsidiaries of Orion. Exhibit 23 Consents of Deloitte & Touche. Exhibit 27 Financial Data Schedule. Exhibit 28 Information from reports furnished to state P insurance regulatory authorities. EX-10.3 2 EXHIBIT 10(iii) ORION CAPITAL CORPORATION 1994 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1. Purpose The purpose of the Orion Capital Corporation 1994 Stock Option Plan for Non-Employee directors (the "Plan") is to promote the interests of Orion Capital Corporation (the "Company") and its stockholders by strengthening the Company's ability to attract and retain the services of experienced and knowledgeable non-employee directors and by encouraging such directors to acquire an increased proprietary interest in the Company. 2. Shares Subject to the Plan Subject to adjustment as provided in Article 7, the total number of shares of common stock (the "Common Stock") of the Company for which options may be granted under the Plan shall be 100,000 shares of Common Stock (the "Shares"). The Shares shall be shares currently authorized but unissued or currently held or subsequently acquired by the Company as treasury shares, including shares purchased in the open market or in private transactions. If any option granted under the Plan expires or terminates for any reason without having been exercised in full, the Shares subject to, but not delivered under, such options may become available for that grant of other options under the Plan. No shares delivered to the Company in full or partial payment of an option exercise price payable pursuant to Section 6.3 shall become available for the grant of other options under the Plan. 3. Administration of the Plan The Plan shall be administered by the Compensation Committee of the Company's Board of Directors (the "Committee"), subject to Articles 10 and 11. Subject to the terms of the Plan, the Committee shall have the power to construe the provisions of the Plan, to determine all questions arising thereunder, and to adopt and amend such rules and regulations for administering the Plan as the Committee deems desirable. 4. Participation in the Plan Each member of the Company's Board of Directors (a "Director") who is not otherwise an employee of the Company or any subsidiary of the Company (an "Eligible Director") shall be eligible to participate in the Plan. 5. Nonstatutory Stock Options all options granted under the Plan shall be nonstatutory options not intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended. 6. Option Terms Each option granted to an Eligible Director under the Plan and the issuance of Shares thereunder shall be subject to the following terms: 6.1 Option Agreements. Each option granted under the Plan shall be evidenced by an option agreement (an "Agreement") duly executed on behalf of the Company and by the Eligible Director to whom such option is granted and dated as of the applicable date of grant. Each Agreement shall be signed on behalf of the Company by an officer or officers delegated such authority by the Committee using either manual or facsimile signature. Each Agreement shall comply with and be subject to the terms and conditions of the Plan. Any Agreement may contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee. 6.2 Option Grant Size and Grant dates. 6.2.1 Initial Grants. An option to purchase 5,000 Shares as adjusted pursuant to Article 7 (an "Initial Grant") shall be granted to a. each Director who is an Eligible Director on the Effective Date (as hereinafter defined), and b. each other Eligible Director immediately following the Annual Meeting at which such Director is first elected to be a Director or at the close of business on the day upon which such Eligible Director is first appointed by the Board to be a Director, whichever first occurs; provided, that if an Eligible Director who previously received an Initial Grant terminates service as a Director and is subsequently elected or appointed to the Board, such Director shall not be eligible to receive a second Initial Grant, but shall be eligible to receive only Annual Grants as provided in Section 6.2.2. 6.2.2 Annual Grants. An option to purchase 1,000 Shares as adjusted pursuant to Article 7 (an "Annual Grant"), shall be granted automatically each year, immediately following the Annual Meeting, to each Director who is an Eligible Director at such time. 6.3 Option Exercise Price. Each Agreement shall state the exercise price per share of the shares of Common Stock to which it relates. The exercise price per share of Common Stock subject to an option shall not be less than 100% of the fair market value ("Fair Market Value") per share of such Common Stock at the close of business on the day of the grant of the option. For purposes of this Plan, Fair Market Value on any date shall be the closing price per share of Common Stock on such date as reported on the New York Stock Exchange composite tape. 6.4 Exercisability. Subject to Section 6.7, an option shall become exercisable on the first anniversary of the day on which such option was granted, if the optionee has continued to serve as a Director until that day. 6.5 Time and Manner of Option Exercise. Any vested and exercisable option is exercisable in whole or in part at any time or from time to time during the term of the option period by giving written notice, signed by the person exercising the option, to the Company stating the number of Shares with respect to which the option is being exercised, accompanied by payment in full of the option exercise price for the number of Shares to be purchased and by the payment or making provision satisfactory to the Company for the payment of any taxes which the Company is obligated to collect with respect to the issue or transfer of the Shares upon such exercise. The date both such notice and payment are received by the office of the Secretary of the Company shall be the date of exercise for the stock option as to such number of Shares. No option may at any time be exercised with respect to a fractional Share. 6.6 Payment of Exercise Price. Payment of the option exercise price may be in cash or payment may be in whole or part by a. transfer to the Company of shares of Common Stock having a Fair Market Value equal to the option exercise price at the time of such exercise, or -2- b. delivery of instructions to the Company to withhold shares, that would otherwise be issued on such exercise of the option, having a Fair Market Value at the time of such exercise equal to the total option exercise price of the options being exercised. If the Fair Market Value of the number of whole shares transferred or the number of whole option Shares surrendered is less than the total exercise price of the option being exercised, the shortfall must be made up in cash. 6.7 Terms of Options. Each option shall expire ten years from its date of grant, but shall be subject to earlier termination as follows: a. In the event of the termination of an optionee's services as a Director by reason of voluntary mid-term retirement, declining to stand for re-election, becoming a full time employee of the Company or a subsidiary of the Company or becoming disabled, all options granted pursuant to this Plan but unexercisable pursuant to Section 6.4 shall automatically expire and shall not be exercisable and all options exercisable pursuant to Section 6.4 but unexercised shall continue to be exercisable until the stated expiration date of such options. b. In the event of the death of an optionee or total disability while the optionee is a Director, the then outstanding options of such optionee that have vested pursuant to Section 6.4 shall be exercisable for one year from the date of the death of the optionee or until the stated grant expiration date, whichever is earlier, by his/her successors in interest, in accordance with the paragraph below. However, all options which have been granted, but have not become exercisable pursuant to Section 6.4, shall automatically expire. c. In the event of the termination of an optionee's service as a Director by the Board of Directors for cause or the failure of such Director to be re-elected (other than for the reasons set forth in Section 6.7(a) or (b), the Committee in its sole discretion can cancel the then-outstanding options of such optionee, including those options which are exercisable and such options shall automatically expire and become non-exercisable on the effective date of such termination. Exercise of a deceased optionee's options that are still exercisable shall be by the estate of such optionee or by a person or persons whom the optionee has designated in writing filed with the Company, or, if no such designation has been made, by the person or persons to whom the optionee's rights have passed by will or the laws of descent and distribution. 6.8 Transferability. The right of any optionee to exercise an option granted under the Plan shall, during the lifetime of such optionee, be exercisable only by the optionee and shall not be assignable or transferable by such optionee other than by will or the laws of descent and distribution. 6.9 Limitation of Rights. 6.9.1 Limitation as to Shares. Neither the recipient of an option under the Plan nor an optionee's successor or -3- successors in interest shall have any rights as a stockholder of the Company with respect to any Shares subject to an option granted to such person until the date of issuance of a stock certificate for such Shares. 6.9.2 Limitation as to Directorship. Neither the Plan, nor the granting of an option, nor any other action taken pursuant to the Plan shall constitute or be evidence of any greement or understanding, express or implied, that an Eligible Director has a right to continue as a Director for any period of time or at any particular rate of compensation. 6.10 Regulatory Approval and Compliance. The Company shall not be required to issue any certificate or certificates for Shares upon the exercise of an option granted under the Plan or to record as a holder of record of Shares the name of the individual exercising an option under the Plan, without obtaining to the complete satisfaction of the Committee the approval of all regulatory bodies deemed necessary by the Committee and without complying, to the Committee's complete satisfaction, with all rules and regulations under federal, state, or local law deemed applicable by the Committee. 7. Capital Adjustments The aggregate number and class of Shares subject to and authorized by the Plan, the number of class of Shares with respect to which an option may be granted to an Eligible Director under the Plan as provided in Article 6, the number and class of Shares subject to each outstanding option, and the exercise price per share specified in each such option shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a split-up or consolidation of shares or any like capital adjustment or the payment of any stock dividend, or other increase or decrease in the number of such Shares effected without receipt of consideration by the Company. 8. Effectiveness of the Plan The Plan shall be effective as of 1994 (the "Effective Date"), subject to the approval by the Company's stockholders. All options issued prior to the date of the approval of the Plan by the Company's stockholders shall be issued subject to such approval. The Plan shall continue in effect until it is terminated by action of the Board or the Company's stockholders, but such termination shall not affect the terms of any then-outstanding options. 10. Termination and Amendment of the Plan The Board may amend, terminate or suspend the Plan at any time, in its sole and absolute discretion; provided, however, that if required to qualify the Plan under Rule 16b-3 promulgated under Section 16, of the Securities Exchange Act of 1934, as amended, ("Rule 16b-3") no amendment shall be made more than once every six months that would change the amount, price or timing of the Initial and Annual Grants, other than to comport with changes in the Internal Revenue Code of 1986, as amended, or the rules and regulations promulgated thereunder; and provided, further, that if required to qualify the Plan under the Rule 16b-3, no amendment that would a. materially increase the number of Shares that may be issued under the Plan, b. materially modify the requirements as to eligibility for participation in the Plan, or c. otherwise materially increase the benefits accruing to participants under the Plan shall be made without the approval of the Company's stockholders. -4- 11. Compliance with Rule 16b-3 Other provisions of the Plan notwithstanding, neither the Committee nor any other person (other than an Eligible Director acting in conformity with the terms of the Plan) shall have any discretionary authority to make determinations regarding the Plan required by Rule 16b-3 to be afforded exclusively to "disinterested persons" as defined thereunder. Adopted by the Board of Directors on September 12, 1994 and approved by the stockholders of the Company on June , 1995. -5- EX-10.7 3 EXHIBIT 10(vii) CONFORMED Employment Agreement --------------------- THIS EMPLOYMENT AGREEMENT, dated as of the 19th day of July, 1994 (the "Agreement"), between Orion Capital Corporation, a Delaware corporation (the "Company"), and Raymond W. Jacobsen ("Executive"); WHEREAS, the Company and Executive hereby agree as follows: 1. Employment. ----------- The Company hereby employs Executive to render services as Senior Vice President of the Company and President and Chief Executive Officer of the EBI Companies ("EBI"), subsidiaries of the Company. The Executive shall assume such responsibilities, perform such duties and have such authority as may from time to time be assigned, delegated or limited by the Company's Board of Directors and Executive shall provide such other services in the future to the Company and its subsidiaries as the Executive and the Company may mutually agree. The Company agrees that Executive will be located, and will render such services (subject to necessary and appropriate business related travel), at EBI's offices in Milwaukee, Wisconsin. Executive hereby accepts such employment and agrees to render his services fully, faithfully, and to the best of his ability, subject to the direction and control of the Board of Directors of the Company. Executive's services shall be exclusive to the Company. 2. TERM. ----- The term of this Agreement shall be for a period of five years commencing on July 19, 1994 and ending on July 18, 1999 (the "Term"). Such Term shall be automatically extended, on July 20, 1997, and at the end of each day thereafter, for one additional day unless the Company or the Executive shall at any time give written notice to the other of its or his, as the case may be, intention not to extend such Term, it being the intention of the parties that this Agreement shall, on and after July 20, 1997, at all times have an unexpired term of at least two years unless either party shall have given notice of termination in accordance with the provisions hereof. 3. COMPENSATION AND BENEFITS. -------------------------- (a) Base Salary. For the services to be rendered by Executive under this Agreement, the Company shall pay to Executive an annual base salary at the rate of not less than $170,000, payable in equal semi-monthly installments or on such other basis as may be applicable to senior executive officers of the Company, less income tax withholdings and other normal employee deductions. Executive will be entitled to receive such increases in his annual base salary as may be approved by the Company. (b) Bonus. Executive shall be entitled to participate in any bonus plan in effect for senior executive officers of the Company and shall receive bonus compensation in accordance therewith as determined by the Board of Directors of the Company or any Committee thereof designated by it. (c) Incentive Compensation and Stock Options. Executive shall participate in long-term and short-term incentive and deferred compensation programs and in stock option and stock award plans of the Company to the extent deemed appropriate by the Board of Directors of the Company in light of Executive's position in the Company. Executive shall, in any event, on and as of the date of this Agreement, be granted 8,000 shares of Restricted Stock of the Company in accordance with the terms of the Company's 1982 Long-Term Performance Incentive Plan, as amended, (the "Plan"). The restriction on the Restricted Stock granted -2- hereunder shall lapse in installments over a period of five years as follows: 25% as such shares of Restricted Stock shall vest on July 19, 1996 and an additional 25% of such shares of Restricted Stock shall vest on each of the third, fourth and fifth anniversaries of the date hereof. Executive shall also be granted 4,000 Performance Units pursuant to the Plan and the Performance Period (as defined in the Plan) applicable thereto shall expire not later than July 18,1999. In the event of Executive's death or disability prior to the complete vesting of these awards, such Restricted Stock and Performance Units will continue to vest as if Executive were still fully employed by the Company. (d) Other Benefits Plans. Executive shall participate in and receive benefits under and in accordance with the provisions of any employee benefit plan adopted or to be adopted by the Company and which is generally applicable to senior executive officers of the Company. 4. VACATION. -------- Executive shall be entitled to a vacation of not less than four weeks during each year. 5. REIMBURSEMENT FOR EXPENSES. --------------------------- Executive shall be entitled to incur on behalf of the Company reasonable and necessary expenses in connection with his duties and the Company shall pay for or reimburse Executive for all such expenses. 6. TERMINATION. ------------ (a) Executive's employment under this Agreement shall terminate: (i) upon the death of Executive; (ii) upon written notice from the Company to Executive in the -3- event of an illness or other cause incapacitating him from performing his duties for 180 consecutive days or for an aggregate of 180 days in any period of nine consecutive months; (iii) upon written notice from the Company in the event that Executive commits any felonious act, is guilty of gross negligence in the performance of his duties, or willfully fails or refuses to comply with the reasonable directions of the Board of Directors of the Company, which notice shall set forth the effective date of termination of this Agreement; (iv) upon seven days written notice to the other party, either party to this Agreement shall have the right to terminate this Agreement prior to the expiration of the Term hereof, for any reason whatsoever. (b) Upon the termination of employment: (i) pursuant to Section 6(a)(i), Executive's estate shall be entitled to receive within 30 days of the termination date base salary payments to the effective date of termination, a pro rata portion of such bonus, if any, as the Board of Directors of the Company shall determine would have been payable to Executive in respect of the fiscal year in which Executive dies and such other benefits, if any, as may be provided to Executive or his successors or beneficiaries under the terms (as modified by Section 3(c) hereof) of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant; (ii) pursuant to Section 6(a)(ii), Executive shall be entitled to receive disability compensation in accordance with the terms and conditions of the Company's disability insurance program, plus such other benefits, if any, as may be provided to him or his successors or beneficiaries under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may -4- have been a participant; (iii) pursuant to Section 6(a)(iii), Executive shall be entitled to receive on the termination date set forth in the notice given pursuant to that Section his base salary to the date of termination and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of employment under the circumstances provided for in Section 6(a)(iii). (iv) pursuant to Section 6(a)(iv), if (x) Executive gives such notice of termination, Executive shall be entitled to receive his base salary to date of termination as set forth in the notice given pursuant to that Section and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of his employment, or (y) the Company gives such notice of termination, Executive shall be entitled to receive his base salary payments as is in effect on the date of such termination during the remaining portion of the unexpired Term and a pro rata portion of such bonus, if any, as the Board of Directors of the Company shall determine would have been payable to Executive in respect of the fiscal year in which Executive terminates employment, and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of employment. -5- 7. UNFAIR COMPETITION. ------------------- In the course of his employment, Executive will have access to confidential records and information of the Company and its subsidiaries and affiliates. During his employment by the Company or any of its subsidiaries, and thereafter, Executive will not directly or indirectly misuse any such information or disclose the same except in accordance with his duties under this Agreement. This provision of this Section 7 shall survive the expiration or termination, for any reason, of this Agreement or Executive's employment. During the Term and for a period of two years thereafter, Executive agrees not to carry on in any state of the United States of America or in any foreign country in which the Company or any subsidiary or affiliate thereof is conducting business, either for himself or as a member of any partnership, or as a stockholder, director, officer, agent, or employee of another person, firm or corporation or otherwise, any business similar to that being carried on by the Company (or any subsidiary or affiliate thereof) if such business is materially detrimental to the Company or any such subsidiary, provided, however, that the mere ownership by Executive of not more than 5% of any corporation or similar business venture shall not be deemed to be a violation of this covenant. 8. MERGER OR REORGANIZATION. -------------------------- This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company or by any merger or consolidation where the Company is not the surviving or resulting corporation, or upon any transfer of all or substantially all of the assets of the Company. In the event of any such merger or consolidation or transfer of assets, the -6- provisions of this Agreement shall be binding and shall inure to the benefit of the surviving or resulting corporation or the corporation to which such assets shall be transferred. 9. ARBITRATION. ------------ Any controversy or claim arising out of or relating to this Agreement, the breach thereof or the coverage of this arbitration provision shall be settled by arbitration which shall be in accordance with the Commercial Arbitration Rules of the American Arbitration Association as such rules shall be in effect on the date of delivery of demand for arbitration. The arbitration of such issues, including the determination of the amount of any damages suffered by either party hereto by reason of the acts or omissions of the other, shall be to the exclusion of any court of law. The decision of the arbitrators or a majority of them shall be final and binding on both parties and their respective heirs, executors, administrators, successors and assigns. There shall be three arbitrators, one to be chosen directly by each party at will and the third arbitrator to be selected by the two arbitrators so chosen. Each party shall pay the fees of the arbitrator selected by him and of his own attorneys and the expenses of his witnesses and all other expenses connected with the presentation of his case. All other costs of the arbitration, including the cost of the record or transcripts thereof, if any, administrative fees, and all other fees and costs shall be borne equally by the parties. 10. NON-ASSIGNABILITY. ------------------ The obligations of Executive hereunder are personal and may not be assigned or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. -7- 11. AMENDMENT. ---------- This instrument contains the entire agreement of the parties. It may not be changed orally but only by a written agree-ment executed by both of the parties hereto. 12. NOTICES. -------- All notices which a party is required or may desire to give to the other party under or in connection with this Agreement shall be sufficient if given by addressing same to the other party as follows: (a) if to Executive to: Raymond W. Jacobsen 20815 Saxon Court Brookfield, Wisconsin 53045 (b) if to the Company to: Orion Capital Corporation 30 Rockefeller Plaza New York, New York 10112 Attn: Secretary or at such other place as may be designed in writing by like notice. Any notice shall be deemed to have been delivered when addressed as required herein and deposited, postage prepaid, in the United States Mail. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date hereinabove set forth. ORION CAPITAL CORPORATION By: ------------------------------------ Alan R. Gruber Chairman and Chief Executive Officer EXECUTIVE By: --------------------------------------- Raymond W. Jacobsen -8- EX-10.16 4 EXHIBIT 10(xvi) RETIREMENT PLAN FOR DIRECTORS OF ORION CAPITAL CORPORATION (As Amended September 12, 1994) Section 1. PURPOSE The purpose of the Plan is to provide the non-employee Directors of Orion Capital Corporation with post-retirement compensation for their services and to assist Orion Capital Corporation in attracting and retaining qualified individuals to serve as Directors. Section 2. DEFINITIONS "Affiliated Company" shall mean any company more than 50 percent of the voting stock of which is directly or indirectly owned by the Corporation. "Corporation" shall mean Orion Capital Corporation. "Credited Service" shall mean all years and fractions thereof of service as a Director, whether before or after the Effective Date. No period during which a Director was employed in the capacity of an employee of the Corporation or any Affiliated Company shall be included in determining the length of a Director's Credited Service. "Director" shall mean a member of the Board of Directors of the Corporation. "Effective Date" shall be April 1, 1990. "Payment Date" shall mean the date or dates on which persons who at such time are currently Directors are paid the Retainer. "Plan" shall mean this Retirement Plan for Directors of the Corporation. "Plan Administrator" shall mean the Secretary of the Corporation. "Retainer" shall mean the annual fee established by the Board of Directors of the Corporation for service as a Director, but excluding meeting fees, any additional fees paid to a Chairman of a Committee of the Board of Directors of the Corporation, expense reimbursements, and any stock options granted to any Director. Section 3. PARTICIPATION All individuals who are Directors on and after the Effective Date and who have at least five (5) years of Credited Service shall be entitled to participate in the Plan and receive the benefits provided hereunder, except that all individuals who were Directors after the Effective Date and prior to September 12, 1994, shall be entitled to participate in the Plan and receive the benefits hereunder irrespective of whether or not any such individual has five (5) years of Credited Service. Section 4. ELIGIBILITY FOR RETIREMENT BENEFITS A Director shall be entitled upon the termination of service as a Director to the retirement benefits provided under Section 6 of this Plan when such Director terminates service as a Director to the Corporation or following a Change in Control, as defined in Section 5 below. Section 5. CHANGE IN CONTROL For the purpose of this Plan, a "Change in Control" shall be deemed to have occurred if and when: (i) any "person", as such term is used in Sections 13(d) and 14(d) (2) of the Securities Exchange Act of 1934 (the "Act"),becomes a beneficial owner, as such term is used in Rule 13d-3 of the Act, of securities of the Corporation representing 40 percent or more of the voting power of the outstanding common stock of the Corporation, (any such owner being hereinafter referred to as an "Acquiring Person"); (ii) a majority of the Board of Directors of the Corporation (the "Board") at anytime consists of individuals elected to membership at a Board meeting or a Corporation shareholders' meeting other than individuals nominated or approved by a majority of Disinterested Directors; (iii) all or substantially all of the business of the Corporation is disposed of pursuant to a merger, consolidation or other transaction (other than a merger, consolidation or other transaction with a company of which 50 percent or more of the combined voting power of the outstanding securities having a right to vote at the election of directors is owned, directly or indirectly, by the Corporation both before and immediately after the merger, consolidation or other transaction) in which the Corporation is not the surviving corporation or the Corporation is materially or completely liquidated. (iv) The Corporation combines with another company and is the surviving corporation (other than a merger, consolidation or other transaction with a company of which 50 percent or more of the combined voting power of the outstanding securities having a right to vote at the election of directors is owned, immedately after the merger, consolidation or other trans- action), but immediately after the combination, the shareholders of the Corporation hold, directly or indirectly less than 50 percent of the total outstanding securities of the combined company having a right to vote at the election of directors. For this purpose, "Disinterested Directors" shall mean any member of the Board (i) who is not an officer or employee of the Corporation or any of its subsidiaries, (ii) who is not an Acquiring -2- Person or an affiliate or associate of an Acquiring Person or a nominee or representative of an Acquiring Person and (iii) who was a member of the Board on the Effective Date or was recommended for election or elected by a majority of the Disinterested Directors then on the Board. Section 6. RETIREMENT BENEFITS The annual retirement benefit payable under the Plan to a retired Director shall be equal to one half (1/2) the annual Retainer in effect on the date a Director's service terminates. The retirement benefit retirement benefit payable for a fractional period of Credited Service shall equal the appropriate fraction of such Retainer. This annual retirement benefit shall be payable to the former Director (or, in the event of his or her death, thereafter to his or her beneficiary or beneficiaries) for a period equal to the length of his or her Credited Service or fifteen (15) years, whichever is less. Payment of the retirement benefit shall be made on each Payment Date commencing with the Payment Date following his or her termination of service, for any reason, as a Director. Notwithstanding the foregoing provisions, however, in the case of retirement benefits to be received following a Change in Control, such benefits, calculated as set forth above, shall be paid in one lump sum, without discount, on the first Payment Date following such Change in Control. Section 7. DEATH BENEFITS In the event that a Director dies while serving as a Director, then a death benefit shall be paid under this Plan to the Director's beneficiary or beneficiaries in an amount and at the times a retirement benefit would have been payable to the Director pursuant to Section 6. Section 8. BENEFICIARIES A Director or former Director's beneficiary or beneficiaries shall be the person or persons last designated as such in a writing and filed by the Director or former Director with the Plan Administrator. If no designation is in effect or the person or persons so designated do not survive the Director or former Director, the beneficiary shall be the estate of the Director or former Director. Section 9. SUSPENSION OF BENEFITS In the event a retired Director who is receiving retirement benefits under this Plan returns to service as a Director, payment of such retirement benefits shall be suspended during such subsequent period of service. Payment of retirement benefits shall commence again on the Payment Date following the date such subsequent service as a Director terminates. The amount of the remaining retirement benefits following such subsequent termination shall be based on the Retainer in effect at the time of such subsequent termination of service as a Director. Payments shall continue until the total period that payment of retirement benefits are made, including the -3- time of payments made prior to an individual's return to service as a Director, equals the total Credited Service by the individual as a Director, or fifteen (15) years, whichever is less. Section 10. FUNDING The benefits payable under this Plan shall not be secured by any assets of the Corporation or any Affiliated Company, nor shall any assets of the Corporation or any Affiliated Company be set aside or allocated to the satisfaction of such benefits. Benefits under the Plan shall be paid from the general assets of the Corporation and each Director's interest in his or her benefits under this Plan shall be only that of an unsecured general creditor of the Corporation. Section 11. ADMINISTRATION The Plan shall be administered by the Plan Administrator. In addition to the powers otherwise specifically granted the Plan Administrator under this Plan, the Plan Administrator shall (i) be empowered to administer and interpret the Plan, (ii) adopt or revise any rules or regulations pertaining to the Plan, and (iii) make any other determinations which he or she believes are necessary or advisable for the administration of the Plan. Section 12. ALIENATION OF BENEFITS No interest of any Director or beneficiary hereunder shall be transferred, assigned, pledged, anticipated or alienated by the Director or beneficiary or beneficiaries in any manner (except by will or the laws of descent and distribution) nor shall it be subject to attachment, bankruptcy proceedings or to any other legal process or the interference or control of creditors of the Director or any beneficiary or beneficiaries of the Director. Section 13. GOVERNING LAWS This Plan shall be governed by and construed under the laws of the State of Delaware. Section 14. AMENDMENT, MODIFICATION, OR TERMINATION OF THE PLAN The Board of Directors at any time may in any respect terminate, amend or modify the Plan, without the consent of any Director or beneficiary, provided that no amendment may reduce the accrued benefits of any Director. -4- EX-10.19 5 EXHIBIT 10(xix) CONFORMED AMENDMENT TO SHAREHOLDER AGREEMENT This Amendment Agreement (the "Amendment") is made as of February 2, 1994, by and among Guaranty National Corporation, a Colorado corporation ("Guaranty"), Orion Capital Corporation, a Delaware corporation ("Orion"), and the wholly owned subsidiaries of Orion (the "Selling Shareholders") listed on Schedule 1 to the Shareholder Agreement dated as of November 7, 1991 (the "Shareholder Agreement"), among Guaranty, Orion and the Selling Shareholders. WHEREAS, the parties have determined that it would be in their mutual best interests to provide for a further increase in the number of independent directors of Guaranty, NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements, and subject to the terms and considerations set forth herein, the parties hereto agree as follows: 1. Section 1.1(b) of the Shareholder Agreement is hereby amended so as to provide in the end of the first sentence thereof that "the Board of Directors of Guaranty shall consist of ten members." Clause (iii) of the second sentence thereof is hereby amended to provide that the Board of Directors of Guaranty shall include "up to five nominees . . . mutually agreeable to Orion and Guaranty . . ." 2. Except as expressly provided herein, the Shareholder Agreement shall continue in full force and effect. IN WITNESS WHEREOF, each of the parties hereto duly authorized thereunto, has executed this Agreement as of the day and year set forth in the heading hereof. GUARANTY NATIONAL CORPORATION By: /s/ Michael L. Pautler -------------------------- Michael L. Pautler Senior Vice President ORION CAPITAL CORPORATION By: /s/ Michael P. Maloney ---------------------------- Michael P. Maloney Vice President THE CONNECTICUT INDEMNITY COMPANY CONNECTICUT SPECIALTY INSURANCE COMPANY DESIGN PROFESSIONALS INSURANCE COMPANY EMPLOYEE BENEFITS INSURANCE COMPANY THE FIRE & CASUALTY INSURANCE COMPANY OF CONNECTICUT SECURITY INSURANCE COMPANY OF HARTFORD SECURITY REINSURANCE COMPANY By: /s/ Michael P. Maloney --------------------------- Michael P. Maloney Senior Vice President -2- AMENDMENT TO SHAREHOLDER AGREEMENT This Amendment Agreement (the "Amendment") is made as of March 2, 1995, by and among Guaranty National Corporation, a Colorado corporation ("Guaranty"), Orion Capital Corporation, a Delaware corporation ("Orion"), and the wholly owned subsidiaries of Orion (the "Selling Shareholders") listed on Schedule 1 to the Shareholder Agreement dated as of November 7, 1991 (the "Shareholder Agreement"), among Guaranty, Orion and the Selling Shareholders. WHEREAS, the parties have determined that it would be in their mutual best interests to provide for a further increase in the number of independent directors of Guaranty, NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements, and subject to the terms and considerations set forth herein, the parties hereto agree as follows: 1. Section 1.1(b) of the Shareholder Agreement is hereby further amended so as to provide at the end of the first sentence thereof that ". . . the Board of Directors of Guaranty shall consist of eleven members." (Emphasis added.) The second ------ sentence thereof is hereby amended to provide that "Nominees for such eleven directorships shall be designated as follows: . . . ------ (iii) up to six nominees shall be nominees mutually agreeable to ---------- Orion and Guaranty who are not (x) officers, directors or employees of Orion or its wholly-owned subsidiaries, other than --------- one such nominee who is a retired officer and director of Orion - --------------------------------------------------------------- but who is still an employee of Orion, or (y) . . ." (Emphasis - -------------------------------------- added.) 2. Except as expressly provided herein, the Shareholder Agreement shall continue in full force and effect. IN WITNESS WHEREOF, each of the parties hereto duly authorized thereunto, has executed this Agreement as of the day and year set forth in the heading hereof. GUARANTY NATIONAL CORPORATION By: /s/ Roger Ware -------------------------- Roger Ware ORION CAPITAL CORPORATION By: /s/ Alan R. Gruber ---------------------------- Alan R. Gruber THE CONNECTICUT INDEMNITY COMPANY CONNECTICUT SPECIALTY INSURANCE COMPANY DESIGN PROFESSIONALS INSURANCE COMPANY EMPLOYEE BENEFITS INSURANCE COMPANY THE FIRE & CASUALTY INSURANCE COMPANY OF CONNECTICUT SECURITY INSURANCE COMPANY OF HARTFORD SECURITY REINSURANCE COMPANY By: /s/ Vincent T. Papa --------------------------- Vincent T. Papa Senior Vice President -2- EX-10.21 6 EXHIBIT 10(xxi) CONFORMED As of February 22, 1994 Orion Capital Corporation 30 Rockefeller Plaza New York, New York 10112 Attention: Vincent T. Papa, Vice President Dear Mr. Papa: Reference is made to (i) the Loan Agreement (the "Loan Agreement") dated March 8, 1993 by and between Orion Capital Corporation, a Delaware corporation (the "Borrower"), the banks signatory thereto (the "Banks) and National Westminster Bank USA, as Agent (the "Agent"). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Loan Agreement. This letter confirms our agreement that the Loan Agreement is hereby amended by: 1. Amending the definition of "Significant Subsidiaries" in Article I by deleting "EBI," in the second line thereof. 2. Deleting "15" in the first line of subsection 5.11(a) and substituting "30" therefor. 3. Amending Section 7.4 by: (i) deleting "and" at the end of subsection 7.4(c); (ii) inserting "acquire all or substantially all of the capital stock of EBIC or" after "may" in the first line of subsection 7.4(d); (iii) deleting "(i)" and "(ii)" in the fourth and sixth lines, respectively of subsection 7.4(d) and substituting "(A)" and "(B)", respectively, therefor; and (iv) deleting the period at the end of subsection 7.4(d) and substituting "; and" therefor and inserting the following new subsection 7.4(e) thereafter: "(e)Orion Capital Companies, Inc. may acquire all or substantially all of the capital stock of DPIC Companies, Inc. and EBI Companies, Inc." Orion Capital Corporation As of February 22, 1994 Page 2 4. Deleting "(b)" in the eighth line of Section 7.7 and substituting "(c)" therefor and by inserting "(b) the dissolution of EBI and Design Professionals Financial Corporation;" after the semi-colon in the eighth line thereof. 5. Inserting "(i) any termination in connection with the dissolution of EBI or Design Professionals Financial Corporation or (ii)" after "except" in the fourth line of subsection 7.12(a). 6. Deleting Schedule 3.1 in its entirety and substituting the attached Schedule 3.1 therefor. 7. Whether or not expressly referred to in paragraphs 1 through 6 above, each other provision of the Loan Agreement shall be deemed amended hereby to the extent necessary consistent with and to effectuate the provisions hereof. All references in the Loan Agreement, the Loan Documents and all other instruments, documents and agreements executed and delivered pursuant to any of the foregoing to the "Loan Agreement", shall be deemed to refer to the Loan Agreement as amended and supplemented by this Amendment. The Borrower hereby represents and warrants to the Agent and the Banks: 1. After giving effect to this Amendment, each and every one of the representations and warranties set forth in Article 3 of the Loan Agreement is true in all respects as of the date hereof and there exists no Default or Event of Default under the Loan Agreement, and no event which, with the giving of notice or lapse of time or both, would constitute an Event of Default. 2. It has full power and authority to enter into, and has taken all proper and necessary corporate action to authorize this Amendment. 3. This Amendment has been duly executed and delivered and constitutes the valid and legally binding obligation of the Borrower, enforceable in accordance with its terms. This Amendment shall be binding upon and inure to the benefit of the Borrower and its successors and to the benefit of the Agent and the Banks and their successors and assigns. Orion Capital Corporation As of February 22, 1994 Page 3 Except as amended hereby, the Loan Agreement shall remain in full force and effect in accordance with its terms. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. This Amendment may be signed in any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. Sincerely, NATIONAL WESTMINSTER BANK USA, as Agent and a Bank By /s/ Robert M. Carley -------------------------------- Robert M. Carley Vice President Title FLEET BANK, NATIONAL ASSOCIATION By /s/ Jan-Gee W. McCollam --------------------------------- Jan-Gee W. McCollam Senior Vice President Title SHAWMUT BANK CONNECTICUT, N.A. By /s/ Jeffrey L. Seavey -------------------------------- Jeffrey L. Seavey Vice President Title CONTINENTAL BANK N.A. By /s/ Janet R. Gates --------------------------------- Janet R. Gates Vice President Title Orion Capital Corporation As of February 22, 1994 Page 4 SANWA BANK CALIFORNIA By /s/ John E. Linder ------------------------------- John E. Linder Vice President Title STATE STREET BANK AND TRUST COMPANY By /s/ Edward M. Anderson --------------------------------- Edward M. Anderson Vice President Title ACCEPTED AND AGREED: ORION CAPITAL CORPORATION By /s/ Vincent T. Papa ------------------------------------- Vincent T. Papa Vice President & Treasurer Title AMENDMENT NO. 2 TO LOAN AGREEMENT AMENDMENT NO. 2 dated the 9th day of November, 1994 by and between ORION CAPITAL CORPORATION, a Delaware corporation (the "Borrower"), the Banks that have executed the signature pages hereto (individually, a "Bank" and collectively, the "Banks") and NATIONAL WESTMINSTER BANK USA, a national banking association, as Agent for the Banks (in such capacity, the "Agent"). W I T N E S S E T H: WHEREAS: (A) The Borrower, the Banks and the Agent entered into a Loan Agreement dated March 8, 1993 (as amended by a letter agreement dated as of February 22, 1994, the "Loan Agreement") pursuant to which the Banks agreed to make loans to the Borrower; (B) The Borrower desires that the Loan Agreement be amended in certain respects; (C) The Banks are willing to amend the Loan Agreement upon the terms and subject to the conditions of this Amendment No. 2; and (D) Capitalized terms not defined herein shall have the meanings ascribed to such terms in the Loan Agreement; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE 1 AMENDMENTS TO LOAN AGREEMENT. --------- ----------------------------- Subject to the satisfaction of the conditions contained in Article 5 hereof, the Loan Agreement is hereby amended as follows: 1.01 Article 1 of the Loan Agreement is hereby amended by: (a) Deleting the definitions set forth opposite the capitalized terms set forth below and substituting therefor the following definitions: Applicable Margin: as of any date of determination thereof, the applicable percentage set forth in the table below based upon the type of Loan and the rating of the Senior Notes (or any refinancing thereof which is senior unsecured long-term debt, without third party credit enhancement) as determined by each of Standard & Poor's Corporation, Moody's Investors Service, Inc. and Duff & Phelps Credit Rating Co. as at such date of determination: EURODOLLAR PRIME RATE RATINGS LOANS CD LOANS LOANS - -------- ---------- --------- ----------- A-/A3 and higher 0.50% 0.75% -0- BBB+/Baa1 0.70% 0.85% -0- BBB/Baa2 0.90% 1.00% -0- BBB-/Baa3 1.10% 1.20% -0- BB+/Ba1 and lower 1.30% 1.40% -0- ; provided, however, that in the event the rating of the Senior Notes (or such refinancing thereof) as determined by each of Standard & Poor's Corporation, Moody's Investors Service, Inc. and Duff & Phelps Credit Rating Co. shall not be equivalent, then the rating of the two such rating agencies that are equivalent shall be used in determining the Applicable Margin, or, if none of the ratings of such rating agencies are equivalent, then the rating of the rating agency that is the middle rating shall be used in determining the Applicable Margin; provided, further, that if any of Standard & Poor's Corporation, Moody's Investors Service, Inc. or Duff & Phelps Credit Rating Co. shall cease to issue a rating of -2- the Senior Notes (or such refinancing thereof) and the rating of the Senior Notes (or such refinancing thereof) of the two remaining rating agencies is not equivalent, the rating of the rating agency that is the higher rating shall be used in determining the Applicable Margin; provided, further, that if none of Standard & Poor's Corporation, Moody's Investors Service, Inc. or Duff & Phelps Credit Rating Co. shall issue a rating of the Senior Notes (or such refinancing), then the Agent and the Borrower shall negotiate in good faith to agree upon a substitute rating agency (and to correlate the system of ratings of such substitute rating agency with that of the rating agency for which it is substituting) and after such substitute rating agency is agreed upon, the foregoing determination shall be made on the basis of the rating assigned by such substitute rating agency provided that such substitute rating agency shall have been approved by the Majority Banks." "Commitment(s): as to each Bank, the respective amounts set forth opposite such Bank's name on the signature pages to Amendment No. 2 under each of the captions "Term Loan Commitment" and "Revolving Credit Commitment", as the case may be, as such amounts shall and/or may be reduced in accordance with the terms hereof." "Consolidated Net Worth: the sum of: (a) the common stock equity and preferred stock (including, without limitation, the Preferred Stock) equity of the Borrower, plus (without duplication) (b) the amount of capital surplus and retained earnings (or in the case of a deficit, minus the deficit); all of which shall be determined in accordance with generally accepted accounting principles consistently applied except (i) to the extent that an inconsistency results from compliance with financial accounting standards adopted by the Borrower after March 8, 1993 with which the Borrower's independent certified public accountants concur and (ii) that Consolidated Net Worth shall be determined excluding the effects of classifying fixed maturity investments as other than "held to maturity" in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standard number 115 since December 31, 1993." Fee(s): as defined in subsection 2.7(f) hereof." Net Loss: for any fiscal year, the consolidated net loss (if any) of the Borrower and its consolidated Subsidiaries as reported in their consolidated financial statements delivered pursuant to Section 5.1 hereof, but shall exclude: (i) any extraordinary gains or losses; (ii) the cumulative effects of any accounting changes pursuant to generally accepted accounting -3- principles, (iii) the effects of classifying fixed maturity investments as other than "held to maturity" in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standard number 115; and (iv) any gains (or losses) after taxes recognized by the Borrower or any of its Subsidiaries upon the sale of any GNC Stock." "Revolving Credit Commitment: as to each Bank, the amount set forth opposite such Bank's name on the signature pages of Amendment No. 2 under the caption "Revolving Credit Commitment"." "Revolving Credit Commitment Termination Date: December 31, 1999." (b) Adding thereto the following definitions in the appropriate alphabetical order: "Amendment No. 2: Amendment No. 2 to Loan Agreement dated the Second Amendment Closing Date between the Borrower, the Banks and the Agent." "Second Amendment Closing Date: November 9, 1994." "Second Amendment Fee: as defined in Subsection 2.7(e) hereof." 1.02 Section 1.2 of the Loan Agreement is hereby amended by inserting "as provided in the definitions of Consolidated Net Worth and Net Loss in Section 1.1 hereof and" after "except" in the fourth line thereof. 1.03 Section 2.4(b) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: "(b) The Revolving Credit Loans made by each Bank shall be evidenced by a single promissory note of the Borrower to such Bank in substantially the form of Exhibit A to Amendment No. 2 (each, a "Revolving Credit Note" and collectively, the "Revolving Credit Notes" and, together with the Term Notes, each a "Note" and collectively, the "Notes"). Each Revolving Credit Note shall be dated the Second Amendment Closing Date, shall be payable to the order of such Bank in a principal amount equal to such Bank's -4- Revolving Credit Commitment as in effect on the Second Amendment Closing Date (after giving effect to Amendment No. 2), and shall otherwise be duly completed. The Revolving Credit Notes shall be payable as provided in subsection 2.1(b) hereof." 1.04 Subsections 2.5(a)(i) and 2.5(e) of the Loan Agreement are each hereby deleted in their entirety and the following substituted therefor: "[INTENTIONALLY OMITTED]" 1.05 Subsection 2.5(c) of the Loan Agreement is hereby amended by deleting "2.5(a)(i) and" from the fifth line thereof. 1.06 Section 2.7 of the Loan Agreement is hereby amended by deleting subsection 2.7(e) in its entirety and substituting the following therefor: "(e) Simultaneously with the execution and delivery of Amendment No. 2, the Borrower shall pay to the Agent, for the account of the Banks, pro rata according to their respective Revolving Credit Commitments, a non-refundable facility fee (the "Second Amendment Fee") in an aggregate amount equal to Seventy- five Thousand Dollars ($75,000.00). (f) The Revolving Credit Commitment Fee, the Term Loan Commitment Fee, the Facility Fee, the Agency Fee and the Second Amendment Fee are hereinafter sometimes referred to individually as a "Fee" and collectively, as the "Fees"." 1.07 Section 2.10 of the Loan Agreement is hereby amended by adding a new sentence at the end thereof to read as follows: "Each change in the Applicable Margin as a result of a change in the rating of the Senior Notes (or any refinancing thereof as provided in the definition of Applicable Margin) shall become effective, (a) on the date upon which such change in rating occurs with respect to Prime Rate Loans and (b) on the first day of each Interest Period commencing after the date upon which such change in rating occurs with respect to Eurodollar Loans and CD Loans." -5- 1.08 Section 3.5 of the Loan Agreement is hereby amended by deleting "$4,000,000" in the third line thereof and substituting "$7,000,000" therefor. 1.09 Section 3.6 of the Loan Agreement is hereby amended by deleting "$4,000,000" in the seventh and eleventh lines thereof and substituting in each case "$7,000,000" therefor. 1.10 Section 5.4 of the Loan Agreement is hereby amended by deleting "$1,000,000" in the tenth line thereof and substituting "$5,000,000" therefor. 1.11 Section 6.7 of the Loan Agreement is hereby amended by deleting "Four Million Dollars ($4,000,000)" in the seventh line thereof and substituting "Seven Million Dollars ($7,000,000)" therefor. 1.12 Subsection 6.9(a) of the Loan Agreement is hereby deleted in its entirety and the following substituted therefor: "(a)Have and maintain as at the last day of each fiscal quarter during the periods set forth below a Consolidated Net Worth of not less than the respective amounts set forth opposite each such period: Minimum Consolidated Period Net Worth - ------- -------------------- March 8, 1993 through and including December 31, 1993 $260,000,000 January 1, 1994 through and including October 31, 1994 $285,000,000 November 1, 1994 through and including December 31, 1994 $330,000,000 January 1, 1995 through and including December 31, 1995 $345,000,000 January 1, 1996 through and including December 31, 1996 $360,000,000 January 1, 1997 through and including December 31, 1997 $375,000,000 January 1, 1998 through and including December 31, 1998 $390,000,000 January 1, 1999 through and including December 31, 1999 $405,000,000 provided, however, that (1) the amounts set forth above shall be increased automatically by an amount equal to all gains after taxes recognized by the Borrower or any Subsidiary upon the sale of any GNC Stock held by it (including, without limitation, by the amount of all gains recognized upon the sale of the initial 300,000 shares of GNC Stock sold by the Borrower and/or its Subsidiaries referred to below) provided that such amounts shall be increased in accordance with this clause (1) only after the date on which the Borrower and its Subsidiaries have sold, in the aggregate, more than 300,000 shares of GNC Stock after the date of this Agreement; and (2) the amounts set forth above shall be decreased automatically by an amount equal to the purchase price paid (less any broker's commission paid in connection with any such repurchase) by the Borrower for the repurchase of its common stock after September 30, 1994 provided that such amounts shall be decreased in accordance with this clause (2) only after the date on which the Borrower has repurchased in the aggregate more than 200,000 shares of its common stock after September 30, 1994." 1.13 Subsection 7.2(d) of the Loan Agreement is hereby amended by deleting "$3,000,000" in the ninth line thereof and substituting "$7,000,000" therefor. 1.14 Subsection 7.3(g) of the Loan Agreement is hereby amended by deleting "$5,000,000" in the fourth line thereof and substituting "$7,000,000" therefor. -7- 1.15 Subsection 7.4(d) of the Loan Agreement is hereby amended by deleting clause (B) thereof in its entirety and substituting the following therefor: "(B)the aggregate amount of the consideration (whether Cash, notes or other forms of payment) paid by the Borrower for or in all such purchases permitted under this subsection 7.4(d) after the Second Amendment Closing Date would not exceed the lesser of (x) an amount equal to fourteen percent (14%) of the tangible net worth of the Borrower and its consolidated Subsidiaries (as determined in accordance with generally accepted accounting principles) as at the fiscal quarter most recently completed prior to the date of such purchase and (y) $50,000,000." 1.16 Section 7.13 of the Loan Agreement is hereby amended by deleting "$5,000,000" in the fourth line thereof and substituting "$10,000,000" therefor. 1.17 Section 7.14 of the Loan Agreement is hereby amended by deleting the chart contained therein and substituting the following therefor: "Fiscal Year Policyholders' Surplus ------------ ----------------------- 1993 $220,000,000 1994 $275,000,000 1995 $290,000,000 1996 $305,000,000 1997 $320,000,000 1998 $335,000,000 1999 $350,000,000" 1.18 Section 7.16 of the Loan Agreement is hereby deleted in its entirety and the following substituted therefor: "Section 7.16 Net Loss. With respect to the Borrower and its consolidated Subsidiaries, have a Net Loss in each of two consecutive fiscal years and which combined exceed $25,000,000." -8- 1.19 Section 8.4 of the Loan Agreement is hereby amended by deleting "$5,000,000" in the last line thereof and substituting "$10,000,000" therefor. 1.20 Section 8.7 of the Loan Agreement is hereby amended by (a) deleting "$5,000,000" in the third and eleventh lines thereof and substituting "$10,000,000" therefor and (b) deleting "$10,000,000" in the fourth and eleventh lines thereof and substituting "$20,000,000" therefor. 1.21 Section 10.6 of the Loan Agreement is hereby amended by deleting the first sentence thereof in its entirety and substituting the following therefor: "No modification, amendment or waiver of or with respect to any provision of this Agreement, any Notes, or any of the other Loan Documents and all other agreements, instruments and documents delivered pursuant hereto or thereto, nor any departure by the Borrower from any of the terms or conditions hereof or thereof, shall in any event be effective unless it shall have been consented to in writing by the Agent and each Bank, except that any modification or amendment of, or waiver or departure by the Borrower with respect to, Articles 1 (other than the definition of "Majority Banks" set forth in Section 1.1 hereof), 3, 4 (provided, however, that the consummation of a Loan by a Bank shall be deemed, with respect to such Loan only, to have the effect of such Bank consenting to the waiver of, or departure from, any term or provision of Article 4 that has not been satisfied as of the date of consummation of such Loan), 5, 6, 7, 8 (other than Sections 8.1 or 8.6 hereof) and 10 (other than this Section 10.6) may be consented to in writing by the Majority Banks, which written consent shall be signed by the Agent upon the direction of such Majority Banks." 1.22 Section 10.9 of the Loan Agreement is hereby amended by deleting paragraphs (a) and (c) thereof in their entirety and substituting the following therefor: -9- "(a)If to the Borrower: Orion Capital Corporation 600 Fifth Avenue New York, New York 10020 Attention: Mr. Vincent T. Papa Vice President and Treasurer Telecopier No.: (212) 581-7261 with a copy to: Donovan Leisure Newton & Irvine 30 Rockefeller Plaza New York, New York 10112 Attention: John J. McCann, Esq. Telecopier No.: (212) 632-3315" "(c)If to the Agent: National Westminster Bank USA, as Agent 592 Fifth Avenue New York, New York 10036 Attention: Mr. David C. Tesher Vice President Telecopier No.: (212) 602-2080 with a copy (other than in the case of Borrowing Notices and reports and other documents delivered in compliance with Article 5 hereof) to: Winston & Strawn 175 Water Street New York, New York 10038 Attention: Marc C. Lewis, Esq. Telecopier No.: (212) 858-4700" 1.23 The Loan Agreement is hereby amended by deleting the schedules thereto in their entirety and substituting therefor the schedules attached to Amendment No. 2 as Exhibit B. -10- ARTICLE 2. AMENDED AND RESTATED REVOLVING CREDIT NOTES. -------------------------------------------- 2.01 Simultaneously with the execution and delivery of this Amendment No. 2, the Borrower shall execute and deliver to each Bank an Amended and Restated Revolving Credit Note in substitution for, and in restatement of, the indebtedness evidenced by the Revolving Credit Note of such Bank. Upon the execution of the Amended and Restated Revolving Credit Note and delivery thereof by the Borrower to such Bank, such Bank shall mark its existing Revolving Credit Note "Amended and Restated by Substitution of Amended and Restated Revolving Credit Note" and shall return it to the Borrower. All interest accrued and unpaid on the existing Revolving Credit Note through the date of execution and delivery of the Amended and Restated Revolving Credit Note shall be evidenced by and payable under the Amended and Restated Revolving Credit Note. ARTICLE 3. ACKNOWLEDGMENTS AND CONFIRMATIONS. ----------------------------------- 3.01 The Borrower acknowledges and confirms that: (a) the term "Obligations" as used in the Loan Documents (or any other term used therein to refer to the Indebtedness, liabilities and obligations of the Borrower to a Bank) includes, without limitation, Indebtedness, liabilities and obligations to such Bank under the Loan Agreement, as amended by -11- this Amendment No. 2, and the Amended and Restated Revolving Credit Note; (b) all references in the Loan Agreement, the other Loan Documents and in any other agreement, instrument and document executed and delivered pursuant to any of the foregoing to the "Loan Agreement" and, in the case of the Loan Agreement to "this Agreement", shall be deemed to refer to the Loan Agreement, as amended hereby; and (c) all references in the Loan Agreement,the other Loan Documents and in any other agreement, instrument or document executed and delivered pursuant to any of the foregoing to the "Notes" or the "Revolving Credit Notes" shall be deemed to refer to the Amended and Restated Revolving Credit Notes. ARTICLE 4. REPRESENTATIONS AND WARRANTIES. ------------------------------- 4.01 The Borrower represents and warrants to the Agent and the Banks that: (a) without giving effect to the amendments to the Loan Agreement set forth in this Amendment No. 2, each of the representations and warranties set forth in Article 3 of the Loan Agreement is true in all respects as of the date hereof and with the same effect as though made on the date hereof, and is hereby incorporated herein in full by reference as if fully restated herein in its entirety, except for changes in the ordinary course -12- of business, which are not, either singly or in the aggregate, materially adverse to the business or financial condition of the Borrower and its Subsidiaries taken as a whole; (b) without giving effect to the amendments to the Loan Agreement set forth in this Amendment No. 2, as of the date hereof, there exists no Event of Default under the Loan Agreement, and no event which, with the giving of notice or lapse of time, or both, would constitute such an Event of Default; (c) it has the power to execute, deliver and perform this Amendment No. 2 and each of the Amended and Restated Revolving Credit Notes. The Borrower has taken all necessary action to authorize the execution, delivery and performance of this Amendment No. 2 and each of the Amended and Restated Revolving Credit Notes. No consent or approval of any Person (including, without limitation, any stockholder), no consent or approval of any landlord or mortgagee, no waiver of any Lien or right of distraint or other similar right and no consent, license, approval, authorization or declaration of any governmental authority, bureau or agency, is required in connection with the execution, delivery or performance by the Borrower, or the validity or enforcement of this Amendment No. 2 and each of the Amended and Restated Revolving Credit Notes; (d) the execution and delivery by it of this Amendment No. 2 and each of the Amended and Restated Revolving -13- Credit Notes and performance by it hereunder and thereunder, will not violate any provision of law and will not conflict with or result in a breach of any order, writ, injunction, ordinance, resolution, decree or other similar document or instrument of any court or governmental authority, bureau or agency, domestic or foreign, or its certificate of incorporation or by-laws, or create (with or without the giving of notice or lapse of time, or both) a default under or breach of any agreement, bond, note or indenture to which it is a party, or by which it is bound or any of its properties or assets is affected, or result in the imposition of any Lien of any nature whatsoever upon any of the properties or assets owned by or used in connection with its business; and (e) this Amendment No. 2 and the Amended and Restated Revolving Credit Notes have been duly executed and delivered by it and each constitutes the valid and legally binding obligation of the Borrower, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws, now or hereafter in effect, relating to or affecting the enforcement of creditors' rights generally and except that the remedy of specific performance and other equitable remedies are subject to judicial discretion. -14- ARTICLE 5. CONDITIONS. ----------- 5.01 The effectiveness of the amendments contained in Article 1 of this Amendment No. 2 shall be subject to the satisfaction of the following conditions: (a) The Borrower shall have executed and delivered this Amendment No. 2; (b) The Borrower shall have executed and delivered to each Bank its Amended and Restated Revolving Credit Note against surrender of the outstanding Revolving Credit Notes; (c) The Agent shall have received: (i) (A) a copy of the certificate of incorporation of the Borrower certified by the secretary of state of the state of the Borrower's incorporation and (B) a certificate of the secretary of the Borrower to the effect that the certificate of incorporation and by-laws of the Borrower delivered to the Agent pursuant to the Loan Agreement have not been amended, modified or changed in any respect and are in full force and effect as of the Second Amendment Closing Date; (ii) copies of all corporate action taken by the Borrower to authorize the execution, delivery and performance of this Amendment No. 2 and each of the Amended and Restated Revolving Credit Notes and the transactions contemplated hereby and thereby, certified as true, correct and complete by its secretary; and (iii) an incumbency certificate (with specimen signatures) with respect to the Borrower; -15- (d) Donovan Leisure Newton & Irvine, counsel to the Borrower, shall have delivered its opinion to the Agent and the Banks, in form and substance satisfactory to the Agent and its counsel; (e) (i) There shall exist no Event of Default or Default under the Loan Agreement; and (ii) The representations and warranties contained in Article 4 of this Amendment No. 2 shall be true and correct with the same effect as though made on the Second Amendment Closing Date, and the Agent shall have received a certificate dated the Second Amendment Closing Date signed by an officer of the Borrower to the foregoing effect; (f) All legal matters incident to this Amendment No. 2 shall be satisfactory to counsel to the Agent; (g) The Borrower shall have paid to the Agent for the ratable benefit of the Banks the Second Amendment Fee of $75,000; and (h) The Borrower shall have paid to the Agent all reasonable legal fees and disbursements incurred by the Agent in connection with the preparation, negotiation and execution of this Amendment No. 2 and the Amended and Restated Revolving Credit Notes, and any documents, instruments and agreements required hereby or thereby. -16- ARTICLE 6. MISCELLANEOUS; NO WAIVER. ------------------------- 6.01 The provisions of Article 10 of the Loan Agreement shall govern this Amendment No. 2 with respect to the subject matter set forth therein. THIS AMENDMENT NO. 2, THE AMENDED AND RESTATED REVOLVING CREDIT NOTES, THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS ACKNOWLEDGED, AMENDED AND CONFIRMED HEREBY, AND ALL OTHER DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION HEREWITH AND THEREWITH, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 6.02 Whether or not the transactions contemplated by this Amendment No. 2 are consummated (unless the failure to consummate the transactions contemplated by this Amendment No. 2 is solely the result of any action or inaction of the Agent or the Banks), the Borrower will pay all fees and out-of-pocket expenses of the Agent and Banks incurred in connection with such transactions, including all reasonable fees and disbursements of legal counsel to the Agent. 6.03 Except as specifically amended herein, the Loan Agreement and each of the other Loan Documents shall remain in full force and effect in accordance with their respective terms. 6.04 This Amendment No. 2 may be signed in any number of counterparts which, when taken together, shall constitute one and the same document. -17- IN WITNESS WHEREOF, the undersigned has executed this Amendment on the date first above written. ORION CAPITAL CORPORATION By:/s/ Vincent T. Papa ----------------------------- Title: Vice President & Treasurer -18- Term Loan Commitment: NATIONAL WESTMINSTER BANK USA, $13,333,333.33 as Agent and as a Bank Revolving Credit By /s/ David C. Tesher Commitment: ---------------------------- $8,000,000.00 David C. Tesher Vice President Lending Office for Prime Rate Loans, Eurodollar Loans and CD Loans: 592 Fifth Avenue New York, New York 10036 Attention: David C. Tesher Vice President Address for Notices: National Westminster Bank USA 592 Fifth Avenue New York, New York 10036 Attention: David C. Tesher Vice President Telex: 232369 Answer-Back Code: NBNA UR Telecopier: (212) 602-2080 -19- Term Loan Commitment: FLEET BANK, NATIONAL ASSOCIATION $10,000,000.00 Revolving Credit Commitment: BY /s/ Jan-Gee W. McCollam $6,000,000.00 ---------------------------- Jan-Gee W. McCollam Senior Vice President Lending Office for Prime Rate Loans: One Constitution Plaza Hartford, Connecticut 06115 Lending Office for CD Loans and Eurodollar Loans: One Constitution Plaza Hartford, Connecticut 06115 Attention: Jan-Gee W. McCollam Senior Vice President Address for Notices: One Constitution Plaza Hartford, Connecticut 06115 Attention: Jan-Gee W. McCollam Senior Vice President Telecopier: (203) 244-5391 Telephone: (203) 244-5975 -20- Term Loan Commitment: SHAWMUT BANK CONNECTICUT, N.A. $10,000,000.00 Revolving Credit By /s/ Thomas E. McKinlay Commitment: ----------------------------- $6,000,000.00 Thomas E. McKinlay Vice President Lending Office for Prime Rate Loans: 777 Main Street Hartford, Connecticut 06115 Lending Office for CD Loans and Eurodollar Loans: 777 Main Street Hartford, Connecticut 06115 Attention: Thomas E. McKinlay Vice President Address for Notices: Shawmut Bank Connecticut, N.A. Insurance Industry MSN 250 777 Main Street Hartford, Connecticut 06115 Attention: Thomas E. McKinlay Vice President Telecopier: (203) 240-1264 -21- Term Loan Commitment: BANK OF AMERICA ILLINOIS $6,666,666.67 Revolving Credit By /s/ John R. Wolak Commitment: ----------------------------- $4,000,000.00 Vice President Title Lending Office for Prime Rate Loans: 231 S. LaSalle Street Chicago, Illinois 60697 Lending Office for CD Loans and Eurodollar Loans: 231 S. LaSalle Street Chicago, Illinois 60697 Attention: John R. Wolak Address for Notices: Bank of America Illinois Insurance Division 10th Floor 231 S. LaSalle Street Chicago, Illinois 60697 Attention: Deborah Lacy Telex No.: 25233 Answer-Back Code: CON Telecopier: (312) 987-0889 -22- Term Loan Commitment: SANWA BANK CALIFORNIA $5,000,000.00 Revolving Credit By /s/ John C. Hyche Commitment: ---------------------------- $3,000,000.00 John C. Hyche Vice President Lending Office for Prime Rate Loans: 601 South Figueroa Street Los Angeles, California 90017 Lending Office for CD Loans and Eurodollar Loans: 601 South Figueroa Street Los Angeles, California 90017 Attention: John C. Hyche Vice President Address for Notices: 601 South Figueroa Street Los Angeles, California 90017 Attention: John C. Hyche, VP Insurance & Financial Services Telex No.: 823038 Answer-Back Code: SANWALA Telecopier: (213) 896-7282 -23- Term Loan Commitment: STATE STREET BANK AND TRUST $5,000,000.00 COMPANY Revolving Credit By /s/ Edward M. Anderson Commitment: ----------------------------- 3,000,000.00 Vice President Title Lending Office for Prime Rate Loans: 225 Franklin Street Boston, Massachusetts 02110 Lending Office for CD Loans and Eurodollar Loans: 225 Franklin Street Boston, Massachusetts 02110 Attention: Edward M. Anderson Vice President (AH2) Address for Notices: State Street Bank and Trust Company of Connecticut, N.A. Insurance Service Division 50 Main Street, Suite 1114 Hartford, Connecticut 06103 Attention: Robert P. Engvall, Jr. Vice President Telex No.: 200139 Answer-Back Code: STATE UR Telecopier: (203) 244-1889 -24- EXHIBIT A TO AMENDMENT NO. 2 TO LOAN AGREEMENT FORM OF AMENDED AND RESTATED REVOLVING CREDIT NOTE $ New York, New York ---------------- November 9, 1994 FOR VALUE RECEIVED, the undersigned, ORION CAPITAL CORPORATION, a Delaware corporation (the "Borrower"), hereby promises to pay to the order of (the "Bank") on December 31, 1999 or on such earlier date as is provided for in the Loan Agreement dated March 8, 1993 by and among the Borrower, the Banks signatory thereto and National Westminster Bank USA, as agent for such Banks (in such capacity, the "Agent") (as heretofore amended and as it may from time to time be further amended, modified or supplemented, hereinafter referred to as the "Loan Agreement") the principal sum of DOLLARS ($ ) (or such lesser amount as shall be equal to the aggregate unpaid principal amount of the Revolving Credit Loans (as defined in the Loan Agreement) made by the Bank under the Loan Agreement), and to pay interest on the unpaid principal amount of each Revolving Credit Loan from the date thereof at the rates per annum and for the periods set forth in or established by the Loan Agreement and calculated as provided therein. All indebtedness outstanding under this Note shall bear interest (computed in the same manner as interest on this Note prior to maturity) at the Post-Default Rate (as such term is defined in the Loan Agreement) for all periods when an Event of Default has occurred and is continuing, commencing on the occurrence of such Event of Default until such Event of Default has been cured or waived as acknowledged in writing by the Agent and the Banks pursuant to Section 10.6 of the Loan Agreement, and all such interest shall be payable on demand. Anything herein to the contrary notwithstanding, the obligation of the Borrower to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be made to the Bank to the extent that the Bank's receipt thereof would not be permissible under the law or laws applicable to the Bank limiting rates of interest which may be -25- charged or collected by the Bank. Any such payments of interest which are not made as a result of the limitation referred to in the preceding sentence shall be made by the Borrower to the Bank on the earliest interest payment date or dates on which the receipt thereof would be permissible under the laws applicable to the Bank limiting rates of interest which may be charged or collected by the Bank. Payment of both principal and interest on this Note are to be made at the office of the Agent at 592 Fifth Avenue, New York, New York 10036, or such other place as the holder hereof shall designate to the Borrower in writing, in lawful money of the United States of America in immediately available funds. This Note is one of the Amended and Restated Revolving Credit Notes referred to in the Loan Agreement (as amended by Amendment No. 2 (as defined in the Loan Agreement)), is subject to prepayment upon the terms and conditions thereof and is entitled to the benefits thereof. The Bank is hereby authorized by the Borrower to record on the schedule annexed to this Note (or on a supplemental schedule thereto) the amount of each Revolving Credit Loan made by the Bank to the Borrower and the amount of each payment or prepayment of principal of such Loans received by the Bank, it being understood, however, that failure to make any such notation shall not affect the rights of the Bank or the obligations of the Borrower hereunder in respect of this Note. The Bank may, at its option, record such matters in its internal records rather than on such schedule. Upon the occurrence of any Event of Default, as defined in the Loan Agreement, the principal amount of and accrued interest on this Note may be declared due and payable in the manner and with the effect provided in the Loan Agreement. Without limiting Section 10.1 of the Loan Agreement, the Borrower shall pay all costs and expenses of collection, including, without limitation, all reasonable attorneys' fees and disbursements in the event that any action, suit or proceeding is brought by the holder hereof to collect this Note. THIS NOTE SHALL BE GOVERNED BY AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS RULES PERTAINING TO CONFLICTS OF LAWS. ORION CAPITAL CORPORATION By ---------------------- Title -26- SCHEDULE TO AMENDED AND RESTATED REVOLVING CREDIT NOTE This Note evidences Revolving Credit Loans made under the within described Loan Agreement, in the principal amounts, and on the dates set forth below, subject to the payments or prepayments of principal set forth below: Principal Principal Date Type of Amount Amount Paid Balance Made Loan of Loan or Prepaid Outstanding Initials - ----- ----- ---------- ----------- ----------- --------- -27- EXHIBIT B TO AMENDMENT NO. 2 TO LOAN AGREEMENT REVISED SCHEDULES ------------------ -28- EX-10.23 7 EXHIBIT 10(xxiii) CONFORMED [Letterhead Of INTERCARGO CORPORATION] 140 East American Lane, 20th Floor Schaumburg, Illinois 60173 February 14, 1995 Mr. Alan R. Gruber Chairman & Chief Executive Officer Orion Capital Corporation 600 Fifth Avenue New York, NY 10020-2301 Dear Alan: This letter amends the Letter Agreement dated September 13, 1993 (the "Agreement") between Intercargo Corporation (the "Company") and Orion Capital Corporation ("Orion") with respect to Orion's ownership of shares of the Company's common stock. For purposes of this amendment, the definitions as set forth in the original Agreement shall have the same meanings in this letter. By this letter the Company and Orion agree that the Agreement is amended as follows: 1. The "Percentage Limitation" referred to in Clause (A) of Section 5(a) of the Agreement is increased to "24.9%". 2. Section 4 is amended by adding the following new sentence as the final sentence: "Orion agrees that prior to December 31, 1998, it will not seek, directly or indirectly, to have more than one person designated by it elected to the Board of Directors of the Company, and prior to that date Orion shall be limited to one representative on the Board of Directors." 3. All other terms and conditions of the Agreement remain unchanged. Mr. Alan R. Gruber February 14, 1995 Page 2 This amendment to the Agreement is conditioned upon Orion and Intercargo receiving all required regulatory approvals from the States of Illinois and California. Very truly yours, INTERCARGO CORPORATION By /s/ James R. Zuhlke ---------------------- James R. Zuhlke President and Chief Executive Officer Accepted and agreed on the date written above: ORION CAPITAL CORPORATION By: /s/ Alan R. Gruber ---------------------------------- Alan R. Gruber Chairman and Chief Executive Officer EX-11 8
EXHIBIT 11 ORION CAPITAL CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (000s omitted-except for per common share data) Year Ended December 31, --------------------------- 1994 1993 1992 ---- ---- ---- Computation of weighted average number of common and equivalent shares outstanding: PRIMARY - Weighted average number of shares outstanding ............................. 14,249 14,461 10,826 Dilutive effect of stock options .......... 99 137 88 ------- ------- ------- Weighted average number of common and equivalent shares ....................... 14,348 14,598 10,914 ======= ======= ======= Net earnings before preferred dividend requirements ............................ $55,245 $68,813 $42,872 Preferred dividends ....................... - 409 6,358 ------- ------- ------- Net earnings attributable to common stockholders ............................ $55,245 $68,404 $36,514 ======= ======= ======= Net earnings per common share ............. $ 3.85 $ 4.69 $ 3.35 ======= ======= ======= FULLY DILUTED - Weighted average number of shares outstanding ............................. 14,249 14,461 10,826 Dilutive effect of stock options .......... 118 137 128 Conversion of $1.90 Preferred Stock ....... - - 2,066 Conversion of $2.125 Preferred Stock ...... - 57 1,454 ------- ------- ------- Weighted average number of common and equivalent shares ....................... 14,367 14,655 14,474 ======= ======= ======= Net earnings before preferred dividend requirements ............................ $55,245 $68,813 $42,872 Adjustable rate preferred stock dividends.. - 407 1,581 ------- ------- ------- Net earnings attributable to common stockholders ............................ $55,245 $68,406 $41,291 ======= ======= ======= Net earnings per common share ............. $ 3.85 $ 4.67 $ 2.85 ======= ======= =======
EX-21 9 EXHIBIT 21 SUBSIDIARIES* OF ORION CAPITAL CORPORATION State or Other Jurisdiction Subsidiary of Incorporation - ------------ ----------------- Clarke & Towner, Inc. Connecticut Connecticut Specialty Group, Inc. Connecticut Connecticut Specialty Insurance Company Connecticut Connecticut Specialty Insurance Group, Inc. Connecticut Design Professionals Administration Corporation California Design Professionals Insurance Company Connecticut DPIC Companies, Inc. California EBI Companies, Inc. Connecticut EBI Consulting Services, Inc. California EBI Indemnity Company Connecticut EFC Property Management, Inc. California Employee Benefits Insurance Company Connecticut Independent Financial Planners Corporation New Jersey Jabawwat, Inc. Delaware Nations' Care, Inc. Connecticut Orion Capital Companies, Inc. Connecticut Orion Properties Corporation Delaware Peninsula Excess Insurance Brokers, Inc. California Risk Analysis and Research Corporation California Security Insurance Company of Hartford Connecticut Security Insurance Company (U.K.) Limited United Kingdom SecurityRe, Inc. Connecticut Security Reinsurance Company Connecticut Security Warranty Association of Florida, Inc. Florida The Connecticut Indemnity Company Connecticut The Fire and Casualty Insurance Company of Connecticut Connecticut - -------------------------------------------------------------------------------- *The listed subsidiaries are wholly-owned by Orion Capital Corporation (the "Company") as of December 31, 1994. The Company owns slightly less than 50% of Guaranty National Corporation of Englewood, Colorado and approximately 20% of Intercargo Corporation of Schaumburg, Illinois. ________________________________________________________________________________ - - 2 - EX-23 10 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 2-65348 on Forms S-8 and S-16 relating to the Orion Capital Corporation 1976 and 1979 Stock Option Plans, No. 2-80636 on Form S-8 relating to the Orion Capital Corporation 1982 Long-Term Performance Incentive Plan, No. 2-63344 on Form S-8 relating to the Orion Capital Corporation Employees' Stock Savings and Retirement Plan and No. 33-53759 on Form S-3 of our report dated February 24, 1995, appearing in this Annual Report on Form 10-K of Orion Capital Corporation for the year ended December 31, 1994. Deloitte & Touche LLP Hartford, Connecticut March 14, 1995 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Annual Report on Form 10-K of Orion Capital Corporation for the year ended December 31, 1994 of our reports dated February 22, 1995, appearing in the Annual Report on Form 10-K of Guaranty National Corporation for the year ended December 31, 1994. Deloitte & Touche LLP Denver, Colorado March 14, 1995 EX-27 11
7 THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ORION CAPITAL CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1994 JAN-1-1994 DEC-31-1994 530,424 367,417 358,915 264,434 1,754 0 1,319,040 6,201 304,324 70,137 2,112,761 1,181,329 256,855 0 12,651 152,382 162,936 0 0 202,152 2,112,761 691,223 84,915 3,437 1,372 498,123 165,108 36,297 71,546 16,301 55,245 0 0 0 55,245 3.85 3.85 830,805 480,826 17,297 134,120 303,266 891,542 17,297
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