-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TZjFlAOc0/E3PNG8SlPNKHpf2ODRpnE0Jaa0bIRYgSrNih02W9EJukYnfynQ4Wtc eXmTc8CMjmFPKNJPDJU5ww== 0000074931-96-000005.txt : 19960320 0000074931-96-000005.hdr.sgml : 19960320 ACCESSION NUMBER: 0000074931-96-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960319 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: 96536143 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, 1995 1-7801 ---------------- ORION CAPITAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-6069054 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 600 Fifth Avenue, New York, NY 10020-2302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 212-332-8080 ------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, $1 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: 9 1/8% Senior Notes due September 1, 2002 7 1/4% Senior Notes due July 15, 2005 (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [x] The aggregate market value of the voting stock of the registrant held by non-affiliates was $619,689,366 as of March 14, 1996. As of March 14, 1996, 13,890,8064 Shares of Common Stock, $1.00 par value, of registrant were outstanding exclusive of shares held by registrant and its subsidiaries. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III is incorporated by reference from registrant's definitive proxy statement for its Annual Meeting to be held on June 5, 1996. Registrant intends to file the proxy material, which involves the election of directors, not later than 120 days after the close of its fiscal year. PART I ITEM 1. BUSINESS Orion Capital Corporation ("Orion") is a property and casualty insurance holding company. Orion's insurance subsidiaries and affiliates are authorized to underwrite and sell most types of property and casualty insurance. Orion's insurance businesses are concentrated in niche insurance markets, particularly workers compensation, professional liability, nonstandard automobile insurance and underwriting ocean marine, inland marine and property insurance through underwriting pools. (Orion and its wholly-owned subsidiaries are referred to collectively as the "Company.") The Company provides workers compensation insurance products through the EBI Companies. The Company sells its professional liability insurance through the DPIC Companies and writes other specialty property and casualty insurance, principally through Connecticut Specialty Insurance Group ("Connecticut Specialty"). The Company also writes assumed reinsurance through SecurityRe Companies. Additionally, the Company provides underwriting management and related services through Wm. H. McGee & Co., Inc. ("McGee"). The Company participates in the nonstandard commercial and personal automobile insurance business through its slightly less than 50% interest in Guaranty National Corporation ("Guaranty National"). (Guaranty National and its wholly-owned subsidiaries are referred to collectively as the "Guaranty National Companies.") Guaranty National is an independent publicly-held company and, except for certain services contractually provided, is not managed by the Company. Five of the eleven members of Guaranty National's board of directors are also members of Orion's board of directors. The Company also owns approximately 20% of the outstanding common stock of Intercargo Corporation ("Intercargo"), an insurance holding company whose subsidiaries specialize in international trade and transportation coverages. In February, 1995, the Company and Intercargo reached an agreement which permits the Company to purchase additional shares from time to time, to bring its ownership up to 24.9% of Intercargo's outstanding common stock. Intercargo operates as an independent company. One member of Intercargo's seven-member board of directors is selected by Orion. On June 30, 1995, Orion purchased all the capital stock of McGee from Sun Alliance Group plc for $22,000,000 in cash. McGee has been underwriting ocean marine, inland marine and property insurance on behalf of the insurance companies it represents for over 108 years. Orion's subsidiary, Security Insurance Company of Hartford, has been represented by McGee for over a century. McGee provides all related services in connection with this business, including policy issuance, claim settlement, accounting and placement of reinsurance. Operations are conducted in the United States, through its head office in New York and twenty branch offices throughout the country. Activities in Canada, Bermuda and Puerto Rico are managed by McGee's subsidiaries located in those jurisdictions and they perform substantially similar services. -2- On July 17, 1995, Orion issued 7 1/4% Senior Notes due July 15, 2005 (the "7 1/4% Senior Notes") with a face value of $100,000,000 in a public offering pursuant to a shelf registration filed with the Securities and Exchange Commission in 1994. The 7 1/4% Senior Notes issued are non-callable to maturity and were sold at 99.23% of par to yield 7.36% per annum. The net proceeds from the offering were approximately $98,113,000, of which $46,500,000 was used to repay all of Orion's debt under its bank loan agreement. The balance is available for general corporate purposes. The only securities Orion currently has outstanding are its Common Stock, 9 1/8% Senior Notes due September 1, 2002 (the "9 1/8% Senior Notes") and the 7 1/4% Senior Notes. The reconfiguration and simplification of Orion's debt and capital structure over the past several years has enabled the Company to take advantage of generally lower interest rates, decrease the cost of its capital and eliminate debt sinking fund payments until maturity of the 9 1/8% Senior Notes and 7 1/4% Senior Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Orion was incorporated under the laws of the State of Delaware in 1960. The Company's principal executive offices are located at 600 Fifth Avenue, New York, New York 10020, and its telephone number is (212) 332-8080. The home office of all the Company's wholly-owned insurance subsidiaries is located at 9 Farm Springs Drive, Farmington, Connecticut 06032. The head office of McGee is located at Four World Trade Center, New York, New York 10048. The Company's insurance, brokerage and management subsidiaries are licensed to transact business throughout the United States and in all Canadian provinces. They obtain substantially all of their business from approximately 3,000 independent insurance agents and brokers. The Company has approximately 2,200 employees, substantially all of whom are employed in the Company's insurance-related operations. For segment reporting purposes, the operations of the Company are reported as four segments. The insurance operations of the Company are treated as three segments: Regional Operations, Reinsurance/Special Programs and the Company's interest in the Guaranty National Companies. Guaranty National's operations were reported on a consolidated basis from 1988 through November 20, 1991 (when the Company owned 100% of Guaranty National) and have been reported on the equity accounting basis since then. The miscellaneous activities of the parent holding company and various incidental subsidiaries not involved in insurance-related activities are reported as a fourth segment under the heading "Other." -3- Regional Operations provides workers compensation insurance products through the EBI Companies. The EBI Companies underwrite and sell workers compensation insurance through independent agents and brokers and also offer alternative workers compensation services and products. Regional Operations' results include the declining costs associated with the run-off of the Company's commercial multiple peril insurance business, which was discontinued in 1988. Reinsurance/Special Programs includes the DPIC Companies, which market professional liability insurance; Connecticut Specialty, which underwrites and sells specialty insurance programs through independent agents and general agents; SecurityRe Companies, which write reinsurance; McGee, an underwriting management company that specializes in ocean marine, inland marine and property insurance; and a 20% interest in Intercargo, which specializes in international trade and transportation coverages. The Guaranty National Companies write nonstandard commercial and personal automobile insurance, general liability insurance, surplus lines commercial property and casualty insurance and collateral protection insurance. The business of Orion's other subsidiaries, all of which are insubstantial, as well as the miscellaneous income and expenses (primarily interest, general and administrative expenses and other consolidating elimination entries) of Orion itself, are reported as a fourth segment. Net earnings for 1995, 1994 and 1993 amounted to $67,622,000, $55,245,000 and $68,813,000 or $4.77, $3.85 and $4.69 per share, respectively, based on weighted average common shares outstanding of 14,187,000 in 1995, 14,348,000 in 1994 and 14,598,000 in 1993. Earnings in 1993 include a benefit of $11,825,000, or $.81 per share, from the cumulative effect of changes in accounting principles. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following tables present condensed financial information showing revenues, pre-tax earnings (loss) and other financial data and ratios of the Company's four segments for each of the three years in the period ended December 31, 1995. Identifiable assets, by segment, are included in Note N to the Consolidated Financial Statements, "Industry Segment Information." -4-
Year Ended December 31, ------------------------------- 1995 1994 1993 ---- ---- ---- (000s omitted) REVENUES: Regional Operations - Premiums earned ....................... $322,098 $278,040 $266,373 Net investment income ................. 35,750 29,287 33,760 Realized investment gains ............. 4,636 1,246 4,153 Other income .......................... 188 239 - -------- -------- -------- Total Regional Operations ........... 362,672 308,812 304,286 -------- -------- -------- Reinsurance/Special Programs - Premiums earned ....................... 426,905 413,183 351,031 Net investment income ................. 59,584 53,209 55,500 Realized investment gains ............. 7,781 2,191 6,706 Other income .......................... 13,564 575 915 -------- -------- -------- Total Reinsurance/Special Programs .. 507,834 469,158 414,152 -------- -------- -------- Other ................................... 3,774 2,977 1,717 -------- -------- -------- $874,280 $780,947 $720,155 ======== ======== ======== EARNINGS (LOSS): Regional Operations ..................... $ 57,830 $ 42,514 $ 34,025 Reinsurance/Special Programs ............ 43,241 34,117 44,032 Guaranty National Companies ............. 4,466 11,244 9,509 -------- -------- -------- Total property and casualty operations. 105,537 87,875 87,566 Other ................................... (17,502) (16,329) (15,061) -------- -------- -------- 88,035 71,546 72,505 Federal income taxes .................... (20,413) (16,301) (15,517) Cumulative effect of adoption of new accounting principles ................. - - 11,825 -------- -------- -------- Net earnings .......................... $ 67,622 $ 55,245 $ 68,813 ======== ======== ======== -5- The following table sets forth, on a consolidated basis, certain insurance ratios for the Company: Year Ended December 31, -------------------------------- 1995 1994 1993 ---- ---- ---- Loss and loss adjustment expenses to premiums earned ....................... 68.4% 72.1% 74.4% Policy acquisition and other insurance expenses to premiums earned ........... 29.0 27.0 26.8 ----- ----- ----- Total before policyholders' dividends.. 97.4 99.1 101.2 Policyholders' dividends to premiums earned ................................ 2.9 2.1 2.0 ----- ----- ----- Total after policyholders' dividends .. 100.3% 101.2% 103.2% ===== ===== =====
The Company's insurance subsidiaries include eight active wholly-owned insurance companies, as well as a wholly-owned reinsurance underwriting management company, an insurance management company, service companies and insurance brokerage firms. One or more of Orion's insurance subsidiaries is licensed and transacts business in each of the 50 states of the United States, the District of Columbia and all provinces of Canada. In 1995, approximately 13.9% of the direct premiums written by the insurance subsidiaries was generated in Pennsylvania, 8.0% in Wisconsin and, in the aggregate, an additional 19.1% was generated in the states of Texas, California and Illinois. The primary line of business in Pennsylvania, Wisconsin, Texas and Illinois was workers compensation. California's primary line was architects and engineers professional liability insurance. The following table shows the geographical distribution of direct insurance premiums written by the Company in 1995, 1994 and 1993:
Geographical Distribution of Direct Premiums Written Year Ended December 31, --------------------------------------------------- State 1995 Pct. 1994 Pct. 1993 Pct. - ----- ---- ---- ---- ---- ---- ---- (000s omitted - except for percentages) Pennsylvania ....... $110,993 13.9% $ 79,031 11.5% $ 74,066 11.4% Wisconsin .......... 64,090 8.0 60,108 8.7 56,209 8.7 Texas .............. 62,426 7.8 53,439 7.7 45,050 7.0 California ......... 45,308 5.7 60,313 8.7 60,675 9.4 Illinois ........... 44,494 5.6 34,285 5.0 28,690 4.4 All others (1) ..... 471,973 59.0 404,317 58.4 382,736 59.1 -------- ----- -------- ----- -------- ----- $799,284 100.0% $691,493 100.0% $647,426 100.0% ======== ===== ======== ===== ======== ===== (1) In 1995, no other single state or country accounts for more than 5% of total direct premiums written.
-6- For 1995, 47.0% of the Company's net premiums written was derived from workers compensation insurance written primarily in thirteen selected states (including all states listed in the preceding table except California); 27.8% related to liability insurance other than automobile, primarily professional liability insurance; 13.0% came from automobile insurance (not including premiums written by Guaranty National Companies); and 6.5% was from marine insurance coverages. No other line of business contributed in excess of 5% to 1995 net premiums written. The following table shows premiums written for the Company, net of reinsurance, by major statutory lines of business:
Net Premiums Written Year Ended December 31, ------------------------------------------------------ 1995 Pct. 1994 Pct. 1993 Pct. ---- ---- ---- ---- ---- ---- (000s omitted - except for percentages) Workers compensation .. $355,691 47.0% $305,157 42.9% $311,150 49.0% Liability other than automobile .......... 210,679 27.8 199,214 28.0 145,493 22.9 Commercial automobile . 64,874 8.6 73,596 10.3 61,798 9.7 Marine ................ 49,152 6.5 30,323 4.3 10,500 1.6 Private passenger automobile .......... 33,161 4.4 62,590 8.8 72,286 11.4 Commercial multiple peril ............... 5,654 .7 8,701 1.2 9,028 1.4 All others ............ 38,225 5.0 32,474 4.5 25,331 4.0 -------- ----- -------- ----- -------- ----- $757,436 100.0% $712,055 100.0% $635,586 100.0% ======== ===== ======== ===== ======== =====
-7- REGIONAL OPERATIONS The Regional Operations segment is comprised primarily of the EBI Companies, which provide traditional workers compensation insurance as well as alternative workers compensation services and products. During 1995, Nations' Care, Inc., the Company's subsidiary which provided alternative workers compensation products, was reintegrated with the EBI Companies' operations. Through the addition of alternative products and pricing approaches to workers compensation operations, the EBI Companies expect to extend the length of their client relationships and further expand their presence in the workers compensation market. From 1990 through 1995, the EBI Companies' net premiums written have accounted for almost all of the premium volume of the Regional Operations segment. The EBI Companies devote substantially all of their resources to underwriting and selling workers compensation insurance through independent agents and brokers. The EBI Companies have a competitive edge stemming from their service oriented approach. They rank among the 25 largest writers of workers compensation insurance in the United States based on net premiums written. Regional Operations staffs its offices with underwriters, field production representatives, claims and loss control representatives, medical and rehabilitation experts and other technical and administrative personnel. The EBI Companies' specialized approach is founded upon a team concept under which loss control and claims management personnel have significant direct involvement in account selection and in underwriting each policy. Upon acceptance of each new account, an EBI Companies team begins to work with the insured and its employees to identify the factors that influence their insurance costs. The EBI Companies approach to underwriting is not merely to evaluate the risk but to attempt to reduce the likelihood of loss through loss control services. During the policy term, an EBI team continues to provide services designed to reduce the frequency and severity of injuries. In late 1994, the EBI Companies introduced the concept of "Zero Accident Culture" (service mark), which focuses insureds on creating an accident free work environment. With a desire to influence and impact the work place environment in order to reduce losses, the EBI Companies concentrate their efforts on single-location insureds, such as small to medium-sized manufacturers, and selected service businesses, such as nursing homes and hospitals. These businesses are generally small enough not to have their own risk management staffs but are large enough to benefit from the EBI Companies' cost-reduction services. Alternative workers compensation products and services are designed to capitalize on the Company's expertise acquired from its service oriented and team approach to traditional workers compensation. The EBI Companies apply those skills to writing workers compensation for large accounts, accounts with large deductibles and other insurance products. They also offer consulting and administrative services to self-insured workers compensation programs and emphasize cost effective loss control and claims management consulting services. -8- A workers compensation policy obligates an insurance company to pay all compensation and other benefits for injured workers as may be required by applicable state workers compensation laws. Such benefits include, among other things, payments for medical and hospital expenses and disability and vocational rehabilitation expenses. The insurance policies currently written by the EBI Companies provide workers compensation coverage with limits of liability set by the provisions of state workers compensation laws. The benefits provided by these laws vary with the nature and severity of the injury or disease, as well as with the wage level, occupation and age of the employee. Employers liability coverage is also provided to employers who may be subject to claims for damages (not workers compensation benefits) because of an injury to a worker. The amount of workers compensation premiums earned is directly dependent upon wage levels as well as the number of employees on the payroll of each policyholder and the job classifications of those employees. Accordingly, premiums may be affected by the level of unemployment in general, and particularly by the level of unemployment experienced in those industries and geographic areas which represent a substantial portion of the Company's workers compensation insurance business. Premium rates are revised annually in most states in which the EBI Companies do business. Rates vary with different job classifications and among different employers. The EBI Companies use the rates and rating plans filed in the states where they do business. See "Industry Characteristics - Rates." The EBI Companies has recorded solid underwriting results for the past few years which has led them to continue a plan of geographic expansion. Always selective about the states in which they operate, EBI Companies' expansion strategy is to anticipate reform initiatives in various states and establish a foothold in such new markets before reform benefits are realized. The EBI Companies are thus able to gain a reputation for service and effective control before such markets attract the more traditional workers compensation companies. Approximately 760 independent agents and brokers produced substantially all of the direct business written in 1995 by the EBI Companies. All of such agents and brokers receive commissions on the sale of insurance. No single independent agent or broker contributed more than 5% of this segment's net written premiums. The agents and brokers provide a broad range of insurance services to the public within their local areas, operate as independent contractors and generally represent other insurers as well. REINSURANCE/SPECIAL PROGRAMS The Company's Reinsurance/Special Programs segment is comprised of five components: DPIC Companies, Connecticut Specialty, SecurityRe Companies, McGee and the Company's 20% equity interest in Intercargo Corporation. All of such components concentrate in highly specialized lines of business in the property and casualty insurance field. -9- DPIC ---- DPIC Companies write professional liability insurance for architects, engineers, accountants and lawyers. They are the second largest underwriter of architect and engineer liability insurance in North America. DPIC Companies' operations are organized to be directly aligned with their various client groups. The architects and engineers underwriting unit is divided into three divisions: Architects, Engineers and Special (large accounts) Risks. Each division is staffed with underwriters and other professionals who focus on a specific discipline thus enabling them to develop programs to address the unique issues facing their clients. DPIC Companies also market the Accountants Professional Liability System (A/pls+) (registered mark), a program of professional liability insurance analogous to their architects and engineers products, for selected medium-sized certified public accounting firms. In 1994, DPIC Companies introduced the Lawyers Professional Liability System, a similar program for preferred law firms. Professional liability insurance covers liability arising out of alleged negligent performance of professional services. Underwriting and claims management require a high level of knowledge and expertise. In an attempt to limit risk exposure, DPIC Companies' specialized underwriters evaluate a great number of factors, including the experience of an applicant firm's professional personnel, the loss history of the firm, the employees covered, the type of work performed and the firm's utilization of suggested loss prevention measures. DPIC Companies use a premium credit incentive program to encourage insureds to participate in their liability education programs and to use other loss prevention practices, such as "limitation of liability" clauses in contracts with their clients. In most jurisdictions the coverage offered by DPIC Companies is on a "claims-made reported" policy form, a form which generally insures only those claims reported by the insured during the policy term. DPIC Companies generally use a policy form under which defense costs, primarily legal fees, are limited by their inclusion within the insured's stated policy limits. This policy form has had a favorable impact in controlling legal costs. DPIC Companies' specialized claims staff, located in eight offices in the United States and Canada, stresses early intervention in disputes to avoid litigation whenever possible. DPIC Companies have pioneered the use of alternative dispute resolution ("ADR") methods to promptly resolve disputes. DPIC Companies' "Mediation Works" program has been particularly successful offering incentives to insureds who agree to mediate disputes. Currently, approximately one third of all open claims are in mediation or some other form of ADR. Management believes that the use of such methods has had a beneficial impact on DPIC Companies' operating results. -10- DPIC Companies market their products through 53 specialized agencies, each highly knowledgeable about risk management for the professions served and about DPIC Companies' loss prevention programs. Management believes that this "value added" approach is the reason why DPIC Companies have experienced a high customer retention rate (averaging over 90% for the ninth consecutive year) and why they are less vulnerable to price competition. The agents participate in continuing education programs sponsored by DPIC Companies and are active in their clients' professional societies. Connecticut Specialty. ---------------------- Connecticut Specialty currently administers the operation of approximately two dozen specialty programs written through general agents. The specialized coverages include workers compensation and brownwater marine insurance, as well as various liability coverages for the trucking industry. Connecticut Specialty finds opportunity in commercial niches, utilizing general agents not only as an efficient and ready-made means of distribution but drawing upon their established expertise and contacts. Connecticut Specialty also develops its own expertise in order to supplement the contributions of its general agents. Connecticut Specialty has developed a methodology for judging opportunities that stresses the knowledge and quality of the general agent and the unique aspects of the type of coverage or class of business being underwritten in order to provide a competitive advantage. Connecticut Specialty defines a "program" as the writing of risks in a class of business not widely pursued, utilizing forms, coverage, pricing methodologies and risk management techniques tailored to the needs of the customer. While the average program premium size is $7,500,000, a few programs are larger, such as long-haul and intermediate truck liability,workers compensation for underground coal mines, brownwater marine, and multi-line coverage for volunteer firefighters. Connecticut Specialty has formed strategic alliances with what it believes are knowledgeable and well respected general agents in the specialty insurance field. Each of its general agents has superior knowledge of its markets and has earned customer loyalty by providing quality services and support. Connecticut Specialty utilizes a profit-sharing approach in writing its special programs whereby minimal profits are earned by the general agent until the program is profitable. Connecticut Specialty closely monitors its programs throughout their existence to ensure that profit potential is maximized. The specialty nature of Connecticut Specialty's business provides some insulation against the competitive pressures of the overall insurance market. Enhanced automation designed for each general agent promotes efficiency and effectiveness for both the agent and Connecticut Specialty. This exclusive relationship with the general agent creates a competitive advantage in the insurance marketplace and also directly impacts the cost of entry by competitors. Connecticut Specialty's ability to exit and enter markets rather quickly is an added competitive advantage. -11- SecurityRe Companies. --------------------- The Reinsurance/Special Programs segment also participates in facultative and treaty reinsurance throughout the United States through SecurityRe Companies. SecurityRe Companies underwrite a diverse book of primarily casualty business, using reinsurance intermediaries, with exposures largely concentrated in the domestic market. SecurityRe Companies' premiums in recent years have been principally concentrated in the treaty segment reinsuring small to medium-sized regional and specialty companies in various lines of business (primarily automobile and commercial coverages). Facultative coverage is provided on an excess of loss basis for casualty and property exposures. Careful underwriting by SecurityRe ensures that only select risks are bound so that exposure to loss is minimized. The largest net amount insured by SecurityRe is $1,000,000. Adherence to strict underwriting guidelines and value-added services to clients make SecurityRe very competitive in the marketplace. McGee. ------ On June 30, 1995, the Company acquired McGee, a leading ocean marine, inland marine and property insurance underwriter. McGee has been in business since 1887. Security Insurance Company of Hartford ("Security"), a subsidiary of the Company, has been represented by McGee since 1894. McGee provides all related services in connection with this business, including policy issuance, claim settlement, accounting and placement of reinsurance. Operations are conducted in the United States, through its head office in New York and twenty branch offices throughout the country. Activities in Canada, Bermuda and Puerto Rico are managed by McGee's subsidiaries located in those jurisdictions and they perform substantially similar services. Each insurer represented by McGee participates in either the United States or Canadian Inter-Office Reinsurance Agreement (the "McGee Pools"). It is through these underwriting pooling agreements that premiums and risk are allocated among the various insurers. The insurers participating in the McGee Pools and the percentage allocated to each insurer is reviewed and revised annually. The current Pool participants have an average tenure of 47 years. Security is a participant in both the United States and Canadian Pools. For the year ending December 31, 1995, McGee underwrote approximately $102,800,000 in net premiums on behalf of the insurers participating in the McGee Pools. The Company's participation in the United States pool was 6%, 7% and 14.5% in 1993, 1994 and 1995, respectively. Participation in the Canadian pool was 10% in 1993 and 1994 and 15% in 1995. Pursuant to the terms of the McGee Purchase Agreement, the Company has agreed to increase its rate of participation for 1996 to 37% in the United States and approximately 49% in Canada. In 1997, the Company's participation in both McGee Pools will increase by an additional 10.5% and, at the Company's option, may increase by a further 6%. -12- McGee, as an underwriting manager, does not directly solicit business from insureds but instead relies on a production force consisting of insurance brokers and agents appointed to represent the portion of the insurers' business which McGee manages. McGee is compensated for its services by the insurers it represents based upon a combination of factors, including a percentage of the premiums written, the profitability of the business written and the management services provided. Intercargo Corporation. ----------------------- The Reinsurance/Special Programs segment also includes the Company's 20% interest in Intercargo. Intercargo is an insurance holding company whose subsidiaries specialize in international trade and transportation coverages. Its principal product lines are U.S. Customs bonds and marine cargo insurance sold to importers and exporters through customs brokers and other service firms engaged in the international movement of goods. Intercargo operates as an independent entity and a pro rata share of any profit or loss is reflected in the Company's consolidated financial statements, based on the Company's equity interest in Intercargo. In February 1995, the Company and Intercargo reached an agreement which permits the Company to purchase additional shares from time to time, to bring the Company's ownership up to 24.9% of Intercargo's outstanding common stock. GUARANTY NATIONAL COMPANIES The Company participates in nonstandard commercial and personal automobile insurance and surplus lines insurance through its interest in Guaranty National. Based in Englewood, Colorado, the Guaranty National Companies underwrite and sell specialty property and casualty coverages which are not readily available in traditional insurance markets. Guaranty National became a publicly held company with its stock listed on the New York Stock Exchange when the Company sold slightly more than half of the outstanding common stock of Guaranty National in a public offering in 1991. Approximately 84% of the Guaranty National Companies' net written premiums during 1995 was derived from writing personal and commercial automobile insurance. Other types of insurance products sold by Guaranty National Companies are general liability, commercial multi-peril, umbrella and property. Guaranty National Companies have historically focused their operations on the nonstandard markets. Nonstandard risks require specialized underwriting, claims management and other skills and experience. Guaranty National Companies' expertise and market position have allowed them to generate an underwriting profit in eight of the last nine years. Guaranty National Companies' personal lines unit principally writes nonstandard automobile insurance, insurance for drivers usually unacceptable to other insurers for, among other reasons, adverse driving or accident history, age or vehicle type, and is sold primarily in the Western and Midwestern regions. Guaranty National's commercial lines unit writes commercial automobile insurance, which covers policyholders such as local and intermediate trucking, garages, used car dealers, public and private livery, -13- and artisan contractors. Other commercial lines coverage includes property (for example, motor-truck cargo), general liability (for example, contractors and fuel-convenience stores), standard umbrella insurance, standard commercial packages and other commercial coverages. Guaranty National also markets collateral protection insurance, primarily insuring automobiles pledged as security for loans for which the borrower has not maintained physical damage coverage as required by the lender. Such business represents 12% of Guaranty National Companies' gross written premiums for 1995. Premium levels for nonstandard risks are substantially higher than for preferred or standard risks. In personal lines, Guaranty National Companies' loss exposure is limited by the fact that its insureds typically purchase low liability limits, often a state's statutory minimum. The nonstandard insurance industry is also characterized by the insurer's ability to minimize its exposure to unprofitable business by effecting timely changes in premium rates and policy terms in response to changing loss and other experiences. On July 18, 1995 Guaranty National acquired all the capital stock of Viking Insurance Holdings, Inc. ("Viking") from Talegen Holdings, Inc., a Xerox Financial Services company, for total consideration of $102,700,000 (subject to certain adjustments). Viking is the parent company of Viking Insurance Company of Wisconsin and other affiliated companies which specialize in providing nonstandard personal automobile insurance. Headquartered in Madison, Wisconsin, Viking writes business primarily in California and 17 other western and midwestern states. Guaranty National financed the acquisition of Viking by selling 1,550,000 shares of its common stock in a European offering at a net price per share of $15.76, converting $20,896,000 of outstanding notes held by the Company into 1,326,128 shares of Guaranty National common stock at a conversion price of $15.76 per share, and utilizing a portion of a new $110,000,000 credit facility from a group of lending banks. The Company's conversion of Guaranty National notes into 1,326,128 shares of common stock restored the Company to its previous ownership level of slightly less than 50% of Guaranty National, after the increase in the number of shares outstanding resulting from Guaranty National's European offering. Guaranty National and its subsidiaries have entered into a series of agreements with the Company. One of these agreements is a shareholder agreement pursuant to which the Company has the right to designate three members of Guaranty National's board, including the Chairman of the Board, for so long as the Company beneficially owns 30% or more of Guaranty National. Under the shareholder agreement, the Company also has a right until 1997 to require Guaranty National to register under the Securities Act of 1933 all or part of the shares of common stock it continues to hold. In addition, the Company's insurance subsidiaries and the Guaranty National Companies also entered into certain reinsurance agreements and a trade name agreement. Orion and Guaranty National have signed an investment management agreement pursuant to which most of the Guaranty National Companies' investment portfolio, including that of Viking, is managed by Orion's investment managers (under the direction and supervision of Guaranty National). Orion was paid a fee of $550,000 per year prior to Guaranty National's acquisition of Viking in July 1995, after which the fee was increased to $650,000 per year. The investment management agreement continues for annual periods, unless terminated by either party upon 90 days prior written notice. -14- INSURANCE INDUSTRY CHARACTERISTICS Loss Reserves - ------------- The Company establishes reserve liabilities for reported losses, incurred but not reported ("IBNR") losses, and claim settlement and administration expenses. Reserves for reported losses and loss adjustment expenses are estimates of the ultimate costs of claims incurred but not settled. IBNR loss reserves are estimates for both unreported claims and additional development of previously reported claims. Reserves are primarily based on the circumstances surrounding each claim, the Company's historical experience with losses arising from claims not yet reported and the particular experience associated with the line of business and type of risk involved. Consideration is also given to expected changes in costs for property, repairs to property, medical care, litigation and other legal costs, and vocational rehabilitation. The Company regularly monitors the factors affecting its reserves to better control claim costs, which also provides a base of information to reevaluate reserve estimates. The reserve estimates are regularly reviewed and adjusted to consider all pertinent information as it becomes available as to the ultimate cost of losses and claims incurred. Such reevaluation is a normal, recurring activity that is inherent in the process of loss reserve estimation. Several methods are used for reviewing reserves, including paid and incurred loss development, and incurred claim counts and average claim costs. These methods can be subject to variability in reserve estimation for a number of reasons, including improved claims department operating procedures and accelerated claims settlement due to the use of alternate dispute resolution and expedited resolution of civil suits in litigation. Additionally, other factors that are analyzed and are considered in the determination of loss reserves include (i) claim emergence and settlement patterns and changes in these patterns from year to year,(ii) trends in the frequency and severity of paid and incurred losses, (iii) changes in policy limits and changes in reinsurance coverages, (iv) changes in the mix and classes of business, and (v) changes in claims handling procedures as determined by discussions with claims and operating staff and through claim audits. Management revises its reserve estimates as appropriate and believes that the loss and loss adjustment expense reserves of the Company's insurance subsidiaries make reasonable and sufficient provision for the ultimate cost of all losses and claims incurred. However, no assurances can be given that reserve development will not occur in the future. Accident Year Loss and Loss Adjustment Expense Analysis - ------------------------------------------------------- Accident year is a period of exposure that is used to accumulate loss and loss adjustment experience by the year in which an incident giving rise to a claim occurs. Accident year information is used for loss reserving and in establishing premium rates. Accident year loss experience is updated in subsequent calendar years until all losses and loss adjustment expenses related to that given accident year have been settled. Accident year loss ratio relates losses associated with incidents giving rise to claims occurring within a given calendar year to premiums earned during the same calendar year. Presented below are loss reserve development tables for the five years ended December 31, 1995 prepared in accident year format. -15-
For each accident year, the following table presents premiums earned, and the provision for loss and loss adjustment expenses as a percentage of premiums earned (the "loss ratios") as established in the initial accident year and cumulative as of December 31, 1995: Loss and Loss Adjustment Accident Premiums Expense Development ------------------------------- Year Earned Initial Cumulative - -------- -------- ------- ---------- (000s omitted) 1991 $701,386 67.7% 64.3% 1992 560,205 71.0 69.3 1993 617,404 70.4 71.8 1994 691,223 69.6 70.3 1995 749,003 66.8 - The table set forth below indicates premiums earned, the loss ratio, the ratio of policy acquisition costs and other insurance expenses to premiums earned (the "expense ratio"), the ratio of policyholders' dividends to premiums earned (the "policyholders' dividend ratio") and the total of the ratios (the "combined ratio") at December 31, 1995: Accident Premiums Loss Expense Policyholders' Combined Year Earned Ratio Ratio Dividend Ratio Ratio - -------- -------- ----- ------- -------------- -------- (000s omitted) 1991 $701,386 64.3% 30.2% 2.4% 96.9% 1992 560,205 69.3 27.3 2.4 99.0 1993 617,404 71.8 26.8 2.0 100.6 1994 691,223 70.3 27.0 2.1 99.4 1995 749,003 66.8 29.0 2.9 98.7 Calendar Year Loss Reserve Analysis - ----------------------------------- An analysis of the Company's calendar year loss and loss adjustment expense reserves net of reinsurance is presented below: Year Ended December 31, ------------------------------------ 1995 1994 1993 -------- -------- -------- (000s omitted) Beginning of year .................. $891,542 $830,805 $746,298 -------- -------- -------- Provision: Current year ..................... 500,514 480,826 434,840 Prior years ...................... 11,719 17,297 24,292 -------- -------- -------- 512,233 498,123 459,132 -------- -------- -------- Payments: Current year ..................... 146,540 134,120 125,042 Prior years ...................... 263,257 303,266 249,583 -------- -------- -------- 409,797 437,386 374,625 -------- -------- -------- End of year ........................ $993,978 $891,542 $830,805 ======== ======== ======== -16- Cumulative reserve development, net of reinsurance, for the Company's wholly-owned insurance subsidiaries (excluding Guaranty National Companies for all years) as of December 31, 1995 for the calendar years 1985 through 1995 is shown in the table that follows: Year Ended December 31, 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 - ----------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (000s omitted) Net liability for unpaid loss and loss adjustment expenses.......... $294,427 $359,623 $401,677 $520,304 $602,519 $595,455 $668,467 $746,298 $830,805 $891,542 $993,978 Paid (cumulative) as of: One year later .... 226,776 211,102 178,100 236,657 281,224 261,464 240,318 249,583 303,266 263,257 - Two years later.... 364,206 320,000 318,883 403,147 438,250 408,624 378,524 429,501 445,369 - - Three years later.. 436,665 409,019 414,616 488,397 526,235 493,218 484,335 514,172 - - - Four years later .. 493,399 468,971 457,182 544,449 581,880 567,068 540,325 - - - - Five years later .. 534,321 494,838 490,973 582,527 633,413 605,039 - - - - - Six years later ... 550,743 518,397 515,478 624,415 660,648 - - - - - - Seven years later.. 571,652 537,567 551,055 643,447 - - - - - - - Eight years later.. 588,050 566,205 563,977 - - - - - - - - Nine years later .. 611,700 576,116 - - - - - - - - - Ten years later ... 619,077 - - - - - - - - - - Net liability reestimated as of: One year later .... 416,208 434,056 469,137 573,632 647,585 657,100 694,948 770,590 848,102 903,261 - Two years later ... 478,093 486,631 504,814 624,337 695,154 685,692 714,953 782,348 854,998 - - Three years later.. 527,200 517,476 548,883 658,024 722,626 705,516 732,047 785,995 - - - Four years later .. 574,073 557,124 568,114 687,818 741,789 741,096 744,251 - - - - Five years later .. 605,513 577,977 597,103 705,475 770,359 756,522 - - - - - Six years later ... 623,291 604,056 610,086 733,836 788,288 - - - - - - Seven years later.. 645,114 611,108 637,322 747,525 - - - - - - - Eight years later.. 652,011 633,723 651,402 - - - - - - - - Nine years later .. 673,417 650,303 - - - - - - - - - Ten years later ... 684,712 - - - - - - - - - - Net deficiency ...... (390,285) (290,680) (249,725) (227,221) (185,770) (161,067) (75,784) (39,697) (24,193) (11,719) - -17- Cumulative reserve development for the Company's wholly-owned insurance subsidiaries (excluding Guaranty National Companies for all years) as of December 31, 1995 for the calendar years 1992 through 1995 is shown in the table that follows: 1992 1993 1994 1995 ---- ---- ---- ---- Gross liability ..... $1,081,396 $1,140,403 $1,181,329 $1,274,982 Reinsurance recoverable ....... 335,098 309,598 289,787 281,004 ---------- ---------- ---------- ---------- Net liability ....... $ 746,298 $ 830,805 $ 891,542 $ 993,978 ========== ========== ========== ========== Gross re-estimated liability ......... $1,091,963 $1,133,514 $1,184,498 - Re-estimated recoverable ....... 305,968 278,516 281,237 - ---------- ---------- ---------- Net re-estimated liability ......... $ 785,995 $ 854,998 $ 903,261 - ========== ========== ========== Gross (deficiency) redundancy ........ $ (10,567) $ 6,889 $ (3,169) - ========== ========== ==========
The preceding loss reserve development tables indicate the aggregate year-end liability for loss and loss adjustment expenses net of reinsurance, the cumulative amounts paid attributable to those reserves through December 31, 1995, the re-estimate of the aggregate liability as of December 31 of each subsequent year and the cumulative development of prior years' reserves. Information is also provided on a gross basis for 1992 through 1995. Consistent with industry practice, certain claims for long-term disability workers compensation benefits are carried at discounted values. At December 31, 1995 and 1994, long-term disability workers compensation loss reserves are carried at $56,603,000 and $51,886,000, respectively, in the consolidated financial statements at net present value using a statutory interest rate of 3.5%. The Company's IBNR loss and loss adjustment expense reserves and other bulk reserves for losses and loss adjustment expenses for which claim files have not been established, net of reinsurance, were $508,872,000, $438,194,000 and $336,446,000 as of December 31, 1995, 1994 and 1993, respectively. The following table presents the differences between loss and loss adjustment expense reserves reported in the consolidated financial statements in accordance with generally accepted accounting principles ("GAAP"), and those reported in the combined annual statement filed with state insurance departments in accordance with statutory accounting practices ("SAP"): -18-
December 31, ---------------------- 1995 1994 ---- ---- (000s omitted) Liability on SAP basis ...................... $1,002,864 $ 909,723 Estimated salvage and subrogation recoveries recorded on a cash basis for SAP and on an accrual basis for GAAP .... (10,381) (14,151) GAAP Reinsurance payable included in SAP reserves ................................ (7,774) (13,817) Foreign subsidiary reserves ............... 9,269 9,787 ---------- ---------- Liability on GAAP basis, net of reinsurance.. 993,978 891,542 Reinsurance on GAAP reserves ................ 281,004 289,787 ---------- ---------- Liability on GAAP basis ..................... $1,274,982 $1,181,329 ========== ==========
During 1995, the Company strengthened loss reserves and experienced development for prior years' business based upon the Company's ongoing actuarial analysis utilizing the most current information available. The 1995 provision for prior accident year losses by major line of business is as follows: (000s omitted) Pools and associations .................... $ 9,398 Reinsurance ............................... 6,504 Commercial multiple peril ................. 6,271 Workers compensation ...................... (11,784) Other...................................... 1,330 -------- $ 11,719 ======== Adverse development relating to the Company's voluntary participation in various pools and associations business is generally recorded as the information is reported to the Company. The development from reinsurance relates to the Company's assumed reinsurance business in which loss and loss adjustment expense experience is indicative of the ceding companies' experience. Starting in 1983, the Company expanded its commercial multiple peril business and then significantly reduced that line of business in 1988 due to greater than expected losses. The development from the commercial multiple peril line of business primarily relates to cancelled California contractors package business, which has recently been experiencing greater claims activity, and from Connecticut Specialty, as reported losses in certain programs developed more than anticipated. The favorable development from the workers compensation line of business is the result of continued improvement from the application of risk management and loss control procedures. The other category includes the Company's professional liability program for architects and engineers and losses from a discontinued auto liability program. -19- Loss reserve estimates are based on forecasts of the ultimate settlement of claims and are subject to uncertainty with respect to future events. Loss reserve amounts are based on management's informed estimates and judgments, using data currently available. Reserve amounts and the underlying actuarial factors and assumptions are regularly analyzed and adjusted to reflect new information. The Company has experienced substantial development of losses from prior accident years, particularly accident years 1984 and 1985 which were the worst years in recent history for the Company and for the property/casualty insurance industry in general. The Company's adverse development primarily resulted from terminated lines of business, pools and other programs, higher than anticipated inflationary pressures, unforeseen judicial decisions (including interpretations of policy coverages beyond what was originally anticipated) and other external factors exposing the Company to risks not known when the insurance policies were priced and issued. To reduce loss development, the Company realigned certain management responsibilities in its Regional Operations segment several years ago. Key management positions were added in that segment to further strengthen loss control and prevention, and to focus more attention towards back-to-work programs for injured workers. These factors tend to reduce loss costs and adverse development. For the design professionals liability line of business, the Company has increasingly used alternative dispute resolution techniques including the extensive use of mediation procedures to settle claims. These procedures often result in reduced litigation and other claim related expenses. The commercial multiple peril business that is being run off has a specifically designated group of claims personnel assigned who have been aggressively settling claims, resulting in an acceleration of payment patterns in more recent years. The majority of the adverse development for the other lines of business relates to strengthening reserves based on historical loss development patterns. The significantly decreased level of adverse development during more recent years is consistent with the strengthening of loss reserves and the strong performance of the Company's ongoing lines of business. Current operations are more focused on underwriting risks where the Company has specialized knowledge and can provide enhanced service to reduce loss costs. This concentration, and the specialized knowledge and growing experience in its selected lines of business arising from such concentration, have enabled the Company to implement improvements in its claims administration and underwriting procedures which have enhanced the Company's ability to analyze data and project reserve trends. -20- Investments - ----------- The Company derives a significant part of its income from its investments. Investments of the Company's insurance subsidiaries are made in compliance with applicable insurance laws and regulations of the respective states in which such companies are domiciled and other jurisdictions in which they conduct business. Neither Orion nor any of its non-insurance subsidiaries is constrained by investment restrictions set forth in state insurance laws. The Company maintains a diversified portfolio representing a broad spectrum of industries and types of securities. The Company has no significant investments in real estate, although it does own the DPIC Companies' home office building in Monterey, California and has invested in several real estate limited partnerships valued at $9,131,000 at December 31, 1995. Investments are managed to achieve a superior total return after taxes, while maintaining a proper balance of safety, liquidity, maturity and marketability. Investments are made based on long-term economic value rather than short-term market conditions. Approximately 39% of the Company's fixed maturity portfolio is invested in tax advantaged securities at December 31, 1995. Except for investments in securities of the United States Government and its agencies, the Company did not have any other investments in any one issuer that exceeded $25,000,000 at December 31, 1995. The Company has the ability to hold its fixed maturity investments to term since its operating cash flow and its short-term investment portfolio provide the Company with substantial liquidity. Fixed maturity investments that the Company has the positive intent to hold to maturity are recorded at amortized cost. Fixed maturity investments which may be sold in response to, among other things, changes in interest rates, prepayment risk, income tax strategies, or liquidity needs are classified as available-for-sale and are carried at market value, with unrealized gains and losses reflected in stockholders' equity. Equity securities are stated at market value. Both the fixed maturities and the equity investments consist primarily of readily marketable securities. The following table shows the composition of the investment portfolio of the Company as of December 31, 1995 and 1994, and the quality ratings for the Company's fixed maturity investments. The investments shown below are listed at their cost, market value and financial statement (book) values. -21-
December 31, 1995 Cost Market Value Book Value - ----------------- ------------------ ------------------ ------------------ (000s omitted - except for percentages) Fixed Maturities: AAA ............. $ 403,434 26.5% $ 421,737 26.1% $ 415,460 25.9% AA .............. 232,810 15.3 248,478 15.4 244,607 15.3 A ............... 148,950 9.8 155,697 9.7 154,801 9.7 BBB ............. 90,132 5.9 94,231 5.8 94,182 5.9 BB .............. 55,602 3.7 55,432 3.4 55,352 3.4 B and Below ..... 47,024 3.1 46,945 2.9 47,005 2.9 Not Rated ....... 35,225 2.3 36,631 2.3 36,631 2.3 ---------- ----- ---------- ----- ---------- ----- Sub-total ..... 1,013,177 66.6 1,059,151 65.6 1,048,038 65.4 Equity Securities.. 257,378 16.9 304,885 18.9 304,885 19.0 Other Long Term Investments ..... 62,925 4.2 62,925 3.9 62,925 3.9 Short Term Investments ..... 187,013 12.3 187,013 11.6 187,013 11.7 ---------- ----- ---------- ----- ---------- ----- $1,520,493 100.0% $1,613,974 100.0% $1,602,861 100.0% ========== ===== ========== ===== ========== ===== December 31, 1994 - ----------------- Fixed Maturities: AAA ............. $ 413,949 30.9% $ 390,075 29.8% $ 394,291 29.9% AA .............. 172,362 12.8 170,235 13.0 170,221 12.9 A ............... 112,923 8.4 107,677 8.2 110,051 8.3 BBB ............. 104,180 7.8 100,128 7.6 101,579 7.7 BB .............. 51,875 3.9 45,805 3.5 46,302 3.5 B and Below ..... 38,507 2.9 34,909 2.7 34,909 2.7 Not Rated ....... 39,501 2.9 40,510 3.1 40,488 3.1 ---------- ----- ---------- ----- ---------- ----- Sub-total ..... 933,297 69.6 889,339 67.9 897,841 68.1 Equity Securities.. 250,929 18.7 264,434 20.2 264,434 20.0 Other Long Term Investments ..... 52,564 3.9 52,564 4.0 52,564 4.0 Short Term Investments ..... 104,201 7.8 104,201 7.9 104,201 7.9 ---------- ----- ---------- ----- ---------- ----- $1,340,991 100.0% $1,310,538 100.0% $1,319,040 100.0% ========== ===== ========== ===== ========== ===== Year Ended December 31, ----------------------- 1995 1994 ---- ---- Yield on average investments: Pre-tax ......... 7.1% 6.5% === === After-tax ....... 5.5% 5.0% === === -22-
Included in other long-term investments on December 31, 1995 were investments in limited partnerships carried at $60,946,000. The assets of these partnerships are managed by outside entities. Individual partnerships may invest in a variety of investment vehicles, including but not limited to U.S. and foreign bonds and equities, both public and private, and real estate. Such partnerships are carried at the Company's interest in the underlying net assets of the limited partnerships. The Company's portion of the partnerships' earnings or losses are recorded in net investment income in the Company's statement of earnings. Net investment income on these partnerships was $9,065,000, $555,000 and $9,203,000 for 1995, 1994 and 1993, respectively. The Company strives to enhance the average return of its portfolio by investing a small percentage of it in a diversified group of non-investment grade fixed maturity securities, or securities that are not rated. The risk of loss due to default is generally considered greater for non-investment grade securities than for investment grade securities because the former, among other things, are typically unsecured, often subordinated to other debts of the issuer and are often issued by highly leveraged companies. In the non-investment grade segment of the investment portfolio, the Company maintains a high degree of diversity, with an average investment per issuer of approximately $1,545,000 at December 31, 1995. Only four such investments, aggregating $24,246,000, were in excess of $5,000,000 as of December 31, 1995. The Company monitors the financial stability of issuers of securities that it owns. When conditions are deemed appropriate, the Company ceases to accrete discount, or accrue interest and dividends. In cases where the value of investments are deemed to be other than temporarily impaired, the Company recognizes losses. During 1995 provisions for such losses were $285,000 for equity securities and $4,050,000 for fixed maturity investments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Investment Income and Realized Investment Gains." Reinsurance - ----------- In the ordinary course of business, the Company's insurance subsidiaries enter into reinsurance contracts with other insurers which serve to provide greater diversification of business and to limit the Company's maximum loss from catastrophes, large risks or unusually hazardous risks. Ceding reinsurance reduces an insurer's operating leverage ratio. A large portion of the Company's reinsurance protection is provided by reinsurance contracts or treaties under which all risks meeting prescribed criteria are automatically covered. In other instances, reinsurance is obtained by negotiation for individual risks, or facultative reinsurance. The Company's insurance subsidiaries have certain excess-of-loss and catastrophe treaties with unaffiliated insurers or reinsurers which provide protection against a specified part or all of certain types of losses over stipulated dollar amounts arising from one or more occurrences. The amount of each risk retained by an insurer is subject to maximum limits which vary -23- by line of business and type of coverage. Retention limits are periodically revised as the capacity of the Company's insurance subsidiaries to retain risk varies and as reinsurance prices change. Reinsurance contracts do not relieve the Company of its obligation to the policyholders. The collectibility of reinsurance is subject to the solvency of the reinsurers. The Company is very selective as to its reinsurers, placing reinsurance with only those reinsurers considered to be in sound financial condition and having satisfactory underwriting ability. Many of the Company's reinsurance agreements are subject to annual renewal as to coverage, limits and price. The financial strength of its reinsurers is continually monitored by the Company. The Company's insurance subsidiaries, to their knowledge, have no material exposure to potential unrecognized losses due to reinsurers that are in known financial difficulties. The Company's insurance subsidiaries have reinsurance protection for workers compensation losses in excess of $1,500,000 up to $100,000,000. The DPIC Companies have reinsurance for 85% of losses from architect and engineer liability in excess of $1,000,000 up to $5,000,000. Certain commercial auto and general liability policies are reinsured for a portion of losses in excess of $500,000 up to $1,000,000. The Company's reinsurance subsidiary maintains various reinsurance arrangements for its facultative and treaty exposures, including catastrophe protection above the $1,000,000 level. In addition to the foregoing, the Company's insurance subsidiaries also maintain other reinsurance arrangements in support of their specific business needs. In 1995 and 1994, the Company's insurance subsidiaries net premiums written to year-end statutory surplus were at levels of 1.5:1 and 1.6:1, respectively. Government Regulation - --------------------- The Company's insurance subsidiaries, in common with those of other insurance companies, are subject to comprehensive regulation by insurance authorities. In particular, the Company is subject to regulation by the Insurance Department of Connecticut, the state of incorporation of all of the Company's insurance subsidiaries. All insurance companies must file annual statements and other reports with state regulatory agencies and are subject to regular and special examinations by those agencies. A regular periodic examination of the Company's insurance subsidiaries, covering their operations and statutory financial statements through December 31, 1991, was satisfactorily completed in 1993 by the Insurance Departments of California and Connecticut. A regular periodic examination covering the Company's operations through December 31, 1994 by the Insurance Department of Connecticut is currently in process. Each of the Company's insurance subsidiaries is also subject to regulation by other jurisdictions in which it sells insurance, including certain Canadian provinces. States regulate the insurance business through supervisory agencies which have broad administrative powers, including powers relating to, among other things, the standards of solvency which must be met and maintained; the licensing of insurers and their agents; restrictions on the amount of risk which may be insured under a single policy; the approval of premium rates; the form and content of the insurance policy and sales literature; the form and content of financial statements; reserve requirements; the imposition of monetary penalties for rules violation; and the nature of and limitations on permitted investments. In general, such regulations are for the protection of policyholders rather than stockholders. -24- In some instances, particularly in connection with workers compensation insurance, various states routinely require deposits of assets for the protection of policyholders and their employee claimants located in those states. As of December 31, 1995 and 1994, securities representing approximately 15% and 18%, respectively, of the book value of the Company's investment portfolio were on deposit with various state treasurers or custodians. Such deposits consist of securities of the types which comply with standards established by each state. The Company is also subject to state laws regulating insurance holding company systems. Most states have enacted legislation and adopted administrative regulations affecting insurance holding companies and the acquisition of control of insurance companies, as well as transactions between insurance companies and their affiliates. The nature and extent of such legislation and regulations currently in effect vary from state to state. Most states, including Connecticut, currently require administrative approval of the acquisition of 10% or more of the outstanding shares of an insurance company incorporated in the state or the acquisition of 10% or more of an insurance holding company whose insurance subsidiary is incorporated in the state. The acquisition of 10% of such shares is deemed to be the acquisition of "control" for the purpose of most holding company statutes and requires the filing of detailed information concerning the acquiring parties and the plan of acquisition and administrative approval prior to such acquisition. Material transactions between insurance companies and affiliated members of the holding company system are generally required to be "fair and reasonable" and in some cases are subject to administrative approval. Other states, in addition to an insurance company's state of domicile, may regulate affiliated transactions and the acquisition of control of licensed insurers. The State of California, for example, presently treats certain insurance subsidiaries of the Company which are not domiciled in California as though they were domestic insurers for insurance holding company purposes. Such subsidiaries are required to comply with the holding company provisions of the California Insurance Code, certain of which provisions may be more restrictive than the comparable laws of the State of Connecticut. All state jurisdictions in which the Company is authorized to transact business require participation in guaranty funds. Insurers authorized to transact business in those jurisdictions can be assessed by a state guaranty fund a percentage (usually from 1% to 2%) of direct premiums written in that jurisdiction each year to pay claims on behalf of insolvent insurers. The likelihood and amount of any future assessment cannot be estimated until after an insolvency has occurred. For the years ended December 31, 1995 and 1994 the Company's insurance subsidiaries were assessed approximately $222,000 and $1,051,000, respectively (net of estimated future recoveries) as a result of known insolvencies. Insurance companies are required by certain states in which they do business to participate in automobile insurance plans and workers compensation plans. These plans provide insurance on risks which are not written in the voluntary market. Participation in these plans has usually been unprofitable for the Company. A number of state legislatures and the United States Congress have for years been considering, or have now enacted, some type of legislative proposals which alter the rules for tort claims and increase the states' authority to regulate insurance companies. These initiatives have expanded -25- in some instances, the states' regulation over rates (See "Rates" below) and also have increased data reporting requirements. In recent years the state insurance regulatory framework has come under federal scrutiny, and certain state legislatures have considered or enacted laws that alter, and in many cases increase, state authority to regulate insurance companies and insurance holding company systems. The National Association of Insurance Commissioners ("NAIC") and state regulators are re-examining existing laws and regulations relating to the solvency of insurers. The NAIC has adopted risk based capital ("RBC") requirements for property and casualty insurers. RBC refers to the determination of the amount of statutory capital required for an insurer based on the risks assumed by the insurer (including, for example, investment risks, credit risks relating to reinsurance recoverables and underwriting risks) rather than just the amount of net premiums written by the insurer. A formula that applies prescribed factors to the various risk elements in an insurer's business is used to determine the minimum statutory capital requirement for the insurer. The capital of each of the Company's insurance subsidiaries at December 31, 1995 exceeds the RBC requirements. Although the federal government generally does not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. There are various current and proposed federal measures which may significantly affect the Company's insurance business, including, among other proposals, the revocation of the antitrust exemption provided by the McCarran-Ferguson Act, Superfund reform and reforms to the litigation system. The various proposed reforms to limit punitive damages and assess costs to the losing side in a lawsuit, if any are enacted, might have a positive impact on the Company and the insurance industry in general. Suggested changes to the nation's health care system, however, if enacted, might negatively affect the Company's workers compensation and automobile liability businesses. The economic and competitive effects of any proposals upon the Company would depend upon the final form such legislation might take. The Company is unable to predict what regulatory proposals may be adopted in the future or the effect any such proposals might have on the Company's business if adopted. Limitations on Payments from Insurance Subsidiaries - --------------------------------------------------- The principal sources of cash available to Orion are dividends, reimbursement of various administrative charges, and tax payments from its subsidiaries. The payment of dividends to Orion by its insurance subsidiaries is subject to state regulation. No state restricts dividend payments by Orion to its stockholders. The ability of the Company's insurance subsidiaries to declare dividends is governed primarily by the insurance laws of Connecticut, the state of incorporation of all of the Company's insurance subsidiaries. Generally, such laws currently provide that, unless prior approval is obtained, dividends of a property and casualty insurance company in any consecutive 12-month period shall not exceed the greater of its net income for the preceding calendar year or 10% of its policyholders' surplus as of the preceding December 31, determined on a statutory accounting basis. Dividends and distributions by the Company's insurance subsidiaries are also subject to a requirement that statutory policyholders' surplus be -26- reasonable in relation to outstanding liabilities and adequate to meet the companies' financial needs following the declaration of any dividends or distributions. State insurance regulators, however, have broad discretionary authority with respect to approving the payment of dividends by insurance companies. Under current Connecticut regulations, the maximum dividends permitted at December 31, 1995 for the ensuing twelve months, without prior approval, aggregated $83,173,000. Orion received $30,546,000 in dividends from its wholly-owned insurance subsidiaries in 1995. Since it is difficult to predict future levels of statutory policyholders' surplus or earnings, the amount of dividends that could be paid in the future without prior approval cannot be determined at this time. Rates - ----- The Company's insurance subsidiaries are generally subject to regulation as to rates. Most states have insurance laws requiring that rate schedules and other information be filed with or made available to the state's regulatory authority, either directly or through a rating organization with which the insurer is affiliated. The regulatory authority may, in most states, disapprove a rate filing if it finds that the rates are inadequate, excessive or unfairly discriminatory. Rates, which are not necessarily uniform for all insurers, vary by class of business, hazard assumed and size of risk. Subject to regulatory requirements, the Company's management determines the prices charged for its policies based on a variety of factors including recent historical claims experience, inflation, competition, tax law and anticipated changes in the legal environment, both judicial and legislative. Methods for arriving at rates vary by type of business, exposure asumed and size of risk. Underwriting profitability is affected by the accuracy of these assumptions, by the willingness of insurance regulators to approve changes in those rates which they control and by such other matters as underwriting selectivity and expense control. The Company's management believes that its rate outlook for its principal lines of business will remain stable during 1996. Some states have adopted open rating systems for workers compensation which permit insurers to set premium rates independently without the prior approval of the insurance commissioners. A number of other states permit insurers to deviate from standard rates for workers compensation insurance after receiving prior approval. In insuring professional liability risks the DPIC Companies are generally not limited to the standard rates of a rating organization but set their own rates because of the unique nature of the risks being underwritten. Ocean marine insurance rates are exempt from regulation. On January 31, 1995, the Department of Insurance of the State of California (the "California Department") advised the Company that it had a liability of approximately $4,000,000, plus interest under regulations issued with respect to an amendment to the California Insurance Code known as Proposition 103. On November 2, 1995, the terms of a Stipulation and Consent Order between the California Department and the Company were adopted by the Commissioner of the California Department. Pursuant to that order, the Company has no premium rollback liability under Proposition 103. Further, the California Department acknowledged that premium rates charged by the Company in California since the passage of Proposition 103 have been in compliance with the requirements of the California Insurance Code. -27- Competition - ----------- The insurance industry is highly competitive. Over 3,000 property and casualty insurance companies write business in the United States, but most of the business is written by about 900 companies. No single company or group has more than 10% of the market. The Company's insurance subsidiaries are in competition with numerous stock and mutual property and casualty insurance companies, as well as state run workers compensation insurance funds, many of which are substantially larger and have significantly greater resources than the Company. Competition may take the form of lower premiums, specialized products, more complete and complex product lines, greater pricing flexibility, superior service, different marketing methods or higher policyholder dividend rates. Superior service and marketing methods are of particular importance in workers compensation. Compet ition might also come from service organizations which administer self-insured programs. The Company's insurance subsidiaries sell their insurance principally through independent agents, brokers and general agents, who typically also represent one or more competing insurance companies. They are paid commissions based on premiums collected from insureds. Commission rates vary according to the type and amount of insurance sold. Some competitors in certain lines obtain their business at a lower direct cost through the use of salaried personnel rather than independent agents and brokers. Rating - ------ A.M. Best Company rates the Company's primary insurance subsidiaries "A (Excellent)." In general, A.M. Best Company's ratings are based on an analysis of the financial condition and operation of an insurance company as it relates to the industry. These ratings are not primarily designed for investors and do not constitute recommendations to buy, sell or hold any security. A.M. Best Company has upgraded the ratings of the Company three times in the last six years. MISCELLANEOUS OPERATIONS The Company's fourth business segment consists primarily of the miscellaneous income and expense (principally interest and general and administrative expenses) of Orion itself. For financial reporting purposes, the Company applies federal income taxes and benefits, as if fully utilizable, to its segments. Any consolidating elimination entries are accounted for in this fourth segment. ITEM 2. PROPERTIES The Company's executive office is located at 600 Fifth Avenue, New York, New York. The home office of the insurance operations of the Company is located in Farmington, Connecticut. The Company's New York executive office facilities consist of approximately 12,000 square feet and are leased at an average annual rental, over ten years, of $465,000. The -28- Farmington office consists of approximately 140,000 square feet and is leased at an annual rental of $4,310,000. The DPIC Companies owns its office building, which consists of approximately 42,000 square feet, in Monterey, California. All of the other insurance operations of the Company are conducted from leased premises in or adjacent to major urban centers throughout the United States, Puerto Rico, Canada and in Bermuda. These operations, in the aggregate, occupy approximately 480,000 square feet, at an annual rental of approximately $8,843,000. The Company believes that its current facilities are suitable and adequate for their present use and anticipated requirements. ITEM 3. LEGAL PROCEEDINGS The Company is routinely engaged in litigation incidental to its businesses. In the judgment of the Company's management, there are no significant legal proceedings pending against the Company which, net of reserves established therefor, are likely to result in judgments for amounts that are material to the financial condition, liquidity or results of operations of Orion and its consolidated subsidiaries, taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. INFORMATION CONCERNING EXECUTIVE OFFICERS OF THE COMPANY The following is a summary of certain information regarding the current executive officers of Orion. All officers of Orion and its subsidiaries serve at the pleasure of their respective Boards of Directors. Alan R. Gruber, Chairman of the Board and Chief Executive Officer of Orion since March 1976; Chairman of Orion Capital Companies, Inc. ("OC Companies"), which provides management services to the Orion Capital Companies, since October 1982; age 68. As previously disclosed, Mr. Gruber plans to retire on December 31, 1996 as Chairman and Chief Executive Officer. After that date, Mr. Gruber will remain a member of Orion's Board of Directors and Chairman of the Executive Committee and, on a part-time basis, will continue employment with the Company as a Senior Executive Consultant. W. Marston Becker, Vice Chairman of the Board since March 8, 1996; Senior Vice President of Orion and President and Chief Executive Officer of the DPIC Companies and Senior Vice President of the OC Companies since July 1994; President and Chief Executive Officer of McDonough Caperton Insurance Group, an insurance brokerage firm, from March 1987 to July 1994; age 43. -29- The Orion Board of Directors has announced its present intention of electing Mr. Becker Chairman of the Board and Chief Executive Officer of Orion effective January 1, 1997, following Mr. Gruber's planned retirement from full-time employment on December 31, 1996. Larry D. Hollen, President and Chief Operating Officer of Orion since March 1, 1994; a director of Orion since March 20, 1992; President of the OC Companies since February 1994; Executive Vice President and Assistant Chief Operating Officer of Orion from December 1, 1992 to February 28, 1994; Senior Vice President of Orion from March 1990 to December 1992; President of the EBI Companies from January 1990 to May 31, 1993; age 50. Raymond W. Jacobsen, Senior Vice President of Orion since July 1994; Vice President of Orion from March 1990 to July 1994; President and Chief Executive Officer of the EBI Companies since June 1, 1993; Acting President and Chief Executive Officer of Connecticut Specialty since October 17, 1995; Executive Vice President of the EBI Companies from December 1989 to May 31, 1993; Senior Vice President of the OC Companies since March 1990; age 43. Daniel L. Barry, Vice President and Controller of Orion since October 1987; Vice Chairman of SecurityRe Inc. since 1989; Senior Vice President of OC Companies since January 1989; Controller of OC Companies since October 1986; age 45. Michael P. Maloney, Vice President, General Counsel and Secretary of Orion since August 1979; Senior Vice President of OC Companies since March 1987; age 51. William G. McGovern, Vice President and Chief Actuary of Orion since March 1990; Senior Vice President and Chief Actuary of OC Companies since October 1989; age 43. Vincent T. Papa, Vice President and Treasurer of Orion since June 1985; Chairman of McGee since September 30, 1995; Senior Vice President of OC Companies since March 1987 and Treasurer since December 1990; age 49. Raymond J. Schuyler, Vice President-Investments of Orion since June 1984; Senior Vice President of OC Companies since March 1986; age 60. -30- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Principal Market. The principal market on which Orion's Common Stock is traded is the New York Stock Exchange. (b) Stock Price and Dividend Information. The table below presents the high and low market prices and dividend information for Orion's Common Stock for 1995 and 1994. Cash Stock Prices Dividends High Low Declared ---- --- --------- 1995: Quarter Ended December 31........ $45.125 $39.875 $.23 Quarter Ended September 30....... 45.25 38.375 .23 Quarter Ended June 30............ 40.25 34.50 .20 Quarter Ended March 31........... 37.875 34.25 .20 ---- Total........................ $.86 ==== 1994: Quarter Ended December 31........ $35.25 $28.125 $.20 Quarter Ended September 30....... 34.625 29.75 .20 Quarter Ended June 30............ 34.75 29.875 .18 Quarter Ended March 31........... 34.00 30.00 .18 ---- Total........................ $.76 ==== Cash dividends have been paid on Orion's Common stock in every quarter since the fourth quarter of 1978, when dividends were first commenced. The quarterly dividend was further increased in February 1996 to $.25 per share. (c) Approximate Number of Holders of Common Stock. The number of holders of record of Orion's Common Stock as of March 14, 1996 was 1,856. -31- ITEM 6. SELECTED FINANCIAL DATA The following table summarizes information with respect to the operations and financial condition of Orion and its subsidiaries. Common stock and per common share data have been restated to give effect to the 5-for-4 stock splits paid on both November 15, 1993 and December 7, 1992. All of Orion's $1.90 Preferred Stock, $2.125 Preferred Stock and Adjustable Rate Preferred Stock were converted into common stock or redeemed during 1992 and 1993. In November 1991, Orion sold 6,250,000 shares of Guaranty National Corporation in an initial public offering, reducing its level of ownership from 100% to slightly less than 50%. Guaranty National's financial statements have been consolidated with those of the Company through November 20, 1991. For the periods subsequent to November 20, 1991, the portion of Guaranty National's results attributable to the Company's ownership is included on an equity accounting basis. Information presented as of December 31, 1991 through 1995 excludes the accounts of Guaranty National. The consolidated financial statements and related notes thereto are furnished under Item 8 of this report.
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (000s omitted-except for per share data) For the year ended December 31: Total revenues ................. $ 874,280 $ 780,947 $ 720,155 $ 647,718 $ 837,294 Gain on sale of common stock of Guaranty National ......... - - - - 33,931 After-tax investment gains (losses) ..................... 7,708 2,427 5,888 3,113 (1,804) Earnings before cumulative effect of change in accounting principles and extraordinary loss ......................... 67,622 55,245 56,988 45,792 44,668 Net earnings ................... 67,622 55,245 68,813 42,872 44,668 Earnings per common share before cumulative effect of change in accounting principles and extraordinary loss ........... 4.77 3.85 3.88 3.62 3.75 Net earnings per common share ........................ 4.77 3.85 4.69 3.35 3.75 Dividends declared - Adjustable rate preferred share ...................... - - 1.10 4.16 4.37 $1.90 preferred share ........ - - - 1.43 1.90 $2.125 preferred share ....... - - .12 2.125 2.125 Common share ................. .86 .76 .68 .60 .59 Weighted average number of common shares and equivalents outstanding .................. 14,187 14,348 14,598 10,914 9,964 As of December 31: Total cash and investments ..... $1,606,445 $1,325,241 $1,328,969 $1,169,379 $1,087,454 Total assets ................... 2,473,588 2,112,761 2,117,454 1,937,408 1,827,069 Total policy liabilities ....... 1,596,033 1,450,835 1,412,285 1,326,872 1,228,951 Notes payable and debentures ... 209,148 152,382 160,372 129,863 142,311 Adjustable rate preferred stock - - - 18,705 19,125 Stockholders' equity ........... 490,903 365,088 394,195 311,287 249,829 Common shares outstanding ...... 13,953 14,041 14,372 13,100 9,905 Book value per common share .... $ 35.18 $ 26.00 $ 27.43 $ 21.48 $ 19.00 -32-
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries (collectively the "Company") operate principally in the property and casualty insurance business. The Company reports its insurance operations in three segments - Regional Operations, Reinsurance/Special Programs and Guaranty National Companies. Regional Operations provides workers compensation insurance products through EBI Companies. Reinsurance/Special Programs includes (i) DPIC Companies ("DPIC"), which markets professional liability insurance, (ii) Connecticut Specialty, which writes specialty insurance programs, (iii) SecurityRe Companies ("SecurityRe"), a reinsurer, (iv) Wm. H. McGee & Co., Inc. ("McGee"), an underwriting management company that specializes in ocean marine, inland marine and property insurance and (v) a 20.0% interest in Intercargo Corporation ("Intercargo") which underwrites insurance coverages for international trade. The third segment consists of the Company's 49.1% interest in Guaranty National Corporation, which specializes in nonstandard commercial and personal automobile insurance. The miscellaneous income and expenses (primarily interest, general and administrative expenses and other consolidating elimination entries) of the parent company are reported as a fourth segment. On June 30, 1995, Orion purchased all of the capital stock of McGee for $22,000,000 in cash. McGee specializes in underwriting ocean marine, inland marine and property insurance through an underwriting pool in the United States and one in Canada. The business is written by McGee on behalf of the insurance companies that comprise the pools. Orion's subsidiary, Security Insurance Company of Hartford, which has been a pool member for over 100 years, is a member of both the United States and Canadian pools. The Company's participation in the United States pool was 6%, 7% and 14.5% in 1993, 1994 and 1995, respectively. Participation in the Canadian pool was 10% in 1993 and 1994 and 15% in 1995. The Company has agreed to increase its rate of participation for 1996 to 37% in the United States and approximately 49% in Canada, and by an additional 10.5% to 16.5%, at the Company's option, for 1997 in both of the McGee pools. The Company's insurance operations have experienced favorable trends for the past several years, as indicated by its combined ratio which has improved from 109.4% in 1991 to 105.4% in 1992, 103.2% in 1993, 101.2% in 1994 and 100.3% in 1995. Operating earnings (earnings after taxes, excluding the effects of the adoption of new accounting principles and after-tax realized investment gains) were $59,914,000, $52,818,000 and $51,100,000, or $4.22, $3.68 and $3.47 per share, in 1995, 1994 and 1993, respectively, based on weighted average shares outstanding of 14,187,000 in 1995, 14,348,000 in 1994 and 14,598,000 in 1993. Preferred stock dividends of $409,000 in 1993 were deducted from earnings to compute earnings per common share. RESULTS OF OPERATIONS Earnings (loss) by segment before federal income taxes and cumulative effect of the adoption of new accounting principles are summarized as follows for the three years ended December 31, 1995: -33-
Year Ended December 31, ----------------------------------- 1995 1994 1993 ---- ---- ---- (000s omitted) Regional Operations ................... $ 57,830 $ 42,514 $ 34,025 Reinsurance/Special Programs .......... 43,241 34,117 44,032 Guaranty National Corporation ......... 4,466 11,244 9,509 -------- -------- -------- Total ............................. 105,537 87,875 87,566 Other ................................. (17,502) (16,329) (15,061) -------- -------- -------- $ 88,035 $ 71,546 $ 72,505 ======== ======== ========
REVENUES Premiums Net premiums written increased 6.4% ($45,381,000) to $757,436,000 in 1995 from $712,055,000 in 1994 and 12.0% ($76,469,000) in 1994 from $635,586,000 in 1993. The results by segment are as follows: - Regional Operations' net premiums written increased 18.9% ($52,860,000) to $332,598,000 in 1995 from $279,738,000 in 1994 and 5.5% ($14,656,000) in 1994 from $265,082,000 in 1993. The premiums written increases were in new territories where the Company believes it will benefit from its service oriented approach. The increases were partially offset by the impact of legislative reforms in certain states which have led to lower premium rates and a reduction in losses and commission expenses, resulting in higher profit margins. The increases in this segment were also mitigated by a shift towards high-deductible workers compensation products, which also have lower premium rates. - Reinsurance/Special Programs' net premiums written decreased 1.7% ($7,479,000) to $424,838,000 in 1995 from $432,317,000 in 1994 and increased 16.7% ($61,813,000) in 1994 from $370,504,000 in 1993. Net premiums written by DPIC for professional liability insurance, the largest special program, were $184,130,000, $173,205,000 and $123,637,000 in 1995, 1994 and 1993, respectively. The increase in 1994 was primarily attributable to the discontinuation on January 1, 1994 of a reinsurance contract, including a $13,704,000 premium refund received in 1994, in order to retain more of DPIC's profitable business. Excluding this refund, DPIC premiums written in 1995 increased 15.4% over premiums written in 1994. The premium increases in 1995 and 1994 reflect both new business and a continuation of a high level of policy renewals. Premium volume for Connecticut Specialty decreased 8.3% ($15,165,000) to $168,262,000 in 1995 from $183,427,000 in 1994 and 4.6% ($8,819,000) in 1994 from $192,246,000 in 1993. The decreases in 1995 and 1994 resulted from the cancellation in the second half of 1994 of a personal injury -34- protection program in Florida and a physical damage program in Texas, where the Company had unfavorable loss experience. The reduction in these programs was partially offset by the introduction of an additional marine program, increased participation in McGee's underwriting pools and an increase in premiums written in professional liability programs in 1995 and truck liability programs during 1994. The percentage of treaty and facultative reinsurance assumed to total net premiums written for Reinsurance/Special Programs amounted to 17.1%, 17.5% and 14.7% in 1995, 1994 and 1993, respectively. Premiums earned increased 8.4% ($57,780,000) to $749,003,000 in 1995 from $691,223,000 in 1994 and 12.0% ($73,819,000) in 1994 from $617,404,000 in 1993. Premiums earned reflects the recognition in income of the changing levels of net premium writings. Net Investment Income Pre-tax net investment income amounted to $99,040,000, $84,915,000 and $91,803,000 in 1995, 1994 and 1993, respectively. The pre-tax yields on the average investment portfolio were 7.1% in 1995, 6.5% in 1994 and 7.4% in 1993, with after-tax yields of 5.5%, 5.0% and 5.5%, respectively. The year-to-year changes in net investment income reflect an increase in equity earnings from limited partnership investments of $8,510,000 from 1994 to 1995, and a decrease in limited partnership income of $8,648,000 from 1993 to 1994. Earnings from limited partnership investments can vary considerably from year- to-year, however, the Company's long-term experience with these investments has been quite favorable. The increase in net investment income for 1995 is also attributable to a higher average portfolio yield on a higher investment base. Net investment income was increased in both years by income generated from the deployment of operating cash flow of $148,017,000 in 1995 and $118,779,000 in 1994. The carrying value of the Company's investment portfolio amounted to $1,602,861,000 at December 31, 1995 and $1,319,040,000 at December 31, 1994. Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which establishes the available-for-sale category of investment securities and requires such securities to be recorded at market value, with unrealized gains and losses reported in a separate component of stockholders' equity. As a result of the adoption of this standard on December 31, 1993, the Company reclassified investments with a market value of $452,102,000 from fixed maturities recorded at amortized cost to fixed maturities recorded at market, and increased unrealized appreciation on investments, a component of stockholders' equity, by $20,720,000, net of deferred income taxes. In December of 1995, the Company reclassified additional investments with a market value of $102,581,000 from fixed maturities recorded at amortized cost to fixed maturities recorded at market, increasing stockholders' equity by $1,329,000. This one-time transfer from the held-to-maturity portfolio was permitted by the implementation guide for SFAS No. 115. Fixed maturity investments which the Company has both the positive intent and the ability to hold to maturity are recorded at amortized cost. Investments which may be sold in response to, among other things, changes in interest rates, prepayment risk, income tax strategies or liquidity -35- needs are classified as available-for-sale and are carried at market value. The carrying value of fixed maturity and short-term investments amounted to $1,235,051,000 and $1,002,042,000 at December 31, 1995 and 1994, respectively, or approximately 76.9% and 75.6% of the Company's cash and investments. The Company's investment philosophy is to achieve a superior rate of return after taxes, while maintaining a proper balance of safety, liquidity, maturity and marketability. The Company invests primarily in investment grade securities and strives to enhance the average return of its portfolio through limited investment in a diversified group of non-investment grade fixed maturity securities or securities that are not rated. The risk of loss due to default is generally considered greater for non-investment grade securities than for investment grade securities because the former, among other things, are often subordinated to other indebtedness of the issuer and are often issued by highly leveraged companies. At December 31, 1995 and 1994, the Company's investment in non-investment grade and unrated fixed maturity securities were carried at $139,075,000 and $119,853,000 with market values of $139,067,000 and $119,277,000, respectively. These investments represented a total of 8.7% and 9.0% of cash and investments and 5.6% and 5.7% of total assets at December 31, 1995 and 1994, respectively. The Company monitors the financial condition of the issuers of securities that it owns. When conditions are deemed appropriate, the Company ceases to accrete discount, or accrue interest and dividends, and, in cases where the value of such investments is deemed to be other than temporarily impaired, recognizes losses. The Company's non-investment grade investments are highly diversified, with an average investment per issuer of approximately $1,545,000 at December 31, 1995. Only four non-investment grade investments aggregating $24,246,000 were in excess of $5,000,000 at December 31, 1995. Realized Investment Gains Net realized investment gains amounted to $11,885,000 in 1995, $3,437,000 in 1994 and $9,478,000 in 1993. Sales of equity securities resulted in net gains of $16,531,000, $3,845,000 and $11,273,000 and sales of fixed maturities resulted in net gains (losses) of $(311,000), $723,000 and $6,662,000 in 1995, 1994 and 1993, respectively. Realized investment gains were reduced by provisions for losses on securities deemed to be other than temporarily impaired. These provisions amounted to $285,000 in 1995, $381,000 in 1994 and $6,310,000 in 1993 for equity securities and $4,050,000, $750,000 and $2,147,000 in 1995, 1994 and 1993, respectively, for fixed maturity investments. Such provisions, based on available information at the time, were made in consideration of the decline in the financial condition of the issuers of these securities. Realized gains (losses) vary from period to period, depending on market conditions relative to the Company's investment holdings, the timing of investment sales generating gains and losses, the occurrence of events which give rise to other than temporary impairment of investments, and other -36- factors. At December 31, 1995 the Company held equity securities with unrealized appreciation of $47,507,000, as compared to unrealized appreciation of $13,505,000 for equity securities held at December 31, 1994. The market value of the fixed maturities portfolio at December 31, 1995 exceeded amortized cost by $45,974,000. This compares with an excess of amortized cost over market value of $43,958,000 for fixed maturities at December 31, 1994. Such amounts can vary significantly depending upon fluctuations in the financial markets. The rise in market values during 1995 is primarily attributable to the decline in interest rates during the year. The average maturity of the Company's fixed maturities has not varied significantly in recent years. The Company intends to shorten the maturity of a portion of its fixed maturity portfolio during 1996. The performance of the Company's investments, including net investment income, net realized gains (losses) and unrealized appreciation (depreciation) is as follows for the three most recent years: Year Ended December 31, -------------------------------- 1995 1994 1993 ---- ---- ---- (000s omitted) Net investment income ..................... $ 99,040 $ 84,915 $ 91,803 -------- -------- -------- Net realized gains (losses): Fixed maturities ........................ (4,361) (27) 4,515 Equity securities ....................... 16,246 3,464 4,963 -------- -------- -------- 11,885 3,437 9,478 -------- -------- -------- Net unrealized appreciation (depreciation): Fixed maturities ........................ 89,932 (92,325) 21,556 Equity securities ....................... 34,002 (18,827) 16,468 -------- -------- -------- 123,934 (111,152) 38,024 -------- -------- -------- $234,859 $(22,800) $139,305 ======== ======== ======== EXPENSES AND OTHER Operating Ratios The following table sets forth certain ratios of insurance operating expenses to premiums earned for the Company: Year Ended December 31, -------------------------------- 1995 1994 1993 ---- ---- ---- Loss and loss adjustment expenses ....... 68.4% 72.1% 74.4% Policy acquisition and other insurance expenses .............................. 29.0 27.0 26.8 ----- ----- ----- Total before policyholders' dividends . 97.4 99.1 101.2 Policyholders' dividends ................ 2.9 2.1 2.0 ----- ----- ----- Total after policyholders' dividends .. 100.3% 101.2% 103.2% ===== ===== ===== -37- The ratio of loss and loss adjustment expenses to premiums earned (the "loss ratio") was 68.4%, 72.1% and 74.4% in 1995, 1994 and 1993, respectively. The decreases in the 1995 and 1994 loss ratios were attributable to improvements in both the Regional Operations and Reinsurance/Special Programs segments. The loss ratio for Regional Operations was 62.4% in 1995, 67.1% in 1994 and 72.0% in 1993. These loss ratios reflect the continued success of the Company's service oriented approach for workers compensation insurance, and the growth in high-deductible policies where experience has been favorable. Reinsurance/Special Programs' loss ratio was 72.9% in 1995, 75.4% in 1994 and 76.1% in 1993. The improvement in the 1995 loss ratio for this segment is primarily the result of favorable loss experience for DPIC and the cancellation of Connecticut Specialty's personal injury protection and physical damage programs which had unfavorable loss experience in 1994. The decrease for 1994 is attributable to increased writings in programs with lower loss ratios, offset in part by increased losses incurred in the two Connecticut Specialty cancelled programs. The ratio of deferred acquisition costs and other insurance expenses to premiums earned (the "expense ratio") was 29.0%, 27.0% and 26.8% in 1995, 1994 and 1993, respectively. The increase in the expense ratio in 1995 is attributable to a number of factors including EBI Companies opening offices in new territories, a change in the mix of business toward policies with lower premiums and losses relative to policyholder servicing expenses and general inflationary increases in fixed operating expenses. The 1994 and 1993 expense ratios reflect low levels of assessments from certain assigned risk pools. The ratio of policyholders' dividends to premiums earned (the "dividend ratio") was 2.9%, 2.1% and 2.0% in 1995, 1994 and 1993, respectively. The increase in the dividend ratio for 1995 is reflective of the lower loss ratios on workers compensation insurance coverages. The combined ratio was 100.3% in 1995, 101.2% in 1994 and 103.2% in 1993. Provisions for losses and loss adjustment expenses include development of loss and loss adjustment expense reserves relating to prior accident years, which increased the calendar year combined ratio by 1.6 percentage points in 1995, 2.5 percentage points in 1994 and 3.9 percentage points in 1993. The loss ratios were adversely affected by loss development in the pool and association (including assigned risk pools) and reinsurance businesses where loss reserves are established by the Company based on information provided from sources outside the Company, and where loss patterns were significantly different than in the past. Other contributing factors were higher than anticipated reported losses for commercial multiple peril business and reserve strengthening for certain other lines of business, including discontinued programs. In 1995 and 1994 adverse development was reduced by the continued improvement in workers compensation insurance from the application of risk management and loss control procedures. The Company's environmental claims principally relate to asbestos and hazardous waste, arising from certain liability business written prior to the mid 1980's, which business was never a major element of the Company's operations. Environmental claims are also received from certain reinsurance pools and associations where reserves are established based on information reported to the Company by the managers of those pools and associations. -38- Establishing reserve liabilities for environmental claims is subject to significant uncertainties that make reserve estimation difficult. Legal decisions have tended to expand insurance coverage beyond the intent of the policies. The disposition of such claims often requires lengthy and costly litigation. Uncertainties as to required clean-up remedies and difficulties in identifying the responsible parties add further to the complexity of reserve estimation for these claims. In recent years, the Company has intensified its efforts to settle and close environmental claims. To help minimize the cost of losses and claims, the Company maintains a dedicated environmental claims staff which administers and continually evaluates each claim and its defense and settlement possibilities. In 1995, 1994 and 1993, the Company paid $5,675,000, $7,233,000 and $5,557,000, respectively, for the costs of defending and settling such claims. Payments in 1995, 1994 and 1993 related to 213, 292 and 216 claims, respectively, for the Company's direct business. Claim counts have been aggregated by year of coverage for each occurrence for which policyholders are being defended, and often include numerous claimants. As of December 31, 1995 and 1994, the Company has environmental claims- related loss and loss adjustment expense reserves, net of reinsurance recoverables, of $34,559,000 and $20,601,000, respectively, which include 474 and 467 claims, respectively, for direct business written by the Company. In estimating liabilities for environmental-related claims, the Company considers all pertinent information as it becomes available. Management believes that the Company's reserves for loss and loss adjustment expenses make reasonable and sufficient provision for the ultimate cost of all losses on claims incurred. However, there can be no assurance that changes in loss trends will not result in additional development of prior years' reserves in the future. Variability in claim emergence and settlement patterns and other trends in loss experience can result in future development patterns different than expected. The Company believes that any such development will continue at the low levels experienced in recent years, considering actions taken to increase reserving levels, improve underwriting standards and emphasize loss control and prevention. The Company's loss ratios in recent years, including development of prior years' losses, have compared favorably with loss ratios experienced by the industry. The Company limits both current loss expense and future development of losses by ceding business to reinsurers. The Company continually monitors the financial strength of its reinsurers and, to the Company's knowledge, has no material exposure with regard to potential unrecognized losses due to reinsurers having known financial difficulties. Interest Expense Interest expense was $15,943,000 in 1995, $13,597,000 in 1994 and $13,044,000 in 1993. The increase of 17.3% in 1995 is due to higher average debt outstanding after the issuance of $100,000,000 of Senior Notes by Orion on July 17, 1995. The 4.2% increase in interest expense in 1994 is primarily attributable to an increase in average interest rates. -39- Other Expenses Other expenses were $24,740,000, $7,862,000 and $6,527,000 in 1995, 1994 and 1993, respectively. The increases in both other income and other expenses for 1995 are primarily attributable to the inclusion of McGee's revenue and expenses after it was acquired by the Company on June 30, 1995. Equity in Earnings of Affiliates Equity in earnings of affiliates includes the Company's portion of earnings from Guaranty National and Intercargo. Earnings (loss) of $1,038,000, $342,000 and ($122,000) were recorded from the Intercargo investment in 1995, 1994 and 1993, respectively. The Company's portion of Guaranty National's net earnings before the cumulative effect of adopting changes in accounting principles was $4,466,000 in 1995, $11,244,000 in 1994 and $9,509,000 in 1993 based on Guaranty National's earnings of $8,929,000, $22,551,000 and $19,285,000, respectively. Gross premiums written for Guaranty National increased to $451,513,000 in 1995 from $364,991,000 in 1994 and $322,613,000 in 1993. Guaranty National's combined ratios were 105.3% in 1995, 97.5% in 1994 and 99.6% in 1993. The increase in gross premiums written in 1995 included $61,766,000 from the acquisition of Viking Insurance Holdings, Inc. ("Viking") by Guaranty National in July 1995. The reduction in Guaranty National's earnings and the higher loss ratio for 1995 are due to Guaranty National strengthening its loss reserves in response to adverse claim trends in the first half of the year. Specific measures have been initiated by Guaranty National to improve results, including tightening underwriting standards and rate increases. In June 1995 Guaranty National sold 1,550,000 shares of its common stock in an offering under Regulation S of the Securities Act of 1933, as amended at a net offering price of $15.76 per share. The Company converted $20,896,000 of Guaranty National subordinated notes it held into 1,326,128 shares of Guaranty National common stock at the net price received by Guaranty National from the offering. The sale of stock and conversion of the subordinated notes increased the stockholders' equity of Guaranty National and facilitated the procurement of bank financing for Guaranty National's acquisition of Viking. Earnings Before Federal Income Taxes Earnings before income taxes were $88,035,000, $71,546,000 and $72,505,000 for 1995, 1994 and 1993, respectively. The 23.0% increase in pre- tax earnings from 1994 to 1995 reflects an improvement in insurance operations profitability of $8,041,000 and an increase in realized investment gains of $8,448,000. The 1.3% decrease in pre-tax earnings from 1993 to 1994 reflects an increase in insurance operations profitability of $5,082,000 and a decrease in realized investment gains of $6,041,000. Federal Income Taxes Federal income taxes on pre-tax operating results and the related effective tax rates amounted to $20,413,000 (23.2%), $16,301,000 (22.8%) and $15,517,000 (21.4%) in 1995, 1994 and 1993, respectively. The Company files -40- consolidated federal income tax returns. Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." Upon adoption of SFAS No. 109, the Company recorded a benefit of $16,881,000 which was principally attributable to deferred tax benefits that had not been recognized due to limitations under prior accounting standards. The Company's effective tax rates for 1995, 1994 and 1993 are less than the statutory tax rate of 35% primarily because of income derived from tax-advantaged securities. The tax rate for 1993 reflects a tax benefit of $450,000 from the effect of the increase in the federal tax rate on the Company's deferred tax asset. Cumulative effect of adoption of new accounting principles Effective January 1, 1993 the Company recorded the cumulative effect of adopting SFAS No. 109 (discussed above) and SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions." SFAS No. 106 requires the accrual of the estimated cost of retiree benefit payments during the years employees provide services. Upon adoption of SFAS No. 106 the cumulative effect of the Company's accumulated obligation for providing medical benefits to retirees was $5,056,000, after a related tax benefit of $2,604,000. Included in the cumulative effects of adopting these accounting principles is the Company's portion of Guaranty National's benefit from changes in accounting principles in 1993 of $360,000, net of $185,000 of federal income taxes provided by the Company. Earnings Per Common Share Primary earnings per common share amounted to $4.77 in 1995, $3.85 in 1994 and $4.69 ($3.88 before the effect of adopting new accounting principles) in 1993. Reflected in the calculation of 1993 earnings per common share are dividends of $409,000 on the Company's Adjustable Rate Preferred Stock (redeemed in 1993) and $2.125 Preferred Stock (converted into common stock or redeemed in 1993). The conversion and redemptions were effected pursuant to the terms of the preferred stocks. Fully diluted earnings per share is not presented as dilution is less than three percent for all periods. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities increased $29,238,000 to $148,017,000 in 1995 from $118,779,000 in 1994 and decreased $4,375,000 in 1994 from $123,154,000 in 1993. Cash flow for 1995 included a disbursement of $7,800,000 under a retrospectively rated program written by DPIC. In 1994 operating cash flow included a $10,223,000 receipt from DPIC's discontinuation of a reinsurance contract. Cash flow for 1993 included a receipt of $17,096,000 under a retrospectively rated program written by DPIC, and the benefit of an income tax overpayment of approximately $4,000,000 from 1992. Excluding these one-time items, year-to-year operating cash flows increased $47,261,000 from 1994 to 1995 and $6,498,000 from 1993 to 1994. The increase in operating cash flow for 1995 was the result of an increase in premiums collected, net investment income received and lower paid losses, offset in part by higher payments for policy acquisition costs and federal income taxes. The increase in 1994 is primarily due to an increase in premiums collected offset by increases in paid losses, policy acquisition costs and federal income tax payments. -41- Cash used in investment activities increased $102,263,000 to $188,448,000 in 1995 from $86,185,000 in 1994 and decreased $38,230,000 in 1994 from $124,415,000 in 1993. Cash is used in investment activities primarily for purchases of investments. The purchases are funded by maturities and sales of investments, as well as by the net cash remaining from positive operating cash flows after cash provided by or used in financing activities. In June 1995 Orion paid $22,000,000 in cash plus acquisition costs to acquire McGee (see discussion above). Cash provided by financing activities was $37,778,000 for 1995. Cash used in financing activities was $32,582,000 and $5,046,000 in 1994 and 1993, respectively. Orion borrowed $12,000,000 under its bank line of credit in June 1995 to finance part of the McGee acquisition. In July 1995 Orion issued $100,000,000 of senior debt (discussed below) and repaid all of its outstanding bank debt. Cash provided in 1993 from an increase in bank borrowings was used to fund the redemption of Orion's Adjustable Rate Preferred Stock. Cash used in financing activities includes dividend payments, scheduled debt repayments and payments related to the Company's common stock repurchase program. Orion increased the quarterly dividend rate on its common stock by 12.5%, 11.1% and 15.0% in the third quarters of 1993, 1994 and 1995, respectively. An additional increase of 8.7% was authorized by the Board of Directors in the first quarter of 1996. Orion's uses of cash consist of debt service, dividends to stockholders and overhead expenses. These cash uses are funded from existing available cash, financing transactions and receipt of dividends, reimbursement of overhead expenses and amounts in lieu of federal income taxes from Orion's insurance subsidiaries. Orion received $30,546,000, $30,013,000 and $25,512,000 in dividends, $6,232,000, $5,735,000 and $5,230,000 for overhead expenses and federal tax payments of $4,500,000, $6,000,000 and $5,600,000 from its insurance subsidiaries in 1995, 1994 and 1993, respectively. In 1993 Orion also received an extraordinary dividend of $65,470,000 (principally securities) from a California-domiciled subsidiary which was simultaneously contributed as capital to a Connecticut-domiciled subsidiary to effect a change in pooling percentages among its insurance subsidiaries. Payments of dividends by Orion's insurance subsidiaries must comply with insurance regulatory limitations concerning stockholder dividends and capital adequacy. State insurance regulators have broad discretionary authority with respect to limitations on the payment of dividends by insurance companies. Limitations under current regulations are well in excess of Orion's cash requirements. Orion's insurance subsidiaries maintain liquidity in their investment portfolios substantially in excess of that required to pay claims and expenses. The insurance subsidiaries held cash and short-term investments of $123,457,000 and $96,572,000 at December 31, 1995 and 1994, respectively. Orion's insurance subsidiaries had consolidated policyholders' surplus of $521,510,000 at December 31, 1995 and $458,676,000 at December 31, 1994, and statutory operating leverage ratios of net premiums written to policyholders' surplus of 1.5:1 and 1.6:1 at December 31, 1995 and 1994, respectively. On July 17, 1995, Orion issued 7 1/4% Senior Notes due 2005 with a face value of $100,000,000 in a public offering pursuant to a shelf registration filed with the Securities and Exchange Commission in 1994. The senior notes issued are non-callable to maturity, and were sold at 99.23% of par to yield -42- 7.36% per annum. The net proceeds from the offering were approximately $98,113,000, of which $46,500,000 was used to repay all of Orion's debt under its bank loan agreement. The balance is available for general corporate purposes. In March 1993 Orion entered into a bank loan arrangement that provided for initial borrowings of up to $60,000,000, consisting of a $50,000,000 term loan and a $10,000,000 line of credit. The proceeds from the term loan were used to redeem Orion's Adjustable Rate Preferred Stock and to repay a bridge loan facility with two banks which was used to redeem Orion's 12 1/2% Subordinated Debentures in December 1992. In November 1994 Orion increased its bank credit line to $30,000,000. In June 1995 Orion borrowed $12,000,000 under the credit line to finance part of the McGee acquisition. All of the Company's bank debt was repaid in July 1995 from the proceeds of the 7 1/4% Senior Notes. The terms of Orion's indentures for its $100,000,000 of 7 1/4% Senior Notes due 2005 and its $110,000,000 of 9 1/8% Senior Notes due 2002 limit the amount of liens and guarantees by the Company, and the Company's ability to incur secured indebtedness without equally and ratably securing the senior notes. Management does not believe that these limitations unduly restrict the Company's operations or limit Orion's ability to pay dividends on its stock. At December 31, 1995 the Company was in compliance with the terms of its senior note indentures. Management believes that the Company continues to have substantial sources of capital and liquidity from the capital markets and bank borrowings. On December 21, 1992, Orion called for redemption its $2.125 Preferred Stock on January 21, 1993. The market price of the shares of common stock that a holder would receive upon conversion of the preferred stock was substantially higher than the redemption price of $25.76 per share. Consequently, most holders converted into common stock prior to the redemption date, resulting in the issuance of 3,579 shares of common stock prior to December 31, 1992 and 1,423,544 shares of common stock in January 1993. Holders of 21,605 shares of $2.125 Preferred Stock who did not elect to convert redeemed their shares for an aggregate of $557,000. The Company repurchased 173,181 shares, 442,327 shares and 177,658 shares of its common stock at an aggregate cost of $7,183,000, $13,745,000 and $5,473,000 in 1995, 1994 and 1993, respectively. The Company's remaining stock purchase authorization from its Board of Directors amounted to $5,446,000 at December 31, 1995. Between January 1 and February 21, 1996, Orion repurchased an additional 16,600 shares of its common stock for $720,000, reducing the remaining authorization to $4,726,000. Orion and its subsidiaries are routinely engaged in litigation incidental to their businesses. Management believes that there are no significant legal proceedings pending against the Company which, net of reserves established therefor, are likely to result in judgments for amounts that are material to the financial condition, liquidity or results of operations of Orion and its consolidated subsidiaries, taken as a whole. (See also Note J to the consolidated financial statements). -43- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT The management of Orion Capital Corporation is responsible for the consolidated financial statements and the information included therein. The consolidated financial statements are fairly presented and have been prepared in accordance with generally accepted accounting principles appropriate in the circumstances, and, where necessary, include amounts based on management's informed estimates and judgments. The Company has a system of internal controls which it believes provides reasonable assurance that assets are safeguarded from loss or unauthorized use, that transactions are recorded in accordance with management's policies and that the financial records are reliable for preparing financial statements. The system of internal controls includes written policies and procedures which are communicated to all appropriate personnel and updated as necessary. Compliance with the system of internal controls is continuously maintained and monitored by management. The internal audit staff of the Company evaluates and reports on the adequacy of and adherence to these controls, policies and procedures. In addition, as part of its audit of the consolidated financial statements, Deloitte & Touche LLP, the independent auditors for the Company, perform an evaluation of the system of internal controls to the extent they consider necessary to express an opinion on the consolidated financial statements. Recommendations concerning the system of internal controls are provided by both the internal auditors and Deloitte & Touche LLP, and management takes actions which are believed to be appropriate responses to these recommendations. The Audit Committee of the Board of Directors is comprised of independent directors, and has general responsibility for oversight of financial controls and audit activities of the Company and its subsidiaries. The Audit Committee, which reports to the Board, annually reviews the qualifications of the independent auditors and meets periodically with them, the internal auditors and management to review the plans and results of the audits. Both internal and independent auditors have free access to the Audit Committee, without members of management present, to discuss the adequacy of the system of internal controls and any other matters which they believe should be brought to the attention of the Committee. Alan R. Gruber Daniel L. Barry Chairman & Chief Executive Officer Vice President & Controller -44- INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders ORION CAPITAL CORPORATION New York, New York We have audited the accompanying consolidated balance sheets of Orion Capital Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedules listed in the Index at Item 14(a)2. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Orion Capital Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Hartford, Connecticut February 21, 1996 -45-
ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (000s omitted) ASSETS December 31, ------------------------- 1995 1994 ---- ---- Investments: Fixed maturities at amortized cost (market $276,282 - 1995 and $358,915 - 1994) .......... $ 265,169 $ 367,417 Fixed maturities at market (amortized cost $748,008 - 1995 and $565,880 - 1994) .......... 782,869 530,424 Common stocks at market (cost $108,211 - 1995 and $116,078 - 1994) .......................... 158,895 141,919 Non-redeemable preferred stocks at market (cost $149,167 - 1995 and $134,851 - 1994) .......... 145,990 122,515 Other long-term investments ..................... 62,925 52,564 Short-term investments .......................... 187,013 104,201 ---------- ---------- Total investments ............................ 1,602,861 1,319,040 Cash .............................................. 3,584 6,201 Accrued investment income ......................... 19,290 17,364 Investments in and advances to affiliates ......... 125,731 108,510 Accounts and notes receivable (less allowance for doubtful accounts $3,212 - 1995 and $1,954 - 1994) .................................. 137,197 125,132 Reinsurance recoverables and prepaid reinsurance .. 360,052 336,032 Deferred policy acquisition costs ................. 77,673 70,137 Property and equipment (less accumulated depreciation $23,223 - 1995 and $20,173 - 1994).. 34,009 25,157 Excess of cost over fair value of net assets acquired (less accumulated amortization $19,119 - 1995 and $17,586 - 1994) .............. 50,199 29,415 Deferred federal income taxes ..................... 8,726 42,008 Other assets ...................................... 54,266 33,765 ---------- ---------- Total assets ................................. $2,473,588 $2,112,761 ========== ========== See Notes to Consolidated Financial Statements -46- ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (000s omitted - except for share data) LIABILITIES AND STOCKHOLDERS' EQUITY December 31, ------------------------- 1995 1994 ---- ---- Liabilities: Policy liabilities - Losses ........................................ $1,007,016 $ 952,531 Loss adjustment expenses ...................... 267,966 228,798 Unearned premiums ............................. 302,105 256,855 Policyholders' dividends ...................... 18,946 12,651 ---------- ---------- Total policy liabilities .................... 1,596,033 1,450,835 Federal income taxes payable .................... 18,910 14,829 Notes payable ................................... 209,148 152,382 Other liabilities ............................... 158,594 129,627 ---------- ---------- Total liabilities ........................... 1,982,685 1,747,673 ---------- ---------- Commitments and Contingencies (Notes I and J) Stockholders' equity: Preferred stock, authorized 5,000,000 shares - issued and outstanding - none Common stock, $1 par value; authorized 30,000,000 shares; issued 15,337,650 shares ... 15,338 15,338 Capital surplus ................................. 146,658 147,598 Net unrealized investment gains (losses), net of federal income taxes (benefit) of $26,691 - 1995 and $(14,146) - 1994 ..................... 63,255 (11,498) Net unrealized foreign exchange translation losses, net of federal income tax benefits of $540 - 1995 and $553 - 1994 ................... (3,935) (3,959) Retained earnings ............................... 298,452 242,908 Treasury stock, at cost (1,385,012 shares - 1995 and 1,296,834 shares - 1994) .................. (26,534) (22,451) Deferred compensation on restricted stock ....... (2,331) (2,848) ---------- ---------- Total stockholders' equity .................. 490,903 365,088 ---------- ---------- Total liabilities and stockholders' equity... $2,473,588 $2,112,761 ========== ========== See Notes to Consolidated Financial Statements -47- ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (000s omitted - except for per share data) Year Ended December 31, ------------------------------ 1995 1994 1993 ---- ---- ---- Revenues: Premiums earned ..................................... $749,003 $691,223 $617,404 Net investment income ............................... 99,040 84,915 91,803 Realized investment gains ........................... 11,885 3,437 9,478 Other income ........................................ 14,352 1,372 1,470 -------- -------- -------- Total revenues .................................... 874,280 780,947 720,155 -------- -------- -------- Expenses: Losses incurred ..................................... 388,409 386,685 366,716 Loss adjustment expenses ............................ 123,824 111,438 92,416 Amortization of deferred policy acquisition costs ... 195,481 165,108 148,440 Other insurance expenses ............................ 21,562 21,461 17,381 Dividends to policyholders .......................... 21,790 14,836 12,513 Interest expense .................................... 15,943 13,597 13,044 Other expenses ...................................... 24,740 7,862 6,527 -------- -------- -------- Total expenses .................................... 791,749 720,987 657,037 -------- -------- -------- Earnings before equity in earnings of affiliates, federal income taxes and cumulative effect of adoption of new accounting principles ............... 82,531 59,960 63,118 Equity in earnings of affiliates ...................... 5,504 11,586 9,387 -------- -------- -------- Earnings before federal income taxes and cumulative effect of adoption of new accounting principles ..... 88,035 71,546 72,505 Federal income taxes .................................. 20,413 16,301 15,517 -------- -------- -------- Earnings before cumulative effect of adoption of new accounting principles ............................... 67,622 55,245 56,988 Cumulative effect of adoption of new accounting principles .......................................... - - 11,825 -------- -------- -------- Net earnings ........................................ $ 67,622 $ 55,245 $ 68,813 ======== ======== ======== Earnings per common share: Earnings before cumulative effect of adoption of new accounting principles ......................... $ 4.77 $ 3.85 $ 3.88 Cumulative effect of adoption of new accounting principles ........................................ - - .81 -------- -------- -------- Net earnings .................................... $ 4.77 $ 3.85 $ 4.69 ======== ======== ======== See Notes to Consolidated Financial Statements -48- ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (000s omitted) Year Ended December 31, ------------------------------ 1995 1994 1993 ---- ---- ---- Convertible exchangeable preferred stock: Balance, beginning of year ................ $ - $ - $ 28,524 Conversion of preferred stock ............. - - (28,524) -------- -------- -------- Balance, end of year ...................... $ - $ - $ - ======== ======== ======== Common stock: Balance, beginning of year ................ $ 15,338 $ 15,338 $ 11,110 Conversion of preferred stock ............. - - 1,139 Exercise of stock options and issuance of restricted stock ........................ - - 24 Stock issued in 5-for-4 stock split ....... - - 3,065 -------- -------- -------- Balance, end of year ...................... $ 15,338 $ 15,338 $ 15,338 ======== ======== ======== Capital surplus: Balance, beginning of year ................ $147,598 $148,167 $124,754 Redemptions and conversions of preferred stock ................................... - - 26,072 Issuance of common stock .................. 152 - - Exercise of stock options and issuance of restricted stock ..................... (1,092) (569) 406 Stock issued in 5-for-4 stock split ....... - - (3,065) -------- -------- -------- Balance, end of year ...................... $146,658 $147,598 $148,167 ======== ======== ======== Net unrealized investment gains (losses): Balance, beginning of year ................ $(11,498) $ 49,566 $ 18,815 Cumulative effect of adoption of new accounting principle, net of taxes of $11,157 .............................. - - 20,720 Change in unrealized investment gains (losses), net of taxes .................. 74,753 (61,064) 10,031 -------- -------- -------- Balance, end of year ...................... $ 63,255 $(11,498) $ 49,566 ======== ======== ======== Net unrealized foreign exchange translation losses: Balance, beginning of year ................ $ (3,959) $ (3,665) $ (2,918) Change in unrealized foreign exchange translation losses, net of taxes ........ 24 (294) (747) -------- -------- -------- Balance, end of year ...................... $ (3,935) $ (3,959) $ (3,665) ======== ======== ======== Retained earnings: Balance, beginning of year ................ $242,908 $198,491 $139,947 Net earnings .............................. 67,622 55,245 68,813 Dividends declared ........................ (12,078) (10,828) (10,269) -------- -------- -------- Balance, end of year ...................... $298,452 $242,908 $198,491 ======== ======== ======== Treasury stock: Balance, beginning of year ................ $(22,451) $(12,182) $ (6,694) Issuance of common stock .................. 770 - - Exercise of stock options and issuance (cancellation) of restricted stock ...... 2,330 3,476 (15) Acquisition of treasury stock ............. (7,183) (13,745) (5,473) -------- -------- -------- Balance, end of year ...................... $(26,534) $(22,451) $(12,182) ======== ======== ======== Deferred compensation on restricted stock: Balance, beginning of year ................ $ (2,848) $ (1,520) $ (2,251) Issuance of restricted stock .............. (517) (2,247) (108) Amortization of deferred compensation on restricted stock ........................ 1,034 919 839 -------- -------- -------- Balance, end of year ...................... $ (2,331) $ (2,848) $ (1,520) ======== ======== ======== See Notes to Consolidated Financial Statements -49- ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (000s omitted) Year Ended December 31, ---------------------------------- 1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Premiums collected ........................ $ 738,083 $ 696,735 $ 626,678 Net investment income collected ........... 91,964 83,603 81,178 Losses and loss adjustment expenses paid .. (409,797) (437,386) (374,625) Policy acquisition costs paid ............. (204,319) (185,217) (162,717) Dividends paid to policyholders ........... (15,495) (14,708) (13,150) Interest paid ............................. (12,530) (12,931) (12,405) Federal income tax payments ............... (18,756) (10,860) (7,100) Other payments ............................ (21,133) (457) (14,705) --------- --------- --------- Net cash provided by operating activities ............................ 148,017 118,779 123,154 --------- --------- --------- Cash flows from investing activities: Maturities of fixed maturities held-to-maturity ........................ 36,804 55,200 - Maturities of fixed maturities available-for-sale ...................... 12,640 28,839 - Sale of fixed maturity held-to-maturity ... - 1,155 - Sales of fixed maturities available-for-sale ...................... 184,501 88,804 - Maturities and sales of fixed maturities .. - - 243,162 Sales of equity securities................. 78,351 49,881 91,144 Investments in fixed maturities held-to-maturity ........................ (41,709) (53,230) - Investments in fixed maturities available-for-sale ...................... (278,173) (156,927) - Investments in fixed maturities ........... - - (311,183) Investments in equity securities .......... (64,450) (84,582) (120,609) Acquisition of McGee ...................... (22,355) - - Effect on cash of consolidating McGee ..... 349 - - Investment in Intercargo Corporation ...... - - (19,315) Net sales (purchases) of short-term investments ............................. (83,617) (7,505) 8,885 Other payments ............................ (10,789) (7,820) (16,499) --------- --------- --------- Net cash used in investing activities ... (188,448) (86,185) (124,415) --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of notes payable ... 110,413 - 59,672 Proceeds from issuance of common stock .... 246 598 286 Repayment of notes payable ................ (54,500) (8,000) (29,500) Dividends paid to stockholders ............ (11,674) (10,609) (10,776) Purchases of common stock and purchases and redemption of adjustable rate preferred stock ......................... (6,689) (14,220) (23,615) Other payments ........................... (18) (351) (1,113) --------- --------- --------- Net cash provided by (used in) financing activities ............................ 37,778 (32,582) (5,046) --------- --------- --------- Effect of foreign exchange rate changes on cash ................................... 36 (244) (24) --------- --------- --------- Net decrease in cash .................... (2,617) (232) (6,331) Cash balance, beginning of year ............. 6,201 6,433 12,764 --------- --------- --------- Cash balance, end of year ................... $ 3,584 $ 6,201 $ 6,433 ========= ========= ========= See Notes to Consolidated Financial Statements -50- ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued) (000s omitted) Year Ended December 31, ------------------------------ 1995 1994 1993 ---- ---- ---- Reconciliation of net earnings to net cash provided by operating activities: Net earnings ................................. $ 67,622 $ 55,245 $ 68,813 -------- -------- -------- Adjustments: Cumulative effect of adoption of new accounting principles .................... - - (11,825) Depreciation and amortization .............. 5,900 4,936 3,939 Amortization of excess of cost over fair value of net assets acquired ............. 1,533 1,172 1,173 Deferred federal income taxes .............. (5,165) 9,906 (931) Amortization of fixed maturity investments . 815 1,700 128 Non-cash investment income ................. (11,272) (2,840) (11,586) Equity in earnings of affiliates ........... (5,504) (11,586) (9,387) Dividends received from affiliates ......... 2,597 3,295 3,135 Realized investment gains .................. (11,885) (3,437) (9,478) Foreign exchange translation adjustment .... 163 257 152 Other....................................... (43) (38) (34) Changes in assets and liabilities (net of effects of acquiring McGee): Decrease (increase) in accrued investment income ................................... (952) 259 492 Increase in accounts and notes receivable .. (11,488) (13,593) (9,298) Decrease (increase) in reinsurance recoverables and prepaid reinsurance ..... (24,020) 57,277 21,326 Increase in deferred policy acquisition costs .................................... (7,536) (12,615) (1,388) Increase in other assets ................... (18,405) (7,589) (431) Increase in losses ......................... 54,485 14,756 52,695 Increase in loss adjustment expenses ....... 39,168 26,170 6,312 Increase (decrease) in unearned premiums ... 45,250 (2,504) 27,043 Increase (decrease) in policyholders' dividends ................................ 6,295 128 (637) Increase (decrease) in federal income taxes payable .................................. 3,964 (4,465) 9,242 Increase (decrease) in other liabilities ... 16,495 2,345 (16,301) -------- -------- -------- Total adjustments and changes ............ 80,395 63,534 54,341 -------- -------- -------- Net cash provided by operating activities .. $148,017 $118,779 $123,154 ======== ======== ======== See Notes to Consolidated Financial Statements -51- /TABLE ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1995, 1994 and 1993 Note A - Significant Accounting Policies Basis of Financial Statement Presentation - Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries (collectively the "Company") operate principally in the property and casualty insurance business. The consolidated financial statements and notes thereto are presented in accordance with generally accepted accounting principles ("GAAP") for property and casualty insurance companies and include the accounts of Orion and its majority-owned subsidiaries. The Company's investments in unconsolidated affiliates are accounted for using the equity method (See Note C). All material intercompany balances and transactions have been eliminated. Adoption of new accounting principles - In 1993 the Company adopted new accounting standards issued by the Financial Accounting Standards Board which had a significant impact on the Company's financial statements. The Company was required to adopt these standards, which are more fully discussed in the notes that follow: SFAS No. 106 - Employers' Accounting for Postretirement Benefits Other Than Pensions SFAS No. 109 - Accounting for Income Taxes SFAS No. 115 - Accounting for Certain Investments in Debt and Equity Securities Regulation - The Company's insurance subsidiaries are subject to comprehensive regulation by various state insurance departments including regulations limiting dividend payments to Orion and intercompany transactions. Under these regulations, the maximum dividends permitted at December 31, 1995 for the ensuing twelve months, without prior approval, aggregated $83,173,000. However, state insurance regulators have broad discretionary authority with respect to approving the payment of dividends by insurance companies. Policyholders' surplus of Orion's wholly-owned insurance subsidiaries determined in accordance with prescribed statutory accounting practices amounted to $521,510,000 at December 31, 1995 and $458,676,000 at December 31, 1994. Statutory net income amounted to $83,842,000, $61,518,000 and $66,862,000 for 1995, 1994 and 1993, respectively. Cash - For purposes of the consolidated statement of cash flows, the Company considers only demand deposit accounts to be cash. -52- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Investments - Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which establishes the available- for-sale category of investment securities and requires such securities to be recorded at market value, with unrealized gains and losses reported in a separate component of stockholders' equity. As a result of the adoption of this standard on December 31, 1993, the Company reclassified investments with a market value of $452,102,000 from fixed maturities recorded at amortized cost to fixed maturities recorded at market, and increased unrealized appreciation on investments, a component of stockholders' equity, by $20,720,000, net of deferred income taxes. Fixed maturity investments include bonds, preferred stocks with mandatory redemption features, and certificates of deposit that mature more than one year after the balance sheet date. Fixed maturity investments that the Company has both the positive intent and the ability to hold to maturity are recorded at amortized cost. Fixed maturity investments which may be sold in response to, among other things, changes in interest rates, prepayment risk, income tax strategies or liquidity needs, are classified as available-for-sale and are carried at market value. Common stocks and non-redeemable preferred stocks are stated at market value. Fluctuations in the market value of these equity securities are recorded as unrealized investment gains or losses and credited or charged to stockholders' equity. Other long-term investments principally include equity ownership interests in limited partnerships, which are recorded using the equity method of accounting. Short-term investments include certificates of deposit and commercial paper which mature within one year of the balance sheet date, money market accounts and United States Treasury Bills. Estimates of market values are generally based on quoted market prices or dealer quotes, if available, or otherwise on an evaluation of the issuers' financial statements. Realized investment gains and losses, including provision for other than temporary impairment of investment securities, are recognized on the specific identification method. Deferred Policy Acquisition Costs - Costs that vary with, and are directly related to, the production of new and renewal business are deferred and amortized as the related premiums are earned. The test for recoverability of such deferred costs includes the consideration of net investment income. Excess of Cost Over Fair Value of Net Assets Acquired - The excess of the cost of acquiring subsidiaries over the fair value of their net assets ("goodwill") is amortized on a straight-line basis over periods of 25 to 40 years. The Company evaluates the recoverability of goodwill from expected future cash flows, and impairments would be recognized in operating results if a permanent diminution in value were to occur. Revenue Recognition - Premiums are earned on a daily pro rata basis over the policy period. A provision is made for anticipated retrospective premium adjustments and audit premiums. Direct and assumed premiums are reduced for reinsurance ceded to other insurers. -53- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Policy Liabilities and Reinsurance - Loss and loss adjustment expense liabilities are established in consideration of individual cases for reported losses and past experience for incurred but not yet reported losses ("IBNR"). Estimated reinsurance receivables are recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts. At December 31, 1995 and 1994, long-term disability workers compensation loss reserves are carried at $56,603,000 and $51,886,000, respectively, in the consolidated financial statements at net present value using a statutory interest rate of 3.5%. Policyholders' dividends on participating policies are accrued at estimated payment rates as the related premiums are earned. Participating business represented 24% and 21% of premiums in-force at December 31, 1995 and 1994, respectively. As a percent of premiums earned, participating business amounted to 24% in 1995 and 21% in 1994 and 1993. Federal Income Taxes - As of January 1, 1993 the Company prospectively adopted SFAS No. 109, "Accounting for Income Taxes," replacing the previous standard for accounting for income taxes, SFAS No. 96. The objectives of SFAS No. 109 are to recognize taxes payable or refundable for the current year, and deferred tax assets or liabilities for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The new standard provides for the recognition of deferred tax assets that were not recognized under SFAS No. 96, and resulted in the recognition of a cumulative tax benefit of $16,881,000 ($1.16 per share) in the Company's consolidated statement of earnings for the year ended December 31, 1993. Postretirement Benefits - Effective January 1, 1993 the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires the Company to accrue the estimated cost of retiree benefits during the years the employees provide services. The Company previously expensed the cost of medical benefits provided to retirees as they were paid. The cumulative effect of adopting SFAS No. 106 as of January 1, 1993 was a decrease in net earnings of $5,056,000 ($.35 per share), after a tax benefit of $2,604,000, which has been included in the Company's consolidated statement of earnings for the year ended December 31, 1993. Stock Split - Common stock and per common share data have been restated, as required, to give effect to the 5-for-4 stock split paid on November 15, 1993 to stockholders of record on October 15, 1993. Earnings Per Common Share - Earnings per common share is computed using the weighted average common and dilutive common equivalent shares outstanding. -54- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note B - Acquisition of Wm. H. McGee & Co., Inc. On June 30, 1995, Orion purchased all of the capital stock of Wm. H. McGee & Co., Inc. ("McGee") for $22,000,000 in cash, and incurred acquisition expenses of $355,000. McGee specializes in underwriting ocean marine, inland marine and property insurance through an underwriting pool in the United States and one in Canada. The business is written by McGee on behalf of the insurance companies that comprise the pools. The Company's participation in the United States pool was 6%, 7% and 14.5% in 1993, 1994 and 1995, respectively. Participation in the Canadian pool was 10% in 1993 and 1994 and 15% in 1995. The Company has agreed to increase its rate of participation for 1996 to 37% in the United States and approximately 49% in Canada, and by an additional 10.5% to 16.5%, at the Company's option, for 1997 in both of the McGee pools. The acquisition has been accounted for by the purchase method, and McGee's operations are included in the Company's results of operations from July 1, 1995. The Company recorded $22,317,000 for the excess of cost over the estimated fair value of the net assets acquired, which is being amortized over a 30 year period. The consolidated results of the Company's operations on a proforma basis, as if the purchase had been made as of the beginning of the year, would not be materially different than reported herein. Note C - Investments in Affiliates As of December 31, 1995 the Company owned 49.1% of the common stock of Guaranty National Corporation ("Guaranty National") and 20.0% of Intercargo Corporation ("Intercargo"), both publicly-held companies. The Company's financial statements include the portion of Guaranty National's and Intercargo's results attributable to the Company's ownership on an equity accounting basis. The Company records its share of Intercargo's operating results in the subsequent quarter, after Intercargo has reported its financial results.
December 31, ------------------- 1995 1994 ---- ---- (000s omitted) The Company's investments in and advances to affiliates were as follows: Book value ......................................... $125,731 $108,510 Market value ....................................... 128,120 138,786 Guaranty National shares held ...................... 7,340 6,004 - Book value of shares held ...................... $106,059 $ 72,564 - Market value of shares held .................... 112,855 110,320 Intercargo shares held ............................. 1,526 1,526 - Book value of shares held ...................... $ 19,672 $ 18,750 - Market value of shares held .................... 15,265 12,593
-55- In June 1995 Guaranty National sold 1,550,000 shares of its common stock in an offering under Regulation S of the Securities Act of 1933, as amended, at a net offering price of $15.76 per share. The Company converted $20,896,000 of Guaranty National subordinated notes it held into 1,326,128 shares of Guaranty National common stock at the net price received by Guaranty National from the offering. The sale of stock and conversion of the subordinated notes increased the stockholders' equity of Guaranty National and facilitated the procurement of financing for Guaranty National's acquisition of Viking Insurance Holdings, Inc. in July 1995. In 1993 the Company acquired 1,526,484 shares, or 20%, of the common stock of Intercargo. The aggregate purchase price, including expenses, was $19,315,000. The excess of cost over the fair value of the underlying equity in net assets acquired was $11,158,000, which is being amortized over a 25 year period. The Company's share of the undistributed earnings of Guaranty National after it was deconsolidated following the sale by the Company of a majority interest in a public offering on November 20, 1991, and Intercargo after acquiring an equity interest in 1993, were, in the aggregate, $24,867,000 as of December 31, 1995 and $22,874,000 as of December 31, 1994. Transactions with Guaranty National for 1995, 1994 and 1993 reported in the consolidated statement of earnings include interest income on the Guaranty National subordinated notes of $1,101,000, $1,640,000 and $1,843,000, investment management fee income of $595,000, $550,000 and $550,000, respectively, and interest expense on a mortgage participation loan of $407,000 in each year. -56-
ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Summarized financial information for the Company's affiliates is set forth below: Year Ended December 31, ------------------------------ 1995 1994 1993 ---- ---- ---- (000s omitted) Revenues: Premiums earned ...................... $474,534 $376,444 $272,636 Realized investment gains ............ 3,291 3,007 5,996 Investment and other income .......... 38,422 28,090 21,813 -------- -------- -------- 516,247 407,541 300,445 -------- -------- -------- Expenses: Insurance expenses ................... 490,952 367,501 274,377 Interest and other ................... 7,452 5,428 3,447 -------- -------- -------- 498,404 372,929 277,824 -------- -------- -------- Earnings before federal income taxes and cumulative effect of change in accounting principles ................ 17,843 34,612 22,621 Federal income taxes ................... 1,482 8,734 4,481 -------- -------- -------- Earnings before cumulative effect of change in accounting principles .... $ 16,361 $ 25,878 $ 18,140 ======== ======== ======== The Company's proportionate share: Earnings before cumulative effect of change in accounting principles .... $ 5,504 $ 11,586 $ 9,387 ======== ======== ======== Cumulative effect of change in accounting principles (SFAS Nos. 106 and 109) ............ $ 545 ======== December 31, -------------------- 1995 1994 ---- ---- (000s omitted) Cash and investments ................................. $ 714,584 $461,203 Other assets ......................................... 306,307 268,872 ---------- -------- 1,020,891 730,075 Policy liabilities ................................... (582,884) (426,997) Notes payable ........................................ (112,735) (56,383) Other liabilities .................................... (63,341) (62,405) ---------- -------- Stockholders' equity ................................. $ 261,931 $184,290 ========== ======== -57- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note D - Investments The amortized cost and estimated market values of investments in fixed maturities, equity securities and short-term investments are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Market December 31, 1995 Cost Gains Losses Value - ----------------- ---------- ---------- ---------- --------- (000s omitted) Held-to-maturity securities: United States Government and government agencies and authorities ........... $ 90,770 $ 3,363 $ (295) $ 93,838 States, municipalities and political subdivisions .... 137,807 6,424 - 144,231 Foreign governments ......... 50 - - 50 Corporate securities ........ 36,542 1,638 (17) 38,163 ---------- -------- -------- ---------- $ 265,169 $ 11,425 $ (312) $ 276,282 ========== ======== ======== ========== Available-for-sale securities: United States Government and government agencies and authorities ........... $ 206,722 $ 13,054 $ (3,712) $ 216,064 States, municipalities and political subdivisions .... 246,026 18,619 (157) 264,488 Foreign governments ......... 7,900 562 - 8,462 Corporate securities ........ 270,001 9,895 (3,647) 276,249 Mortgage-backed securities (exclusive of government agencies) ................ 17,359 282 (35) 17,606 Equity securities ........... 257,378 61,979 (14,472) 304,885 Short-term investments....... 187,013 - - 187,013 ---------- -------- -------- ---------- $1,192,399 $104,391 $(22,023) $1,274,767 ========== ======== ======== ========== December 31, 1994 - ----------------- Held-to-maturity securities: United States Government and government agencies and authorities ........... $ 124,176 $ 242 $ (4,084) $ 120,334 States, municipalities and political subdivisions .... 137,736 1,848 (3,062) 136,522 Foreign governments ......... 50 - - 50 Corporate securities ........ 105,455 1,020 (4,466) 102,009 ---------- -------- -------- ---------- $ 367,417 $ 3,110 $(11,612) $ 358,915 ========== ======== ======== ========== Available-for-sale securities: United States Government and government agencies and authorities ........... $ 168,022 $ 1,016 $(18,083) $ 150,955 States, municipalities and political subdivisions .... 180,145 955 (5,738) 175,362 Foreign governments ......... 7,678 113 (133) 7,658 Corporate securities ........ 193,909 2,884 (15,553) 181,240 Mortgage-backed securities (exclusive of government agencies) ................ 16,126 102 (1,019) 15,209 Equity securities ........... 250,929 37,345 (23,840) 264,434 Short-term investments....... 104,201 - - 104,201 ---------- -------- -------- ---------- $ 921,010 $ 42,415 $(64,366) $ 899,059 ========== ======== ======== ========== -58- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Net investment income for the three years ended December 31, 1995 was as follows: Year Ended December 31, --------------------------------- 1995 1994 1993 ---- ---- ---- (000s omitted) Net investment income: Fixed maturities ...................... $ 69,453 $ 67,305 $ 69,565 Equity securities ..................... 15,410 14,964 10,495 Other long-term investments ........... 9,125 685 9,130 Short-term investments ................ 6,311 2,902 3,276 Accounts and notes receivable ......... 113 134 179 Other ................................. 353 411 712 -------- -------- -------- Total investment income ............. 100,765 86,401 93,357 Less investment expenses .............. 1,725 1,486 1,554 -------- -------- -------- Net investment income ............... $ 99,040 $ 84,915 $ 91,803 ======== ======== ======== Certain information concerning realized and unrealized gains (losses) for fixed maturities and equity securities is set forth below: Year Ended December 31, --------------------------------- 1995 1994 1993 ---- ---- ---- (000s omitted) Fixed maturities (only available-for-sale securities for 1995 and 1994): Gross realized gains .................. $ 7,891 $ 4,774 $ 10,817 Gross realized losses ................. (8,372) (4,267) (4,155) Provision for other than temporary impairment .......................... (4,050) (750) (2,147) -------- -------- -------- $ (4,531) $ (243) $ 4,515 ======== ======== ======== Change in unrealized gains (losses) recorded in stockholders' equity .... $ 70,317 $(66,076) $ 29,131 ======== ======== ======== Equity securities: Gross realized gains .................. $ 17,879 $ 5,319 $ 15,163 Gross realized losses ................. (1,348) (1,474) (3,890) Provision for other than temporary impairment .......................... (285) (381) (6,310) -------- -------- -------- $ 16,246 $ 3,464 $ 4,963 ======== ======== ======== Change in unrealized gains (losses) recorded in stockholders' equity .... $ 34,002 $(18,827) $ 16,468 ======== ======== ======== In December 1995 the Company reclassified investments with a market value of $102,581,000 from fixed maturities recorded at amortized cost to fixed maturities recorded at market, and recorded unrealized appreciation net of taxes of $1,329,000. This one-time transfer from the held-to-maturity portfolio was permitted by the implementation guide for SFAS No. 115. -59- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In 1994 the Company transferred securities of two issuers with an amortized cost of $11,469,000 and a market value of $10,122,000 from the held-to- maturity portfolio to the available-for-sale category due to a deterioration in the creditworthiness of these issuers. The Company sold only one security with an amortized cost of $991,000 from the held-to-maturity portfolio during 1994, resulting in a realized gain of $164,000. The amortized cost and estimated market values of fixed maturity and short-term investments at December 31, 1995, by contractual fiscal maturity, are shown below. Expected maturities will differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties. Fixed Maturities Fixed Maturities Held-to-Maturity Available-for-Sale -------------------- -------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value --------- --------- --------- --------- (000s omitted) Due in one year or less .......... $ 19,220 $ 19,274 $232,198 $231,714 Due after one year through five years .......................... 121,599 125,403 59,323 59,628 Due after five years through ten years .......................... 59,894 62,950 116,893 119,686 Due after ten years .............. 64,456 68,655 368,443 396,435 -------- -------- -------- -------- 265,169 276,282 776,857 807,463 Mortgage-backed securities ....... - - 158,174 162,419 -------- -------- -------- -------- $265,169 $276,282 $935,031 $969,882 ======== ======== ======== ========
Other long-term investments had aggregate carrying values of $62,925,000 at December 31, 1995 and $52,564,000 at December 31, 1994 including mortgage loans on real estate of $1,979,000 and $1,764,000, respectively. Estimated market values of mortgage loans and other long-term investments approximate their carrying values. The carrying value of the Company's investments in principal-only securities and interest-only securities totalled approximately $7,685,000, or 0.5% of total invested assets, at December 31, 1995. -60- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The carrying value of securities on deposit with state regulatory authorities in accordance with statutory requirements totalled $237,732,000 and $234,265,000 at December 31, 1995 and 1994, respectively. Excluding investments in Guaranty National and securities of the United States Government and its agencies, the Company did not have any investments in securities of any one issuer that exceeded $25,000,000. The Company had $1,441,000 and $1,344,000 of fixed maturity investments for which it was not accruing income for the years ended December 31, 1995 and 1994, respectively. Note E - Reinsurance In the normal course of business, the Company's insurance subsidiaries reinsure certain risks, generally on an excess-of-loss or pro rata basis, with other companies in order to limit losses. Reinsurance does not discharge the primary liability of the original insurer. As of December 31, 1995 and 1994, recoverables for reinsurance ceded to the Company's four largest reinsurers, excluding direct business written for the McGee pool, were an aggregate of $84,654,000 and $99,476,000, respectively. At December 31, 1995 and 1994 these reinsurers provided qualified trust accounts for the benefit of the Company of $39,223,000 and $43,526,000, respectively. As of December 31, 1995, recoverables for reinsurance ceded to the clearing company for the McGee pool were $60,745,000, versus $1,777,000 for 1994, and the Company had ceded balances payable to the clearing company of $22,660,000. The table below illustrates the effect of reinsurance on premiums written and premiums earned:
Year Ended December 31, ------------------------------------- 1995 1994 1993 ---- ---- ---- (000s omitted-except for percentages) Direct premiums written ................ $ 799,284 $ 691,493 $ 647,426 Reinsurance assumed .................... 127,445 120,851 132,702 --------- --------- --------- Gross premiums written ................. 926,729 812,344 780,128 Reinsurance ceded ...................... (169,293) (100,289) (144,542) --------- --------- --------- Net premiums written ................... $ 757,436 $ 712,055 $ 635,586 ========= ========= ========= Percentage of amount assumed to net .... 16.8% 17.0% 20.9% ========= ========= ========= Direct premiums earned ................. $ 754,927 $ 685,110 $ 635,374 Reinsurance assumed .................... 126,552 129,737 117,711 --------- --------- --------- Gross premiums earned .................. 881,479 814,847 753,085 Reinsurance ceded ...................... (132,476) (123,624) (135,681) --------- --------- --------- Net premiums earned .................... $ 749,003 $ 691,223 $ 617,404 ========= ========= ========= Loss and loss adjustment expenses incurred recoverable from reinsurers.. $ 70,872 $ 56,778 $ 70,297 ========= ========= =========
Reinsurance recoverables and prepaid reinsurance includes prepaid reinsurance of $68,525,000 at December 31, 1995 and $31,708,000 at December 31, 1994. -61- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note F - Loss and Loss Adjustment Expense Reserves An analysis of the Company's calendar year loss and loss adjustment expense reserves is summarized as follows:
Year Ended December 31, ------------------------------------- 1995 1994 1993 ---- ---- ---- (000s omitted) Net balance, beginning of year ....... $ 891,542 $ 830,805 $ 746,298 ---------- ---------- ---------- Provision: Current year ....................... 500,514 480,826 434,840 Prior years ........................ 11,719 17,297 24,292 ---------- ---------- ---------- 512,233 498,123 459,132 ---------- ---------- ---------- Payments: Current year ....................... 146,540 134,120 125,042 Prior years ........................ 263,257 303,266 249,583 ---------- ---------- ---------- 409,797 437,386 374,625 ---------- ---------- ---------- Net balance, end of year ............. 993,978 891,542 830,805 Add reinsurance recoverables ....... 281,004 289,787 309,598 ---------- ---------- ---------- Balance, end of year ................. $1,274,982 $1,181,329 $1,140,403 ========== ========== ==========
Loss reserve estimates are based on forecasts of the ultimate settlement of claims and are subject to uncertainty with respect to future events. Loss reserve amounts are based on management's informed estimates and judgments, using data currently available. Reserve amounts and the underlying actuarial factors and assumptions are regularly analyzed and adjusted to reflect new information. Such reevaluation is a normal, recurring activity that is inherent in the process of loss reserve estimation and therefore, no assurances can be given that reserve development will not occur in the future. A substantial portion of the loss development experienced by the Company during the three years ended December 31, 1995 resulted from pools and associations and other reinsurance, where development is related to the ceding companies' experience, and from discontinued programs or lines of business. Reserve strengthening, higher initial reserving and increased stabilization in the Company's business have resulted in a decreasing level of loss development. An analysis of the Company's loss and loss adjustment expense environmental reserves and related claim counts for the three years ended December 31, 1995 is presented below: -62- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended December 31, ----------------------------------------------------- 1995 1994 1993 --------------- --------------- --------------- Claim Claim Claim Amount Counts Amount Counts Amount Counts ------ ------ ------ ------ ------ ------ (000s omitted for dollar amounts) Net balance, beginning of year ............. $20,601 467 $17,189 512 $15,184 335 Provision ........... 19,633 10,645 7,562 Payments ............ (5,675) (7,233) (5,557) ------- ------- ------- Net balance, end of year ................ 34,559 474 20,601 467 17,189 512 Add reinsurance recoverables ...... 10,509 11,391 4,699 ------- ------- ------- Balance, end of year .. $45,068 $31,992 $21,888 ======= ======= =======
Establishing reserve liabilities for environmental claims is subject to significant uncertainties that make reserve estimation difficult. Legal decisions have tended to expand insurance coverage beyond the intent of the policies. The Company does not use discounting in determining its reserves for environmental claims. IBNR of $21,739,000 and $13,791,000 is included in net reserves for environmental claims at December 31, 1995 and 1994, respectively. The Company's environmental claims principally relate to asbestos and hazardous waste, arising from certain liability business written prior to the mid 1980's, which business was never a major element of the Company's operations. Environmental claims are also received from certain reinsurance pools and associations where reserves are established based on information reported to the Company by the managers of those pools and associations. In view of the lines of insurance that the Company has traditionally written, environmental claims have not represented, and are not expected to represent in the future, a material portion of the Company's total claims. -63- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note G - Notes Payable On July 17, 1995, Orion issued 7 1/4% Senior Notes due 2005 with a face value of $100,000,000 (the "7 1/4% Senior Notes") in a public offering. The net proceeds from the offering were approximately $98,113,000, of which $46,500,000 was used to repay Orion's debt under a bank loan agreement and the balance was used for general corporate purposes. Orion had $42,500,000 of notes payable under its bank loan agreement as of December 31, 1994, at interest rates between 6.71% and 6.90%. The indentures for the 7 1/4% Senior Notes and for Orion's 9 1/8% Senior Notes due 2002 limit the amount of liens and guarantees by the Company, and the Company's ability to incur secured indebtedness without equally and ratably securing the senior notes. As of December 31, 1995, $110,000,000 of Orion's debt is scheduled to be repaid on September 1, 2002 and the remaining $100,000,000 is due on July 15, 2005. Notes payable are recorded at face value less unamortized discount. The carrying value and estimated market value of notes payable consist of the following:
Estimated Carrying Value Market Value ------------------ ------------------ December 31, 1995 1994 1995 1994 ------------ ---- ---- ---- ---- (000s omitted) $110,000,000 face amount, 9 1/8% Senior Notes, due September 1, 2002 ....................... $109,894 $109,882 $125,642 $111,815 $100,000,000 face amount, 7 1/4% Senior Notes, due July 15, 2005 ........................... 99,254 - 104,160 - Borrowings under loan agreement with banks (various interest rates) .................... - 42,500 - 42,500 -------- -------- -------- -------- $209,148 $152,382 $229,802 $154,315 ======== ======== ======== ========
-64- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note H - Federal Income Taxes Orion and its wholly-owned subsidiaries file consolidated federal income tax returns. The consolidated federal income tax current provisions for 1995 and 1993 were based on the regular tax method. The current provision for 1994 was computed by the alternative minimum tax method. The 1993 tax provision reflects a tax benefit of $450,000 from the effect of the increase in the federal tax rate on the Company's deferred tax asset. The Company adopted SFAS No. 109 effective January 1, 1993. The new standard provides for the recognition of deferred tax assets that were not recognized under the prior standard, SFAS No. 96. The cumulative effect of adopting SFAS No. 109 was a benefit of $16,881,000. Substantially all federal income taxes incurred by Orion and its subsidiaries relate to domestic operations.
The components of the provision (benefit) for federal income taxes on income from operations, and allocations of taxes (benefits) to other items for the three years ended December 31, 1995 are as follows: Year Ended December 31, ----------------------------------- 1995 1994 1993 ---- ---- ---- (000s omitted) Taxes on income from continuing operations: Current ............................... $ 25,578 $ 6,395 $ 16,448 Deferred .............................. (5,165) 9,906 (931) -------- -------- -------- 20,413 16,301 15,517 Taxes allocated to other items: Cumulative effect of change in accounting for postretirement benefits ............................ - - (2,604) Stockholders' equity, for unrealized appreciation (depreciation) of securities .......................... 40,837 (32,864) 18,718 Stockholders' equity, for foreign exchange translation gains (losses) . 13 (159) (394) -------- -------- -------- $ 61,263 $(16,722) $ 31,237 ======== ======== ======== -65- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The tax effects of the temporary differences comprising the Company's net deferred tax asset as of December 31, 1995 and 1994 are as follows: December 31, ---------------------- 1995 1994 ---- ---- (000s omitted) Deferred tax assets: Loss reserve discounting ...................... $ 55,512 $ 52,940 Unearned premium reserves ..................... 16,609 16,145 Policyholders' dividends ...................... 6,596 4,188 Realized investment losses .................... 4,319 3,672 Unrealized investment losses .................. - 8,975 Deferred income ............................... 2,482 2,659 Retiree medical benefits ...................... 4,263 3,097 Other ......................................... 11,560 8,426 -------- -------- 101,341 100,102 -------- -------- Deferred tax liabilities: Deferred policy acquisition costs ............. 27,186 24,548 Investment in affiliates ...................... 20,114 19,091 Investment income ............................. 9,933 10,375 Unrealized investment gains ................... 31,482 - Other ......................................... 3,900 4,080 -------- -------- 92,615 58,094 -------- -------- $ 8,726 $ 42,008 ======== ======== -66- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A reconciliation of expected federal income tax expense on pre-tax earnings before cumulative effect of adoption of new accounting principles at regular corporate rates to actual tax expense is as follows: Year Ended December 31, ------------------------------------------------ 1995 1994 1993 ---- ---- ---- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- (000s omitted-except for percentages) Expected income tax expense.. $30,812 35.0% $25,041 35.0% $25,377 35.0% Change in enacted tax rate .. - - - - (905) (1.3) Dividends-received deduction. (5,601) (6.4) (5,830) (8.2) (4,019) (5.5) Tax-exempt interest ......... (6,470) (7.3) (5,362) (7.5) (4,929) (6.8) Amortization of goodwill .... 536 .6 410 .6 410 .6 Other ....................... 1,136 1.3 2,042 2.9 (417) (.6) ------- ---- ------- ---- ------- ---- Actual income tax expense ... $20,413 23.2% $16,301 22.8% $15,517 21.4% ======= ==== ======= ==== ======= ====
Note I - Commitments Minimum lease commitments at December 31, 1995, with the majority having initial lease periods from one to twenty-five years, are as follows: (000s omitted) 1996 ....................................... $15,661 1997 ....................................... 11,473 1998 ....................................... 9,331 1999 ....................................... 6,937 2000 ....................................... 6,003 2001 and thereafter ........................ 36,441 ------- Minimum lease commitments ................ $85,846 ======= Rent expense amounted to $14,112,000, $11,519,000 and $11,976,000 net of sublease rentals of $9,000 in 1994 and $419,000 in 1993. Substantially all leases are for office space and equipment. A number of lease commitments contain renewal options ranging from one to thirty years. Note J - Contingencies On January 31, 1995, the Department of Insurance of the State of California (the "Department") advised the Company that it had a liability of approximately $4,000,000 plus interest under regulations issued with respect to an amendment to the California Insurance Code known as Proposition 103. On November 2, 1995, the terms of a Stipulation and Consent Order between the Department and the Company were adopted by the Commissioner of the Department. Pursuant to that order, the Company has no premium rollback liability under Proposition 103. Further, the Department acknowledged that premium rates charged by the Company in California since the passage of Proposition 103 have been in compliance with the requirements of the California Insurance Code. -67- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Orion and its subsidiaries are routinely engaged in litigation incidental to their businesses. Management believes that there are no significant legal proceedings pending against the Company which, net of reserves established therefor, are likely to result in judgments for amounts that are material to the financial condition, liquidity or results of operations of Orion and its consolidated subsidiaries, taken as a whole. Note K - Stockholders' Equity and Earnings Per Common Share During 1995, the Company repurchased 173,181 shares of its common stock at an aggregate cost of $7,183,000. The Company repurchased 442,327 shares for $13,745,000 in 1994 and 177,658 shares for $5,473,000 in 1993. Orion declared a 5-for-4 split of its common stock which was paid on November 15, 1993 to shareholders of record on October 15, 1993. All common stock and per common share data presented in the financial statements give effect to the stock split. On December 21, 1992, Orion called for redemption its $2.125 Convertible Exchangeable Preferred Stock (the "$2.125 Preferred Stock") on January 21, 1993. The market price of the shares of common stock that a holder would receive upon conversion of the preferred stock was substantially higher than the redemption price of $25.76 per share. Consequently, most holders converted into common stock prior to the redemption date, resulting in the issuance of 3,579 shares of common stock in December 1992 and 1,423,544 shares of common stock in January 1993. Holders of 21,605 shares of $2.125 Preferred Stock, who did not elect to convert, redeemed their shares for an aggregate of $557,000. On April 7, 1993, the Company redeemed all of the outstanding shares of its Adjustable Rate Preferred Stock for $18,520,000 in cash. Orion declared dividends on its common stock of $12,078,000, $10,828,000 and $9,860,000, or $.86, $.76 and $.68 per share in 1995, 1994 and 1993, respectively. Dividends were declared in 1993 in the amount of $407,000, or $1.10 per share, on Orion's Adjustable Rate Preferred Stock and $2,000, or $.12 per share, on the $2.125 Preferred Stock. The weighted average common shares outstanding for purposes of computing earnings per share amounted to 14,187,000, 14,348,000 and 14,598,000 shares for 1995, 1994 and 1993, respectively. Dividends on preferred stock were deducted from earnings in 1993 to compute earnings per common share. Orion has a Stockholder Rights Plan (the "Rights Plan") under which each outstanding share of common stock includes 64% of one preferred stock purchase right (the "Rights"). The Rights Plan is designed to assure stockholders that they will receive equitable treatment in the event of a proposed takeover. -68- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Under the Rights Plan, each holder of a Right is entitled to buy one-hundredth of a share of Series A Participating Junior Preferred Stock. The Rights become exercisable if an acquiror gains a 20% or greater beneficial ownership interest in Orion's common stock, on other than fair and favorable terms to all stockholders. Each Right not owned by such acquiror will enable the holder to purchase, at an initial exercise price of $80, common stock having a value of twice the Right's exercise price. In addition, under certain circumstances if Orion is involved in a merger each Right will entitle its holder to purchase, at the Right's then current exercise price, common shares of such other company having a value of twice the Right's exercise price. Note L - Employee Benefit Plans The Company maintains a Stock Savings and Retirement Plan (the "Plan"), qualified under Internal Revenue Code Section 401(k), for eligible employees of the Company (except for employees of McGee). Employee and employer matched contributions to the savings funds are limited to the extent allowable under the Plan and federal income tax law. The Plan also provides for defined contribution savings and retirement benefits that allow the Company to make annual contributions to the Plan based on a percentage of employees' compensation. Employees vest in the Company's contributions over a six-year period. The Company has adopted a Surplus Benefit Plan which provides deferred benefits for those employees who received less than the full employer contribution to the Company's 401(k) plan as a result of federal tax limitations on participation in the Plan. McGee maintains a Profit Sharing Plan (the "McGee Plan") which is also a 401(k) plan for eligible employees of McGee. Employee and employer contributions are limited by the McGee Plan and federal income tax law. Employer contributions vest over a seven-year period. McGee has noncontributory defined benefit retirement plans covering all eligible employees, and a nonqualified supplemental retirement plan for certain key employees. At December 31, 1995 the accumulated benefit obligation of the defined benefit plans was approximately $20,205,000, and plan assets for these plans were approximately $19,233,000. The Company maintains a number of incentive plans for key employees. Under the Company's 1982 Long-Term Performance Incentive Plan (the "Incentive Plan"), shares of restricted stock as well as stock options may be granted by Orion. Orion granted 27,515, 70,015 and 5,688 shares of restricted stock to key employees during 1995, 1994 and 1993, respectively. Restricted stock is considered issued and outstanding when awarded. There are restrictions as to its transferability, which restrictions lapse proportionately from the second to the fifth anniversaries of grant date. As of December 31, 1995, the restrictions have not lapsed on 115,556 shares of restricted stock. All stock options are granted by Orion at fair market value at date of grant, and are intended to qualify as incentive stock options. Stock options become -69- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) exercisable from the first through fourth anniversaries of the date of grant, and expire ten years after the date of grant. As of December 31, 1995, the number of shares of stock reserved under the Incentive Plan is 471,545 of which 177,374 shares are available for future awards and 294,171 shares are for outstanding stock options, including 175,180 stock options that are exercisable. A summary of the option transactions is as follows:
Year Ended December 31, --------------------------------------------------------------------- 1995 1994 1993 ---- ---- ---- Price Price Price Options Range Options Range Options Range ------- ----- ------- ----- ------- ----- Balance - January 1 ... 348,802 $10.16-33.75 284,337 $10.16-32.40 305,860 $10.16-23.92 Granted ............... - - 129,800 32.50-33.75 3,438 32.40 Cancelled ............. (5,273) 23.92 (19,531) 14.56-23.92 - - Exercised ............. (49,358) 10.16-23.92 (45,804) 10.16-23.92 (24,961) 10.16-14.56 ------- ------- ------- Balance - December 31.. 294,171 10.16-33.75 348,802 10.16-33.75 284,337 10.16-32.40 ======= ======= =======
Orion maintains a non-qualified defined benefit retirement plan for members of the Board of Directors who are not employees. Benefits are based on years of service and director fee levels at retirement. In 1995, Orion's stockholders authorized 100,000 shares for a stock option plan for non- employee directors. During 1995 Orion granted 54,000 stock options to directors at fair market value, which become exercisable one year from the date of grant and expire in ten years. The total expense for 1995, 1994 and 1993 for the above savings, retirement and pension benefit plans for employees and directors amounted to $6,588,000, $4,659,000 and $3,277,000, respectively. Note M - Postretirement Medical Benefits The Company provides postretirement medical benefits to full-time employees who have attained age 55 and have 10 years of consecutive service immediately prior to retirement. McGee employees that attain age 55 while in service with McGee are eligible for postretirement medical benefits if they have 10 years of service, with an increasing level of benefits for additional years of service up to 35. The postretirement health care plans are not funded. The accumulated postretirement benefit obligation of these plans included in other liabilities in the consolidated balance sheet, including McGee's plan for 1995, is as follows: -70- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, ---------------- 1995 1994 ---- ---- (000s omitted) Retirees ................................. $ 3,353 $2,143 Fully eligible active plan participants .. 1,713 976 Other active plan participants ........... 3,585 3,234 Unrecognized net gains ................... 3,528 2,496 ------- ------ $12,179 $8,849 ======= ====== Net postretirement benefit cost for the years ended December 31, 1995, 1994 and 1993 was $1,203,000, $1,243,000 and $598,000 consisting of service cost benefits earned of $695,000, $813,000 and $130,000 and interest on the accumulated postretirement benefit obligation of $612,000, $539,000 and $468,000, respectively, and amortization of unrecognized net gains of $104,000 in 1995 and $109,000 in 1994. The expected health care cost trend rate used as of December 31, 1995 was 9% for 1996 and 1997, decreasing linearly each year until it reaches 5% for 2005 and future years. At December 31, 1994 the expected health care cost trend rates used were 10.25% for 1995 and 9.5% for 1996, ratably reduced to 6% for 2003 and later years. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the aggregate service cost and interest cost for 1995, 1994 and 1993 by $245,000, $289,000 and $145,000, respectively, and increase the accumulated postretirement benefit obligation as of December 31, 1995 and 1994 by $1,304,000 and $953,000, respectively. A one-percentage-point decrease in the health care cost rate would decrease service and interest costs and the accumulated post retirement benefit obligation by similar amounts. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.0% at December 31, 1995 and 8.5% at December 31, 1994. -71- ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note N - Industry Segment Information The Company's insurance operations are organized and reported as three business segments: Regional Operations, Reinsurance/Special Programs and Guaranty National Companies. Regional Operations provides workers compensation insurance products through EBI Companies. Reinsurance/Special Programs includes DPIC Companies (which markets professional liability insurance), Connecticut Specialty (which writes specialty insurance programs), SecurityRe Companies (a reinsurer), McGee (an underwriting management company that specializes in ocean marine, inland marine and property insurance) and a 20% interest in Intercargo (which underwrites insurance coverages for international trade). The third segment consists of the Company's 49.1% interest in Guaranty National Corporation, which specializes in nonstandard commercial and personal automobile insurance. The Company includes its share of Guaranty National's earnings using the equity method of accounting. The miscellaneous income and expenses (primarily interest, general and administrative expenses and other consolidating elimination entries) of the parent company are reported as a fourth segment. Identifiable assets of the Regional Operations and Reinsurance/Special Programs segments are primarily allocated based on the cash flows of these segments. Financial information for the Company's segments for 1995, 1994 and 1993 is shown below: -72-
Earnings (Loss) Before Federal Income Taxes Realized and Cumulative Net Investment Effect of Premiums Investment Gains Other Total Accounting Identifiable Earned Income (Losses) Income Revenues Changes Assets -------- ---------- ---------- -------- -------- -------------- ------------ (000s omitted) 1995: Regional Operations.... $322,098 $ 35,750 $ 4,636 $ 188 $362,672 $ 57,830 $ 836,089 Reinsurance/Special Programs ............ 426,905 59,584 7,781 13,564 507,834 43,241 1,460,435 Guaranty National Companies ........... - - - - - 4,466 106,059 Other ................. - 3,706 (532) 600 3,774 (17,502) 71,005 -------- -------- -------- -------- -------- -------- ---------- Total ............... $749,003 $ 99,040 $ 11,885 $ 14,352 $874,280 $ 88,035 $2,473,588 ======== ======== ======== ======== ======== ======== ========== 1994: Regional Operations ... $278,040 $ 29,287 $ 1,246 $ 239 $308,812 $ 42,514 $ 748,680 Reinsurance/Special Programs ............ 413,183 53,209 2,191 575 469,158 34,117 1,213,026 Guaranty National Companies ........... - - - - - 11,244 89,760 Other ................. - 2,419 - 558 2,977 (16,329) 61,295 -------- -------- -------- -------- -------- -------- ---------- Total ............... $691,223 $ 84,915 $ 3,437 $ 1,372 $780,947 $ 71,546 $2,112,761 ======== ======== ======== ======== ======== ======== ========== 1993: Regional Operations ... $266,373 $ 33,760 $ 4,153 $ - $304,286 $ 34,025 $ 758,596 Reinsurance/Special Programs ............ 351,031 55,500 6,706 915 414,152 44,032 1,234,033 Guaranty National Companies ........... - - - - - 9,509 92,590 Other ................. - 2,543 (1,381) 555 1,717 (15,061) 32,235 -------- -------- -------- -------- -------- -------- ---------- Total ............... $617,404 $ 91,803 $ 9,478 $ 1,470 $720,155 $ 72,505 $2,117,454 ======== ======== ======== ======== ======== ======== ==========
ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note O - Selected Quarterly Financial Data (Unaudited) Quarterly results of operations and earnings per common share for 1995 and 1994 are summarized as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (000s omitted-except for per share data) 1995: Premiums earned ......................... $175,058 $186,709 $183,902 $203,334 Net investment income ................... 23,853 24,435 25,572 25,180 Realized investment gains ............... 2,560 726 5,885 2,714 Other income ............................ 326 241 6,862 6,923 -------- -------- -------- -------- Total revenues ...................... $201,797 $212,111 $222,221 $238,151 ======== ======== ======== ======== Net earnings ........................ $ 17,062 $ 16,049 $ 17,257 $ 17,254 ======== ======== ======== ======== Net earnings per common share ........... $ 1.20 $ 1.13 $ 1.21 $ 1.22 ======== ======== ======== ======== 1994: Premiums earned ......................... $167,095 $162,443 $180,703 $180,982 Net investment income ................... 20,768 20,601 22,550 20,996 Realized investment gains ............... 533 178 1,197 1,529 Other income ............................ 302 415 341 314 -------- -------- -------- -------- Total revenues ...................... $188,698 $183,637 $204,791 $203,821 ======== ======== ======== ======== Net earnings ........................ $ 13,240 $ 11,567 $ 15,329 $ 15,109 ======== ======== ======== ======== Net earnings per common share ........... $ .91 $ .80 $ 1.07 $ 1.07 ======== ======== ======== ======== The sum of quarterly per common share amounts may not agree with the corresponding annual amounts due to rounding or antidilution during certain quarters. -73-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Pursuant to General Instruction G(3) to this form, the information required by Part III (Items 10, 11, 12 and 13) hereof is incorporated by reference from the Company's definitive proxy statement for its Annual Meeting to be held on June 5, 1996. The Company intends to file the proxy material, which involves the election of directors, not later than 120 days after the close of the Company's fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 Financial Statements: The following financial statements are included in Part II, Item 8. Page ---- Report of Management................................. 44 Independent Auditors' Report......................... 45 Orion Capital Corporation and Subsidiaries: December 31, 1995 and 1994 Consolidated Balance Sheet................. 46-47 For the years ended December 31, 1995, 1994 and 1993 Consolidated Statement of Earnings......... 48 Consolidated Statement of Stockholders' Equity................................... 49 Consolidated Statement of Cash Flows....... 50-51 Notes to the Consolidated Financial Statements.. 52-73 (a) 2. Financial Statement Schedules: Selected Quarterly Financial Data - for the years ended December 31, 1995, and 1994 - Included in Part II, Item 8. -74- Page ---- Schedule I Consolidated Summary of Investments - Other than Investments in Related Parties - December 31, 1995............................ S-1 II Condensed Financial Information of Registrant - S-2, S-3, December 31, 1995, 1994 S-4, S-5, and 1993........................ S-6 III Supplementary Insurance Information - December 31, 1995, 1994 and 1993............. S-7 V Valuation and Qualifying Accounts - December 31, 1995, 1994 and 1993................... S-8 VI Supplemental Information For Property - Casualty Insurance Underwriters - December 31, 1995, 1994 and 1993............................ S-9 Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the Financial Statements or notes thereto. (a) 3. Exhibits: Exhibit 3(i) Restated Certificate of Incorporation of Orion, as amended on June 3, 1993; filed as Exhibit 3(i) to the Company's Annual Report on Form 10-K for 1993. Exhibit 3(ii) By-Laws of Orion, as amended on May 7, 1993; filed as Exhibit 3(ii) to the Company's Annual Report on Form 10-K for 1993. Exhibit 4(i) Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Orion, dated March 23, 1989; filed as Exhibit 4(xi) to the Company's Annual Report on Form 10-K for 1988. -75- Exhibit 4(ii) Specimen certificate representing shares of Orion's Common Stock (proof of March 27, 1989); filed as Exhibit 4(xii) to the Company's Annual Report on Form 10-K for 1988. Exhibit 4(iii) Indenture, dated as of September 8, 1992, between Orion and the Connecticut National Bank (now known as Shawmut Bank Connecticut, National Association), as Trustee of Orion's 9 1/8% Senior Notes due September 1, 2002; filed as Exhibit 4(v) to the Company's Annual Report on Form 10-K for 1992. Exhibit 4(iv) Specimen certificate representing Orion's 9 1/8% Senior Notes; filed as Exhibit 4(vi) to the Company's Annual Report on Form 10-K for 1992. Exhibit 4(v) Senior Debt Indenture, dated as of July 17, 1995, between Orion and the State Street Bank and Trust Company of Connecticut, National Association, as Trustee of Orion's 7 1/4% Senior Notes due July 15, 2005; filed as Exhibit 4.9 to the Company's Current Report on Form 8-K, filed on 7/14/95. Exhibit 4(vi) First Supplemental Indenture to the Senior Debt Indenture; filed as Exhibit 4.9(a) to the Company's Current Report on Form 8-K, filed on 7/14/95. Exhibit 4(vii) Specimen Certificate representing Orion's 7 1/4% Senior Notes; filed as Exhibit 4.9(b) to the Company's Current Report on Form 8-K, filed on 7/14/95. Exhibit 10(i)* Orion's Deferred Compensation Plan, as amended; filed as Exhibit 10(i) to the Company's Annual Report on Form 10-K for 1991. Exhibit 10(ii)* Orion's 1982 Long-Term Performance Incentive Plan, as amended; filed as Exhibit 10(iii) to the Company's Annual Report on Form 10-K for 1992. Exhibit 10(iii)* Orion's 1994 Stock Option Plan for Non- Employee Directors; filed as Exhibit 10(iii) to the Company's Annual Report on Form 10-K for 1994. Exhibit 10(iv)* Employment Agreement between Alan R. Gruber and Orion, dated as of March 19, 1993; filed as Exhibit 10(v) to the Company's Annual Report on Form 10-K for 1992. *Management contract or compensatory plan or arrangement. -76- Exhibit 10(v)* Employment Agreement between Robert B. Sanborn and Orion, dated as of March 19, 1993; filed as Exhibit 10(vi) to the Company's Annual Report on Form 10-K for 1992. Exhibit 10(vi)* Employment Agreement between Larry D. Hollen and Orion, as amended and restated on December 6, 1995. Exhibit 10(vii)* Employment Agreement between Raymond W. Jacobsen and Orion, as amended and restated as of December 6, 1995. Exhibit 10(viii)* Employment Agreement between W. Marston Becker and Orion, dated as of October 31, 1995. Exhibit 10(vix) Lease Agreement between Connecticut UTF, Inc., as lessor, and Security Insurance Company of Hartford ("Security"), as lessee, dated as of December 19, 1984; filed as Exhibit 10(xxxiii) to the Company's Annual Report on Form 10-K for l984. Exhibit 10(x) Second Assignment of Lease and Agreement from Connecticut UTF, Inc. to Security, dated as of December 19, 1984; filed as Exhibit 10(xxxiv) to the Company's Annual Report on Form 10-K for 1984. Exhibit 10(xi) Purchase Money Second Mortgage from Connecticut UTF, Inc., as mortgagor, to Security, as mortgagee, dated as of December 19, 1984; filed as Exhibit 10(xxxvi) to the Company's Annual Report on Form 10-K for 1984. Exhibit 10(xii) Purchase Money Note, in the face amount of $2,800,000, from Connecticut UTF, Inc. to Security, dated December 19, 1984; filed as Exhibit 10(xxxvi) to the Company's Annual Report on Form 10-K for l984. Exhibit 10(xiii) Guarantee from Orion to Connecticut UTF, Inc., dated as of December 19, 1984, guaranteeing the performance of Security under its lease with Connecticut UTF, Inc.; filed as Exhibit 10(xxxvii) to the Company's Annual Report on Form 10-K for 1984. Exhibit 10(xiv) Form of Indemnification Agreement, dated as of June 3, 1987, between Orion and each of its Directors and Executive Officers; filed as Exhibit 10(xl) to the Company's Annual Report on Form 10-K for l987. *Management contract or compensatory plan or arrangement. -77- Exhibit 10(xv) Rights Agreement, dated as of March 15, 1989, between Orion and Manufacturers Hanover Trust Company, Rights Agent; filed as Exhibit 1 to the Company's Form 8-A filed March 28, 1989. Exhibit 10(xvi) Specific Excess Reinsurance Agreement, effective January 1, 1990, by and among several of the Company's wholly-owned insurance subsidiaries and Cologne Reinsurance Company (Dublin) Ltd.; filed as Exhibit 10(xxiv) to the Company's Annual Report on Form 10-K for 1990. Exhibit 10(xvii)* Retirement Plan for Directors of Orion, as amended (September, 1994); filed as Exhibit 10(xvi) to the Company's Annual Report on Form 10-K for 1994. Exhibit 10(xviii)* Orion Supplemental Benefits Plan, filed as Exhibit 10(xxv) to the Company's Annual Report on Form 10-K for 1991. Exhibit 10(xix) Shareholder Agreement, dated as of November 7, 1991 by and among the Company, Guaranty National Corporation and certain wholly-owned subsidiaries of the Company; filed as Exhibit 10(xxv) to the Company's Annual Report on Form 10-K for 1991. Exhibit 10(xx) Amendments to the Shareholder Agreement by and among the Company, Guaranty National Corporation and certain wholly-owned subsidiaries of the Company made as of February 2, 1994 and March 2, 1995; filed as Exhibit 10(xix) to the Company's Annual Report on Form 10-K for 1994. Exhibit 10(xxi) Underwriting Agreement for Orion's 7 1/4% Notes due 2005, dated July 12, 1995; filed as Exhibit 1 to the Company's Current Report on Form 8-K, filed on 7/14/95. Exhibit 10(xxii) Letter Agreement, dated September 13, 1993, by and between Orion and Intercargo Corporation; filed as Exhibit 10(xxii) to the Company's Annual Report on Form 10-K for 1993. Exhibit 10(xxiii) Amendment, dated February 14, 1995, to the Letter Agreement by and between Orion Capital Corporation and Intercargo Corporation; filed as Exhibit 10(xxiii) to the Company's Annual Report on Form 10-K for 1994. Exhibit 10(xxiv) Agreement, dated September 13, 1993, by and between Orion and The Harper Group, Inc.; filed as Exhibit 10(xxiii) to the Company's Annual Report on Form 10-K for 1993. Exhibit 10(xxv) Purchase Agreement by and between Sun Alliance USA Inc. and Orion, dated as of June 30, 1995. *Management contract or compensatory plan or arrangement. -78- Exhibit 11 Statement re: computation of earnings per common share. Exhibit 21 Subsidiaries of Orion. Exhibit 23 Consents of Deloitte & Touche LLP Exhibit 27 Financial Data Schedule. Exhibit 28 Information from reports furnished to state insurance regulatory authorities. Copies of exhibits may be obtained upon payment of a $.50 per page fee. Such requests should be made in writing to: Corporate Secretary, Orion Capital Corporation, 600 Fifth Avenue, New York, New York 10020. (b) Reports on Form 8-K: None. (c) Filed exhibits: See Exhibit Index (d) Financial statements of non-consolidated subsidiaries: The Audited Consolidated Financial Statements of Guaranty National Corporation and subsidiaries, Consolidated Balance Sheet at December 31, 1995 and 1994, Consolidated Statement of Earnings, State- ment of Changes in Shareholders' Equity and Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993, the Related Notes to the Consolidated Financial Statements and Financial Statement Schedules included in Guaranty National Corporation's Annual Report on Form 10-K for the 1995 fiscal year are incorporated herein by reference ("Guaranty National 1995 Form 10-K"). In addition, the information set forth under the caption "Reserves" (on pages 13 through 17) of the Guaranty National 1995 Form 10-K is in- corporated by reference herein. The Company currently holds a slightly less than 50% interest in Guaranty National's outstanding common stock. Since November 1991, Guaranty National's operations have been reported by the Company on the equity accounting basis. -79- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORION CAPITAL CORPORATION By: /s/ Alan R. Gruber March 14, 1996 ------------------ Alan R. Gruber Chairman of the Board (Principal Executive and Financial Officer) By: /s/ Daniel L. Barry March 14, 1996 ------------------- Daniel L. Barry Vice President and Controller (Principal Accounting Officer) -80- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons (including a majority of the members of the Board of Directors of the Registrant) in the capacities and on the dates indicated: Signature and Title Date - ------------------------- -------------- /s/ Alan R. Gruber March 14, 1996 - ------------------------- Alan R. Gruber Chairman of the Board /s/ W. Marston Becker March 14, 1996 - -------------------------- Vice Chairman /s/ Bertram J. Cohn March 14, 1996 - ------------------------- Bertram J. Cohn Director /s/ John C. Colman March 14, 1996 - ------------------------- John C. Colman Director /s/ Larry D. Hollen March 14, 1996 - ------------------------- Larry D. Hollen Director /s/ Robert H. Jeffrey March 14, 1996 - ---------------------- Robert H. Jeffrey Director /s/ Warren R. Lyons March 14, 1996 - ------------------------- Warren R. Lyons Director /s/ James K. McWilliams March 14, 1996 - ------------------------- James K. McWilliams Director /s/ R. W. Moore March 14, 1996 - ------------------------- Ronald W. Moore Director -81- Signature and Title Date - ---------------------- -------- - ---------------------- Robert B. Sanborn Director /s/ William J. Shepherd March 14, 1996 - ----------------------- William J. Shepherd Director /s/ John R. Thorne March 14, 1996 - ----------------------- John R. Thorne Director - -------------------- Roger B. Ware Director -82- EXHIBIT INDEX Exhibit 10(vi) Employment Agreement between Larry D. Hollen and Orion, as amended and restated on December 6, 1995. Exhibit 10(vii) Employment Agreement between Raymond W. Jacobsen and Orion, as amended and restated as of December 6, 1995. Exhibit 10(viii) Employment Agreement between W. Marston Becker and Orion, dated as of October 31, 1996. Exhibit 10(xxvi) Purchase Agreement by and between Sun Alliance USA Inc. and Orion, dated as of June 30, 1995. Exhibit 11 Statement re: computation of earnings per common share. Exhibit 21 Subsidiaries of Orion. Exhibit 23 Consents of Deloitte & Touche. Exhibit 27 Financial Data Schedule. Exhibit 28** Information from reports furnished to state insurance regulatory authorities. - --------------------------------- **Exhibit 28, information from reports furnished to state insurance regulatory authorities, has been filed on paper with the Securities and Exchange Commission under cover of Form SE. -83-
SCHEDULE I ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1995 (000s omitted) ============================================================================== Column A Column B Column C Column D -------- -------- -------- -------- Amount Shown on Balance Type of Investment Cost Value Sheet ______________________________________________________________________________ Fixed maturities held-to-maturity: Bonds - United States Government and government agencies and authorities ................ $ 90,770 $ 93,838 $ 90,770 States, municipalities and political subdivisions .... 137,807 144,231 137,807 Foreign governments ......... 50 50 50 All other corporate bonds ... 36,542 38,163 36,542 ---------- -------- ---------- 265,169 276,282 265,169 ---------- ======== ---------- Fixed maturities available-for-sale: Bonds - United States Government and government agencies and authorities ................ 206,722 216,064 216,064 States, municipalities and political subdivisions .... 246,026 264,488 264,488 Foreign governments ......... 7,900 8,462 8,462 Public utilities ............ 7,086 7,789 7,789 All other corporate bonds ... 188,351 194,499 194,499 Redeemable preferred stocks ... 91,923 91,567 91,567 ---------- -------- ---------- 748,008 782,869 782,869 ---------- ======== ---------- Equity securities: Common stocks - Public utilities ............ 8,348 10,287 10,287 Banks, trusts and insurance companies ................. 36,704 71,292 71,292 Industrial, miscellaneous and all other ................. 63,159 77,316 77,316 Non-redeemable preferred stocks 149,167 145,990 145,990 ---------- -------- ---------- 257,378 304,885 304,885 ---------- ======== ---------- Mortgage loans on real estate ... 1,979 1,979 Other long-term investments ..... 60,946 60,946 Short-term investments .......... 187,013 187,013 ---------- ---------- Total investments ......... $1,520,493 $1,602,861 ========== ========== S-1 SCHEDULE II ORION CAPITAL CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT ORION CAPITAL CORPORATION BALANCE SHEET (000s omitted) ASSETS December 31, -------------------- 1995 1994 ---- ---- Fixed maturities held at market (cost $666 - 1995 and $1,344 - 1994) ...................................... $ 666 $ 1,344 Short-term investments ................................ 55,425 12,838 Cash .................................................. 3 180 Notes receivable and other assets ..................... 4,476 4,078 Deferred federal income taxes ......................... 8,739 42,008 Investment in subsidiaries ............................ 651,781 497,024 Excess of cost over fair value of net assets acquired.. 48,987 28,140 -------- -------- Total assets ........................................ $770,077 $585,612 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities ..................................... $ 31,551 $ 27,325 Due to affiliates ..................................... 19,682 25,988 Federal income taxes payable .......................... 18,793 14,829 Notes payable ......................................... 209,148 152,382 -------- -------- Total liabilities ................................... 279,174 220,524 Stockholders' equity .................................. 490,903 365,088 -------- -------- Total liabilities and stockholders' equity .......... $770,077 $585,612 ======== ======== 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, ---------------------------- 1995 1994 1993 ---- ---- ---- Revenues: Net investment income ....................... $ 1,770 $ 396 $ 458 Realized investment losses .................. (800) - (13) Other income ................................ 595 550 550 -------- -------- -------- 1,565 946 995 -------- -------- -------- Expenses: Interest .................................... 15,537 13,190 12,670 General and administrative .................. 3,106 3,676 1,629 Amortization of excess of cost over fair value of net assets acquired .............. 1,470 1,110 1,111 -------- -------- -------- 20,113 17,976 15,410 -------- -------- -------- Loss before federal income taxes (benefit), equity in net earnings of subsidiaries and cumulative effect of adoption of new accounting principles ....................... (18,548) (17,030) (14,415) -------- -------- -------- Federal income taxes (benefit): Current ..................................... 24,165 6,395 16,448 Deferred .................................... (3,881) 9,906 (931) -------- -------- -------- 20,284 16,301 15,517 -------- -------- -------- Loss before equity in net earnings of subsidiaries and cumulative effect of change in accounting principles .................... (38,832) (33,331) (29,932) Equity in net earnings of subsidiaries ........ 106,454 88,576 86,920 -------- -------- -------- Earnings before cumulative effect of change in accounting principles ....................... 67,622 55,245 56,988 Cumulative effect of change in accounting principles .................................. - - 11,825 -------- -------- -------- Net earnings .................................. $ 67,622 $ 55,245 $ 68,813 ======== ======== ======== 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, ------------------------------ 1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Dividends received from subsidiaries ...... $ 30,546 $ 30,013 $ 25,512 Net investment income collected ........... 1,737 212 156 Federal income taxes received from subsidiaries ............................ 4,500 6,000 5,600 Interest paid ............................. (12,123) (12,524) (11,998) Other expenses paid ....................... (2,276) (2,454) (2,249) Other receipts ............................ 1,268 3,230 634 -------- -------- -------- Net cash provided by operating activities. 23,652 24,477 17,655 -------- -------- -------- Cash flows from investing activities: Sales of equity securities ................ - 426 Purchase of fixed maturities .............. - (1,344) - Net purchases of short-term investments ... (42,587) (4,313) (4,793) Investments in subsidiaries ............... 4,476 763 (6,983) Acquisition of McGee ...................... (22,355) - - Other payments ............................ (99) (795) (17) -------- -------- -------- Net cash used in investing activities ... (60,565) (5,689) (11,367) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of notes payable ... 110,413 - 59,672 Proceeds from issuance of common stock .... 246 598 286 Repayment of notes payable ................ (54,500) (8,000) (29,500) Dividends paid to stockholders ............ (12,717) (11,263) (11,598) Purchases of common stock and purchases and redemption of adjustable rate preferred stock ......................... (6,689) (38) (23,615) Other payments ............................ (17) (351) (1,113) -------- -------- -------- Net cash provided by (used in) financing activities ............................ 36,736 (19,054) (5,868) -------- -------- -------- Net increase (decrease) in cash ......... (177) (266) 420 Cash balance, beginning of year ........... 180 446 26 -------- -------- -------- Cash balance, end of year ................. $ 3 $ 180 $ 446 ======== ======== ======== 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, ------------------------------ 1995 1994 1993 ---- ---- ---- Reconciliation of net earnings to net cash provided by operating activities: Net earnings ................................ $ 67,622 $ 55,245 $ 68,813 -------- -------- -------- Adjustments: Cumulative effect of change in accounting principles .............................. - - (11,825) Equity in net earnings of subsidiaries .... (106,454) (88,576) (86,920) Consolidating elimination of subsidiaries income taxes ............................ 30,941 10,576 18,962 Dividends received from subsidiaries ...... 30,546 30,013 25,512 Depreciation and amortization ............. 2,594 2,064 1,966 Deferred federal income taxes (benefit) ... (3,881) 9,906 (931) Realized investment losses ................ 800 - 13 Amortization of discount on debt .......... 36 10 9 Change in assets and liabilities: Decrease (increase) in notes receivable and other assets ............................ 90 (520) 470 Increase (decrease) in taxes payable and other liabilities ....................... 7,799 (1,668) 9,952 Increase (decrease) in due to affiliates .. (6,441) 7,427 (8,366) -------- -------- -------- Total adjustments and changes ........... (43,970) (30,768) (51,158) -------- -------- -------- Net cash provided by operating activities.. $ 23,652 $ 24,477 $ 17,655 ======== ======== ======== 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, 1995, 1994 and 1993 Note A - Notes Payable Notes payable consist of the following:
Estimated Carrying Value Market Value ----------------- ----------------- December 31, 1995 1994 1995 1994 ------------ ---- ---- ---- ---- (000s omitted) $110,000,000 face amount, 9 1/8% Senior Notes, due September 1, 2002 .......... $109,894 $109,882 $125,642 $111,815 $100,000,000 face amount, 7 1/4% Senior Notes, due July 15, 2005 .............. 99,254 - 104,160 - Borrowings under loan agreement with banks (various interest rates) ........ - 42,500 - 42,500 -------- -------- -------- -------- $209,148 $152,382 $229,802 $154,315 ======== ======== ======== ========
As of December 31, 1995, $110,000,000 of the Registrant's debt is scheduled to be repaid on September 1, 2002 and the remaining $100,000,000 is due on July 15, 2002. Note B - Expense Reimbursement and Management Fees During 1993 through 1995, the Registrant was reimbursed for payroll, office rental and other expenses incurred by it to support the operations of its insurance subsidiaries. This reimbursement of $6,232,000, $5,735,000 and $5,230,000 in 1995, 1994 and 1993, respectively, is accounted for as a reduction of general and administrative expenses. The Registrant received an investment management fee from Guaranty National of $595,000 in 1995 and $550,000 in 1994 and 1993. S-6
SCHEDULE III ORION CAPITAL CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION (000s omitted) - ----------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column J Column K -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Reserve For Unpaid Dividends Amortization Deferred Losses Payable Losses and of Deferred Policy- Policy and Loss to Net Loss Policy Other holders' Acquisition Adjustment Unearned Policy- Premiums Investment Adjustment Acquisition Insurance Dividend Premiums Segment Costs Expenses Premiums holders Earned Income Expenses Costs Expenses Expenses Written (a) ___________________________________________________________________________________________________________________________________ 1995: Regional Operations $29,516 $ 460,597 $ 84,360 $16,799 $322,098 $ 35,750 $201,054 $ 73,544 $11,302 $17,231 $332,598 Reinsurance/ Special Programs. 48,157 814,385 217,745 2,147 426,905 59,584 311,179 121,937 10,260 4,559 424,838 Other ............. - - - - - 3,706 - - - - - ------- ---------- -------- ------- -------- -------- -------- -------- ------- ------- -------- $77,673 $1,274,982 $302,105 $18,946 $749,003 $ 99,040 $512,233 $195,481 $21,562 $21,790 $757,436 ======= ========== ======== ======= ======== ======== ======== ======== ======= ======= ======== 1994: Regional Operations $21,313 $ 463,360 $ 62,431 $11,179 $278,040 $ 29,287 $186,437 $ 55,986 $ 9,871 $12,404 $279,738 Reinsurance/ Special Programs. 48,824 717,969 194,424 1,472 413,183 53,209 311,686 109,122 11,590 2,432 432,317 Other ............. - - - - - 2,419 - - - - - ------- ---------- -------- ------- -------- -------- -------- -------- ------- ------- -------- $70,137 $1,181,329 $256,855 $12,651 $691,223 $ 84,915 $498,123 $165,108 $21,461 $14,836 $712,055 ======= ========== ======== ======= ======== ======== ======== ======== ======= ======= ======== 1993: Regional Operations $19,326 $ 474,903 $ 67,310 $10,581 $266,373 $ 33,760 $191,826 $ 59,596 $ 8,144 $ 9,232 $265,082 Reinsurance/ Special Programs. 38,196 665,500 192,049 1,942 351,031 55,500 267,306 88,844 9,237 3,281 370,504 Other ............. - - - - - 2,543 - - - - - ------- ---------- -------- ------- -------- -------- -------- -------- ------- ------- -------- $57,522 $1,140,403 $259,359 $12,523 $617,404 $ 91,803 $459,132 $148,440 $17,381 $12,513 $635,586 ======= ========== ======== ======= ======== ======== ======== ======== ======= ======= ======== (a) 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 _______________________________________________________________________________ 1995: Allowance for doubtful accounts- Accounts and notes receivable $1,954 $1,689 $ - $ 431 $3,212 ====== ====== ====== ====== ====== 1994: Allowance for doubtful accounts- Accounts and notes receivable $1,859 $1,030 $ - $ 935 $1,954 ====== ====== ====== ====== ====== 1993: Allowance for doubtful accounts- Accounts and notes receivable $1,959 $2,337 $ - $2,437 $1,859 ====== ====== ====== ====== ====== (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) ___________________________________________________________________________________________________________________________________ 1995: Consolidated property and casualty entities $ 77,673 $1,274,982 $ 4,100 $302,105 $749,003 $ 95,334 $500,514 $ 11,719 $195,481 $409,797 $757,436 ======== ========== ======== ======== ======== ======== ======== ======== ======== ======== ======== 1994: Consolidated property and casualty entities $ 70,137 $1,181,329 $ 4,100 $256,855 $691,223 $ 82,496 $480,826 $ 17,297 $165,108 $437,386 $712,055 ======== ========== ======== ======== ======== ======== ======== ======== ======== ======== ======== 1993: Consolidated property and casualty entities $ 57,522 $1,140,403 $ 4,100 $259,359 $617,404 $ 89,260 $434,840 $ 24,292 $148,440 $374,625 $635,586 ======== ========== ======== ======== ======== ======== ======== ======== ======== ======== ======== (a) Discount deducted in Column C is computed using a statutory interest rate of 3.5% for certain workers compensation losses. S-9 /TABLE EX-10 2 Exhibit 10(vi) Amended and Restated Employment Agreement THIS EMPLOYMENT AGREEMENT, initially dated as of the 1st day of December, 1992 and amended and restated hereby as of December 6, 1996 (the "Agreement"), between Orion Capital Corporation, a Delaware corporation (the "Company"), and Larry D. Hollen ("Executive"); WHEREAS, the Company and Executive hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive to render services as President and Chief Operating Officer of the Company. The Executive shall assume such responsibilities, perform such duties and have such authority as may from time to time be assigned, delegated or limited by the Company's Board of Directors and Executive shall provide such other services in the future to the Company and its subsidiaries as the Executive and the Company may mutually agree. The Company agrees that Executive will be located, and will render such services (subject to necessary and appropriate business related travel), at the Company's offices in Farmington, Connecticut or such other location as the Executive and the Company may mutually agree. Executive hereby accepts such employment and agrees to render his services fully, faithfully, and to the best of his ability, subject to the direction and control of the Board of Directors of the Company. Executive's services shall be exclusive to the Company, provided that, upon prior written approval of the Company, the Executive may serve as a member of the board of directors of other corporations. 2. TERM. The term of this Agreement shall be for a period of five years commencing on December 1, 1992 and ending on November 30, 1997 (the "Term"). Such Term shall be automatically extended, on December 2, 1995, and at the end of each day thereafter, for one additional day unless the Company or the Executive shall at any time give written notice to the other of its or his, as the case may be, intention not to extend such Term, it being the intention of the parties that this Agreement shall, on and after December 2, 1995, at all times have an unexpired term of at least two years unless either party shall have given notice of termination in accordance with the provisions hereof. 3. COMPENSATION AND BENEFITS. (a) Base Salary. For the services to be rendered by Executive under this Agreement, the Company shall pay to Executive an annual base salary at the rate of not less than $200,000, payable in equal semi-monthly installments or on such other basis as may be applicable to senior executive officers of the Company, less income tax withholdings and other normal employee deductions. Commencing April 1, 1993 and annually thereafter during the Term, Executive will be entitled to receive such increases in his annual base salary as may be approved by the Company. (b) Bonus. Executive shall be entitled to participate in any bonus plan in effect for senior executive officers of the Company and shall receive bonus compensation in accordance therewith as determined by the Board of Directors of the Company or any Committee thereof designated by it. (c) Incentive Compensation and Stock Options. Executive shall participate in long-term and short-term incentive and deferred compensation programs and in stock option and stock award plans of the Company to the extent deemed appropriate by the Board of Directors of the Company in light of Executive's position in the Company. - 2 - Executive shall, in any event, on and as of the date of this Agreement, be granted 15,625 shares of Restricted Stock of the Company in accordance with the terms of the Company's 1982 Long-Term Performance Incentive Plan, as amended, (the "Plan"). The restriction on the Restricted Stock granted hereunder shall lapse in installments over a period of five years as follows: 25% as such shares of Restricted Stock shall vest on December 1, 1994 and an additional 25% of such shares of Restricted Stock shall vest on each of the third, fourth and fifth anniversaries of the date hereof. Executive shall also be granted 7,812.50 Performance Units pursuant to the Plan and the Performance Period (as defined in the Plan) applicable thereto shall expire not later than December 1, 1997. In the event of Executive's death or disability prior to the complete vesting of these awards, such Restricted Stock and Performance Units will continue to vest as if Executive were still fully employed by the Company. (d) Other Benefits Plans. Executive shall participate in and receive benefits under and in accordance with the provisions of any employee benefit plan adopted or to be adopted by the Company and which is generally applicable to senior executive officers of the Company. 4. PAID TIME OFF Executive shall be entitled to paid time off of not less than five weeks during each year. 5. REIMBURSEMENT FOR EXPENSES. Executive shall be entitled to incur on behalf of the Company reasonable and necessary expenses in connection with his duties and the Company shall pay for or reimburse Executive for all such expenses. - 3 - 6. TERMINATION. (a) Executive's employment under this Agreement shall terminate: (i) upon the death of Executive; (ii) upon written notice from the Company to Executive in the event of an illness or other cause incapacitating him from performing his duties for 180 consecutive days or for an aggregate of 180 days in any period of nine consecutive months; (iii) upon written notice from the Company in the event that Executive commits any felonious act, is guilty of gross negligence in the performance of his duties, or willfully fails or refuses to comply with the reasonable directions of the Board of Directors of the Company, which notice shall set forth the effective date of termination of this Agreement; (iv) upon seven days written notice to the other party, either party to this Agreement shall have the right to terminate this Agreement prior to the expiration of the Term hereof, for any reason whatsoever. (v) upon seven days written notice to the other party, at any time during the twelve month period following any month in which a change in the effective voting control of the Company shall have occurred, either party shall have the right to terminate this Agreement prior to the expiration of the Term hereof, for any reason whatsoever. A change in the effective voting control of the Company shall be deemed to have occurred upon the earliest to happen of the following: A. any person or group of related or affiliated persons shall have become the beneficial owner or owners of 40% or more of the outstanding Common Stock of the Company; - 4 - B. there shall have occurred a merger or consolidation in which the Company is not the survivor or in which holders of Common Stock of the Company shall have become entitled to receive cash, securities of the Company other than voting Common Stock or securities of any other person; or C. at any time a majority of the members of the Board of Directors of the Company shall be persons who were elected at one or more meetings held, or by one or more consents given, by the stockholders of the Company during the preceding twelve months and who were not members of the Board of Directors twelve months prior to that time. (b) Upon the termination of employment: (i) pursuant to Section 6(a)(i) because of Executive's death, Executive's estate shall be entitled to receive within 30 days of the termination date base salary payments to the effective date of termination, a pro rata portion of such bonus, if any, as the Board of Directors of the Company shall determine would have been payable to Executive in respect of the fiscal year in which Executive dies and such other benefits, if any, as may be provided to Executive or his successors or beneficiaries under the terms (as modified by Section 3(c) hereof) of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant; - 5 - (ii) pursuant to Section 6(a)(ii) because of Executive's disability, as defined thereunder, Executive shall be entitled to receive disability compensation in accordance with the terms and conditions of the Company's disability insurance program, plus such other benefits, if any, as may be provided to him or his successors or beneficiaries under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant; (iii) pursuant to Section 6(a)(iii), because of Executive's wrongful conduct, as defined thereunder, Executive shall be entitled to receive on the termination date set forth in the notice given pursuant to that Section his base salary to the date of termination and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of employment under the circumstances provided for in Section 6(a)(iii). (iv) pursuant to Section 6(a)(iv), if (x) Executive gives such notice of termination, Executive shall be entitled to receive his base salary to date of termination as set forth in the notice given pursuant to that Section and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of his employment, or (y) the Company gives such notice of termination, Executive shall be entitled to receive his base salary payments as is in effect on the date of such termination for the lesser of (1) the remaining portion of - 6 - the unexpired Term or (2) two years after the date of such termination. In addition, Executive shall be entitled to receive a pro rata portion of such bonus, if any, as the Board of Directors of the Company shall determine would have been payable to Executive in respect of the fiscal year in which Executive terminates employment, and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of employment. (v) pursuant to an election by the Company or by Executive under Section 6(a)(v) during the twelve month period following the month in which a change in the effective voting control of the Company shall have occurred, Executive (or his successors, representatives or beneficiaries if Executive shall die or become incapacitated) shall be entitled to receive his base salary (at the level in effect on the giving of notice pursuant to Section 6(a)(v)) for the lesser of (1) the remaining portion of the unexpired Term or (2) two years after the date of such termination. In addition, Executive shall be entitled to receive a pro rata portion of such bonus which would be payable to Executive, in respect of the year in which notice shall have been given, if Executive had achieved target performance for Executive's salary grade, as applied to Executive's base salary on the date of the giving of notice by the Company or Executive, as the case may be, plus such other benefits, if any, as may be provided to him or his successors, representatives or beneficiaries under the terms of benefit, incentive, option, stock award and other programs of the Company in which he may be or have been a participant. - 7 - (vi) If, on the date of the giving of notice by the Company or Executive pursuant to Section 6(a)(v), Executive shall have unexercisable stock options or restricted stock awards still subject to restrictions, then all such options shall be deemed to be exercisable and all restrictions in respect of such restricted stock awards shall be deemed to have been satisfied and lapsed ten days before the effective date of termination. If, on the date of the giving of notice pursuant to Section 6(a)(v), Executive shall have performance-related units or awards in respect of which the period over which performance is to be based has not expired, the period of performance shall be deemed to have expired at the end of the month preceding the effective date of termination and Executive shall be entitled to receive the value of such units or awards at the end of such month on the basis on an equitable prorating of the performance period, performance targets and award amounts. 7. UNFAIR COMPETITION. In the course of his employment, Executive will have access to confidential records and information of the Company and its subsidiaries and affiliates. During his employment by the Company or any of its subsidiaries, and thereafter, Executive will not directly or indirectly misuse any such information or disclose the same except in accordance with his duties under this Agreement. After Executive terminates employment with the Company, Executive will not solicit or otherwise encourage other officers or employees of the company or its subsidiaries or affiliates to leave their employment in order to join Executive in any business endeavor nor shall Executive aid, promote, encourage or be a party to any acts, the effect of which would divert, diminish or prejudice the goodwill or - 8 - business of the Company or any of its subsidiaries or affiliates. The provisions of this Section 7 shall survive the expiration or termination, for any reason, of this Agreement or Executive's employment. Executive understands that for the violation of the foregoing provisions, the Company may seek injunctive relief to protect its interest, in addition to damages. During the Term and for a period of two years thereafter, Executive agrees not to carry on in any state of the United States of America or in any foreign country in which the Company or any subsidiary or affiliate thereof is conducting business, either for himself or as a member of any partnership, or as a stockholder, director, officer, agent, or employee of another person, firm or corporation or otherwise, any business similar to that being carried on by the Company (or any subsidiary or affiliate thereof) if such business is materially detrimental to the Company or any such subsidiary, provided, however, that the mere ownership by Executive of not more than 5% of any corporation or similar business venture shall not be deemed to be a violation of this covenant. 8. MERGER OR REORGANIZATION. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company or by any merger or consolidation where the Company is not the surviving or resulting corporation, or upon any transfer of all or substantially all of the assets of the Company. In the event of any such merger or consolidation or transfer of assets, the provisions of this Agreement shall be binding and shall inure to the benefit of the surviving or resulting corporation or the corporation to which such assets shall be transferred. - 9 - 9. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, the breach thereof or the coverage of this arbitration provision shall be settled by arbitration which shall be in accordance with the Commercial Arbitration Rules of the American Arbitration Association as such rules shall be in effect on the date of delivery of demand for arbitration. The arbitration of such issues, including the determination of the amount of any damages suffered by either party hereto by reason of the acts or omissions of the other, shall be to the exclusion of any court of law. The decision of the arbitrators or a majority of them shall be final and binding on both parties and their respective heirs, executors, administrators, successors and assigns. Judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction. There shall be three arbitrators, one to be chosen directly by each party at will and the third arbitrator to be selected by the two arbitrators so chosen. Each party shall pay the fees of the arbitrator selected by him and of his own attorneys and the expenses of his witnesses and all other expenses connected with the presentation of his case. All other costs of the arbitration, including the cost of the record or transcripts thereof, if any, administrative fees, and all other fees and costs shall be borne equally by the parties. 10. NON-ASSIGNABILITY. The obligations of Executive hereunder are personal and may not be assigned or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. - 10 - 11. AMENDMENT. This instrument contains the entire agreement of the parties. It may not be changed orally but only by a written agreement executed by both of the parties hereto. 12. NOTICES. All notices which a party is required or may desire to give to the other party under or in connection with this Agreement shall be sufficient if given by addressing same to the other party as follows: (a) if to Executive to: Larry D. Hollen 10 Fernhurst Farmington, Connecticut 06032 (b) if to the Company to: Orion Capital Corporation 600 Fifth Avenue New York, New York 10020 Attn: Secretary or at such other place as may be designed in writing by like notice. Any notice shall be deemed to have been delivered when addressed as required herein and deposited, postage prepaid, in the United States Mail. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date hereinabove set forth. ORION CAPITAL CORPORATION By: ------------------------------------ Alan R. Gruber Chairman and Chief Executive Officer EXECUTIVE By: --------------------------------- Larry D. Hollen - 11 - EX-10 3 Exhibit 10(vii) Amended and Restated Employment Agreement THIS EMPLOYMENT AGREEMENT, initially dated as of the 19th day of July, 1994 and amended and restated hereby as of December 6, 1996 (the "Agreement"), between Orion Capital Corporation, a Delaware corporation (the "Company"), and Raymond W. Jacobsen ("Executive"); WHEREAS, the Company and Executive hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive to render services as Senior Vice President of the Company and President and Chief Executive Officer of the EBI Companies ("EBI"), subsidiaries of the Company. The Executive shall assume such responsibilities, perform such duties and have such authority as may from time to time be assigned, delegated or limited by the Company's Board of Directors and Executive shall provide such other services in the future to the Company and its subsidiaries as the Executive and the Company may mutually agree. The Company agrees that Executive will be located, and will render such services (subject to necessary and appropriate business related travel), at EBI's offices in Milwaukee, Wisconsin or such other location as the Executive and the Company may mutually agree. Executive hereby accepts such employment and agrees to render his services fully, faithfully, and to the best of his ability, subject to the direction and control of the Board of Directors of the Company. Executive's services shall be exclusive to the Company, provided that, upon prior written approval of the Company, the Executive may serve as a member of the board of directors of other corporations. 2. TERM. The term of this Agreement shall be for a period of five years commencing on July 19, 1994 and ending on July 18, 1999 (the "Term"). Such Term shall be automatically extended, on July 20, 1997, and at the end of each day thereafter, for one additional day unless the Company or the Executive shall at any time give written notice to the other of its or his, as the case may be, intention not to extend such Term, it being the intention of the parties that this Agreement shall, on and after July 20, 1997, at all times have an unexpired term of at least two years unless either party shall have given notice of termination in accordance with the provisions hereof. 3. COMPENSATION AND BENEFITS. (a) Base Salary. For the services to be rendered by Executive under this Agreement, the Company shall pay to Executive an annual base salary at the rate of not less than $170,000, payable in equal semi-monthly installments or on such other basis as may be applicable to senior executive officers of the Company, less income tax withholdings and other normal employee deductions. Executive will be entitled to receive such increases in his annual base salary as may be approved by the Company. (b) Bonus. Executive shall be entitled to participate in any bonus plan in effect for senior executive officers of the Company and shall receive bonus compensation in accordance therewith as determined by the Board of Directors of the Company or any Committee thereof designated by it. - 2 - (c) Incentive Compensation and Stock Options. Executive shall participate in long-term and short-term incentive and deferred compensation programs and in stock option and stock award plans of the Company to the extent deemed appropriate by the Board of Directors of the Company in light of Executive's position in the Company. Executive shall, in any event, on and as of the date of this Agreement, be granted 8,000 shares of Restricted Stock of the Company in accordance with the terms of the Company's 1982 Long-Term Performance Incentive Plan, as amended, (the "Plan"). The restriction on the Restricted Stock granted hereunder shall lapse in installments over a period of five years as follows: 25% as such shares of Restricted Stock shall vest on July 19, 1996 and an additional 25% of such shares of Restricted Stock shall vest on each of the third, fourth and fifth anniversaries of the date hereof. Executive shall also be granted 4,000 Performance Units pursuant to the Plan and the Performance Period (as defined in the Plan) applicable thereto shall expire not later than July 18,1999. In the event of Executive's death or disability prior to the complete vesting of these awards, such Restricted Stock and Performance Units will continue to vest as if Executive were still fully employed by the Company. (d) Other Benefits Plans. Executive shall participate in and receive benefits under and in accordance with the provisions of any employee benefit plan adopted or to be adopted by the Company and which is generally applicable to senior executive officers of the Company. 4. PAID TIME OFF Executive shall be entitled to paid time off of not less than five weeks during each year. - 3 - 5. REIMBURSEMENT FOR EXPENSES. Executive shall be entitled to incur on behalf of the Company reasonable and necessary expenses in connection with his duties and the Company shall pay for or reimburse Executive for all such expenses. 6. TERMINATION. (a) Executive's employment under this Agreement shall terminate: (i) upon the death of Executive; (ii) upon written notice from the Company to Executive in the event of an illness or other cause incapacitating him from performing his duties for 180 consecutive days or for an aggregate of 180 days in any period of nine consecutive months; (iii) upon written notice from the Company in the event that Executive commits any felonious act, is guilty of gross negligence in the performance of his duties, or willfully fails or refuses to comply with the reasonable directions of the Board of Directors of the Company, which notice shall set forth the effective date of termination of this Agreement; (iv) upon seven days written notice to the other party, either party to this Agreement shall have the right to terminate this Agreement prior to the expiration of the Term hereof, for any reason whatsoever. (v) upon seven days written notice to the other party, at any time during the twelve month period following any month in which a change in the effective voting control of the Company shall have occurred, either party shall have the right to terminate this Agreement prior to the expiration of the Term hereof, for any reason whatsoever. A change in the effective voting control of the Company shall be deemed to have occurred - 4 - upon the earliest to happen of the following: A. any person or group of related or affiliated persons shall have become the beneficial owner or owners of 40% or more of the outstanding Common Stock of the Company; B. there shall have occurred a merger or consolidation in which the Company is not the survivor or in which holders of Common Stock of the Company shall have become entitled to receive cash, securities of the Company other than voting Common Stock or securities of any other person; or C. at any time a majority of the members of the Board of Directors of the Company shall be persons who were elected at one or more meetings held, or by one or more consents given, by the stockholders of the Company during the preceding twelve months and who were not members of the Board of Directors twelve months prior to that time. (b) Upon the termination of employment: (i) pursuant to Section 6(a)(i) because of Executive's death, Executive's estate shall be entitled to receive within 30 days of the termination date base salary payments to the effective date of termination, a pro rata portion of such bonus, if any, as the Board of Directors of the Company shall determine would have been payable to Executive in respect of the fiscal year in which Executive dies and such other benefits, if any, as may be provided to Executive or his successors or beneficiaries under the terms (as modified by Section 3(c) hereof) of retirement, benefit, incentive, option, stock award and other programs of - 5 - the Company in which he may be or may have been a participant; (ii) pursuant to Section 6(a)(ii) because of Executive's disability, as defined thereunder, Executive shall be entitled to receive disability compensation in accordance with the terms and conditions of the Company's disability insurance program, plus such other benefits, if any, as may be provided to him or his successors or beneficiaries under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant; (iii) pursuant to Section 6(a)(iii), because of Executive's wrongful conduct, as defined thereunder, Executive shall be entitled to receive on the termination date set forth in the notice given pursuant to that Section his base salary to the date of termination and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of employment under the circumstances provided for in Section 6(a)(iii). (iv) pursuant to Section 6(a)(iv), if (x) Executive gives such notice of termination, Executive shall be entitled to receive his base salary to date of termination as set forth in the notice given pursuant to that Section and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of his employment, or (y) the Company gives such notice of termination, Executive shall be entitled to receive his base salary payments as is in effect on the date of such termination for the lesser of (1) the remaining portion of - 6 - the unexpired Term or (2) two years after the date of such termination. In addition, Executive shall be entitled to receive a pro rata portion of such bonus, if any, as the Board of Directors of the Company shall determine would have been payable to Executive in respect of the fiscal year in which Executive terminates employment, and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of employment. (v) pursuant to an election by the Company or by Executive under Section 6(a)(v) during the twelve month period following the month in which a change in the effective voting control of the Company shall have occurred, Executive (or his successors, representatives or beneficiaries if Executive shall die or become incapacitated) shall be entitled to receive his base salary (at the level in effect on the giving of notice pursuant to Section 6(a)(v)) for the lesser of (1) the remaining portion of the unexpired Term or (2) two years after the date of such termination. In addition, Executive shall be entitled to receive a pro rata portion of such bonus which would be payable to Executive, in respect of the year in which notice shall have been given, if Executive had achieved target performance for Executive's salary grade, as applied to Executive's base salary on the date of the giving of notice by the Company or Executive, as the case may be, plus such other benefits, if any, as may be provided to him or his successors, representatives or beneficiaries under the terms of benefit, incentive, option, stock award and other programs of the Company in which he may be or have been a participant. - 7 - (vi) If, on the date of the giving of notice by the Company or Executive pursuant to Section 6(a)(v), Executive shall have unexercisable stock options or restricted stock awards still subject to restrictions, then all such options shall be deemed to be exercisable and all restrictions in respect of such restricted stock awards shall be deemed to have been satisfied and lapsed ten days before the effective date of termination. If, on the date of the giving of notice pursuant to Section 6(a)(v), Executive shall have performance-related units or awards in respect of which the period over which performance is to be based has not expired, the period of performance shall be deemed to have expired at the end of the month preceding the effective date of termination and Executive shall be entitled to receive the value of such units or awards at the end of such month on the basis on an equitable prorating of the performance period, performance targets and award amounts. 7. UNFAIR COMPETITION. In the course of his employment, Executive will have access to confidential records and information of the Company and its subsidiaries and affiliates. During his employment by the Company or any of its subsidiaries, and thereafter, Executive will not directly or indirectly misuse any such information or disclose the same except in accordance with his duties under this Agreement. After Executive terminates employment with the Company, Executive will not solicit or otherwise encourage other officers or employees of the company or its subsidiaries or affiliates to leave their employment in order to join Executive in any business endeavor or shall Executive aid, promote, encourage or be a party to any acts, the effect of which would divert, diminish or prejudice the goodwill or business of the Company or any of its subsidiaries or affiliates. The - 8 - provisions of this Section 7 shall survive the expiration or termination, for any reason, of this Agreement or Executive's employment. Executive understands that for the violation of the foregoing provisions, the Company may seek injunctive relief to protect its interest, in addition to damages. During the Term and for a period of two years thereafter, Executive agrees not to carry on in any state of the United States of America or in any foreign country in which the Company or any subsidiary or affiliate thereof is conducting business, either for himself or as a member of any partnership, or as a stockholder, director, officer, agent, or employee of another person, firm or corporation or otherwise, any business similar to that being carried on by the Company (or any subsidiary or affiliate thereof) if such business is materially detrimental to the Company r any such subsidiary, provided, however, that the mere ownership by Executive of not more than 5% of any corporation or similar business venture shall not be deemed to be a violation of this covenant. 8. MERGER OR REORGANIZATION. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company or by any merger or consolidation where the Company is not the surviving or resulting corporation, or upon any transfer of all or substantially all of the assets of the Company. In the event of any such merger or consolidation or transfer of assets, the provisions of this Agreement shall be binding and shall inure to the benefit of the surviving or resulting corporation or the corporation to which such assets shall be transferred. 9. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, the breach thereof or the coverage of this arbitration provision - 9 - shall be settled by arbitration which shall be in accordance with the Arbitration Rules of the American Arbitration Association as such rules shall be in effect on the date of delivery of demand for arbitration. The arbitration of such issues, including the determination of the amount of any damages suffered by either party hereto by reason of the acts or omissions of the other, shall be to the exclusion of any court of law. The decision of the arbitrators or a majority of them shall be final and binding on both parties and their respective heirs, executors, administrators, successors and assigns. Judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction. There shall be three arbitrators, one to be chosen directly by each party at will and the third arbitrator to be selected by the two arbitrators so chosen. Each party shall pay the fees of the arbitrator selected by him and of his own attorneys and the expenses of his witnesses and all other expenses connected with the presentation of his case. All other costs of the arbitration, including the cost of the record or transcripts thereof, if any, administrative fees, and all other fees and costs shall be borne equally by the parties. 10. NON-ASSIGNABILITY. The obligations of Executive hereunder are personal and may not be assigned or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. 11. AMENDMENT. This instrument contains the entire agreement of the parties. It may not be changed orally but only by a written agreement executed by both of the parties hereto. - 10 - 12. NOTICES. All notices which a party is required or may desire to give to the other party under or in connection with this Agreement shall be sufficient if given by addressing same to the other party as follows: (a) if to Executive to: Raymond W. Jacobsen 730 North Plankinton Avenue, Apt. 2D Brookfield, Wisconsin 53203 (b) if to the Company to: Orion Capital Corporation 600 Fifth Avenue New York, New York 10020 Attn: Secretary or at such other place as may be designed in writing by like notice. Any notice shall be deemed to have been delivered when addressed as required herein and deposited, postage prepaid, in the United States Mail. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date hereinabove set forth. ORION CAPITAL CORPORATION By: ----------------------------------- Alan R. Gruber Chairman and Chief Executive Officer EXECUTIVE By: ----------------------------------- Raymond W. Jacobsen - 10 - EX-10 4 Exhibit 10(viii) Employment Agreement THIS EMPLOYMENT AGREEMENT, dated as of the 31st day of October, 1995 (the "Agreement"), between Orion Capital Corporation, a Delaware corporation (the "Company"), and W. Marston Becker ("Executive"); WHEREAS, the Company and Executive hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive to render services as Senior Vice President of the Company and President and Chief Executive Officer of the DPIC Companies ("DPIC"), subsidiaries of the Company. The Executive shall assume such responsibilities, perform such duties and have such authority as may from time to time be assigned, delegated or limited by the Company's Board of Directors and Executive shall provide such other services in the future to the Company and its subsidiaries as the Executive and the Company may mutually agree. The Company agrees that Executive will be located, and will render such services (subject to necessary and appropriate business related travel), at DPIC's offices in Monterey, California or such other location as the Executive and the Company may mutually agree. Executive hereby accepts such employment and agrees to render his services fully, faithfully, and to the best of his ability, subject to the direction and control of the Board of Directors of the Company. Executive's services shall be exclusive to the Company, provided that, upon the prior written approval of the Company, the Executive may serve as a member of the board of directors of other corporations. 2. TERM. The term of this Agreement shall be for a period of five years commencing on October 31, 1995 and ending on October 31, 2000 (the "Term"). Such Term shall be automatically extended, on October 31, 1998, and at the end of each day thereafter, for one additional day unless the Company or the Executive shall at any time give written notice to the other of its or his, as the case may be, intention not to extend such Term, it being the intention of the parties that this Agreement shall, on and after October 31, 1998, at all times have an unexpired term of at least two years unless either party shall have given notice of termination in accordance with the provisions hereof. 3. COMPENSATION AND BENEFITS. (a) Base Salary. For the services to be rendered by Executive under this Agreement, the Company shall pay to Executive an annual base salary at the rate of not less than $220,000, payable in equal semi-monthly installments or on such other basis as may be applicable to senior executive officers of the Company, less income tax withholdings and other normal employee deductions. Executive will be entitled to receive such increases in his annual base salary as may be approved by the Company. (b) Bonus. Executive shall be entitled to participate in any bonus plan in effect for senior executive officers of the Company and shall receive bonus compensation in accordance therewith as determined by the Board of Directors of the Company or any Committee thereof designated by it. (c) Incentive Compensation and Stock Options. Executive shall participate in long-term and short-term incentive and deferred compensation programs and in stock option and stock award plans of the Company to the extent deemed appropriate by the Board of - 2 - Directors of the Company in light of Executive's position in the Company. Executive shall, in any event, on and as of the date of this Agreement, be granted 7,500 shares of Restricted Stock of the Company in accordance with the terms of the Company's 1982 Long-Term Performance Incentive Plan, as amended, (the "Plan"). The restriction on the Restricted Stock granted hereunder shall lapse in installments over a period of five years as follows: 25% as such shares of Restricted Stock shall vest on October 31, 1997 and an additional 25% of such shares of Restricted Stock shall vest on each of the third, fourth and fifth anniversaries of the date hereof. Executive shall also be granted 3,750 Performance Units pursuant to the Plan and the Performance Period (as defined in the Plan) applicable thereto shall expire not later than October 31, 2000. In the event of Executive's death or disability prior to the complete vesting of these awards, such Restricted Stock and Performance Units will continue to vest as if Executive were still fully employed by the Company. (d) Other Benefits Plans. Executive shall participate in and receive benefits under and in accordance with the provisions of any employee benefit plan adopted or to be adopted by the Company and which is generally applicable to senior executive officers of the Company. 4. PAID TIME OFF. Executive shall be entitled to paid time off of not less than five weeks during each year. 5. REIMBURSEMENT FOR EXPENSES. Executive shall be entitled to incur on behalf of the Company reasonable and necessary expenses in connection with his duties and the Company shall pay for or reimburse Executive for all such expenses. - 3 - 6. TERMINATION. (a) Executive's employment under this Agreement shall terminate: (i) upon the death of Executive; (ii) upon written notice from the Company to Executive in the event of an illness or other cause incapacitating him from performing his duties for 180 consecutive days or for an aggregate of 180 days in any period of nine consecutive months; (iii) upon written notice from the Company in the event that Executive commits any felonious act, is guilty of gross negligence in the performance of his duties, or willfully fails or refuses to comply with the reasonable directions of the Board of Directors of the Company, which notice shall set forth the effective date of termination of this Agreement; (iv) upon seven days written notice to the other party, either party to this Agreement shall have the right to terminate this Agreement prior to the expiration of the Term hereof, for any reason whatsoever. (v) upon seven days written notice to the other party, at any time during the twelve month period following any month in which a change in the effective voting control of the Company shall have occurred, either party shall have the right to terminate this Agreement prior to the expiration of the Term hereof, for any reason whatsoever. A change in the effective voting control of the Company shall be deemed to have occurred upon the earliest to happen of the following: A. any person or group of related or affiliated persons shall have become the beneficial owner or owners of 40% or more of the outstanding Common Stock of the Company; B. there shall have occurred a merger or consolidation in which the Company is not the survivor or in which - 4 - holders of Common Stock of the Company shall have become entitled to receive cash, securities of the Company other than voting Common Stock or securities of any other person; or C. at any time a majority of the members of the Board of Directors of the Company shall be persons who were elected at one or more meetings held, or by one or more consents given, by the stockholders of the Company during the preceding twelve months and who were not members of the Board of Directors twelve months prior to that time. (b) Upon the termination of employment: (i) pursuant to Section 6(a)(i) because of Executive's death, Executive's estate shall be entitled to receive within 30 days of the termination date base salary payments to the effective date of termination, a pro rata portion of such bonus, if any, as the Board of Directors of the Company shall determine would have been payable to Executive in respect of the fiscal year in which Executive dies and such other benefits, if any, as may be provided to Executive or his successors or beneficiaries under the terms (as modified by Section 3(c) hereof) of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant; (ii) pursuant to Section 6(a)(ii) because of Executive's disability, as defined thereunder, Executive shall be entitled to receive disability compensation in accordance with the terms and conditions of the Company's disability insurance program, plus such other benefits, if any, as may be provided to him or his successors or beneficiaries under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant; - 5 - (iii) pursuant to Section 6(a)(iii) because of Executive's wrongful conduct, as defined thereunder, Executive shall be entitled to receive on the termination date set forth in the notice given pursuant to that Section his base salary to the date of termination and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of employment under the circumstances provided for in Section 6(a)(iii). (iv) pursuant to Section 6(a)(iv), if (x) Executive gives such notice of termination, Executive shall be entitled to receive his base salary to date of termination as set forth in the notice given pursuant to that Section and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of his employment, or (y) the Company gives such notice of termination, Executive shall be entitled to receive his base salary payments as is in effect on the date of such termination for the lesser of (1) the remaining portion of the unexpired Term or (2) two years after the date of such termination. In addition, Executive shall be entitled to receive a pro rata portion of such bonus, if any, as the Board of Directors of the Company shall determine would have been payable to Executive in respect of the fiscal year in which Executive terminates employment, and such other benefits, if any, as may be provided to him under the terms of retirement, benefit, incentive, option, stock award and other programs of the Company in which he may be or may have been a participant and to which he is then entitled upon termination of employment. - 6 - (v) pursuant to an election by the Company or by Executive under Section 6(a)(v) during the twelve month period following the month in which a change in the effective voting control of the Company shall have occurred, Executive (or his successors, representatives or beneficiaries if Executive shall die or become incapacitated) shall be entitled to receive his base salary (at the level in effect on the giving of notice pursuant to Section 6(a)(v)) for the lesser of (1) the remaining portion of the unexpired Term or (2) two years after the date of such termination. In addition, Executive shall be entitled to receive a pro rata portion of such bonus which would be payable to Executive, in respect of the year in which notice shall have been given, if Executive had achieved target performance for Executive's salary grade, as applied to Executive's base salary on the date of the giving of notice by the Company or Executive, as the case may be, plus such other benefits, if any, as may be provided to him or his successors, representatives or beneficiaries under the terms of benefit, incentive,option, stock award and other programs of the Company in which he may be or have been a participant. (vi) If, on the date of the giving of notice by the Company or Executive pursuant to Section 6(a)(v), Executive shall have unexercisable stock options, or restricted stock awards still subject to restrictions, then all such options shall be deemed to be exercisable and all restrictions in respect of such restricted stock awards shall be deemed to have been satisfied and lapsed ten days before the effective date of termination. If, on the date of the giving of notice pursuant to Section 6(a)(v), Executive shall have performance-related units or awards in respect of which the period over which performance is to be based has not - 7 - expired, the period of performance shall be deemed to have expired at the end of the month preceding the effective date of termination and Executive shall be entitled to receive the value of such units or awards at the end of such month on the basis on an equitable prorating of the performance period, performance targets and award amounts. 7. UNFAIR COMPETITION. In the course of his employment, Executive will have access to confidential records and information of the Company and its subsidiaries and affiliates. During his employment by the Company or any of its subsidiaries, and thereafter, Executive will not directly or indirectly misuse any such information or disclose the same except in accordance with his duties under this Agreement. After Executive terminates employment with the Company, Executive will not solicit or otherwise encourage other officers or employees of the Company or its subsidiaries or affiliates to leave their employment in order to join Executive in any business endeavor nor shall Executive aid, promote, encourage or be a party to any acts, the effect of which would divert, diminish or prejudice the goodwill or business of the Company or any of its subsidiaries or affiliates. The provisions of this Section 7 shall survive the expiration or termination, for any reason, of this Agreement or Executive's employment. Executive understands that for the violation of the foregoing provisions, the Company may seek injunctive relief to protect its interest, in addition to damages. During the Term and for a period of two years thereafter, Executive agrees not to carry on in any state of the United States of America or in any foreign country in which the Company or any subsidiary or affiliate thereof is conducting business, either for himself or as a member of any partnership, or as a stockholder, director, officer, agent, or - 8 - employee of another person, firm or corporation or otherwise, any business similar to that being carried on by the Company (or any subsidiary or affiliate thereof) if such business is materially detrimental to the Company or any such subsidiary, provided, however, that the mere ownership by Executive of not more than 5% of any corporation or similar business venture shall not be deemed to be a violation of this covenant. 8. MERGER OR REORGANIZATION. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company or by any merger or consolidation where the Company is not the surviving or resulting corporation, or upon any transfer of all or substantially all of the assets of the Company. In the event of any such merger or consolidation or transfer of assets, the provisions of this Agreement shall be binding and shall inure to the benefit of the surviving or resulting corporation or the corporation to which such assets shall be transferred. 9. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, the breach thereof or the coverage of this arbitration provision shall be settled by arbitration which shall be in accordance with the Commercial Arbitration Rules of the American Arbitration Association as such rules shall be in effect on the date of delivery of demand for arbitration. The arbitration of such issues, including the determination of the amount of any damages suffered by either party hereto by reason of the acts or omissions of the other, shall be to the exclusion of any court of law. The decision of the arbitrators or a majority of them shall be final and binding on both parties and their respective heirs, executors, administrators, successors and assigns. Judgement upon the award rendered - 9 - by the arbitrators may be entered in any court having jurisdiction. There shall be three arbitrators, one to be chosen directly by each party at will and the third arbitrator to be selected by the two arbitrators so chosen. Each party shall pay the fees of the arbitrator selected by him and of his own attorneys and the expenses of his witnesses and all other expenses connected with the presentation of his case. All other costs of the arbitration, including the cost of the record or transcripts thereof, if any, administrative fees, and all other fees and costs shall be borne equally by the parties. 10. NON-ASSIGNABILITY. The obligations of Executive hereunder are personal and may not be assigned or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. 11. AMENDMENT. This instrument contains the entire agreement of the parties. It may not be changed orally but only by a written agreement executed by both of the parties hereto. 12. NOTICES. All notices which a party is required or may desire to give to the other party under or in connection with this Agreement shall be sufficient if given by addressing same to the other party as follows: (a) if to Executive to: W. Marston Becker 8 Sleepy Hollow Estates Carmel Valley, CA 93924 (b) if to the Company to: Orion Capital Corporation 600 Fifth Avenue - 24th Floor New York, New York 10020 Attn: Secretary - 10 - or at such other place as may be designed in writing by like notice. Any notice shall be deemed to have been delivered when addressed as required herein and deposited, postage prepaid, in the United States Mail. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date hereinabove set forth. ORION CAPITAL CORPORATION By: --------------------------- Alan R. Gruber Chairman and Chief Executive Officer EXECUTIVE By: ------------------------------ W. Marston Becker - 11 - EX-10 5 Exhibit 10(xxvi) PURCHASE AGREEMENT BY AND BETWEEN SUN ALLIANCE USA INC. AND ORION CAPITAL CORPORATION Dated as of June 30, 1995 TABLE OF CONTENTS Page ----- I. THE TRANSACTION . . . . . . . . . . . . . . . . . 1 1.1 Purchase of Common Stock . . . . . . . . . 1 1.2 Consideration . . . . . . . . . . . . . . 1 II. THE CLOSING . . . . . . . . . . . . . . . . . . 2 2.1 Closing . . . . . . . . . . . . . . . . . . 2 III. REPRESENTATIONS AND WARRANTIES OF SUN . . . . . . 2 3.1 Organization and Good Standing. . . . . . 2 3.2 Capitalization . . . . . . . . . . . . . . 3 3.3 Regulatory Status . . . . . . . . . . . . 4 3.4 Authorization . . . . . . . . . . . . . . 4 3.5 Books and Records . . . . . . . . . . . . 5 3.6 No Adverse Change . . . . . . . . . . . . 5 3.7 Litigation and Other Proceedings . . . . 5 3.8 Title to Properties . . . . . . . . . . . 6 3.9 No Materially Adverse Agreements . . . . 7 3.10 No Conflicts . . . . . . . . . . . . . . 8 3.11 Taxes . . . . . . . . . . . . . . . . . . 9 3.12 Investments . . . . . . . . . . . . . . . 12 3.13 Employment Matters . . . . . . . . . . . 12 3.14 Employee Benefit Plans; ERISA . . . . . . 13 3.15 Contracts . . . . . . . . . . . . . . . . 17 - i - 3.16 Capital Expenditures . . . . . . . . . . 18 3.17 Banks . . . . . . . . . . . . . . . . . . 18 3.18 Agents and Brokers . . . . . . . . . . . 18 3.19 Approved Forms of Policies . . . . . . . 18 3.20 Insurance . . . . . . . . . . . . . . . . 19 3.21 Absence of Material Changes and Adverse Factors . . . . . . . . . . . . . 19 3.22 Environmental Matters . . . . . . . . . . 19 3.23 Finders and Brokers . . . . . . . . . . . 20 3.24 Disclosure . . . . . . . . . . . . . . . . 21 3.25 Canadian Bank Act . . . . . . . . . . . . 21 IV. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF ORION . . . . . . . . . . . . . . . 21 4.1 Organization and Standing . . . . . . . . 21 4.2 Certificate of Incorporation and . . . . . 21 By-Laws 4.3 Authority . . . . . . . . . . . . . . . . 21 4.4 Finders and Brokers . . . . . . . . . . . 22 4.5 Investor Status . . . . . . . . . . . . . 22 4.6 Bank or Banking Institutions . . . . . . . 22 V. COVENANTS OF ORION AND SUN . . . . . . . . . . . . 23 5.1 Access to Properties, Books and Records . . . . . . . . . . . . . . . . 23 5.2 Conduct of Business . . . . . . . . . . . 23 - ii - 5.3 Regulatory and Other Filings and Approvals . . . . . . . . . . . . . . . . 27 5.4 Premerger Notification and Clearance . . . 27 5.5 Bermuda Company . . . . . . . . . . . . . 28 5.6 Further Assurances . . . . . . . . . . . . 29 5.7 Pension Plan Matters . . . . . . . . . . . 29 5.8 Tax Matters . . . . . . . . . . . . . . . 31 VI. AGREEMENTS WITH RESPECT TO POOL OPERATION . . . . . . . . . . . . . . . . 36 6.1 Pool Participations; Reinsurance . . . . . 36 6.2 Underwriting Operations of the Pool . . . 39 VII. CONDITIONS TO OBLIGATIONS OF ORION . . . . . . . 43 7.1 Covenants . . . . . . . . . . . . . . . . 43 7.2 Representations and Warranties . . . . . . 43 7.3 Absence of Litigation and Required Regulatory Approvals . . . . . . . . . . . 43 7.4 Premerger Notification . . . . . . . . . . 44 7.5 No Material Adverse Effect . . . . . . . . 44 7.6 Employment and Consulting Agreements . . . 44 7.7 Management and Reinsurance Agreements . . . 44 7.8 Unfair Competition and Confidentiality Agreements . . . . . . . . . . . . . . . 44 7.9 Opinion of Counsel for Sun and McGee . . . 45 - iii - VIII. CONDITIONS TO OBLIGATIONS OF SUN . . . . . . . 45 8.1 Covenants . . . . . . . . . . . . . . . 45 8.2 Representations and Warranties . . . . . 45 8.3 Absence of Litigation and Required Regulatory Approvals . . . . . . . . . 45 8.4 Premerger Notification . . . . . . . . . 46 8.5 Management and Reinsurance Agreements . . 46 8.6 Opinion of Counsel for Orion . . . . . . 46 IX. TERMINATION . . . . . . . . . . . . . . . . . . 46 9.1 Termination . . . . . . . . . . . . . . . 46 9.2 Effect of Termination . . . . . . . . . . 47 9.3 Conduct Following Termination . . . . . . 47 X. AMENDMENT; WAIVERS . . . . . . . . . . . . . . . . 47 10.1 Amendments, Modifications, Etc. . . . . . 47 10.2 Waivers . . . . . . . . . . . . . . . . . 48 XI. DEFINED TERMS . . . . . . . . . . . . . . . . . . 48 XII. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . 52 12.1 Expenses . . . . . . . . . . . . . . . . 52 12.2 Notices . . . . . . . . . . . . . . . . 52 12.3 Entire Agreement . . . . . . . . . . . . 53 12.4 No Assignment . . . . . . . . . . . . . . 53 12.5 Survival of Representations and Warranties and Covenants . . . . . . . . 54 - iv - 12.6 Governing Law . . . . . . . . . . . . . . 54 12.7 Dispute Resolution . . . . . . . . . . . 54 12.8 Press Releases . . . . . . . . . . . . . 55 12.9 Counterparts . . . . . . . . . . . . . . 55 12.10 Headings . . . . . . . . . . . . . . . . 55 EXHIBITS - -------- Exhibit A - Bermuda Management Agreement Exhibit B - Quota Share Retrocession Agreement in Respect of Period From January 1, 1995 to December 31, 1995 Exhibit C - Pool Management Agreement Exhibit D - Option Agreement in Respect of Sun Bermuda Exhibit E-1 - Employment Continuation Agreement Exhibit E-2 - Consulting Agreement Exhibit F - Agreement With Respect To Confidentiality and Competition SCHEDULES - --------- Schedule 3.2 Capitalization of McGee and Subsidiaries Schedule 3.7 Litigation and Other Proceedings Schedule 3.8 Properties of McGee Schedule 3.10 Consents and Approvals of Sun Schedule 3.12 Investments Schedule 3.13 Employment Matters - v - Schedule 3.14 ERISA Schedule 3.15 Contracts Schedule 3.16 Capital Expenditures Schedule 3.17 Banks Schedule 3.18 Agents and Brokers Schedule 3.20 Insurance Schedule 4.3 Consents and Approvals of Orion Schedule 5.2 Conduct of Business Schedule 6.2 Business Plan Outline Schedule 11 Syndicates - vi - AGREEMENT (the "Agreement"), dated June 30, 1995, by and between ORION CAPITAL CORPORATION, a Delaware corporation ("Orion"), as purchaser, and SUN ALLIANCE USA INC., a New York corporation ("Sun") as seller, W I T N E S S E T H: - - - - - - - - - - WHEREAS, Sun is the direct or indirect owner of 100% of the outstanding shares of capital stock of each of Phoenix Assurance Company of New York, a New Hampshire corporation ("Phoenix") and Marine Indemnity Insurance Company of America, a New York corporation ("Marine"); and WHEREAS, Sun Alliance Insurance Overseas Limited, an affiliate of Sun, owns 100% of the capital stock of The London Assurance, an English corporation, the Canadian Branch of which is hereinafter referred to as "London"; and WHEREAS, Wm. H. McGee & Co., Inc. ("McGee") is a corporation duly organized and validly existing under the laws of the State of New York, having outstanding capital stock consisting of 4,400 shares of common stock, without par value (the "Common Stock"); and WHEREAS, Sun and Phoenix own in the aggregate 100% of the Common Stock, all of which is to be sold to and purchased by Orion pursuant hereto; NOW, THEREFORE, the parties hereto agree as follows, intending that defined terms used herein shall have the meanings set forth in Article XI: I. THE TRANSACTION ---------------- Section 0.1 PURCHASE OF COMMON STOCK. Upon the terms and subject to all of the conditions set forth herein, Sun agrees to sell, and to cause Phoenix to sell, to Orion and Orion agrees to acquire from Sun and Phoenix on the Closing Date 100% of the Common Stock. Section 0.2 CONSIDERATION. In full consideration for the sale of the Common Stock by Sun and Phoenix to Orion provided for herein, together with the other undertakings and commitments made and delivered by Sun to Orion herein, at the Closing Orion shall deliver to Sun the sum of Seventeen Million and 00/100 ($17,000,000.00) Dollars in immediately available funds and shall deliver to Phoenix the sum of Five Million and 00/100 ($5,000,000) Dollars in immediately available funds. II. THE CLOSING ------------ Section 1.1 CLOSING. The closing of the transactions provided for herein (the "Closing") shall occur at the offices of Sun at 10 East 50th Street in New York City or at such other place as shall be determined by Orion and Sun, on June 30, 1995; provided, however, that if any of the conditions provided for in Articles VII and VIII hereof shall not have been met or waived by Sun or by Orion, as the case may be, by the scheduled Closing, then the party which is unable to meet such condition or conditions shall be entitled to postpone the Closing by notice to the other party to such effect until such condition or conditions shall have been met (which such party will seek to cause to happen at the earliest practicable date) or waived (such postponed Closing to be held on five business days notice from the postponing party to the other party), but in no event shall such postponements extend past August 15, 1995. At the Closing, Sun and Orion shall deliver, or cause to be delivered, to the other such certificates, receipts or other documents or instruments, in addition to those specifically provided for herein, as may reasonably be requested by the other and as are customary for transactions of the type contemplated hereunder. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." III. REPRESENTATIONS AND WARRANTIES OF SUN -------------------------------------- Sun represents and warrants to Orion that: 2.1 ORGANIZATION AND GOOD STANDING. McGee is a corporation duly organized and existing and in good standing under the laws of the State of New York, has the corporate power to carry - 2 - on its business as it is now being conducted and is duly qualified to do business as a foreign corporation in each jurisdiction in which such qualification is required and where the failure so to qualify would have a material adverse effect on the business, properties or financial condition of McGee and its Subsidiaries taken as a whole or the ability of any of them to carry on the business of the Pool (a "Material Adverse Effect"). Each Subsidiary of McGee is a corporation duly organized and existing and in good standing under the laws of its jurisdiction of incorporation and has the corporate power to carry on its business as it is now being conducted and is duly qualified to do business as a foreign corporation in each jurisdiction in which such qualification is required and where the failure so to qualify would have a Material Adverse Effect. To Sun's Knowledge, Sun has heretofore made available to Orion true and complete copies of (a) the Certificate of Incorporation and By-laws of McGee and each of its Subsidiaries, (b) all minutes of the meetings and copies of resolutions of stockholders, the board of directors and each committee of the board of directors of McGee and each of its Subsidiaries held since the date of its incorporation or organization and (c) all powers of attorney, if any, issued by McGee or any of its Subsidiaries. Section 2.2 CAPITALIZATION. McGee has an authorized capital stock consisting of 11,000 shares of Common Stock, without par value, of which, as of the date hereof, 4,400 shares are issued and outstanding. No shares of McGee Common Stock are held in treasury. All of the issued and outstanding stock of McGee is duly authorized, validly issued, fully paid and non-assessable and is owned by Sun and Phoenix as set forth in Schedule 3.2 hereto, free and clear (except as otherwise shown on Schedule 3.2) of any and all claims, liens, restrictions, pledges, charges, rights of third parties or other encumbrances. Neither Sun nor McGee is a party to or is bound by any agreement or has since September 8, 1987 (i) made any commitment to sell or issue any securities of McGee other than the Common Stock which is the subject of this Agreement, or (ii) taken any corporate action to approve, or in contemplation of, any of the foregoing except for the approval of this Agreement. Holders of Common Stock have no preemptive rights and the Common Stock is subject to no voting trust, proxy or similar agreement. Schedule 3.2 correctly identifies each of McGee's Subsidiaries, its jurisdiction of incorporation and the percentage of its voting stock owned by McGee and each other Subsidiary. McGee is the legal and beneficial owner of all of the shares of voting stock it purports to own of each Subsidiary of McGee, and such ownership is - 3 - free and clear (except as otherwise shown on Schedule 3.2) of any and all claims, liens, restrictions, pledges, charges, rights of third parties or other encumbrances. All such shares have been duly authorized, validly issued and are fully paid and non-assessable. No Subsidiary of McGee has any common or preferred stock authorized or outstanding other than as set forth on Schedule 3.2 and neither McGee nor Sun nor any such Subsidiary is a party to or is bound by any agreement or commitment to sell or issue any securities of any Subsidiary of McGee or has taken any corporate action to approve, or in contemplation of, any of the foregoing. Section 2.3 REGULATORY STATUS. To Sun's Knowledge, McGee and each of its Subsidiaries has (and has caused each of its officers and employees to have) all requisite power and authority, and all necessary licenses, permits, franchises and other governmental authorizations necessary to own and operate its properties and to carry on its business as now conducted. To Sun's Knowledge, all filings required to have been made with any insurance or other regulatory agency by McGee or any of its Subsidiaries (whether on its own behalf or on behalf of the Pool) have been properly prepared and duly and timely filed except where the failure to have made such filings could not reasonably be expected to have a Material Adverse Effect. Such filings made since January, 1990 have been delivered by Sun to Orion or made available for inspection, or copies thereof have been sent by Sun or made available to Orion. Immediately after, and after giving effect to, the execution and delivery of this Agreement, McGee and each of its Subsidiaries will be in compliance with each law, rule, regulation, ordinance, code, order, judgment and decree applicable to it or affecting its business, property or financial affairs, failure to comply with which could reasonably be expected to have a Material Adverse Effect. Section 2.4 AUTHORIZATION. (a) This Agreement has been duly authorized by all necessary corporate action of Sun and Phoenix. Neither this Agreement nor any of the transactions provided for herein violates any provision of the Certificate of Incorporation or By-Laws of Sun or McGee or any Subsidiary of McGee or any agreement by which any of them or any of their respective properties is bound. This Agreement will, when duly executed and delivered, be a valid and binding agreement of Sun, enforceable against Sun in accordance with its terms, except as limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' - 4 - rights generally, and except that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the equitable discretion of the court before which any proceeding therefor may be brought. (b) Each of the Ancillary Agreements to which Phoenix, London, Marine or Sun Bermuda is a party has been or, prior to the Closing, will be duly authorized by all necessary corporate action of Phoenix, London, Marine or Sun Bermuda, as the case may be. None of the Ancillary Agreements to which any such Subsidiary of Sun is a party, nor any of the transactions provided for therein, violates any provision of the Certificate of Incorporation, or similar charter document, or By-Laws of such Subsidiary or any agreement by which such Subsidiary or its properties is bound. Each of the Ancillary Agreements to which Phoenix, London, Marine or Sun Bermuda is a party will, when duly executed and delivered, be a valid and binding agreement of Phoenix, London, Marine or Sun Bermuda, as the case may be, enforceable against it in accordance with the terms thereof, except as limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally, and except that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the equitable discretion of the court before which any proceeding therefor may be brought. Section 2.5 BOOKS AND RECORDS. The consolidated balance sheets of McGee and its Subsidiaries as of December 31, 1994 and the related consolidated statements of income, stockholders' equity and cash flows for the fiscal year ended on such date, all of which were audited by independent certified public accountants, and the consolidated balance sheet of McGee and its Subsidiaries as of March 31, 1995 and the related statement of income for the three months ended on such date, copies of which have been delivered by Sun to Orion, have been prepared in accordance with generally accepted accounting principles consistently applied (except that the March 31, 1995 financial statements are subject to normal year- end adjustments and do not contain full footnote disclosures in accordance with generally accepted accounting principles) and present fairly the financial position of McGee and its Subsidiaries as of such dates and the results of their operations for such periods. Sun has also delivered or made available to Orion all management letters for years beginning after December 31, 1990 which were received by Sun, McGee or any Subsidiary of McGee from its independent certified public accountants. - 5 - Section 2.6 NO ADVERSE CHANGE. Since December 31, 1994, there has been no event or occurrence (or absence thereof), or combination of the foregoing, which has had a Material Adverse Effect. Section 2.7 LITIGATION AND OTHER PROCEEDINGS. Except as set forth in Schedule 3.7, there are no actions, suits, investigations or proceedings pending against, or to Sun's Knowledge threatened against, the Pool (provided that this representation shall not extend to actions, suits, investigations or proceedings against the Pool which arise solely out of claims under insurance coverage issued by or for the Pool), McGee or its Subsidiaries or any of their respective officers or employees or their respective businesses, properties or assets, by any person, governmental body or agency or by any securities exchange or national securities association, which action, suit, investigation or proceeding is reasonably likely to have a Material Adverse Effect. Neither Sun nor McGee nor any Subsidiary of McGee is in default with respect to any order of any court, governmental authority or agency or arbitration board or tribunal or in violation of any laws or governmental rules or regulations where such default or violation is reasonably likely to have a Material Adverse Effect. Neither McGee nor any of its Subsidiaries is in default under any contract or commitment which default has had or is reasonably likely to have a Material Adverse Effect. Section 2.8 TITLE TO PROPERTIES. McGee and each Subsidiary of McGee has good and marketable title to all the property it purports to own, including that reflected in the most recent balance sheet referred to in Section 3.5 and: (i) All real property owned or leased by McGee or any Subsidiary of McGee and, in the case of leased property, the lease pursuant to which it is leased, is listed and described on Schedule 3.8. McGee has good and marketable fee title to all owned real property reflected on Schedule 3.8, free and clear of all liens, charges and encumbrances, other than rights of way and easements of record, and subject only to liens of current real and personal property taxes, and such minor defects of title of a nature generally found in properties of similar character which do not in any material way affect the marketability of such real properties or interfere with the ownership and use of such real properties. To Sun's Knowledge, each lease reflected on Schedule 3.8 is valid and subsisting in accordance with its terms, no default - 6 - by any party thereto has occurred, no event, act or omission has occurred which constitutes or with notice or passage of time or both would constitute a default and all such leases are free and clear of any and all charges, liens, claims, rights of third parties and other encumbrances. To Sun's Knowledge, neither McGee nor any of its Subsidiaries leases any real property to or from any, parent, affiliate, officer or director or any person related to or owned or controlled by any parent, affiliate, officer or director of McGee or any of its Subsidiaries. (ii) Schedule 3.8 contains a true and complete summary, by office location and type of property, of all items of personal property (other than investments reflected in Schedule 3.12) having a value in excess of $10,000 which are used by McGee or any Subsidiary of McGee in its business. Except as set forth in Schedule 3.8, all such personal property is owned or leased by McGee or a Subsidiary free and clear of any and all liens, charges or encumbrances, except for liens for current taxes not yet due and payable and except for those which do not materially detract from the value of the property subject thereto or interfere with the ownership and use of such property. All such personal property is in good operating condition and repair, ordinary wear and tear excepted, and capable of performing the functions for which it is now used. To Sun's Knowledge, neither McGee nor any Subsidiary of McGee leases any personal property to or from any officer or director of, or any person related to or owned or controlled by any officer or director of, McGee or any Subsidiary of McGee. (iii) To Sun's Knowledge, Schedule 3.8 contains a true and complete description of all copyrights, patents, trademarks, trade names, franchises, computer and other programs processes and applications and other intellectual property owned or licensed by, and applications for any of the foregoing made by, McGee and each Subsidiary of McGee. To Sun's Knowledge, none of such property is subject to any lien, charge, encumbrance or adverse claim of any kind. To Sun's Knowledge, and except as set forth in Schedule 3.8, all such rights are valid, subsisting and in full force and effect in accordance with their terms without interference with, or infringement on or by, the rights of any other person (in each case which are material to the business and operations of - 7 - McGee and its Subsidiaries, taken as a whole). To Sun's Knowledge, neither McGee nor any Subsidiary of McGee is engaged in any infringement or unlawful use of any trademark, service mark, trade name, copyright, program, process or application or other intangible property right owned or alleged to be owned by others. Section 2.9 NO MATERIALLY ADVERSE AGREEMENTS. To Sun's Knowledge, neither McGee nor any of its Subsidiaries is a party to any agreement or instrument or subject to any charter or other corporate restriction which has a Material Adverse Effect or in the future is reasonably likely (so far as Sun can now reasonably foresee) to have a Material Adverse Effect. Section 2.10 NO CONFLICTS. Neither the execution nor the delivery by Sun of this Agreement, nor the consummation of the transactions contemplated hereby, nor the compliance with or fulfillment of the terms and provisions hereof by Sun, will: (i) conflict with or result in a breach or violation of any of the terms, conditions or provisions of the Certificate of Incorporation or By-Laws of Sun or McGee or any of McGee's Subsidiaries; or (ii) conflict with or result in a breach or violation of, or default or loss of a material benefit under, or permit the acceleration of any obligation under any provision of any agreement, indenture, mortgage, lien, lease or other instrument or restriction of any kind to which Sun, McGee or any Subsidiary of McGee is a party or by which it or any of its assets or properties is otherwise bound; or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Sun or McGee or any of the Subsidiaries of McGee or any of the assets or properties of any of them; which conflict, breach, violation, default, loss or other result, in the case of each of clauses (ii) and (iii), is reasonably likely to have a Material Adverse Effect or a material adverse effect on the ability of Sun to perform its obligations hereunder. Except as set forth in Schedule 3.10 hereto, no consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of Sun or McGee or any Subsidiary of McGee is required in connection with the execution, delivery and performance of this Agreement or the offer, sale or delivery of the Common Stock as provided herein. (b) Neither the execution nor the delivery by any Subsidiary of Sun of any of the Ancillary Agreements to which such Subsidiary is a party, nor the consummation by any such Subsidiary - 8 - of the transactions contemplated by any Ancillary Agreement to which it is a party, nor the compliance with or fulfillment by any such Subsidiary of the terms and provisions of any Ancillary Agreement to which it is a party, will: (i) conflict with or result in a breach or violation of any of the terms, conditions or provisions of the Certificate of Incorporation or By-Laws of such Subsidiary; or (ii) conflict with or result in a breach or violation of, or default or loss of a material benefit under, or permit the acceleration of any obligation under any provision of any agreement, indenture, mortgage, lien, lease or other instrument or restriction of any kind to which such Subsidiary is a party or by which it or any of its assets or properties is otherwise bound; or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to such Subsidiary or any of its assets or properties; which conflict, breach, violation, default, loss or other result, in the case of each of clauses (ii) and (iii), is reasonably likely to have a Material Adverse Effect or a material adverse effect on the ability of such Subsidiary to perform its obligations under any of the Ancillary Agreements to which it is a party. Section 2.11 TAXES. Except as disclosed in Schedule 3.11: a. To Sun's Knowledge, each of McGee and its Subsidiaries (and with respect to federal income Taxes, every other entity included in a consolidated federal Tax Return including McGee and its Subsidiaries (collectively, the "Consolidated Group")) has duly and timely filed (either separately or as part of a consolidated group) with the appropriate government agencies, all federal, state, local and foreign returns, filings and reports with respect to Taxes (the "Tax Returns") which are due. The term "Taxes," as used in this Agreement, shall mean all federal, state, local and foreign income and capital taxes, value added taxes, sales and use taxes, assessments, withholdings, duties, levies, fees and other governmental charges or impositions of each and every kind, and interest, penalties and additions to tax with respect thereto. b. To Sun's Knowledge, neither McGee nor any of its Subsidiaries is delinquent in the payment of any Taxes nor has any of them requested any extension of time within which to pay any such Taxes or file any Tax Return with respect thereto except to the extent that such Taxes have since been paid or such Tax Return has since been filed. - 9 - c. To Sun's Knowledge, there is no agreement, waiver or consent providing for an extension of time with respect to (1) the filing of any Tax Return, election or designation, (2) the payment or issuance of any assessment of any Tax or (3) the issuance of any deficiency against McGee or any of its Subsidiaries with respect to Taxes. In addition, no power of attorney has been granted by McGee or any of its Subsidiaries with respect to any tax matter which is currently in force. d. To Sun's Knowledge, there is no (i) claim or deficiency for any Taxes which has been threatened or asserted against McGee or any of its Subsidiaries or the Consolidated Group, (ii) action, suit, proceeding, investigation, audit or claim threatened or now pending against, or with respect to, McGee or any of its Subsidiaries or the Consolidated Group with regard to any Taxes, or (iii) claim for additional amounts or assessments of such Taxes asserted by any such authority. e. The federal income Tax Returns of McGee and its Subsidiaries (including any Tax Return filed by the Consolidated Group) have been examined by the Internal Revenue Service for all periods to and including 1989 and all deficiencies asserted as a result of such examinations have been paid or finally settled and to Sun's knowledge no issue has been raised by the Internal Revenue Service in any such examination which, by application of the same or similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Revenue Canada, Taxation has mailed a notice of an original assessment in respect of the Canadian federal income tax liability of the Canadian Subsidiary of McGee for all fiscal years up to and including the fiscal year ended 1993. To Sun's knowledge, no issue has been raised by any Canadian federal or provincial taxation authority in any examination which, by application of the same or similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. f. To Sun's Knowledge, (i) McGee and each of its Subsidiaries has not filed an election, consent or agreement under Section 341(f) of the Code; (ii) no indebtedness of McGee or any of its Subsidiaries consists of "corporate acquisition indebtedness" within the meaning of Section 279 of the Code; (iii) since September 8, 1987, there has not been an "ownership change," "owner shift involving a five-percent shareholder" or an "equity structure shift" relating to McGee or any of its Subsidiaries within the meaning of Section 382(g) of the Code and since September 8, 1987, - 10 - there has not been an acquisition of control of McGee or any of its Subsidiaries within the meaning of the Income Tax Act (Canada); (iv) no property of McGee or any of its Subsidiaries is "tax-exempt use property" within the meaning of Section 168(h) of the Code nor property that Orion will be required to treat as being owned by another person pursuant to section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986; (v) neither McGee nor any of its Subsidiaries is a party to any agreement which would require them, by reason of the transactions contemplated in this Agreement or other related agreements executed on the Closing Date, to make any payment which would constitute a "parachute payment" for purposes of Sections 28OG and 4999 of the Code; (vi) neither McGee nor any of its Subsidiaries has made any election pursuant to state or foreign tax laws that is currently binding on Sun; (vii) neither McGee nor any of its Subsidiaries is a "gain corporation" within the meaning of Section 384(c)(4) of the Code; (viii) no member of the federal consolidated group of which McGee is a member has made an affirmative action carryover election within the meaning of Section 1.338-4T(f)(6)(i) of the Treasury Regulations; (ix) neither Sun nor Phoenix is a "foreign person" within the meaning of Section 1445 of the Code; (x) no deferred intercompany transactions within the meaning of Section 1.1502-13 of the Treasury Regulations have occurred between the members of the Consolidated Group and McGee and its Subsidiaries; and (xi) McGee does not have an excess loss account as defined in Section 1.1502-19 of the Treasury Regulations with respect to any of its Subsidiaries. g. To Sun's Knowledge: (i) Each of McGee and its Subsidiaries has withheld from each payment made to any of its officers, directors, former directors, and employees and former employees the amount of all taxes and other deductions (including without limitation, income taxes, unemployment, disability, and other required taxes and contributions) required to be withheld and has timely paid such withholding (together with its required employer's amount, if any) and has timely and properly filed all required information returns and Tax Returns with respect thereto. (ii) Neither McGee nor the Canadian Subsidiary of McGee has, prior to the date hereof, made or filed any elections for purposes of the Income Tax Act (Canada). - 11 - (iii) Neither McGee nor the Canadian Subsidiary of McGee has, prior to the date hereof, acquired property from or disposed of property for proceeds less than the fair market value thereof to, any person, firm or corporation with whom it does not deal at arm's length as the term is construed under the Income Tax Act (Canada). (iv) The Canadian Subsidiary of McGee has no outstanding loans or indebtedness incurred by directors, former directors, officers, shareholders (including Sun, Phoenix, London and Marine) of that company or by any person or corporation not dealing at arm's length (as the term is construed under the Income Tax Act (Canada)) with any of the foregoing. (v) The taxation year end of the Canadian Subsidiary of McGee for income tax purposes is December 31. The taxation year end of the Canadian Subsidiary of McGee has not been changed except as a result of the transactions contemplated by this Agreement. (vi) McGee does not carry on business in Canada through a permanent establishment within the meaning of that term in the Canada-U.S. Income Tax Convention. h. All representations and warranties of Sun as to Taxes or matters with respect thereto are provided for in this Section 3.11, and no other section of this Article III shall be construed or interpreted as a representation or warranty of Sun as to Taxes or matters with respect thereto. i. All representations and warranties set forth in this Section 3.11 shall be considered true and correct unless the breach thereof would have a Material Adverse Effect. Section 2.2 INVESTMENTS. Schedule 3.12, lists (and shows the custodial location of) all investments in bonds, stocks and other securities owned by McGee and each of its Subsidiaries as at the second business day prior to the date hereof, all of which comply in all material respects with laws and regulations applicable to the ownership of the same by McGee and its respective Subsidiaries. McGee and each of its Subsidiaries has good and marketable title to all its investments, free and clear of any and all liens, charges, claims, restrictions, pledges, rights of third parties and other encumbrances. - 12 - Section 2.13 EMPLOYMENT MATTERS. Schedule 3.13 contains a true and complete list of the names and total compensation of all officers, directors and employees of McGee and each of its Subsidiaries whose current annual rate of compensation (including bonuses and commissions paid or committed to such individuals) exceeds $100,000, together with a summary of the bonuses, additional remuneration and other benefits, if any, paid or payable to each such listed person for the years commencing on January 1, 1994 and January 1, 1995. To Sun's Knowledge, McGee has no employment or labor contracts relating to any officers, directors or employees of McGee or any of its Subsidiaries and no employee of McGee or any of its Subsidiaries is represented by a labor organization of any type. To Sun's Knowledge, there are, and has not since September 8, 1987 been, any effort to unionize or organize any employees of McGee or any of its Subsidiaries, and no claim under any federal, state, provincial or local employment related law, order, ordinance or regulation, or unfair labor practice, discrimination, wage-and-hour or employment equity claim is pending or, to Sun's Knowledge, threatened against or with respect to McGee or any of its Subsidiaries. Section 2.14 EMPLOYEE BENEFIT PLANS; ERISA. (a) Schedule 3.14 sets forth a true and complete list of all employee benefit plans, agreements, commitments, practices or arrangements of any type (including, but not limited to, plans described in Section 3(3) of ERISA) maintained by McGee or any of its Subsidiaries for the benefit of current or former employees or directors, or with respect to which McGee or any of its Sub- sidiaries has a liability, whether direct or indirect, actual or contingent (including, but not limited to, liabilities arising from affiliation under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA) (the "Benefit Plans"). There are no benefit plans, agreements, commitments, practices or arrangements of any type providing benefits to employees or directors of McGee or its Subsidiaries for which McGee or its Subsidiaries could have any liability other than the Benefit Plans. (b) No Benefit Plan is a "multiemployer plan" (within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA) or a "multiple employer plan" (within the meaning of Section 4064 of ERISA or Section 413(c) of the Code). Neither McGee nor any of its Subsidiaries has a current or potential liability or obligation, whether direct or indirect, with respect to any multiemployer plan - 13 - or multiple employer plan. Except as set forth on Schedule 3.14, no Benefit Plan is a foreign benefit plan (a plan established or maintained outside the United States of America for the benefit of employees substantially all of whom are aliens not residing in the United States of America). (c) Sun has delivered or made available to Orion, true and complete copies of the following documents, as they may have been amended to the date hereof, embodying or relating to the Benefit Plans: (i) each of the Benefit Plans listed in Schedule 3.14, including all amendments thereto, any related trust agreements, group annuity contracts, insurance policies or other funding agreements or arrangements; (ii) the most recent determination letter, if any, as to qualification under Section 401(a) or 403(a) of the Code, received from the Internal Revenue Service ("IRS") with respect to each of the Benefit Plans; (iii) the actuarial valuation, if any, prepared with respect to each of the Benefit Plans for the two most recent plan years and the most recent annual and periodic accountings of Benefit Plan assets, if applicable; (iv) the current summary plan description, if any, for each of the Benefit Plans and any material modifications thereto; and (v) the annual return/report on IRS Form 5500, 5500-C/R, 5500-C or 5500-R, if any, for each of the Benefit Plans for the two most recent plan years. (d) Except as provided for in this Agreement or as set forth in Schedule 3.14, since December 31, 1994, neither Sun nor McGee (i) has adopted, entered into, or amended any Benefit Plan that is a defined benefit pension plan, including any change in the assumptions or factors used in determining benefit equivalencies under any Benefit Plan, or (ii) since the date of the most recent actuarial valuation report, made any change in the actuarial methods or assumptions used in funding any Benefit Plan that is a defined benefit pension plan subject to ERISA, in the case of (i) or (ii) other than as required by the applicable Benefit Plan, or - 14 - as may be required to maintain compliance with the law or in accordance with contracts or agreements elsewhere disclosed in this Agreement. (e) Except as set forth in Schedule 3.14, (i) the written terms of each of the Benefit Plans and any related trust agreement, group annuity contract, insurance policy or other funding arrangement are in substantial compliance with the applicable requirements, if any, of ERISA, the Code and any other applicable law, and, to Sun's Knowledge, each of the Benefit Plans has been administered in material compliance with such requirements and in accordance with its terms; (ii) there are no contributions, premiums or other payment obligations concerning the Benefit Plans which were due and payable on or before the date hereof which have not been made in full and in proper form, and adequate accruals have been provided for in the financial statements for all other contributions or amounts as may be required to be paid to the Benefit Plans with respect to periods which include the Closing Date or which ended prior thereto; (iii) neither Sun nor McGee has made or agreed to make, nor is required (in order to bring any of the Benefit Plans into substantial compliance with the applicable requirements, if any, of ERISA, the Code or other applicable law) to make, any change in benefits that would materially increase the costs of maintaining any of the Benefit Plans, except as provided for in Section 5.7(c) of this Agreement; (iv) no prohibited transaction has occurred with respect to which McGee or any Subsidiary of McGee may be directly or indirectly liable for any excise tax or penalty under Section 4975 of the Code or Section 502(i) of ERISA; (v) each of the Benefit Plans for which Sun or McGee has claimed a deduction under Section 404(a)(1), (2) or (3) of the Code has received a favorable determination letter from the IRS as to the tax qualification of such Benefit Plan (or has a pending request for such a letter, which request was filed within the period described in Section 401(b) of the Code), and such favorable determination has not been modified, revoked or limited by failure to satisfy any condition thereof or by a subsequent amendment to, or failure to amend, such Benefit Plan and any related trust is exempt from taxation under Section 501(a) of the Code; (vi) as of the date hereof, there are no actions, suits, disputes, arbitrations or claims pending (other than routine claims for benefits) or legal, administrative or other proceedings or governmental investigations pending or, to the knowledge of Sun or McGee, threatened against any Benefit Plan or against the assets of any Benefit Plan; (vii) all premiums, interest charges, and - 15 - penalties for late payment, if any, due to the PBGC as of the date hereof with respect to the Plans have been paid; (viii) no Benefit Plan has been partially terminated under Section 411(d)(3) of the Code (except that no representation is being made as to whether a partial termination occurs solely by reason of the cash-out of participants provided for under Section 5.7(c) of this Agreement) and no Benefit Plan that is subject to Title IV of ERISA has been terminated at any time during the seven-calendar-year period immediately preceding the date hereof, and no proceeding has been initiated, to the knowledge of Sun or McGee, to terminate any Benefit Plan or to terminate any "employee benefit plan" (as defined in Section 3(3) of ERISA) subject to Title IV of ERISA sponsored by a member of a controlled group including Sun or McGee, and McGee has neither incurred nor reasonably expects to incur, any liability under Title IV of ERISA in respect of any termination of any Benefit Plan or any employee benefit plan; (ix) to Sun's Knowledge, McGee has satisfied any bond coverage requirement of ERISA and all reporting and disclosure obligations under ERISA, the Code or other applicable law with respect to each of the Benefit Plans and the related trust, group annuity contract, insurance policy or other funding arrangement; (x) no "reportable event" within the meaning of Section 4043(b) of ERISA (as amended by GATT) has occurred with respect to any Benefit Plan subject to ERISA (other than those that may result from the transactions contemplated by this Agreement and disregarding any such events for which no report is required to be filed); (xi) no breach of fiduciary duty has occurred with respect to which McGee, its Subsidiaries, or any Benefit Plan may be liable or otherwise damaged; (xii) all contributions made or required to be made under each Benefit Plan for which a federal income tax deduction has been claimed meet the requirements for deductibility under the Code; (xiii) to the extent permitted by applicable law, McGee has expressly reserved in itself the right to amend, modify or terminate each written Benefit Plan which is subject to ERISA and each written foreign benefit plan, or any portion of it, without liability to itself; (xiv) no Benefit Plan that is subject to Part 2, Subtitle B of Title I of ERISA has invested in: (1) insurance or annuity contracts issued by an insurance company with an A.M. Best rating below A as of December 31, 1994, or (2) employer securities or employer real property; (xv) no Benefit Plan requires McGee or its Subsidiaries to continue to employ any employee, director or consultant; (xvi) with respect to each Benefit Plan subject to either Section 412 of the Code or Section 302 of ERISA: (1) such plan's actuary has determined that such plan uses a funding method permissible under ERISA and the actuarial assumptions used in - 16 - connection therewith are reasonable, both individually and in the aggregate, (2) no such plan has any accumulated funding deficiency, whether or not waived; and (xvii) to Sun's knowledge, the most recent actuarial valuation report for each Benefit Plan which is a defined benefit plan, including any foreign defined benefit plan, is based on information provided by McGee (or Sun, with respect to employees of Sun Alliance Services USA Inc.) which was accurate and complete in all material respects. (f) Except as set forth in Schedule 3.14, with respect to each Benefit Plan which is a welfare plan described in Section 3(1) of ERISA: (i) no such plan provides medical or death benefits with respect to current or former employees or directors of McGee beyond their termination of employment, other than coverage mandated by Sections 601-608 of ERISA and 4980B(f) of the Code, (ii) each such plan has been administered in compliance with Sections 601-608 of ERISA and 4980B(f) of the Code; (iii) no such plan has undisclosed reserves, assets, surpluses or prepaid premiums; and (iv) no communication to any employee or former employee made by or on behalf of Sun, McGee, any plan committee, any plan fiduciary or any plan administrator has been inconsistent with the documents or actual operation of each such plan or could be reasonably construed to infringe on McGee's right to modify, terminate or amend each such plan, to the extent such right exists. (g) The consummation of the transactions contemplated by this Agreement will not (i) entitle any individual to severance pay, or (ii) except as provided for in Section 5.7 of this Agreement, accelerate the time of payment or vesting, or increase the amount, of compensation due to any individual. No payment made or contemplated under any Benefit Plan constitutes an "excess parachute payment" within the meaning of Section 280G of the Code. Section 2.5 CONTRACTS. Schedule 3.15 contains a list and description of all contracts, agreements, undertakings and indebtedness (written or oral) to which, to Sun's Knowledge, McGee or any Subsidiary of McGee is a party or by which it or its property is bound and which (i) involve aggregate indebtedness, or an aggregate commitment, of $50,000 or more or have a remaining term which cannot be terminated on not more than ninety days' notice or (ii) relate to McGee's operation of the Pool (but excluding contracts of insurance and reinsurance by or on behalf of the Pool) or the relationships between and among Pool Participants. To Sun's Knowledge, all such contracts, agreements, undertakings and indebtedness are free of any default or breach or any alleged - 17 - default or breach by McGee, any Subsidiary of McGee or any other party thereto and no event, act or omission has occurred which, with the giving of notice or the passage of time or both, would constitute a breach or default by McGee or any Subsidiary of McGee or any other party thereto of any of such contracts, leases, agreements, undertakings or indebtedness. To Sun's Knowledge, and except as listed and described in Schedule 3.15, neither McGee nor any Subsidiary of McGee is a party to or is bound by any contract with, or is indebted to, any parent, affiliate, officer or director of (or to any person related to or owned or controlled by any parent, affiliate, officer or director of) McGee or any Subsidiary of McGee in any amount whatsoever other than in respect of salaries (and other compensation and benefits disclosed in Schedule 3.13) of any officer or director of McGee or any Subsidiary of McGee. Except as listed and described in the Schedule 3.15, none of such parents, affiliates, officers or directors is indebted to McGee or any Subsidiary of McGee. Section 2.16 CAPITAL EXPENDITURES. Except as disclosed in Schedule 3.16, neither McGee nor any Subsidiary of McGee has an outstanding commitment for capital expenditures (including but not limited to expenditures for data processing hardware, software and systems) in excess of $50,000 other than for ordinary repairs and maintenance. Section 2.17 BANKS. Schedule 3.17 contains a true and complete list of all banks or other financial institutions in which either McGee or any Subsidiary of McGee has an account, line of credit or safe deposit box, showing a description of each such account and line of credit. Section 2.18 AGENTS AND BROKERS. Schedule 3.18 contains a true and complete list of the names and addresses of each person ("agents and brokers" herein) who has any authority to bind (i) McGee or any Subsidiary of McGee or (ii) the Pool or any Pool Participant (in its capacity as a Pool Participant) or (iii) any insurance company in its capacity as an issuer of policies of insurance or reinsurance on behalf of the Pool, in each case with a description of the type of agency or binding authority granted, and the geographical or other limits of each such authority or agency. Sun has delivered or made available to Orion true and complete copies of all agreements or other instruments granting any powers of attorney, agency agreements and broker agreements, including all current form contracts, of each of McGee and each Subsidiary of McGee. To Sun's Knowledge, except as set forth in - 18 - Schedule 3.18, and except where prohibited by law each such contract with each such agent or broker is terminable by McGee or such Subsidiary, without payment of any compensation or indemnity, on ninety (90) days' (or less) notice. To Sun's Knowledge, (i) each agent and broker has been and continues to be properly licensed to represent McGee or such Subsidiary, as the case may be to the extent required by law; (ii) except as set forth on Schedule 3.18, since December 31, 1994 neither McGee nor any Subsidiary of McGee has terminated or experienced the resignation of any agent or broker and (iii) McGee and each of its Subsidiaries has satisfactory relations with its agents and brokers. Section 2.19 APPROVED FORMS OF POLICIES. Each form of insurance policy, policy endorsement or amendment, reinsurance contract, annuity contract, application form, sales material and service contract, and the rates, rating plans and premiums therefor, now in use by McGee or any Subsidiary of McGee, or by or on behalf of the Pool, in any jurisdiction has, where required, been approved by the appropriate insurance regulatory authorities of such jurisdiction except where the failure to be so approved is not reasonably likely to have a Material Adverse Effect. Section 2.20 INSURANCE. Schedule 3.20 contains a true and complete list of all policies of insurance issued to McGee or to any Subsidiary of McGee or naming any of them as insureds or covering any of their businesses, assets or liabilities, showing policy limits, type of coverage, annual premium, premium payment dates, expiration dates, cash surrender value, and the amount of loans, if any, secured. No policy listed has been cancelled and each policy listed will continue in effect after the Closing Date on the terms indicated in Schedule 3.20 unless cancelled by the insured after the Closing Date. Section 2.21 ABSENCE OF MATERIAL CHANGES AND ADVERSE FACTORS. Since December 31, 1994, and except for the transactions provided for herein, there has not been, in respect of McGee or any Subsidiary of McGee: (a) any loss or destruction of, or damage (whether or not covered by insurance) to, any of its assets or properties which materially affects or impairs its ability to conduct its business as now conducted or proposed to be conducted such that a Material Adverse Effect is reasonably likely to result therefrom; (b) any other event or condition of any character reasonably likely to have a Material Adverse Effect; - 19 - (c) any declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of McGee or any Subsidiary of McGee or any direct or indirect redemption, purchase or other acquisition by McGee or any Subsidiary of McGee of any such stock; or (d) any indebtedness or other liability or obligation (whether absolute, accrued, contingent or otherwise) incurred or other transaction (except that reflected in this Agreement) incurred by it other than in the ordinary course of business. Section 2.22 ENVIRONMENTAL MATTERS. To Sun's Knowledge, McGee and each of McGee's Subsidiaries is in compliance with all applicable environmental laws governing its business for which failure to comply is likely to have a Material Adverse Effect, and neither McGee nor any of its Subsidiaries is liable for any material penalties, fines or forfeitures for failure to comply with any of the foregoing in the manner set forth above. All licenses, permits, registrations or approvals required for the business of McGee and each of McGee's Subsidiaries under any environmental law have, to Sun's Knowledge, been secured and McGee and each of its Subsidiaries is in substantial compliance therewith, except such licenses, permits, registrations or approvals the failure to secure, or to comply with which, is not likely to have a Material Adverse Effect. To Sun's Knowledge, there are no environmental claims pending or threatened, which (a) question the validity, term or entitlement of McGee or any of McGee's Subsidiaries for any permit, license, order or registration required for the operation of any facility which McGee or any of McGee's Subsidiaries currently operates and (b) wherein an unfavorable decision, ruling or finding would be reasonably likely to have a Material Adverse Effect. To Sun's Knowledge, there are no facts, circumstances, conditions or occurrences on any real property owned or leased by McGee or any of McGee's Subsidiaries, or on any property adjacent to such real property that could reasonably be expected (i) to form the basis of an environmental claim against McGee or any of its Subsidiaries or any real property owned or leased by McGee or any of its Subsidiaries or (ii) to cause such real property to be subject to any restrictions on the ownership, occupancy, use or transferability of such real property under any environmental law, except in each such case, such environmental claims or restrictions that individually or in the aggregate are not reasonably likely to have a Material Adverse Effect. To Sun's Knowledge hazardous toxic materials have not at any time been (i) generated, used, treated or stored on, or transported to or from, any real property owned or - 20 - leased by McGee or any of McGee's Subsidiaries except in compliance with applicable environmental laws or (ii) released on any such real property, in each case where such occurrence or event is reasonably likely to have a Material Adverse Effect. Section 2.23 FINDERS AND BROKERS. All negotiations on behalf of Sun relative to this Agreement and the transactions contemplated hereby have been carried on directly by Sun without the intervention of any broker, finder, investment banker or other third party representing Sun. Neither Sun nor any Subsidiary nor any officer or director of Sun or any of its Subsidiaries has engaged or authorized any broker, finder, investment banker or other third party to act on behalf of Sun, directly or indirectly, as a broker, finder, investment banker or in any other like capacity in connection with this Agreement or the transactions contemplated hereby, or has consented to or acquiesced in anyone so acting. Sun knows of no claim by any person against Sun or any of its Subsidiaries or Orion for compensation for so acting or of any basis for such a claim and Sun shall hold Orion totally harmless against any costs or expenses to Orion arising out of any such claim. Section 2.24 DISCLOSURE. No representation or warranty of Sun contained herein or in any Schedule hereto contains or will on the Closing Date contain any untrue statement of a material fact or omits or will on the Closing Date omit to state any material fact necessary to make the statements herein or therein not false or misleading. Section 3.25 CANADIAN BANK ACT. To Sun's Knowledge, the principal activity in Canada of McGee and each of its Subsidiaries does not consist of (i) providing any services that a bank is permitted by the Bank Act (Canada) to provide in Canada, (ii) providing fiduciary services, (iii) performing the functions of an investment dealer, stock broker, investment counsellor or portfolio manager, (iv) the business of insurance, including the function of an insurance agent or broker or (v) any combination of such activities, all as defined by the provisions of the Bank Act (Canada). - 21 - IV. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF ORION -------------------------------- Orion represents, warrants and agrees as follows: Section 3.1 ORGANIZATION AND STANDING. Orion is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Orion has all requisite corporate power and authority to own its properties and to carry on its business as now being conducted. Section 3.2 CERTIFICATE OF INCORPORATION AND BY-LAWS. The copies of the Certificate of Incorporation and By-Laws of Orion which have heretofore been delivered to Sun are true, accurate and complete and reflect all amendments or changes in effect as of the date hereof. Section 3.3 AUTHORITY. Orion has full corporate power and authority to enter into this Agreement and (subject to any requisite approvals of insurance and other regulatory authorities, all of which are set forth on Schedule 4.3 hereto) to carry out the transactions contemplated hereby. The execution and performance of this Agreement have been duly and validly authorized by all necessary corporate action on the part of Orion and this Agreement constitutes a valid and binding obligation of Orion enforceable in accordance with its terms, except as limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally, and except that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the equitable discretion of the court before which any proceeding therefor may be brought. Neither the execution nor the delivery of this Agreement, nor the consummation of the transactions herein contemplated, nor compliance with nor fulfillment of the terms and provisions hereof, will (i) conflict with or result in a breach or violation of any of the terms, conditions or provisions of the Certificate of Incorporation or By- Laws of Orion. Except as set forth in Schedule 4.3 hereto, no consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of Orion or any Subsidiary of Orion is required in connection with the execution, delivery and performance by Orion of this Agreement or the purchase of the Common Stock as provided herein. - 22 - Section 3.4 FINDERS AND BROKERS. All negotiations on behalf of Orion relative to this Agreement and the transactions contemplated hereby have been carried on directly by Orion without the intervention of any broker, finder, investment banker or other third party representing Orion. Neither Orion nor any Subsidiary nor any officer or director of Orion or any of its Subsidiaries, has engaged or authorized any broker, finder, investment banker or other third party to act on Orion's behalf, directly or indirectly, as a broker, finder, investment banker or in any other like capacity in connection with this Agreement or the transactions contemplated hereby, or has consented to or acquiesced in anyone so acting. Orion knows of no claim by any person against Orion or any of its Subsidiaries for compensation for so acting or of any basis for such a claim and Orion shall hold Sun totally harmless against any costs or expenses to Sun arising out of any such claim. Section 3.5 INVESTOR STATUS. Orion is an "Accredited Investor" within the meaning of SEC Rule 501(a). Section 3.6 BANK OR BANKING INSTITUTION. Neither Orion nor any affiliate (as defined) of Orion is a "foreign bank" or "foreign banking institution" as such terms may be defined under the Bank Act (Canada). V. COVENANTS OF ORION AND SUN Section 4.1 ACCESS TO PROPERTIES, BOOKS AND RECORDS. Prior to the Closing Date, Sun shall afford or cause McGee to afford to the officers, attorneys, accountants and other authorized representatives of Orion, reasonable access to McGee and to each Subsidiary of McGee and to the officers, properties, books and records (electronic and other) of all of the foregoing during regular business hours and upon prior notice to Sun in order to afford Orion the opportunity to make such investigations of the affairs of McGee and its Subsidiaries as they may reasonably deem necessary. Sun shall also furnish, or cause McGee and its Subsidiaries to furnish, to Orion such information relating to their respective businesses and affairs as Orion shall from time to time reasonably request. All information made available to Orion and its representatives pursuant to this Section 5.1 shall be subject to the terms of the confidentiality letter agreement dated January 9, 1995 between Sun and Orion (which is incorporated herein by reference thereto). - 23 - Section 4.2 CONDUCT OF BUSINESS. (a) Except as otherwise permitted by this Agreement, or as set forth on Schedule 5.2 hereto, or with the prior written consent of Orion, prior to the Closing Date Sun shall not cause, suffer or permit McGee or any of its Subsidiaries, either on its own behalf or on behalf of or for the account of the Pool to: (i) create, issue or sell any of its own stocks, bonds, or other of its corporate securities, or grant or otherwise issue any options, warrants or other purchase rights with respect thereto, or enter into any contract or commitment to do any of the foregoing; (ii) create, incur, assume, guarantee or otherwise become liable with respect to any obligations or liabilities, fixed or contingent, in excess of $50,000 in the aggregate; (iii) declare or make any payment or distribution to its stockholders or purchase or redeem any shares of its capital stock or the capital stock of McGee or any Subsidiary of McGee; (iv) sell or transfer any properties or assets (including cash held in bank accounts or otherwise) or cancel, release or assign any indebtedness owed to it or any claims held by it, other than in the ordinary course of business; (v) mortgage, pledge or subject to lien, or any other encumbrance, any assets, tangible or intangible except for liens (i) with respect to deposits with State insurance departments and (ii) letters of credit, trust funds and funds withheld arrangements, in each case relating to credit for reinsurance provided that such liens shall have been in the ordinary course of business; (vi) sell, assign, transfer or otherwise dispose of any tangible assets or cancel any debt or claim, except in each case in the ordinary course of business; (vii) sell, assign or transfer any intangible right or asset; - 24 - (xv) arrange for or solicit the issuance or renewal of insurance of any risk other than those insurance risks which are undertaken by or on behalf of the Pool; (xvi) knowingly do or omit to do any act which could reasonably be expected to cause a breach of any contract, commitment or obligation, which breach is reasonably likely to have a Material Adverse Effect; (xvii) make any capital expenditures, capital additions or capital improvements, or commitments for any of the foregoing, which involve, in the aggregate, in excess of $50,000, except for commitments in effect on the date hereof as reflected on Schedule 3.16; (xviii) amend any Tax Return, settle any tax audit or tax controversy, make any tax election or change any tax accounting method; (xix) directly or indirectly encourage, initiate or engage in discussions or negotiations with, or provide any information to, any corporation, partnership, person or other entity or group, other than Orion and its Subsidiaries, concerning the issuance or sale of any shares of its capital stock, any merger or other business combination, any disposition of or grant of an interest in a substantial asset or any similar transaction involving McGee; and Sun will and will cause McGee to notify Orion promptly and in full detail of any proposal made, or to be made, to Sun or McGee, with respect to (i) any offer to purchase, or any invitation to tender for purchase, any or all of the capital stock of McGee or any Subsidiary of McGee; (ii) any proposed merger or other form of business combination with McGee or any Subsidiary of McGee; or (iii) any purchase of any substantial asset or liability of McGee or any Subsidiary of McGee or any interest in any substantial asset or liability of McGee or any Subsidiary of McGee. (d) Except as otherwise permitted by this Agreement or with the prior written consent of Orion, prior to the Closing Date, Sun shall cause McGee and each of its Subsidiaries to use commercially reasonable best efforts to: - 26 - (i) maintain at all times its status as a corporation, duly organized, validly existing, in good standing and duly qualified and licensed to conduct its business as now being conducted (x) in the jurisdiction of its incorporation and (y) except where the failure to do so would not have a Material Adverse Effect, each of the other jurisdictions in which it is so conducting its business; (ii) at all times do or cause to be done, and cause each of its officers and employees to do, all things necessary to maintain, preserve and renew the corporate existence of McGee and the corporate existence of the Subsidiaries of McGee and all federal, provincial, state and local and other licenses, permits, franchises and other governmental authorizations necessary to own and operate their respective properties and carry on their respective businesses, and comply with all federal, provincial, state and local laws applicable to McGee or any of its Subsidiaries or the Pool except where the failure to do so is not reasonably likely to have a Material Adverse Effect; (iii) operate its business substantially as presently operated and only in the ordinary course and (A) preserve substantially intact the present business organization (including the retention of key employees), (B) collect all premiums, balances due from reinsurers and Pool Participants and accounts receivable and (C) preserve its relationships with and the goodwill of its Pool Participants, customers, suppliers, agents, general agents, other insurers and reinsurers and other persons having business dealings with it except where the failure to do so is not reasonably likely to have a Material Adverse Effect; (iv) with respect to the properties of McGee and each of its Subsidiaries, maintain in force all existing casualty and liability insurance and reinsurance policies and fidelity bonds or policies or bonds providing substantially the same coverage; (v) maintain proper business and accounting records for itself in accordance with generally accepted accounting principles and for the Pool in accordance with accounting practices required or permitted by applicable federal, provincial, state and local regulation; - 27 - advise Orion in writing of any event, occurrence or circumstance of which it is aware which is reasonably likely to have a Material Adverse Effect; (vii) comply in all material respects with all laws applicable to it and to the conduct of its business; (vi) maintain all of the properties which are material to its business operations or financial condition in good operating condition and repair, ordinary wear and tear excepted, and take all steps reasonably necessary to maintain its intangible assets. Section 4.3 REGULATORY AND OTHER FILINGS AND APPROVALS. Each of Orion and Sun shall duly make (and Sun shall cause its Subsidiaries, including McGee and its Subsidiaries, to make) all regulatory filings required to be made by each in respect of this Agreement or the transactions contemplated hereby. Each of Orion and Sun shall use its commercially reasonable best efforts to obtain (and cause its Subsidiaries to obtain) all regulatory approvals necessary to carry out the transactions contemplated by this Agreement, including, without limitation, the obtaining by Orion's Subsidiaries of any necessary approvals by insurance commissioners or superintendents of insurance of policy forms to be used by or on behalf of the Pool following the Closing. Section Premerger Notification and Clearance. Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "Hart- Scott-Rodino Act"), the Investment Canada Act and the Competition Act of Canada, each of Orion and Sun will file, or cause to be filed, any application, notification or report form which is required to be filed with the Premerger Notification Office of the U.S. Federal Trade Commission or with the Antitrust Division of the U.S. Department of Justice or with Investment Canada (collectively referred to herein as the "Premerger Notification Agencies") in respect of the transactions contemplated hereby, each of which filings shall comply as to form with all requirements applicable thereto and all of the data and information reported in which shall be true, correct and complete in all material respects. Each of Orion and Sun will promptly comply with all requests, if any, of any of the Premerger Notification Agencies for additional informa- tion or documentation in connection with each notification, report and application filed by or on behalf of either Orion or Sun with any of the Premerger Notification Agencies, unless in the opinion of both Donovan Leisure Newton & Irvine and Dewey Ballantine (or of Morris/Rose/Ledgett and Borden & Elliot in the case of filings made - 28 - under the Investment Canada Act) such compliance is not necessary in order to obtain clearance from the relevant Premerger Notification Agencies. Such additional information and documentation will comply with all requirements applicable thereto and will be true, correct and complete in all material respects. Section 4.5 BERMUDA COMPANY. Effective as of the Closing, Orion shall cause Wm. H. McGee & Co. (Bermuda), Ltd., a Bermuda corporation and a Subsidiary of McGee ("McGee Bermuda"), to enter into a Management Agreement with Sun Bermuda substantially in the form of Exhibit A hereto. Under such Agreement, Sun Bermuda shall write and issue insurance exclusively for McGee and McGee Bermuda shall pay all costs and expenses incurred by Sun Bermuda (including, without limitation, any licensing fees) in connection with its business and operations during the period from the Closing through the earlier of December 31, 1997 or the date as of which the Management Agreement is terminated because Orion has notified Sun that it no longer requires the services of Sun Bermuda as a writer and issuer of insurance. Sun shall have no obligation, after the earlier of such dates to continue to write and issue or cause to be written and issued those forms of insurance (in the jurisdictions in which they have been issued) which have heretofore been written and issued by Sun Bermuda on behalf of McGee or any Subsidiary of McGee or the Pool and Orion will, if it or one of its insurance Subsidiaries wishes to write and issue those forms of insurance, after the earlier of such dates, either (a) exercise the option referred to in Section 6.2(d) to purchase Sun Bermuda, or (b) organize or acquire by that date a properly qualified and licensed Bermuda corporation. Section 4.6 FURTHER ASSURANCES. Each of Orion and Sun agrees to use commercially reasonable best efforts to take such reasonable action as may be necessary or appropriate in order to effectuate the transactions contemplated hereby. In case at any time after the Closing Date any further action by Sun is necessary or desirable to vest Orion with full title to the Common Stock and to the use, benefit and ownership of the properties, assets, rights, approvals, immunities and franchises of McGee and its Subsidiaries evidenced thereby, Sun shall take all such action. (b) From and after the date hereof and until December 31, 1997, and in furtherance of and in addition to other obligations of Sun pursuant to this Agreement and the transactions entered into pursuant hereto, Sun shall not (i) use or purport to license or allow any other person to license any mark, trade name - 29 - or trade dress of McGee or any Subsidiary of McGee or (ii) in any way damage or disparage, and shall undertake and ensure that no Subsidiary of Sun so damages or disparages, the name, business or reputation of McGee or any of McGee's Subsidiaries, or of the Pool or any mark, trade name or trade dress of McGee or any Subsidiary of McGee or of the Pool. Section 4.7 PENSION PLAN MATTERS. Effective no later than the Closing Date, Sun shall cease to be a participating employer under the Wm. H. McGee & Co., Inc. Retirement Income Plan (the "Pension Plan") and the Profit Sharing Plan of Wm. H. McGee & Co., Inc. (the "Fidelity Plan") and McGee and its Subsidiaries shall be the sole participating employers with the power to amend such plans. (b) Within 60 days following the Closing Date, Sun shall cause to be established an individual account plan (the "Sun Plan"), which plan shall be substantially similar to the Fidelity Plan, except to the extent necessary to comply with the tax qualification provisions of the Code, for the benefit of participants in the Fidelity Plan who are current or former employees of Sun Alliance USA Services Inc. and beneficiaries of deceased employees or former employees of Sun Alliance USA Services Inc. ("Plan Participants"). Contributions with respect to the Plan Participants under the Fidelity Plan shall be made only for the period through the Closing Date. Within 60 days following the Closing Date, Sun shall deliver to Orion a copy of the Sun Plan and a determination letter in respect thereof to the effect that the terms of the Sun Plan satisfy the requirements under Section 401(a) of the Code. As soon as practicable after the receipt of such letter, but no later than 60 days following the Closing Date, Sun and Orion shall cause on behalf of their respective plans the filing with the IRS of Forms 5310-A, as either may be required to file such form, specifying a valuation date approximately 30 days after the filing of such form(s), as mutually agreed to by Sun and Orion, on which date shall occur an in-kind transfer from the trust through which the Fidelity Plan is funded to the trust for the Sun Plan of each Plan Participant's aggregate account balance. On the date specified in the Form(s) 5310-A, or such later valuation date as is mutually agreed upon by Sun and Orion, or, in the event that neither Sun nor Orion is required to file a Form 5310-A, as soon as practicable after receipt of the determination letter, the transfer of each Plan Participant's aggregate account balance from the Fidelity Plan's trust to the Sun Plan's trust shall occur. Sun - 30 - shall pay any and all Fidelity expenses, fees and disbursements in connection with such transfer and otherwise each of Sun and Orion shall pay its own fees, expenses and reimbursements in connection with such transfer. (c) On or before the Closing Date, Sun shall cause the Pension Plan to be amended in the form set forth in Schedule 3.14. Within a 30 day period immediately following the Closing, Sun shall use reasonable efforts (to the extent permitted by applicable law) to obtain the consent of each current employee of Sun Alliance USA Services Inc. to cash him or her out of the Pension Plan as of the next practicable valuation date after the Closing Date. After the Closing Date, Sun shall cooperate with Orion and McGee with respect to any reasonable request by Orion or McGee to provide information to current employees of Sun Alliance USA Services Inc. who have not been cashed out. Sun shall pay any and all expenses, fees and disbursements incurred for actuarial evaluations in connection with the cash-outs and, otherwise, each of Sun and Orion shall pay its own expenses, fees and disbursements. (d) Sun will indemnify and hold harmless Orion, McGee and its Subsidiaries from and against any damages, liabilities, losses, costs or other obligations arising in connection with or attributable to any employee benefit plan (as defined in Section 3(3) of ERISA) maintained by or which has ever been contributed to by Sun or any entity affiliated with Sun under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA, other than plans maintained by or contributed to by McGee and its Subsidiaries. (e) Orion, McGee and Sun each agree to cooperate in providing records and administrative information to implement the provisions of this Section. Section 4.8 TAX MATTERS. Each of Orion and Sun covenants that: (a) (i) Sun shall prepare and file, or cause to be prepared and filed, and shall have the sole authority with respect to the form and content of, and otherwise control, all federal income Tax Returns and all state or local combined, consolidated and unitary Income Tax Returns which include McGee or its Subsidiaries for all taxable periods ending on or before the Closing Date (the "Sun Returns"), including the federal income Tax Return required to be filed for the period commencing on January 1, - 31 - 1995 and ending on the Closing Date (the "1995 Short Period Tax Return" and the "1995 Short Period," respectively); provided, however, that Sun shall consult with, and reasonably consider the views of, McGee, with respect to the treatment of any item on such Tax Returns where such treatment (A) does not materially effect the Consolidated Group and (B) could reasonably be expected to have a material adverse effect on McGee. The 1995 Short Period Tax Return shall be prepared in a manner consistent with the federal income Tax Returns of McGee filed prior to the Closing Date (the "Prior Returns"), as such Prior Returns shall have been amended. (ii) Orion shall be responsible for preparing and filing or causing McGee and its Subsidiaries to prepare and file all Tax Returns not described above in subsection 5.8(a)(i) required to be filed after the Closing Date which include McGee or its Subsidiaries or the operations of McGee or its Subsidiaries. (b) Orion shall be liable for and shall pay and hold Sun and its Subsidiaries harmless against any and all Taxes attributable to McGee or its Subsidiaries or such entities' operations (including federal income Taxes that McGee is liable for under the terms of the Federal Income Tax Allocation Agreement among Sun and its Subsidiaries, dated March 4, 1991, as amended through the date of this Agreement (the "Tax Allocation Agreement")). Notwithstanding the foregoing, with respect to any taxable periods ending on or before December 31, 1994, Orion's indemnity liability hereunder shall not exceed the sum of (i) two- hundred thousand dollars ($200,000) and (ii) the amount of any refund of Taxes paid by Sun to Orion pursuant to Section 5.8 (d) hereof or received by McGee or its Subsidiaries directly in respect to taxable periods ending on or before December 31, 1994, net of any additional Taxes imposed upon McGee or its Subsidiaries with respect to any such refund, and (iii) the liabilities for, or reserves in respect of, current or prior period Taxes which were reflected on the financial statements of McGee and its Subsidiaries, dated December 31, 1994, and which, as of the Closing, remain unpaid (the amount of any Taxes not indemnifiable by Orion by reason of the operation of this sentence being referred to as the "Reimbursable Taxes"). Sun will indemnify and hold harmless Orion, McGee and its Subsidiaries from and against (i) any liability for the Taxes of any member of the Consolidated Group, other than McGee and its Subsidiaries and (ii) any Taxes of McGee and its Subsidiaries constituting Reimbursable Taxes. The amount of any indemnity payment made under this Section 5.8(b) by one - 32 - party to or for the benefit of the other party will be reduced, but not below zero, by an amount equal to the present value of any current or reasonably anticipated future tax benefit which is made available, directly or indirectly, to the indemnitee or any affiliate thereof for any taxable period (or portion thereof) by reason of any such indemnity or other payment or the accrual of any amount giving rise to any such payment (or by reason of the adjustment or other event or circumstance giving rise thereto). The calculation of the present value of any such current or reasonably anticipated future tax benefit shall be made (A) by discounting the amount of any reasonably anticipated future tax benefit from the period such benefit is reasonably anticipated to be realized to the date the related payment under this Section 5.8(b) is to be made, utilizing a discount rate equal to the Applicable Federal Rate (as such term is defined in section 1274 of the Code and the Treasury Regulations promulgated thereunder and which is effective for the last day of the month preceding the month the related payment under this Section 5.8(b) is due) which most accurately corresponds to the length of the period such amount is being discounted, and (B) assuming that the calculation of the current or reasonably anticipated future tax benefit for the item(s) in question is based on application of the highest applicable federal, state and local income tax rate in effect for the taxable period(s) (or portion(s) thereof) during which the related payment under Section 5.8(b) is to be made. (c) Orion shall cause McGee to pay to Sun, or Sun shall pay to McGee, as the case may be, the difference between the Taxes attributable to the 1994 federal income taxable period and the 1995 Short Period required to be paid by McGee under the Tax Allocation Agreement and the amounts theretofore paid by McGee to Sun in respect of the relevant taxable period, which payments shall be paid within five (5) days of the date Sun files the 1994 federal consolidated income Tax Return and the 1995 Short Period Tax Return, respectively. In addition, Sun or McGee, as the case may be, will pay to the other the amount due pursuant to Section 6.3 of the Tax Allocation Agreement within five days of the date on which Sun files the 1995 Short Period Tax Return. (d) Provided that Orion or McGee have paid, indemnified and held harmless Sun and its Subsidiaries against all Taxes attributable to McGee or its Subsidiaries or their operations, Sun shall pay to Orion the amount of any refund of Taxes received (together with any interest received or credited with respect to such refund) after the Closing Date by Sun to the extent that such - 33 - amount is in excess of any amount that Orion has not paid by reason of the operation of the limitation set forth in the second sentence of subsection 5.8(b) hereof and that is attributable to McGee or its Subsidiaries under the Tax Allocation Agreement. Sun shall pay to Orion the amount owing hereunder within twenty (20) business days after the receipt or realization by Sun of the related refund or credit. (e) Orion shall be liable for and shall pay, and shall hold Sun and its Subsidiaries harmless against, any Taxes attribut- able to any election under Section 338 of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to the transactions contemplated hereunder. (f) Orion shall be liable for and shall pay, and shall hold Sun and its Subsidiaries harmless against, any transfer, recordation, stamp, or similar Taxes of any kind required in the applicable jurisdiction in connection with the effectuation of the transactions contemplated hereunder and imposed upon Sun and its Subsidiaries. (g) Sun, Orion and McGee hereby agree that the transfer of the Common Stock under this Agreement and the acquisition or control of McGee shall be effective as of the close of business on the Closing Date and that it is their intention, for federal income Tax purposes, that McGee and its Subsidiaries will cease to be a member of the Sun Consolidated Group as of said close of business. (h) Orion agrees that, to the extent permitted by applicable law, it shall not carry back, and shall not cause or permit McGee or its Subsidiaries or any other affiliate of Orion to carry back, any net operating loss, loss from operations or other tax attribute to any taxable year or period of McGee or its Subsidiaries or any affiliate thereof (including, but not limited to, any member of any affiliated, combined or unitary group of which McGee is or was a member) ending on or before the Closing Date, or to any taxable period beginning before and ending after the Closing Date, to the extent of the portion of such period ending on the Closing Date. Orion agrees that Sun shall not have any obligation under this Agreement to return or remit any refund or other tax benefit attributable to a breach by Orion of the foregoing undertaking. - 34 - (i) In connection (A) with any federal income tax audit or administrative or court proceeding relating to taxable periods of McGee ending on or prior to the Closing Date and (B) with any proposed assessment of any Reimbursable Taxes, Sun shall have the sole right in good faith and in a reasonably diligent manner to represent McGee's interest in such audit or proceeding or the contest of any proposed assessment, including by employing counsel of its choice. Sun will keep McGee and its counsel informed of the status of all audits or proceedings and the contest of any proposed assessment to the extent such matters relate to Taxes other than Reimbursable Taxes and shall afford McGee and its counsel the right to participate (at McGee's expense) in any such audits or proceedings to the extent such matters relate to Taxes other than Reimbursable Taxes. Sun shall not, without the consent of McGee (which consent shall not be unreasonably withheld), settle any issues or agree to any proposed assessments which settlement or agreement involves Taxes with respect to McGee or its Subsidiaries of $10,000 or more. Orion shall cooperate fully with Sun and make available to Sun in a timely fashion all data and other information reasonably requested by Sun in any such audit or proceeding including, but not limited to, the granting of a power of attorney to Sun to represent McGee and its Subsidiaries. (j) With respect to the taxable periods of McGee and its Subsidiaries ending on or before the Closing Date for which a Sun Return is to be filed, Orion shall cause McGee and its Subsidiaries to prepare and provide to Sun packages of tax information materials (including, but not limited to, (1) information requested by Sun in writing, and (2) federal and state income tax information), together with relevant work papers and all other relevant materials requested by Sun for these purposes (the "Tax Packages"), for purposes of enabling Sun to prepare all Sun Returns required to be filed by Sun pursuant to Section 5.8(a)(i) for such periods. Orion shall use its best efforts to cause the Tax Packages for the taxable periods ending December 31, 1994 of McGee to be delivered to Sun on or before July 31, 1995, and Orion shall cause the Tax Packages of McGee for all other such periods, including the Short Period, to be delivered to Sun on or before June 30, 1996; provided, however, that for purposes of enabling Sun to prepare and file an extension of time for filing any Sun Returns which include the Short Period, Orion shall cause McGee to furnish to Sun by February 15, 1996, McGee's preliminary estimate of taxable income for the Short Period. - 35 - (k) Orion recognizes that from time to time after the Closing Date, Sun and its affiliates and their agents and representatives will need reasonable access to accounting and tax books, records and other information h eld by McGee and its Subsidiaries with respect to their assets or operations for events, transactions or other items occurring or accruing on or prior to the Closing Date ("Tax Records"). In connection therewith, Orion agrees that it and its affiliates shall retain all the Tax Records, including, in particular, all such Tax Records that Sun may specify in reasonable detail in writing on or before the Closing Date ("Specified Tax Records") and will retain such other of the Tax Records in such format and for such periods as Orion would retain its own tax records, taking into account the expiration of the applicable period of assessment of the Tax to which such retention relates. Furthermore, prior to (i) knowingly discarding or destroying any Tax Records (other than Specified Tax Records), and (ii) discarding or destroying any Specified Tax Records, Orion shall give Sun and its affiliates and their agents and representatives a reasonable opportunity to inspect, review and make copies or take possession of the Tax Records or Specified Tax Records, as the case may be. (l) Except with respect to the parties, obligations under this Agreement, at the Closing, the Tax Allocation Agreement shall be deemed terminated on and as of the Closing Date. (m) Sun and Orion agree that any indemnity or other payment made under this Section 5.8 shall be treated by the parties for all purposes as an adjustment to the consideration being provided for the Common Stock hereunder (except to the extent required by any taxing authority or to the extent that a portion of such indemnity or other payment is treated as interest by reason of Section 483 of the Code), and shall be allocated pro rata between the Common Stock held by Sun and the Common Stock held by Phoenix. (n) The obligations of Sun and Orion under this Section 5.8 relating to any Taxes or matters with respect thereto shall survive until the lapse of the statute of limitations for the assessment of such Tax or sixty (60) days after the final administrative or judicial determination of such Tax and for a tax for which McGee or its Subsidiaries are not primarily liable, the later to occur of (a) the lapse of the statute of limitations for the collection of such Tax or (b) sixty (60) days after the final - 36 - administrative or judicial determination that such tax is collectable against Sun or its Subsidiaries; provided, however, that any claim in respect of an obligation under this Section 5.8 asserted in writing prior to the lapse of the statute of limitations or sixty days after the final administrative or judicial determination shall continue to survive. (o) After the Closing, neither party shall have any liability or obligation to the other for Taxes or matters with respect thereto except pursuant to this Section 5.8. VI. AGREEMENTS WITH RESPECT TO POOL OPERATION ---------------------- Section 5.1 POOL PARTICIPATIONS; REINSURANCE. Subject to the occurrence of the Closing: (a) Effective as of 12:00 a.m. New York Time on January 1, 1995 (the "Pool Transfer Time") the participations of Marine and Phoenix (or another Subsidiary of Sun which has capital and surplus at least equal to that of Phoenix) in the U.S. Pool will be as follows: (i) as to all business with an inception date during the period from the Pool Transfer Time through 12:00 p.m. New York Time on December 31, 1995 the aggregate and individual interest of Marine and Phoenix as U.S. Pool Participants shall be unchanged from the levels thereof set forth in the definition of "Pool" in Article XI hereof except to the extent set forth in the reinsurance agreement referred to in Section 6.1(b); (ii) as to all business with an inception date during the period from 12:00 a.m. New York Time on January 1, 1996 until 12:00 p.m. New York Time on December 31, 1996 the aggregate interest of Marine and Phoenix as Pool Participants shall be not more than 22.5% of the U.S. Pool and not less than 12% of the U.S. Pool, such aggregate interest (and the individual interests of each of Marine and Phoenix, in each case so long as it is a Subsidiary of Sun) to be determined by Orion in its sole discretion and to be set forth in a written - 37 - notice delivered by Orion to each of Marine and Phoenix not later than October 31, 1995; and the interest of SICH, as a U.S. Pool Participant in that year, shall not be less than the aggregate interest of Marine and Phoenix as U.S. Pool Participants in that year (determined as aforesaid) and SICH shall (to the extent permitted by applicable laws and regulations) retain net, and unreinsured, a participation at least equal to such aggregate interest of Marine and Phoenix; (iii) as to all business with an inception date during the period from 12:00 a.m. New York Time on January 1, 1997 until 12:00 p.m. New York Time on December 31, 1997, the aggregate interest of Marine and Phoenix as Pool Participants in respect of the U.S. Pool related to Participants in that year shall be not more than 12% of the U.S. Pool and not less than 6% of the U.S. Pool, such aggregate interest (and the individual interests of each of Marine and Phoenix, in each case so long as it is a Subsidiary of Sun) to be determined by Orion in its sole discretion and to be set forth in a written notice delivered by Orion to each of Marine and Phoenix not later than October 31, 1996; and the interest of SICH, as a Pool Participant in respect of the U.S. Pool related to that year, shall not at any time prior to December 31, 1997 be less than the aggregate interest of Marine and Phoenix as Pool Participants in respect of the U.S. Pool related to that year (determined as aforesaid) and SICH shall (to the extent permitted by applicable laws and regulations) retain net, and unreinsured, a participation at least equal to such aggregate interest of Marine and Phoenix; (iv) any "contingent" or "profit" commissions as defined in the Pool Agreement otherwise due to McGee from any of London, Marine or Phoenix in respect of the operations of the Pool subsequent to the Pool Transfer Time and prior to 12:00 p.m. New York Time on December 31, 1997 shall not be payable or paid by any of them; and (v) Sun and Orion shall be liable for, and entitled to share in, any contingent commissions payable to or from McGee or from or to any reinsurer of Pool exposures in respect of operations of the Pool prior to the Closing Date, such sharing to be in proportion to the interest of each of London, Marine, Phoenix and any other Subsidiary or former Subsidiary of Sun and SICH as a Pool Participant during the year in respect of which the reinsurance which shall have given rise to the contingent commissions liability or entitlement was - 38 - ceded (and assuming for purposes of this calculation that there are no other Pool Participants), such proportional allocations to be carried out separately in respect of the U.S. Pool and the Canadian Pool; and (vi) as to all business with an inception date on or after 12:00 a.m. New York Time on January 1, 1998 the interest as Pool Participants of London, Marine and Phoenix in respect of any Pool related to periods after that time shall be as Orion and Sun shall have further agreed in writing between them by not later than December 31, 1996. (b) At the Closing, Phoenix will cede to SICH (which may, in turn, retrocede to one or more insurance Subsidiaries of Orion (which, in turn, shall retain the same net and unreinsured (except to the extent it may retrocede it to one or more other Subsidiaries of Orion on the same basis) until December 31, 1997) a further participation in the U.S. Pool equal to 7-1/2% of the aggregate amount of all participations in the U.S. Pool pursuant to a quota share retrocession agreement in the form attached as Exhibit B, with respect to the period from 12:00 a.m. New York Time on January 1, 1995 to 12:00 p.m. New York Time on December 31, 1995; and the interest of SICH as a U.S. Pool Participant, as increased by the reinsurance agreement referred to in this Section 6.1(b) shall be 14.5%. Effective with respect to all business having an inception date during the period January 1, 1996 through December 31, 1997, SICH shall become and shall remain the "Clearing Company" as defined in the Inter Office ReinsuranceAgreement referred to in the definition of Pool Agreement for all purposes of the U.S. Pool. (c) Effective as of the Pool Transfer Time, the participations of London, Marine and SICH in the Canadian Pool will be as follows: (i) the aggregate percentage interest of London and Marine, collectively as Pool Participants in the Canadian Pool, with respect to business having an inception date during the calendar year beginning at 12:00 a.m. New York Time on January 1, 1995 shall be as set forth in the definition of "Pool" in Article XI hereof, and with respect to business having an inception date during the calendar year 1996 and 1997, respectively, shall be equivalent to the aggregate percentage interests of Marine and Phoenix, collectively, as Pool Participants in the U.S. Pool, with respect to such respective years; - 39 - (ii) the percentage interest of SICH, as a Pool Participant in the Canadian Pool, with respect to business having an inception date during the calendar year 1995 shall be 10% and for business having an inception date during the calendar years 1996 and 1997 shall be at least equal to the aggregate percentage interest of SICH, as a Pool Participant in the U.S. Pool, with respect to such respective years; (iii) SICH shall (to the extent permitted by applicable laws and regulations) at all times retain net and unreinsured (except to the extent that SICH may retrocede such interest to one or more insurance Subsidiaries of Orion (which in turn shall (subject to its right to retrocede such interest to one or more other insurance Subsidiaries of Orion on the same basis) retain the same net and unreinsured until December 31, 1997) a percentage interest as a Pool Participant in the Canadian Pool at least equal to the aggregate percentage interests of Marine and London for the respective calendar years as provided above; and (iv) as to all business with an inception date on or after 12:00 a.m. New York Time on January 1, 1998, the interests of London and Marine as Pool Participants in respect of any Canadian Pool shall be as Orion and Sun may further agree in writing between them by not later than December 31, 1996. Section 5.2 UNDERWRITING OPERATIONS OF THE POOL. (a) From the date hereof through the Closing Date: (i) Sun will cause McGee to use commercially reasonable best efforts to conduct the underwriting operations of the Pool in the ordinary course and in a manner consistent with prior practice and otherwise in accordance with this Agreement; and (ii) Sun will not, and will not cause or permit McGee to, introduce or commence on behalf of the Pool or for its account the offering of any new product or service or the underwriting of any type of risk or any line of insurance not currently written by or through the Pool. - 40 - (b) (i) From and after the Closing and through 12:00 p.m. New York Time on December 31, 1996, McGee shall, and Orion shall use commercially reasonable best efforts to cause McGee to, manage the affairs of the Pool on behalf of the Pool Participants and undertake on behalf of the Pool only such insurance risks as shall in the judgment of McGee be appropriate and consistent with prior practices of the Pool and otherwise be in accordance with this Agreement and the Ancillary Agreements. From and after the Closing, pursuant to the Management Agreement referred to below, Phoenix, London and Marine will issue such policies of insurance as are placed by McGee on behalf of the Pool; provided that Orion shall not cause or permit McGee to introduce or commence, on behalf of the Pool, the offering of any new product or service or the underwriting of any type of risk or any line of insurance not written by or through the Pool prior to the Closing Date and provided further that except as may be necessary to update and maintain existing policy forms and filings, none of Phoenix, London or Marine shall be obliged to file or qualify any new form of policy. (ii) At the Closing, Sun will cause each of Phoenix, London, Sun Bermuda and Marine to enter into one or more Management Agreements with McGee, McGee Bermuda or Wm. H. McGee & Co. of Canada, Ltd., as appropriate in the form attached as Exhibit C. In the event that at any time during the term of the Management Agreement Sun shall receive any notice or inquiry from any insurance regulatory authority with respect to the Management Agreement or Sun's participation as a party thereto, Sun shall give prompt notice thereof to Orion and McGee. Sun and McGee will use their best efforts to cooperate in the resolution of any regulatory issues which may exist and to that end (i) each may, in coordination with the other, make formal and informal appearances before and presentations to such regulatory authority and (ii) each shall cooperate in good faith in negotiating changes necessary to resolve any regulatory concern to the satisfaction of the regulatory authority concerned. In the event that such authority shall determine that appropriate amendments are not possible and that the Management Agreement must be terminated in light of the facts and applicable law at the time of such determination then Orion shall cause McGee to agree to the termination of the Management Agreement within the time period required by such regulatory authority. (c) Orion shall, or shall cause McGee to, deliver to Sun a written business plan for the Pool for each of 1995 and 1996 which shall address in reasonable detail the topics set forth in Schedule 6.2 and which shall be delivered, in the case of the 1995 business plan, not later than 60 days following the Closing and, in the case of the 1996 business plan, not later than February 29, 1996. At all times prior to December 31, 1997, Sun shall have the right, at its own expense, to visit the headquarters office of McGee at reasonable times and on a reasonable number of occasions during normal business hours to discuss the business and affairs of McGee with officers of McGee reasonably designated by McGee for such purpose and to make copies of relevant corporate records; provided that each of Orion and McGee shall have received at least ten days' notice of each such visit. (d) From and after the Closing Date, Orion shall take, and shall use commercially reasonable best efforts to cause McGee and the insurance Subsidiaries of Orion to take, all steps necessary to enable McGee to manage, after 12:00 p.m. New York Time on December 31, 1995, the Pool in accordance with the business plan of McGee. To that end, Orion will proceed or will use commercially reasonable best efforts to cause McGee and the Subsidiaries of Orion to proceed, in a manner consistent with reasonable commercial practice, to: (i) form or acquire, if the same shall not theretofore have been formed or acquired pursuant to Section 5.5, an insurance company organized and existing under the laws of Bermuda and qualified to issue insurance policies of a type and in a manner and amount consistent with prior practices of Sun Bermuda; provided that Orion may, at its election in its sole discretion, satisfy its obligation under this clause (i) by acquiring from Sun at any time prior to December 31, 1997 all of the outstanding capital stock of Sun Bermuda pursuant to an Option Agreement in the form attached as Exhibit D; (ii) make with all necessary insurance regulatory authorities such policy-form and rate filings as shall be necessary so that one or more insurance Subsidiaries of Orion is able to issue all forms of policies now being issued on behalf of the Pool by one or more of London, Phoenix and Marine; and - 41 - (iii) reduce the gross direct written premiums of Phoenix in respect of insurance policies issued for the U.S. Pool and having an inception date during the separate periods from July 1, 1995 to December 31, 1995, from January 1, 1996 to December 31, 1996 and from January 1, 1997 to December 31, 1997 to be in an amount less than five percent of the policyholder surplus of Phoenix at December 31, 1994, December 31, 1995 and December 31, 1996, respectively. For purposes of the immediately foregoing provision, all gross direct written premiums of Phoenix having inception dates during the period July 1, 1995 through December 31, 1995 but attributable to policies for which quotes were made by McGee prior to the Closing shall be disregarded. (e) From and after the Closing Date and until December 31, 1995 and 1996, respectively, Sun shall not take or allow Phoenix to take any voluntary action to reduce policyholder surplus of Phoenix to an amount less than $65,000,000 in the case of December 31, 1995 and $50,000,000 in the case of December 31, 1996. From and after the Closing Date and until December 31, 1995, Sun shall not take or allow Marine to take any voluntary action to reduce policyholder surplus of Marine to an amount less than the minimum amount required for Marine to be an authorized surplus lines insurer in the State of Texas but not in an amount in excess of $15,250,000. (f) From and after the Closing Date, neither Sun nor any Subsidiary or Affiliate of Sun shall have or threaten or assert any claim against the Pool, or against McGee or any Subsidiary of McGee in respect of the operation of the Pool subsequent to September 8, 1987 and prior to the Closing Date, except to the extent that such person may be entitled to share in the experience of the Pool during any year as set forth in the financial statements of the Pool furnished to such person, and Sun shall indemnify and hold each of Orion and McGee harmless from all losses, costs and expenses (including but not limited to legal fees and all costs of investigation and defense) incurred by either in the event any such claim is threatened or asserted. (g) At all times prior to December 31, 1997 McGee shall maintain errors and omissions coverage in an amount not less than $6,500,000 per occurrence and a deductible of not more than $100,000 per occurrence with one or more insurers rated "A" or better by A.M. Best Company; provided that any insurance Subsidiary of Orion shall be presumed to be approved by Sun and provided - 42 - further that if the annual premiums for such coverage (pro-rated for the period from the Closing Date to March 30, 1996) shall exceed in the year beginning April 1, 1996, 103% of such 1994 premiums or in the year beginning April 1, 1997 shall be more than 106% of such 1995 premiums then McGee shall maintain coverage in such amount and with such deductibles as may be obtained by McGee within the premium-amount limits set forth above. VII. CONDITIONS TO OBLIGATIONS OF ORION ------------------------- The obligations of Orion under this Agreement are, at its option, subject to the fulfillment, on or before the Closing Date, of each of the following conditions precedent: Section 6.1 COVENANTS. Sun and each Subsidiary of Sun shall have performed and complied with all the terms, covenants and conditions required by this Agreement to be performed or complied with by Sun on or before the Closing Date, and Orion shall have received from Sun, at the Closing, a certificate executed by an officer of Sun to that effect, dated the Closing Date. Section 6.2 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Sun in this Agreement shall be true and correct as of the Closing Date as though such representations and warranties were made at and as of such time, and Orion shall have received from Sun one or more certificates, dated the Closing Date, to that effect executed by one or more officers of Sun. Section 6.3 ABSENCE OF LITIGATION AND REQUIRED REGULATORY APPROVALS. Every consent of or approval by any governmental authority which is required in connection with the transactions contemplated by this Agreement shall have been obtained and be in full force and effect and there shall not be in effect any injunction, writ, preliminary restraining order or any order, ruling or request of any nature issued by a court or governmental agency of competent jurisdiction directing that any transactions provided for herein not be consummated as so provided and no suit, action, proceeding or investigation shall be pending or threatened before any court or governmental agency, which relates to or asserts (i) the illegality of any of the transactions - 43 - contemplated by this Agreement, or which seeks the restraint or prohibition of the consummation of any of the transactions contemplated by this Agreement or (ii) that material misleading statements or omissions have been made in connection with the consummation of any of the transactions contemplated by this Agreement or (iii) a claim for damages in a material amount, or other material relief against McGee or any of McGee's Subsidiaries, or against Orion, if such claim shall arise from or relate to this Agreement or the transactions contemplated hereby. Section 6.4 PREMERGER NOTIFICATION. Any applicable period of time necessary before the transactions contemplated hereby can be consummated, as provided by the Hart-Scott-Rodino Act or the Investment Canada Act, shall have expired, all required clearances thereunder shall have been obtained and no action or proceeding shall have been instituted by any of the Premerger Notification Agencies or any similar agency claiming to have jurisdiction for the purpose of enjoining or delaying the consummation of the transactions contemplated hereby. Section 6.5 NO MATERIAL ADVERSE EFFECT. Sun shall have furnished to Orion a certificate of an officer of Sun to the effect that no act, omission or event has occurred between the date hereof and the Closing Date which could reasonably be expected to have a Material Adverse Effect. Section 6.6 EMPLOYMENT AND CONSULTING AGREEMENTS. McGee shall have entered into an Agreement With Respect to Employment and Unfair Competition dated the Closing Date and substantially in the form of Exhibit E-1 with each of the key management employees of McGee identified therein and one or more Consulting Agreements in the form of Exhibit E-2 with the individuals identified therein. Such agreements shall not have been terminated, rescinded, cancelled, revoked, amended, modified or superseded, and no agree- ment or understanding to do any of the foregoing in the future shall exist, nor shall there have been any breach of any term or condition of either such agreement by any party thereto, whether or not consented to or waived by the other party nor shall any act or omission have occurred which with the passage of time or the giving of notice or both would constitute a breach of either thereof. Section 6.7 MANAGEMENT AND REINSURANCE AGREEMENTS. Management and Reinsurance Agreements in the forms of Exhibits B and C shall have been entered into and shall be in full force and effect. - 44 - Section Unfair Competition and Confidentiality Agreements. Sun, Phoenix, Marine, London and Sun Bermuda shall have entered into an Agreement With Respect to Confidentiality and Unfair Competition in the form of Exhibit F. Section 6.8 OPINION OF COUNSEL FOR SUN AND MCGEE. Orion shall have received an opinion from Dewey Ballantine, special counsel for Sun, with respect to matters relating to Sun, its Subsidiaries and its and their obligations under this Agreement and the other Opinion Documents referred to below, and (ii) an opinion of John P. Iacono, Esq., Senior Vice President and General Counsel of McGee, with respect to matters relating to McGee and its Subsidiaries and their obligations under the Opinion Documents, each dated the Closing Date, in the form attached as Exhibit 7.9 and in form and substance satisfactory to Orion and its counsel. VIII. CONDITIONS TO OBLIGATIONS OF SUN --------------------------------- The obligations of Sun under this Agreement are, at its option, subject to the fulfillment, on or before the Closing Date of each of the following conditions precedent: Section 7.1 COVENANTS. Orion shall have performed or complied with all the terms, covenants and conditions required by this Agreement to be performed or complied with by it on or before the Closing Date, and Sun shall have received from Orion, at the Closing, a certificate executed by an officer of Orion to that effect, dated the Closing Date. Section 7.2 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Orion in this Agreement shall be true and correct as of the Closing Date as though such representations and warranties were made at and as of such time and Sun shall have received from Orion a certificate, dated the Closing Date, to that effect executed by an officer of Orion. Section 7.3 ABSENCE OF LITIGATION AND REQUIRED REGULATORY APPROVALS. Every consent of or approval by any governmental authority which is required in connection with the transactions contemplated by this Agreement shall have been obtained and be in full force and effect and there shall not be in effect any injunction, writ, preliminary restraining order or any - 45 - order, ruling or request of any nature issued by a court or governmental agency of competent jurisdiction directing that any transactions provided for herein not be consummated as so provided and no suit, action, proceeding or investigation shall be pending or threatened before any court or governmental agency, which relates to or asserts (i) the illegality of any of the transactions contemplated by this Agreement, or which seeks the restraint or prohibition of the consummation of any of the transactions contemplated by this Agreement or (ii) that material misleading statements or omissions have been made in connection with the consummation of any of the transactions contemplated by this Agreement or (iii) a claim for damages in a material amount, or other material relief against McGee or any of McGee's Subsidiaries, or against Sun or any of its Subsidiaries, if such claim shall arise from or relate to this Agreement or the transactions contemplated hereby. Section 7.4 PREMERGER NOTIFICATION. Any applicable period of time necessary before the transactions contemplated hereby can be consummated, as provided by the Hart-Scott-Rodino Act or the Investment Canada Act, shall have expired, all required clearances thereunder shall have been obtained and no action or proceeding shall have been instituted by any of the Premerger Notification Agencies or any similar agency claiming to have jurisdiction for the purpose of enjoining or delaying the consummation of the transactions contemplated hereby. Section 7.5 MANAGEMENT AND REINSURANCE AGREEMENTS. Management and Reinsurance Agreements in the forms of Exhibit B and C shall have been entered into and shall be in full force and effect. Section 7.6 OPINION OF COUNSEL FOR ORION. Sun shall have received an opinion of Donovan Leisure Newton & Irvine, counsel for Orion, dated the Closing Date, in the form attached as Exhibit 8.6 and in form and substance satisfactory to Sun and its counsel. IX. TERMINATION ------------ Section 8.1 TERMINATION. At any time prior to the Closing Date, this Agreement may be terminated and the transactions provided for herein abandoned, whether before or after adoption and approval thereof by Sun and Orion: - 46 - (a) by mutual written consent of the parties hereto; (b) by Orion, if on the Closing Date any of the conditions set forth in Article VII hereof shall not have been met; (c) by Sun, if on the Closing Date any of the conditions set forth in Article VIII hereof shall not have been met; (d) by Sun or Orion, if the Closing shall not have occurred on or before August 15, 1995. Section 8.2 EFFECT OF TERMINATION. In the event of any termination pursuant to this Article IX, the parties hereto shall be released from all liabilities and obligations arising under this Agreement with respect to matters contemplated by this Agreement, other than for damages to the extent arising from a prior breach of this Agreement and other than as provided in Section 5.1 (last sentence only), 12.1 and 12.8. Section 8.3 CONDUCT FOLLOWING TERMINATION. If this Agreement is terminated pursuant to Section 9.1(b) or Section 9.1(d), until a date ninety days after such termination, Sun will not, nor will it cause, direct or authorize its Subsidiaries or any officers, directors, affiliates, employees or agents of Sun or any Subsidiaries of Sun to, initiate, solicit or engage in negotiations or discussions with any third party for the purpose of assisting, inducing or soliciting such party to make a proposal for or in respect of (i) any offer to purchase, or any invitation to tender for purchase, any or all of the capital stock of McGee or any Subsidiary of McGee; (ii) any proposed merger or other form of business combination with McGee or any Subsidiary of McGee; or (iii) any purchase of any substantial asset or liability of McGee or any Subsidiary of McGee or any interest in any substantial asset or liability of McGee or any Subsidiary of McGee or provide information to any third party in respect of or in furtherance of such a proposal and will notify Orion promptly if any solicitations are received subsequent to the date hereof with respect to any such proposal. - 47 - X. AMENDMENT; WAIVERS -------------------- Section 9.1 AMENDMENTS, MODIFICATIONS, ETC. At any time prior to the Closing, this Agreement and the Exhibits hereto may be amended, modified, superseded or supplemented to the extent permitted by applicable law only by an instrument in writing executed and delivered on behalf of each of the parties hereto, which instrument when so executed and delivered shall thereupon become a part of this Agreement and the provisions thereof shall be given effect as if contained in this Agreement as of the date hereof. Section 9.2 WAIVERS. The representations, warranties, covenants and conditions of this Agreement may be waived only by a written instrument executed by the party so waiving. The failure of any party at any time or times to require performance of any provision hereof shall not affect the right of such party at a later time to enforce the same. No waiver by any party of any condition, or breach of any term, covenant, agreement, representation or warranty contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of any other condition or of the breach of any other term, covenant, agreement, representation or warranty contained in this Agreement. XI. DEFINED TERMS -------------- When used as defined terms in this Agreement, the following terms shall have the meanings set forth herein: "ACCREDITED INVESTOR" shall have the meaning given to it in Section 4.6. "ANCILLARY AGREEMENTS" shall mean the Management Agreements, the Reinsurance Agreements, and the Agreement with Respect to Confidentiality and Competition in the respective forms attached as Exhibits hereto. "BENEFIT PLAN" shall have the meaning set forth in Section 3.14. - 48 - "BERMUDA MANAGEMENT AGREEMENT" shall have the meaning set forth in Section 5.5. "COMMON STOCK" shall have the meaning set forth in the third recital paragraph. "CLOSING" shall each have the meaning set forth in Section 2.1. "CLOSING DATE" shall have the meaning set forth in Section 2.1. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "CONSOLIDATED GROUP" shall have the meaning set forth in Section 3.11(a). "EMPLOYMENT CONTINUATION AGREEMENTS" shall mean and include the ag reements, forms of which are attached as Exhibit E-1. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA AFFILIATE" shall have the meaning set forth in Section 3.14. "HART-SCOTT-RODINO ACT" shall have the meaning set forth in Section 5.4. "IRS" shall mean the Internal Revenue Service. "LONDON" shall mean the Canadian Branch of The London Assurance, an English corporation. "MANAGEMENT AGREEMENT" shall mean the Bermuda Management Agreement and the management agreements referred to in Section 6.2(b). "MARINE" shall mean Marine Indemnity Insurance Company of America, a New York corporation. - 49 - "MATERIAL ADVERSE EFFECT" shall have the meaning set forth in Section 3.1. "MCGEE" shall mean Wm. H. McGee & Co., Inc., a New York corporation. "MCGEE BERMUDA" shall have the meaning set forth in Section 5.5. "NEW YORK TIME" shall mean time, whether Eastern Standard or Daylight Saving as may be the case, as determined in the City of New York. "ORION" shall mean Orion Capital Corporation, a Delaware corporation. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "PHOENIX" shall mean Phoenix Assurance Company of New York, a New Hampshire corporation. "POOL" shall mean those insurance underwriting and management arrangements which have been in effect from time to time between and among one or more of McGee, Wm. H. McGee & Co. of Canada Ltd. and Wm. H. McGee & Co. (Bermuda) Ltd. and the insurers participating in such arrangements as set forth in the Pool Agreements and among them, the present participants in the Canadian Pool and United States Pool being as follows: UNITED STATES POOL CANADIAN POOL POOL PARTICIPANTS % POOL PARTICIPANTS % - -------------------- ------------------- Phoenix 45% London 35.0% Taisho Marine & Fire Insurance Co. of America 15.0% Marine 28.5% Marine 7.5% Providence Washington Insurance Company 15.0% Continental Casualty Company (CNA) 7.5% SICH 15.0% SICH 7.0% Mitsui Marine and Fire 6.5% Insurance Company - 50 - UNITED STATES POOL CANADIAN POOL POOL PARTICIPANTS % POOL PARTICIPANTS % - -------------------- ------------------- The Providence Washington Insurance Company 7.0% Lucky Insurance Company, Ltd. (United States Branch) 6.0% The Baloise Insurance Co. of America 5.0% Each reference to the "Pool" shall, unless the context otherwise requires, be deemed to include both the Canadian Pool and the United States Pool and each annual renewal of the Pool so long as there shall be outstanding assets or liabilities of the Pool in respect of that year and shall further be deemed to include the participation of the Pool Participants in the Syndicates. "POOL AGREEMENTS" means (i) the Inter-Office Reinsurance Agreement dated as of January 1, 1975, as amended by the related Addenda Nos. 1-4 and supplemented by annual Schedules of Participations thereto, among McGee and the Pool Participants (the "Inter-Office Reinsurance Agreement"), and (ii) the Underwriting Management Agreements, General Agency & Management Agreements, Management Agreements and related Ancillary Agreements, each as amended, between or among McGee and the Pool Participants, which are listed in Schedule 3.15 as being entered into in connection with the Pool. "POOL PARTICIPANTS" shall mean those insurers and reinsurers who, from time to time, have participated or may participate in the Pool in respect of any year. "POOL TRANSFER TIME" shall have the meaning set forth in Section 6.1. "PREMGERGE NOTIFICATION AGENCIES" shall have the meaning set forth in Section 5.4. "REINSURANCE AGREEMENT" shall mean the quota share retrocession agreement referred to in Section 6.1(b). - 51 - "SICH" shall mean Security Insurance Company of Hartford, a Connecticut corporation and a wholly owned Subsidiary of Orion. "SUBSIDIARY" means any corporation of which a corporation or one or more Subsidiaries of such corporation owns or controls, directly or indirectly, more than fifty percent (50%) of the outstanding stock having by its terms ordinary voting power to elect a majority of the Board of Directors of such corporation, irrespective of whether or not at the time stock of any one class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency. "SUN" shall mean Sun Alliance USA Inc., a New York corporation. "SUN BERMUDA" shall mean Sun Insurance Company (Bermuda) Limited, a Bermuda corporation and an affiliate of Sun. "SUN'S KNOWLEDGE" shall mean, when used to qualify a representation or warranty of Sun, that such is being made or given only on the basis of and to the extent of the knowledge of Sun and its officers and directors, reasonable inquiry having been made by them or on their behalf in respect of the subject matter of the representation or warranty. "SYNDICATES" shall mean and include the American Hull Syndicate, the Water Quality Insurance Syndicate, the American Offshore Syndicate and the other insurance and reinsurance syndicates listed in Schedule 11 hereto. "TAXES" shall have the meaning set forth in Section 3.11(a). "TAX RETURN" shall have the meaning set forth in Section 3.11(a). XII. MISCELLANEOUS PROVISIONS ------------------------- Section 11.1 EXPENSES. Whether or not the Closing shall have occurred and regardless of whether this Agreement is terminated, each party hereto shall pay all of the costs and expenses incurred by it in connection with this Agreement and the - 52 - other transactions contemplated hereby (including, without limitation, disbursements and expenses of its attorneys, accountants and advisors, and printing and filing costs and fees). Section 11.2 NOTICES. All notices or other communications required or permitted under this Agreement shall be in writing and sufficient if delivered personally or sent by confirmed telecopy or by registered or certified mail, postage prepaid, addressed as follows: If to Orion, to Orion Capital Corporation 600 Fifth Avenue New York, New York 10020-2302 Attn: Treasurer Fax: (212) 247-4824 with a copy to Donovan Leisure Newton & Irvine 30 Rockefeller Plaza New York, N.Y. 10112 Attn: John J. McCann, Esq. Fax: (212) 632-3315 If to Sun or to McGee, to Sun Alliance USA Inc. 10 East 50th Street 27th Floor New York, New York 10022 Attn: John A. Moore President Fax: (212) 753-8552 with copies to Dewey Ballantine 1301 Avenue of the Americas New York, N.Y. 10019-6092 Attn: James A. FitzPatrick, Jr., Esq. Fax: (212) 259-6333 - 53 - Any party may change the person and addresses to which notices or other communications are to be sent to it by giving written notice of any such change in the manner provided herein for giving notice. Section 11.3 ENTIRE AGREEMENT. This Agreement, together with the schedules and exhibits hereto and the documents and instruments referred to herein, sets forth the entire agreement and understanding of the parties hereto in respect of the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof. No party hereto has relied upon any oral or written statement, representation, warranty, covenant, condition, understanding or agreement made by any other party or any representative, agent or employee thereof, except for those expressly set forth in this Agreement or in the schedules or exhibits hereto or the documents or instruments referred to herein. Section 11.4 NO ASSIGNMENT. This Agreement shall inure to the benefit of, and be binding upon, the respective successors and assigns of the parties hereto. No assignment of any rights or delegation of any obligations provided for herein shall be made by any party hereto without the express prior written consent of each other party except that Orion may assign its rights (but not delegate its duties except as permitted herein) hereunder to any wholly-owned Subsidiary of Orion. Section 11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND COVENANTS. All representations and warranties of the parties hereto which are contained in this Agreement shall remain operative and in full force and effect until December 31, 1997, regardless of any investigation made by or on behalf of any of the parties hereto, following the Closing. Notwithstanding anything herein to the contrary, neither party hereto shall be liable to the other (or any affiliate thereof) for any damages, liabilities, losses, costs or other obligations arising from any inaccuracy or breach of any representation or warranty or breach or nonfulfillment of any covenant or agreement hereunder unless and until the aggregate amount of all such damages, liabilities, losses, costs or other obligations exceeds $500,000 in which event such party shall be liable to the other for the full amount thereof, up to a maximum aggregate payment of $22,000,000, except that liability described in Section 5.7(d) of this Agreement shall not be subject to such maximum aggregate payment. This Section 12.5 shall not apply to Taxes or matters with respect thereto, which shall be governed exclusively under Section 5.8. - 54 - Section 11.6 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to agreements made and to be performed entirely within such State, except (a) matters related to the validity of corporate action, which shall be governed by the laws of the state or other jurisdiction of incorporation of the relevant corporation and (b) matters related to compliance of the transactions contemplated by the Agreement with applicable insurance regulatory statutes. Section 11.7 DISPUTE RESOLUTION. If a dispute arises out of or relates to this Agreement, or the performance or an asserted breach thereof, the parties agree first to try in good faith to settle the dispute and further agree that, to that end: (a) A meeting shall be held promptly between Orion and Sun attended by individuals with decision-making authority regarding the dispute, to attempt in good faith to negotiate a resolution of the dispute. (b) If within fifteen days of the first meeting of such individuals they have not succeeded in negotiating a resolution of the dispute or agreed to extend the time within which to do so, the parties agree to submit the dispute to mediation in accordance with the Commercial Mediation Rules of the American Arbitration Association. Orion and Sun shall bear their own costs and share equally the costs of the mediation. (c) Orion and Sun will jointly appoint a mutually- acceptable mediator, seeking assistance in such regard from the American Arbitration Association if they have been unable to agree on such appointment within a period of twenty days from the conclusion of the negotiation period. (d) The parties agree to participate in good faith in the mediation, and negotiations related thereto or arising therefrom, for a period of 30 days after appointment of a mediator. If the parties are not successful in solving the dispute through mediation within that period of time (or, if sooner, within 60 days from the conclusion of the negotiation period), then the dispute shall be resolved by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, with each of Orion and Sun selecting one arbitrator of a panel of three and the two arbitrators so selected designating the third member of the panel of arbitrators. In the event that such two arbitrators - 55 - cannot agree on a third arbitrator within thirty days, one shall be designated by the American Arbitration Association upon application by either of the two arbitrators. The decision of the arbitrators shall be binding upon the parties and judgment upon the award entered by the arbitrators may be entered in any court having jurisdiction thereof. Orion and Sun shall each bear its own costs and the costs of the arbitrator appointed by each of them and they shall share equally the costs of the third arbitrator and the administrative costs of the arbitration. Section 11.8 PRESS RELEASES. Orion and Sun will each consult with the other in advance of making any public announcement or press release, releasing any publicity or otherwise disclosing any information related to the execution of this Agreement or any transactions contemplated hereby, and each of Orion and Sun will obtain the consent of the other with respect to the form, content and timing thereof, which consent shall not unreasonably be withheld, except in the case of such disclosure as may be required by applicable law or securities exchange requirements. Section 11.9 COUNTERPARTS. This Agreement may be executed in any number of separate counterparts, each of which shall be deemed to be an original, but which together shall constitute one and the same instrument. Section 11.10 HEADINGS. The section and article headings contained in this Agreement are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. - 56 - IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly executed on the date first above written. ORION CAPITAL CORPORATION By: ----------------------- Attest: By: ----------------- Secretary SUN ALLIANCE USA INC. By: -------------------- Attest: By: ----------------- Secretary - 57 - EXHIBIT B QUOTA SHARE RETROCESSION AGREEMENT BETWEEN MARINE INDEMNITY INSURANCE COMPANY OF AMERICA (Hereinafter called the "Reinsured") AND SECURITY INSURANCE COMPANY OF HARTFORD (Hereinafter called the "Retrocessionaire") In consideration of the premium and terms and conditions hereinafter set forth, the parties hereto agree as follows: ARTICLE I --------- Business Covered: - ----------------- The Reinsured obligates itself to cede to the Retrocessionaire and the Retrocessionaire obligates itself to accept as reinsurance from the Reinsured, a 16 2/3% quota share interest of the Reinsured's Net Retention, as hereinafter defined, of its 45% participation of insurance or reinsurance, or other evidences of liability ceded or retroceded to the Reinsured under the Wm. H. McGee & Co., Inc. Inter-Office Reinsurance Agreement ("Inter-Office Reinsurance Agreement"). Net Retention: - ------------- The term Net Retention shall mean the gross amount of the Reinsured's liabilities and obligations on insurance and reinsurance assumed under the Inter-Office Reinsurance Agreement less any reinsurance effected by Wm. H. McGee & Co., Inc. on behalf of the Inter-Office Reinsurance Pool or by the Reinsured. It is also understood and agreed that this Agreement shall apply to the Reinsured's Net Retention after deduction of all per risk reinsurances. ARTICLE II ---------- Commencement and Termination: - ---------------------------- This Agreement shall take effect 12:01 a.m. Eastern Standard Time, January 1, 1995 [and shall apply to all losses occurring on and after this date in respect of new and renewal business written on and after this date.] or [and shall apply to all risks attaching on or after that date regardless of the date of the issue of the insurance policy or policies concerned.] This Agreement shall remain in force and effect until 12:00 p.m. Eastern Standard Time, December 31, 1995 at which time it shall automatically terminate without any notice required by the parties hereto. Special Termination: - ------------------- It is especially understood and agreed that should at any time the Reinsured or the Retrocessionaire lose the whole or part of its paid up capital, become insolvent, or be placed in conservation, rehabilitation or liquidation, or have a receiver appointed, or be acquired or controlled by, merged with, or reinsure its entire business with any other company or corporation, the other party shall have the right to terminate this Agreement forthwith upon the giving of (30) thirty days notice in writing, which shall be in accordance with the termination provisions of this Article. If any law or regulation of the federal or state or local government of any jurisdiction in which the Company is doing business shall render illegal the arrangements made in this Agreement, the Agreement can be terminated immediately insofar as it applies to such jurisdiction by the Reinsured giving notice to the Retrocessionaire to such effect. ARTICLE III ------------ Territory: - ---------- The liability of the Retrocessionaire under this Agreement shall be limited to losses in connection with property located in the United States of America, its territories, possessions, dependencies, Puerto Rico and Canada, except that the Retrocessionaire's liability shall also apply to properties, - 2 - wherever located, which are protected under extraterritorial provisions of the Company's original contracts. ARTICLE IV ---------- Exclusions: - ---------- This Agreement does not cover: 1. Life, Accident and Health and all Casualty business including Third Party Bodily Injury Liability and Medical Payments; 2. Loss under Third Party Property Damage Liability Coverage, except Legal Liability pursuant to a care, custody or control exposure such as, but not limited to, Warehousemen's Legal Liability, Garagekeeper's Legal Liability and Fire Legal Liability; 3. Fidelity and Surety, except when written as part of and included as an incidental part of Multiple Peril Policies; 4. Hail and/or Rain on growing, standing and/or drying crops; 5. War, as per North American War Exclusion Clause; 6. Offshore Oil and Gas Drilling Rigs; 7. Livestock Mortality; 8. Aviation business, including satellites, but not to exclude land transit or temporary location risks on aircraft hulls when covered under Inland Marine Transportation policies, nor location coverage on aircraft stocks and parts; 9. Financial Guarantee which shall for the purpose of this Agreement be construed to mean policies guaranteeing payment of indebtedness, insolvency or financial credit; 10. Residual Value Insurance; 11. Flood and Earthquake, except when written in conjunction with other perils; - 3 - 12. Nuclear Incidents as per the following clauses: -Nuclear Incident Exclusion Clauses - Physical Damage - Reinsurance, U.S.A. and Canada; -Nuclear Incident Exclusion Clauses - Physical Damage and Liability (Boiler and Machinery Policies) Reinsurance - U.S.A. and Canada; -Nuclear Energy Risks Exclusion Clause (Reinsurance) 1984 (Worldwide, excluding U.S.A. and Canada); 13. Treaty Reinsurance Assumed; 14. Insolvency Funds as per Insolvency Funds Exclusion Clause attached hereto; and 15. See page and Pollution as per I.S.O. Exclusion Clause or so deemed. ARTICLE V ---------- Premium: - ------- The Retrocessionaire shall receive its share of the net premiums received by the Reinsured after deductions for all brokerage and/or Agency and/or General Agency commissions paid or payable, any contingent or profit commissions paid or payable to Agents and Reinsured's General Agents, any overriding commission payable to the Reinsured's manager and any contingent or profit commission upon the net profits payable to the Reinsured's manager. ARTICLE VI ---------- Follow the Fortunes: - -------------------- The Retrocessionaire shall be subject to the same conditions as the original insurance and reinsurance policies and shall follow, subject to the terms of this Agreement, the fortunes of the Reinsured in respect of all business ceded hereunder. The Reinsured shall not be prejudiced in any way by any involuntary omission, delay or error, it being understood that such omission, delay or error shall be corrected as soon as possible. - 4 - ARTICLE VII ------------ Accounts: - -------- The Reinsured shall render an account for all business written as nearly as possible on the twentieth day of each month for the preceding month's business and shall remit balances due the Retrocessionaire not later than 90 days from the close of the month in which the business is written. The Reinsured shall likewise render an account for all loss settlements, reinsurance recoveries due thereon as well as salvages, refunds and/or other recoveries. All accounts and settlements between the parties shall be made in U.S. Dollars. Remittances or settlements are not to prejudice the right of the Reinsured to charge back to the Retrocessionaire any premium or other credits made by the Reinsured's manager which may prove uncollectible for any reason. ARTICLE VIII ------------- Claims, Taxes and Other Expenses: - -------------------------------- The Retrocessionaire shall pay its proportionate share of all (i) losses and/or loss adjustment expenses as well as legal or other expenses in connection with the adjustment or resistance of claims (ii) expenses charged by Reinsured's manager in the handling of claims and for inspection, survey or audit of insureds records; and (iii) premium and franchise taxes payable by the Reinsured to any municipal, provincial, state, federal or regulatory authority. It is understood and agreed that in consideration of the terms under which this Agreement is issued, the Reinsured undertakes not to claim any deduction with respect to the premium hereon when making premium tax returns to the appropriate tax authorities. - 5 - ARTICLE IX ----------- Seven Year Roll-Over: - -------------------- The Retrocessionaire agrees to assume responsibility for its share of unearned premiums, outstanding and incurred but not reported losses recorded by the Reinsured for a period of seven (7) years following the close of the Accounting Year in which the premiums were written. At that point any balance of premiums or losses are to be transferred and distributed by the Reinsured's Managers under a Reinsurance Portfolio arrangement among the companies who are then members of the Manager's Group during the succeeding Accounting year. ARTICLE X ---------- Insolvency: - ---------- In the event of the insolvency of the Reinsured, this Reinsurance shall be payable by the Retrocessionaire directly to the Company or its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Reinsured without diminution because of the insolvency of the Reinsured or because the liquidator, receiver, conservator or statutory successor of the Reinsured has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Reinsured shall give written notice to the Retrocessionaire of the pendency of a claim against the insolvent Reinsured indicating the policy or bonds reinsured which claim would involve a possible liability on the part of the Retrocessionaire within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership and that during the pendency of such claim, the Retrocessionaire may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Reinsured or its liquidator, receiver, conservator or statutory successor. The expense thus incurred against the insolvent Reinsured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reinsured solely as a result of the defense undertaken by the Retrocessionaire. - 5 - The reinsurance under this Agreement shall be payable by the Retrocessionaire directly to the Reinsured, or to its liquidator, receiver, conservator or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where the agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company and (b) where the Retrocessionaire with the consent of the direct insured or insureds and with the prior approval of the Superintendent of Insurance of the State of New York to the certificate of assumption on New York risks has assumed such policy obligations of the Reinsured as direct obligations of the Retrocessionaire to the payees under such policies and in substitution for the obligations of the Reinsured to such payees. ARTICLE XI ----------- Arbitration: - ------------ As a precedent to any right of action hereunder, if any differences shall arise between the contracting parties with reference to the interpretation of this Agreement or their rights with respect to any transaction involved, whether arising before or after termination of this Agreement, such differences shall be submitted to arbitration upon the written request of one of the contracting parties. Each party shall appoint an arbitrator within thirty days of being requested to do so, and the two named shall select a third arbitrator before entering upon the arbitration. If either party refuses or neglects to appoint an arbitrator within the time specified, the other party may appoint the second arbitrator. If the two arbitrators fail to agree on a third arbitrator within thirty days of their appointment, each of them shall name three individuals, of whom the other shall decline two, and the choice shall be made by drawing lots. All arbitrators shall be active or retired disinterested officers of insurance or reinsurance companies or Underwriters at Lloyd's, London not under the control of either party to this Agreement. Each party shall submit its case to its arbitrator within thirty days of the appointment of the third arbitrator or within such period as may be agreed by the arbitrators. All arbitrators shall interpret this Agreement as an honorable engagement rather - 6 - than as merely a legal obligation. They are relieved of all judicial formalities and may abstain from following the strict rules of law. They shall make their award with a view to effecting the general purpose of this Agreement in a reasonable manner rather than in accordance with a literal interpretation of the language. The decision in writing of any two arbitrators, when filed with the contracting parties, shall be final and binding on both parties. Judgment upon the award rendered may be entered in any Court having jurisdiction thereof. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the third arbitrator and of the arbitration. In the event that two arbitrators are chosen by one party as above provided, the expense of the arbitrators and the arbitration shall be equally divided between the two parties. Any arbitration shall take place in the city in which the ceding Company's Head Office is located unless some other place is mutually agreed upon by the contracting parties. ARTICLE XII ----------- Alterations: - ----------- 1. This Agreement may be altered at any time by mutual consent of the parties either by Addendum or by correspondence. Such Addendum or correspondence shall be deemed to form an integral part of this Agreement. 2. This Agreement may be executed in any number of copies each of which shall be deemed to be an original and shall be binding upon all parties. - 7 - IN WITNESS WHEREOF the parties have executed this Agreement this day of , 1995. MARINE INDEMNITY INSURANCE COMPANY OF AMERICA ------------------------------------ SECURITY INSURANCE COMPANY OF HARTFORD ---------------------------------------- - 8 - EX-11 6
EXHIBIT 11 ORION CAPITAL CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (000s omitted-except for per common share data) Year Ended December 31, --------------------------- 1995 1994 1993 ---- ---- ---- Computation of weighted average number of common and equivalent shares outstanding: PRIMARY - Weighted average number of shares outstanding ............................. 14,055 14,249 14,461 Dilutive effect of stock options .......... 132 99 137 ------- ------- ------- Weighted average number of common and equivalent shares ....................... 14,187 14,348 14,598 ======= ======= ======= Net earnings before preferred dividend requirements ............................ $67,622 $55,245 $68,813 Preferred dividends ....................... - - 409 ------- ------- ------- Net earnings attributable to common stockholders ............................ $67,622 $55,245 $68,404 ======= ======= ======= Net earnings per common share ............. $ 4.77 $ 3.85 $ 4.69 ======= ======= ======= FULLY DILUTED - Weighted average number of shares outstanding ............................. 14,055 14,249 14,461 Dilutive effect of stock options .......... 139 118 137 Conversion of $2.125 Preferred Stock ...... - - 57 ------- ------- ------- Weighted average number of common and equivalent shares ....................... 14,194 14,367 14,655 ======= ======= ======= Net earnings before preferred dividend requirements ............................ $67,622 $55,245 $68,813 Adjustable rate preferred stock dividends.. - - 407 ------- ------- ------- Net earnings attributable to common stockholders ............................ $67,622 $55,245 $68,406 ======= ======= ======= Net earnings per common share ............. $ 4.76 $ 3.85 $ 4.67 ======= ======= =======
EX-21 7 EXHIBIT 21 SUBSIDIARIES* OF ORION CAPITAL CORPORATION State or Other Jurisdiction Subsidiary of Incorporation - ------------ ----------------- Clarke & Towner, Inc. Connecticut Connecticut Specialty Group, Inc. Connecticut Connecticut Specialty Insurance Company Connecticut Connecticut Specialty Insurance Group, Inc. Connecticut Design Professionals Administration Corporation California Design Professionals Insurance Company Connecticut Dimock & Associates, Inc. Insurance Brokers California DPIC Companies, Inc. California EBI Companies, Inc. Connecticut EBI Consulting Services, Inc. California EBI Indemnity Company Connecticut EFC Property Management, Inc. California Employee Benefits Insurance Company Connecticut Independent Financial Planners Corporation New Jersey Jabawwat, Inc. Delaware Wm. H. McGee & Co., Inc. New York Wm. H. McGee & Co. (Bermuda) Ltd Bermuda Wm. H. McGee & Co. of Canada, Ltd. Canada Wm. H. McGee & Co. of Puerto Rico, Inc. Puerto Rico Wm. H. McGee Services, Inc. New York Nations' Care, Inc. Connecticut Orion Capital Companies, Inc. Connecticut Orion Properties Corporation Delaware Peninsula Excess Insurance Brokers, Inc. California Security Insurance Company of Hartford Connecticut Security Insurance Company (U.K.) Limited United Kingdom SecurityRe, Inc. Connecticut Security Reinsurance Company Connecticut Security Warranty Association of Florida, Inc. Florida The Connecticut Indemnity Company Connecticut The Fire and Casualty Insurance Company of Connecticut Connecticut - -------------------------------------------------------------------------------- *The listed subsidiaries are wholly-owned by Orion Capital Corporation (the "Company") as of December 31, 1995. The Company owns slightly less than 50% of Guaranty National Corporation of Englewood, Colorado and approximately 20% of Intercargo Corporation of Schaumburg, Illinois. EX-23 8 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 2-65348 on Forms S-8 and S-16 relating to the Orion Capital Corporation 1976 and 1979 Stock Option Plans, No. 2-80636 on Form S-8 relating to the Orion Capital Corporation 1982 Long-Term Performance Incentive Plan, No. 2-63344 on Form S-8 relating to the Orion Capital Corporation Employees' Stock Savings and Retirement Plan and No. 33-59847 on Form S-8 of our report dated February 21, 1996, appearing in this Annual Report on Form 10-K of Orion Capital Corporation for the year ended December 31, 1995. Deloitte & Touche LLP Hartford, Connecticut March 15, 1996 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Annual Report on Form 10-K of Orion Capital Corporation for the year ended December 31, 1995 of our reports dated February 20, 1996, appearing in the Annual Report on Form 10-K of Guaranty National Corporation for the year ended December 31, 1995. Deloitte & Touche LLP Denver, Colorado March 15, 1996 EX-27 9
7 THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ORION CAPITAL CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-1-1995 DEC-31-1995 782,869 265,169 276,282 304,885 1,979 0 1,602,861 3,584 291,527 77,673 2,473,588 1,274,982 302,105 0 18,946 209,148 161,996 0 0 328,907 2,473,588 749,003 99,040 11,885 14,352 512,233 195,481 43,352 88,035 20,413 67,622 0 0 0 67,622 4.77 4.76 891,542 500,514 11,719 146,540 263,257 993,978 11,719
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