-----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, IafwpJPbdqHzGjLjSATsg7EP3ujm83a+CGrEqwte0ffDoIO+0Z233YRmAFrqK2KL o07DAC+z+le2/AiUtr44nA== 0000074931-97-000021.txt : 19970508 0000074931-97-000021.hdr.sgml : 19970508 ACCESSION NUMBER: 0000074931-97-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970507 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORION CAPITAL CORP CENTRAL INDEX KEY: 0000074931 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 956069054 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-02120 FILM NUMBER: 97597108 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1997 ( ) TRANSITION REPORT, PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-7801 ORION CAPITAL CORPORATION -------------------------- (Exact name of registrant as specified in its charter) Delaware 95-6069054 - --------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 600 Fifth Avenue New York, New York 10020 - 2302 - ---------------------------------------- ----------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 332-8080 -------------- Former name, former address and former fiscal year if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- 13,760,551 shares of Common Stock, $1.00 par value, of the registrant were outstanding on May 5, 1997. Page 1 of 27 Exhibit Index Appears at Page 23 ORION CAPITAL CORPORATION FORM 10-Q INDEX For the Quarter Ended March 31, 1997 Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheet at March 31, 1997 (Unaudited) and December 31, 1996 .................................. 3 - 4 Consolidated Statement of Earnings for the three-months ended March 31, 1997 and 1996 (Unaudited) .............. 5 Consolidated Statement of Stockholders' Equity for the three-months ended March 31, 1997 and 1996 (Unaudited), and for the year ended December 31, 1996 ............... 6 Consolidated Statement of Cash Flows for the three-months ended March 31, 1997 and 1996 (Unaudited) .............. 7 - 8 Notes to Consolidated Financial Statements (Unaudited) ... 9 - 11 Independent Accountants' Review Report ................... 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 13 - 20 PART II. OTHER INFORMATION .................................. 21 Page 2
PART 1. FINANCIAL INFORMATION ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS (000s omitted) March 31, 1997 December 31, (Unaudited) 1996 -------------- ------------ Investments: Fixed maturities at amortized cost (market $331,541 - 1997 and $334,755 - 1996) .................................. $ 328,279 $ 326,841 Fixed maturities at market (amortized cost $1,352,446 - 1997 and $1,169,812 - 1996) ..................... 1,361,948 1,205,308 Common stocks at market (cost $143,258 - 1997 and $136,631 - 1996) .............. 201,158 209,281 Non-redeemable preferred stocks at market (cost $159,764 - 1997 and $151,439 - 1996) ....................... 162,828 152,312 Other long-term investments .............. 85,110 90,129 Short-term investments ................... 311,441 325,896 ---------- ---------- Total investments ..................... 2,450,764 2,309,767 Cash ....................................... 5,606 11,607 Accrued investment income .................. 28,212 25,724 Investment in affiliate .................... 22,616 22,170 Accounts and notes receivable .............. 182,068 181,495 Reinsurance recoverables and prepaid reinsurance .............................. 506,912 517,209 Deferred policy acquisition costs .......... 139,478 136,168 Property and equipment ..................... 66,981 68,763 Excess of cost over fair value of net assets acquired .......................... 80,449 81,198 Deferred federal income taxes .............. 38,527 23,554 Other assets ............................... 86,843 86,702 ---------- ---------- Total assets .......................... $3,608,456 $3,464,357 ========== ========== See Notes to Consolidated Financial Statements (Unaudited) Page 3 ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY (000s omitted - except for share data) March 31, 1997 December 31, (Unaudited) 1996 -------------- ------------ Liabilities: Policy liabilities - Losses ...................................... $1,422,149 $1,421,920 Loss adjustment expenses .................... 372,652 363,744 Unearned premiums ........................... 497,114 496,249 Policyholders' dividends .................... 20,780 22,489 ---------- ---------- Total policy liabilities .................. 2,312,695 2,304,402 Notes payable ................................. 310,734 310,904 Other liabilities ............................. 237,163 227,087 ---------- ---------- Total liabilities ......................... 2,860,592 2,842,393 ---------- ---------- Contingencies (Note F) Minority interest in subsidiary ................ 45,435 45,231 ---------- ---------- Company-obligated mandatorily redeemable capital securities of subsidiary trust holding solely the Junior Subordinated Debentures of Orion ......................... 125,000 - ---------- ---------- Stockholders' equity: Preferred stock, authorized 5,000,000 shares; issued and outstanding - none Common stock, $1 par value; authorized 30,000,000 shares; issued 15,337,650 shares.. 15,338 15,338 Capital surplus ............................... 158,592 158,587 Net unrealized investment gains, net of federal income taxes of $18,811 - 1997 and $31,674 - 1996 .............................. 48,164 72,260 Net unrealized foreign exchange translation losses, net of federal income taxes of $217 - 1997 and $414 - 1996 ................. (2,530) (2,164) Retained earnings ............................. 396,414 370,793 Treasury stock, at cost (1,580,099 shares - 1997 and 1,569,115 shares - 1996) ........... (35,668) (34,980) Deferred compensation on restricted stock ..... (2,881) (3,101) ---------- ---------- Total stockholders' equity ................ 577,429 576,733 ---------- ---------- Total liabilities and stockholders' equity. $3,608,456 $3,464,357 ========== ========== See Notes to Consolidated Financial Statements (Unaudited) Page 4 ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (000s omitted-except for per common share data) Three Months Ended March 31, ---------------------------- 1997 1996 ---- ---- Revenues: Premiums earned ............................. $323,963 $302,402 Net investment income ....................... 40,221 34,502 Realized investment gains ................... 15,789 5,365 Other income ................................ 4,939 5,522 -------- -------- Total revenues ............................ 384,912 347,791 -------- -------- Expenses: Losses incurred ............................. 170,015 168,800 Loss adjustment expenses .................... 48,987 43,177 Amortization of deferred policy acquisition costs ..................................... 94,798 78,439 Other insurance expenses .................... 6,119 8,836 Dividends to policyholders .................. 5,064 3,946 Interest expense ............................ 6,123 6,175 Other expenses .............................. 11,029 10,704 -------- -------- Total expenses ............................ 342,135 320,077 -------- -------- Earnings before equity in earnings (loss) of affiliate, federal income taxes and minority interest expense ............................ 42,777 27,714 Equity in earnings (loss) of affiliate ........ 587 (840) -------- -------- Earnings before federal income taxes and minority interest expense ................... 43,364 26,874 Federal income taxes .......................... 9,921 6,066 Minority interest expense: Subsidiary earnings ......................... 1,599 2,921 Subsidiary trust preferred securities ....... 2,366 - -------- -------- Net earnings ................................ $ 29,478 $ 17,887 ======== ======== Net earnings per common share ............... $ 2.12 $ 1.28 ======== ======== See Notes to Consolidated Financial Statements (Unaudited) Page 5 ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (000s omitted) Three Months Ended March 31, Year Ended (Unaudited) December 31, ------------------- ------------ 1997 1996 1996 ---- ---- ---- Common stock ............................. $ 15,338 $ 15,338 $ 15,338 ======== ======== ======== Capital surplus: Balance, beginning of period ........... $158,587 $146,658 $146,658 Exercise of stock options and issuance / cancellation of restricted stock ..... 5 (328) 29 Recognition of pre-reorganization federal income tax benefits .......... - - 11,900 -------- -------- -------- Balance, end of period ................. $158,592 $146,330 $158,587 ======== ======== ======== Net unrealized investment gains (losses): Balance, beginning of period ........... $ 72,260 $ 63,255 $ 63,255 Change in unrealized investment gains (losses), net of taxes ............... (24,096) (14,368) 9,005 -------- -------- -------- Balance, end of period ................. $ 48,164 $ 48,887 $ 72,260 ======== ======== ======== Net unrealized foreign exchange translation losses: Balance, beginning of period ........... $ (2,164) $ (3,935) $ (3,935) Change in unrealized foreign exchange translation losses, net of taxes ..... (366) 250 1,771 -------- -------- -------- Balance, end of period ................. $ (2,530) $ (3,685) $ (2,164) ======== ======== ======== Retained earnings: Balance, beginning of period ........... $370,793 $298,452 $298,452 Net earnings ........................... 29,478 17,887 86,631 Dividends declared ..................... (3,857) (3,472) (14,290) -------- -------- -------- Balance, end of period ................. $396,414 $312,867 $370,793 ======== ======== ======== Treasury stock: Balance, beginning of period ........... $(34,980) $(26,534) $(26,534) Exercise of stock options and issuance / cancellation of restricted stock ..... 24 453 2,702 Acquisition of treasury stock .......... (712) (3,886) (11,148) -------- -------- -------- Balance, end of period ................. $(35,668) $(29,967) $(34,980) ======== ======== ======== Deferred compensation on restricted stock: Balance, beginning of period ........... $ (3,101) $ (2,331) $ (2,331) Issuance / cancellation of restricted stock ................................ 43 124 (1,827) Amortization of deferred compensation on restricted stock ..................... 177 229 1,057 -------- -------- -------- Balance, end of period ................. $ (2,881) $ (1,978) $ (3,101) ======== ======== ======== See Notes to Consolidated Financial Statements (Unaudited) Page 6 ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (000s omitted) Three Months Ended March 31, ---------------------------- 1997 1996 ---- ---- Cash flows from operating activities: Premiums collected ........................... $ 338,054 $ 317,222 Net investment income collected .............. 31,585 33,053 Losses and loss adjustment expenses paid ..... (206,694) (192,435) Policy acquisition costs paid ................ (108,608) (100,789) Dividends paid to policyholders .............. (6,773) (4,665) Interest paid ................................ (10,280) (10,322) Federal income tax refunds (payments) ........ 139 (1,368) Other payments ............................... (13,406) (2,502) --------- --------- Net cash provided by operating activities .. 24,017 38,194 --------- --------- Cash flows from investing activities: Maturities of fixed maturity investments ..... 31,429 26,489 Sales of fixed maturity investments .......... 67,614 86,280 Sales of equity securities ................... 49,527 28,128 Investments in fixed maturities .............. (272,297) (100,378) Investments in equity securities ............. (49,379) (25,765) Effect on cash of consolidating Guaranty National ................................... - 6,794 Net sales (purchases) of short-term investments ................................ 15,068 (25,179) Other receipts (payments) .................... 9,324 (4,378) --------- --------- Net cash used in investing activities ...... (148,714) (8,009) --------- --------- Cash flows from financing activities: Net proceeds from issuance of trust preferred securities ................................. 123,242 - Proceeds from exercise of stock options ...... 195 - Repayment of notes payable ................... (188) (750) Dividends paid to stockholders ............... (3,856) (3,213) Dividends paid to minority stockholders ...... (363) (954) Purchases of common stock .................... (315) (3,417) Other payments ............................... - (12) --------- --------- Net cash provided by (used in) financing activities ............................... 118,715 (8,346) --------- --------- Effect of foreign exchange rate changes on cash ......................................... (19) (163) --------- --------- Net increase (decrease) in cash ............ (6,001) 21,676 Cash balance, beginning of period .............. 11,607 3,584 --------- --------- Cash balance, end of period .................... $ 5,606 $ 25,260 ========= ========= See Notes to Consolidated Financial Statements (Unaudited) Page 7 ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued) (UNAUDITED) (000s omitted) Three Months Ended March 31, ---------------------------- 1997 1996 ---- ---- Reconciliation of net earnings to net cash provided by operating activities: Net earnings .................................. $ 29,478 $ 17,887 -------- -------- Adjustments: Depreciation and amortization ............... 3,140 2,638 Amortization of excess of cost over fair value of net assets acquired .............. 749 769 Deferred federal income taxes ............... (1,353) 546 Amortization of fixed maturity investments .. (166) (497) Non-cash investment income .................. (4,835) (3,214) Equity in (earnings) loss of affiliates ..... (587) 840 Dividends received from affiliates .......... 171 137 Realized investment gains ................... (15,789) (5,365) Minority interest in subsidiary earnings .... 1,599 2,921 Foreign exchange translation adjustment ..... 142 544 Other ....................................... (160) (11) Change in assets and liabilities: Decrease (increase) in accrued investment income .................................... (2,478) 1,313 Increase in accounts and notes receivable ... (573) (2,170) Decrease (increase) in reinsurance recoverables and prepaid reinsurance ...... 10,297 (20,765) Increase in deferred policy acquisition costs (3,310) (7,544) Decrease (increase) in other assets ......... (1,058) 4,348 Increase in losses .......................... 229 27,325 Increase in loss adjustment expenses ........ 8,908 2,876 Increase in unearned premiums ............... 865 26,681 Decrease in policyholders' dividends ........ (1,709) (719) Increase (decrease) in other liabilities .... 457 (10,346) -------- -------- Total adjustments and changes ............. (5,461) 20,307 -------- -------- Net cash provided by operating activities ..... $ 24,017 $ 38,194 ======== ======== See Notes to Consolidated Financial Statements (Unaudited) Page 8
ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Three Months Ended March 31, 1997 and 1996 Note A - Basis of Financial Statement Presentation The consolidated financial statements and notes thereto are prepared in accordance with generally accepted accounting principles for property and casualty insurance companies. The consolidated financial statements include Orion Capital Corporation ("Orion") and its majority-owned subsidiaries (collectively the "Company"). The Company's investment in its unconsolidated affiliate is accounted for using the equity method. All material intercompany balances and transactions have been eliminated. The Company completed a tender offer for Guaranty National Corporation ("Guaranty National") common stock in July 1996, and increased its ownership of Guaranty National from 49.5% to 81%. The Company's interest in Guaranty National was included on an equity basis in financial statements previously issued for the first quarter of 1996. Results for the first quarter of 1996 have been restated to reflect the consolidation of Guaranty National in the Company's financial statements. A minority interest charge has been recorded for the portion of Guaranty National's earnings attributable to the shares not owned by the Company for both the 1997 and 1996 periods. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the Company's results of operations, financial position and cash flows for all periods presented. Although these consolidated financial statements are unaudited, they have been reviewed by the Company's independent accountants, Deloitte & Touche LLP, for conformity with accounting requirements for interim financial reporting. Their report on such review is included herein. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1996 annual report on Form 10-K. Note B - Investment in Affiliate As of March 31, 1997 the Company owned 24.8% of the common stock of Intercargo Corporation ("Intercargo"), a publicly-held company. The Company records its share of Intercargo's operating results in the subsequent quarter, after Intercargo has reported its financial results. Summarized financial information of Intercargo for the three months ended March 31, 1997 and 1996 is as follows: Page 9 Three Months Ended March 31, ------------------ 1997 1996 ---- ---- (000s omitted) Revenues: Premiums earned ................................. $ 16,357 $ 21,628 Investment and other income ..................... 3,751 2,251 -------- -------- 20,108 23,879 -------- -------- Expenses: Insurance expenses .............................. 17,701 27,865 Interest ........................................ 265 282 -------- -------- 17,966 28,147 -------- -------- Earnings (loss) before equity in earnings of affiliate and federal income taxes .............. 2,142 (4,268) Equity in earnings of affiliate ................... 985 - Federal income (taxes) benefit .................... (264) 629 -------- -------- Net earnings (loss) ............................. $ 2,863 $ (3,639) ======== ======== The Company's proportionate share, including amortization of goodwill ........................ $ 587 $ (840) ======== ======== Note C - Reinsurance In the normal course of business, the Company's insurance subsidiaries reinsure certain risks, generally on an excess-of-loss or pro rata basis, with other companies to limit exposure to losses. Reinsurance does not discharge the primary liability of the original insurer. The table below summarizes certain reinsurance information: Three Months Ended March 31, ---------------------------- 1997 1996 ---- ---- (000s omitted) Direct premiums written .................. $371,511 $347,859 Reinsurance assumed ...................... 25,242 47,044 -------- -------- Gross premiums written ................... 396,753 394,903 Reinsurance ceded ........................ (62,528) (73,957) -------- -------- Net premiums written ..................... $334,225 $320,946 ======== ======== Direct premiums earned ................... $362,119 $328,210 Reinsurance assumed ...................... 33,522 41,375 -------- -------- Gross premiums earned .................... 395,641 369,585 Reinsurance ceded ........................ (71,678) (67,183) -------- -------- Net premiums earned ...................... $323,963 $302,402 ======== ======== Loss and loss adjustment expenses incurred recoverable from reinsurers ............ $ 32,576 $ 23,420 ======== ======== Page 10 Note D - Trust Preferred Securities On January 13, 1997 Orion issued $125,000,000 of 8.73% Junior Subordinated Deferrable Interest Debentures due January 1, 2037 (the "Debentures") to Orion Capital Trust I (the "Trust"), a Delaware statutory business trust sponsored by Orion. The Trust simultaneously sold $125,000,000 of 8.73% Capital Securities (the "Trust Preferred Securities") which have substantially the same terms as the Debentures. The Trust Preferred Securities are subordinate to all liabilities of the Company, and may be redeemed without premium on or after January 1, 2007. Orion registered the Trust Preferred Securities under the Securities Act of 1933 in April 1997. The Trust is wholly owned by Orion and the sole assets of the Trust are the Debentures issued by Orion. Orion has provided a full and unconditional guaranty of the Trust's obligations under the Trust Preferred Securities, including all costs, expenses, debts and liabilities of the Trust. Note E - Stockholders' Equity and Earnings Per Common Share The Company repurchased 11,396 shares of its common stock at an aggregate cost of $712,000 in the first three months of 1997. The remaining authorization from the Company's Board of Directors was $4,017,000 as of March 31, 1997. Earnings per common share was computed using the weighted average common and dilutive common equivalent shares outstanding for the three months ended March 31, 1997 and 1996. The weighted average common and equivalent shares amounted to 13,899,000 and 13,997,000 shares for the quarters ended March 31, 1997 and 1996, respectively. In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share" which establishes new guidelines for the computation and disclosure of earnings per share. SFAS No. 128 is required to be adopted at the end of 1997. Current earnings per share ("EPS") disclosures will be replaced by Basic EPS and Diluted EPS as defined in SFAS No. 128. Pro forma Basic EPS and Diluted EPS computed in accordance with SFAS No. 128 would be $2.16 and $2.12 for the first quarter of 1997 and $1.29 and $1.28 for the first quarter of 1996, respectively. Note F - Contingencies Orion and its subsidiaries are routinely engaged in litigation incidental to their businesses. Management believes that there are no significant legal proceedings pending against the Company which, net of reserves established therefor, are likely to result in judgments for amounts that are material to the financial condition, liquidity or results of operations of Orion and its consolidated subsidiaries, taken as a whole. Page 11 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors Orion Capital Corporation New York, New York We have reviewed the accompanying consolidated balance sheet of Orion Capital Corporation and subsidiaries (the "Company") as of March 31, 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the three-month periods ended March 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Orion Capital Corporation and subsidiaries as of December 31, 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended; and in our report dated February 14, 1997, we expressed an unqualified opinion on those consolidated financial statements. The consolidated statements of earnings and cash flows for the year ended December 31, 1996 are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1996 and related consolidated statement of stockholders' equity for the year then ended is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. DELOITTE & TOUCHE LLP Hartford, Connecticut April 23, 1997 Page 12 ORION CAPITAL CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 1997 and 1996 RESULTS OF OPERATIONS Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries (collectively the "Company") operate principally in the property and casualty insurance business. The Company reports its insurance operations in three segments. In addition, the miscellaneous income and expenses (primarily interest, general and administrative expenses and other consolidating elimination entries) of the parent company are reported as a fourth segment. The three insurance segments are as follows: Regional Operations - this segment includes the workers compensation insurance products and services sold by the EBI Companies. Special Programs - this segment is comprised of several parts - DPIC Companies, which markets professional liability insurance; - Connecticut Specialty, which writes specialty insurance programs; - Wm. H. McGee, an underwriting management company that specializes in ocean marine, inland marine and commercial property insurance; and - the Company's 24.8% interest in Intercargo Corporation, which sells insurance coverages for international trade. Guaranty National - this segment specializes primarily in non-standard automobile insurance and other property insurance. Page 13 Earnings (loss) by segment before federal income taxes and minority interest expense are summarized as follows for the quarterly periods ended March 31, 1997 and 1996: Three Months Ended March 31, ------------------ 1997 1996 ---- ---- (000s omitted) Regional Operations ............................... $20,698 $12,815 Special Programs .................................. 16,905 11,947 Guaranty National ................................. 11,054 7,241 ------- ------- 48,657 32,003 Other ............................................. (5,293) (5,129) ------- ------- Total ........................................... $43,364 $26,874 ======= ======= The Company completed a tender offer for Guaranty National common stock in July 1996, and increased its ownership of Guaranty National from 49.5% to 81%. This has enabled the Company to share in a larger percentage of Guaranty National's earnings in the first quarter of 1997 as compared to the 1996 period, and to benefit from its inclusion in Orion's federal income tax return. Guaranty National's improved operating performance has also favorably impacted the Company's earnings for the 1997 quarter. The Company's interest in Guaranty National was included on an equity basis in financial statements previously issued for the first quarter of 1996. Results for the first quarter of 1996 have been restated to reflect the consolidation of Guaranty National in Orion's financial statements. A minority interest charge has been recorded for the portion of Guaranty National's earnings attributable to the shares not owned by the Company for both the 1997 and 1996 periods. REVENUES Premiums written and premiums earned - ------------------------------------ Net premiums written for the Company by segment are as follows: Three Months Ended March 31, ------------------ 1997 1996 ---- ---- (000s omitted) Regional Operations ............. $ 87,782 $ 91,605 Special Program ................. 108,146 105,728 Guaranty National ............... 138,297 123,613 -------- -------- $334,225 $320,946 ======== ======== Page 14 Regional Operations' net premiums written decreased 4.2% in the first quarter of 1997 as compared to the first quarter of 1996 due to lower premium rates. Legislative reforms in certain states have led to an increasingly competitive workers compensation marketplace with lower premium rates commensurate with reduced benefit levels. Commission expenses were proportionately reduced by the lower rates. The rate reductions were partially offset by increased premiums written from EBI Companies' selective geographic expansion and penetration, including the opening of three branch offices in 1997 and seven in 1996 in territories where the Company believes it will benefit from its service oriented approach. Special Programs' net premiums written during the first quarter of 1997 increased 2.3% from the first quarter of 1996, or 16.4% excluding premiums from the Company's assumed reinsurance business that is being run off. Premiums written by DPIC Companies for professional liability insurance decreased .7% to $43,921,000 in 1997's first quarter from $44,228,000 for the first quarter of 1996. The decrease is primarily attributable to a very competitive market offset in large part by the continuation of a high level of policy renewals. Premium volume for Connecticut Specialty increased 30.9% to $45,819,000 in the first quarter of 1997 from $35,013,000 in the 1996 period. The increase in premiums was primarily from transportation programs, including truck liability and physical damage coverages, as well as increases in low exposure professional liability programs. Also, premiums written for most Connecticut Specialty programs increased in 1997 over the 1996 first quarter from higher retentions after a change in reinsurance effective May 1996. Premiums written by Wm. H. McGee increased 45.2% to $12,731,000 in 1997's first quarter from $8,770,000 in 1996's first quarter. The increase is principally the result of the Company's greater participation in the underwriting pools managed by McGee. Guaranty National's net premiums written for the first quarter of 1997 increased 11.9% over the first quarter of 1996. Net premiums written for personal lines increased 26.9% to $82,120,000 in 1997's first quarter from $64,703,000 in the same period of 1996. The increase for personal lines was primarily attributable to legislation in California which requires all drivers to have liability insurance, which significantly increased our one- month policy business. Commercial lines premiums decreased 14.4% to $33,573,000 in 1997 from $39,201,000 during 1996's first quarter. The majority of the decrease for commercial lines was from lower production in the commercial auto and umbrella programs, increased competition by standard carriers in the nonstandard marketplace, and the effect of both agent and program cancellations during 1996. Premiums written by the collateral protection unit were $22,604,000 for the first quarter of 1997, up 14.7% from $19,709,000 for the comparable period in 1996. The premium volume growth for this unit comes from increased writing in new programs for automobile financing GAP and mortgage fire coverages, and from a new warranty program. Page 15 Premiums earned increased 7.1% to $323,963,000 in the first quarter of 1997 compared to $302,402,000 in the first quarter of 1996. Premiums earned reflects the recognition in income of the changing levels of net premium writings. Net investment income - --------------------- Pre-tax net investment income increased 16.6% to $40,221,000 for the first quarter of 1997 from $34,502,000 for the first quarter of 1996. The pre-tax yields on the average investment portfolio were 7.3% for the first quarter of 1997 and 6.5% for the first quarter of 1996 and the after-tax yields were 5.6% and 5.2%, respectively. The increase in net investment income results from increased earnings both on a higher investment base and from investments in limited partnerships. The higher investment base includes the proceeds related to the issuance of $125,000,000 of trust preferred securities in January 1997 and our positive operating cash flow. Limited partnership earnings increased to $4,617,000 in the first quarter of 1997 from $2,955,000 for the 1996 period. Fixed maturity investments which the Company has both the positive intent and the ability to hold to maturity are recorded at amortized cost. Fixed maturity investments which may be sold in response to, among other things, changes in interest rates, prepayment risk, income tax strategies or liquidity needs are classified as available-for-sale and are carried at market value. The carrying value of fixed maturity and short-term investments amounted to $2,001,668,000 and $1,858,045,000, or approximately 81.5% and 80.0% of the Company's cash and investments at March 31, 1997 and December 31, 1996, respectively. The Company's investment philosophy is to achieve a superior rate of return after taxes while maintaining a proper balance of safety, liquidity, maturity and marketability. The Company invests primarily in investment grade securities and strives to enhance the average return of its portfolio through limited investment in a diversified group of non-investment grade fixed maturity securities or securities that are not rated. At March 31, 1997 and December 31, 1996, the Company's investments in non-investment grade and unrated fixed maturity securities were carried at $273,284,000 and $219,473,000, respectively. These investments represented 11.1% and 9.5% of cash and investments and 7.6% and 6.3% of total assets at March 31, 1997 and December 31, 1996, respectively. Realized investment gains - ------------------------- Net realized investment gains increased $10,424,000 to $15,789,000 in the first quarter of 1997 from $5,365,000 in the first quarter of 1996. Realized investment gains in the first quarters of 1997 and 1996 are net of $1,778,000 and $1,168,000, respectively, of provisions for losses on securities deemed to be other than temporarily impaired. Realized gains (losses) vary from period to period, depending on market conditions relative to the Company's investment holdings, the timing of investment sales generating gains and losses, the occurrence of events which give rise to other than temporary impairment of investments, and other factors. Page 16 EXPENSES AND OTHER Operating ratios - ---------------- The following table sets forth certain ratios of insurance operating expenses to premiums earned for the Company and the ratio of loss and loss adjustment expenses to premiums earned (the "loss ratio") by segment. Three Months Ended March 31, ------------------ 1997 1996 ---- ---- Loss and loss adjustment expenses ................. 67.6% 70.1% Policy acquisition costs and other insurance expenses ........................................ 31.1 28.9 ----- ----- Total before policyholders' dividends ......... 98.7 99.0 Policyholders' dividends .......................... 1.6 1.3 ----- ----- Total after policyholders' dividends .......... 100.3% 100.3% ===== ===== Loss and loss adjustment expense ratio by segment: Regional Operations ............................ 58.5% 65.8% Special Programs ................................ 73.0% 70.0% Guaranty National ............................... 69.1% 73.5% Management believes that the Company's reserves for loss and loss adjustment expenses make reasonable and sufficient provision for the ultimate cost of all losses on claims incurred. Adverse development of prior years' losses amounted to $1,542,000 in the first quarter of 1997, compared with $1,359,000 in the 1996 period. The improvement in the loss ratio for the Regional Operations segment results from favorable loss experience achieved by EBI Companies through its service oriented approach of working with its customers to prevent losses and reduce claim costs. The increase in the loss ratio for the Special Programs segment is attributable in large part to losses from certain programs cancelled by Connecticut Specialty, and higher initial reserving by DPIC Companies. Each of Guaranty National's units had lower loss ratios in 1997's first quarter versus the comparable 1996 period. The largest impact was from lower losses from personal lines during 1997. Page 17 The increase in the ratio of deferred policy acquisition costs and other insurance expenses to premiums earned (the "expense ratio") is attributable to the Company's continued investment in building its loss prevention and claims management competencies as well as the costs of opening EBI Companies offices in new territories. The increase for 1997 was also the result of the change in Connecticut Specialty's reinsurance in May 1996, which provides for lower ceding commissions. Interest expense - ---------------- Interest expense was $6,123,000 in the first quarter of 1997 versus $6,175,000 in 1996, reflecting consistent levels of debt outstanding and interest rates on the Company's debt for the first quarter of both years. Equity in earnings (loss) of affiliate - -------------------------------------- Equity in earnings (loss) of affiliate includes the Company's portion of earnings from the Intercargo investment of $587,000 in 1997's first quarter versus a loss of $840,000 recorded in the first quarter of 1996. The Company records its share of Intercargo's results in the subsequent quarter. Federal income taxes - -------------------- Federal income taxes on pre-tax operating results and the related effective tax rates amounted to $9,921,000 (22.9%) and $6,066,000 (22.6%) in the first quarters of 1997 and 1996, respectively. The Company's effective tax rate is less than the statutory tax rate of 35% primarily because of income derived from tax-advantaged securities. The effective tax rate in the first quarter of 1997 is also reduced by the deduction allowable for the interest on Orion's Junior Subordinated Deferrable Interest Debentures held by its subsidiary trust. Minority interest expense - ------------------------- Minority interest in subsidiary earnings of $1,599,000 and $2,921,000 for the first quarters of 1997 and 1996, respectively, represent the portion of Guaranty National's earnings, net of federal income taxes, attributable to Guaranty National's minority shareholders. This expense was lower in 1997 after the Company increased its ownership of Guaranty National in July 1996, partially offset by the higher earnings of Guaranty National in the first quarter of 1997. Minority interest in subsidiary trust of $2,366,000 for the first quarter of 1997 represents the financing cost before the federal income tax deduction on Orion's $125,000,000 of 8.73% trust preferred securities issued in January 1997. Page 18 LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities decreased by $14,177,000 to $24,017,000 in 1997 from $38,194,000 in 1996. The decrease in operating cash flow for 1997 was the result of higher payments for losses, policy acquisition costs and policyholders' dividends, offset in part by an increase in premiums collected. Cash used in investment activities increased to $148,714,000 in 1997 from $8,009,000 in 1996. Cash is used in investment activities primarily for purchases of investments. The purchases are funded by maturities and sales of investments, as well as by the net cash from positive operating cash flows after cash provided by or used in financing activities. Cash invested in 1997 includes the investment of the net proceeds from the issuance of $125,000,000 of trust preferred securities. Cash provided by financing activities was $118,715,000 in the first quarter of 1997 and cash used in financing activities was $8,346,000 for the first quarter of 1996. Cash was provided from the net proceeds of $125,000,000 of trust preferred securities issued by Orion in January 1997. Cash was used for dividend payments and the Company's stock repurchase program in both 1997 and 1996. Orion increased its quarterly dividend rate by 8.7% and 12.0% in the first and fourth quarters of 1996, respectively. Orion's uses of cash consist of debt service, dividends to stockholders and overhead expenses. These cash uses are funded from existing available cash, financing transactions and receipt of dividends, reimbursement of overhead expenses and amounts received in lieu of federal income taxes from Orion's insurance subsidiaries. Payments of dividends by Orion's insurance subsidiaries must comply with insurance regulatory limitations concerning stockholder dividends and capital adequacy. Limitations under current regulations are well in excess of Orion's cash requirements. Orion's insurance subsidiaries maintain liquidity in their investment portfolios substantially in excess of that required to pay claims and expenses. The insurance subsidiaries held cash and short-term investments of $152,687,000 and $293,477,000 at March 31, 1997 and December 31, 1996, respectively. Orion's insurance subsidiaries had combined policyholders' surplus of $679,936,000 at March 31, 1997 and $670,572,000 at December 31, 1996, and statutory operating leverage ratios of trailing twelve months' net premiums written to policyholders' surplus of 2.0:1 at both March 31, 1997 and December 31, 1996. The terms of Orion's indentures for its $100,000,000 of 7 1/4% Senior Notes due 2005 and its $110,000,000 of 9 1/8% Senior Notes due 2002 limit the amount of liens and guaranties by the Company, and the Company's ability to incur secured indebtedness without equally and ratably securing the senior notes. Management does not believe that these limitations unduly restrict the Company's operations or limit Orion's ability to pay dividends on its stock. At March 31, 1997, the Company was in compliance Page 19 with the terms of its senior note indentures. Management believes that the Company continues to have substantial sources of capital and liquidity from the capital markets and bank borrowings. On January 13, 1997 Orion issued $125,000,000 of 8.73% Junior Subordinated Deferrable Interest Debentures due January 1, 2037 (the "Debentures") to Orion Capital Trust I (the "Trust"), a Delaware statutory business trust sponsored by Orion. The Trust simultaneously sold $125,000,000 of 8.73% Capital Securities (the "Trust Preferred Securities") which have substantially the same terms as the Debentures. The net proceeds from the sale of the Trust Preferred Securities will be used for general corporate purposes. The Trust Preferred Securities are subordinate to all liabilities of the Company, and may be redeemed without premium on or after January 1, 2007. The Company may defer interest distributions on the Trust Preferred Securities, however, during any period when such cumulative distributions have been deferred, Orion may not declare or pay any dividends or distributions on its common stock. Orion registered the Trust Preferred Securities under the Securities Act of 1933 in April 1997. The Company repurchased 11,396 shares of its common stock at an aggregate cost of $712,000 in the first three months of 1997. The Company's remaining stock purchase authorization from its Board of Directors amounted to $4,017,000 at March 31, 1997. FORWARD-LOOKING STATEMENTS All statements made in this Quarterly Report on Form 10-Q that do not reflect historical information are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward- looking statements. Such risks, uncertainties and other factors include, among other things, (i) general economic and business conditions; (ii) interest rate and financial market changes; (iii) competition and the regulatory environment in which we operate; (iv) claims frequency; (v) claims severity; (vi) medical cost inflation; (vii) increases in the cost of property repair; (viii) the number of new and renewal policy applications submitted to us; and (ix) other factors over which we have little or no control. The Company disclaims any obligation to update or to publicly announce the impact of any such factors or any revisions to any forward looking statements to reflect future events or developments. Page 20 PART II OTHER INFORMATION Items 1 - 5. - ------------ None. Item 6. Exhibits and Reports on Form 8-K - ------------------------------------------ (a) Exhibits Exhibit 11: Computation of Earnings Per Common Share. Exhibit 15: Deloitte & Touche LLP Letter re unaudited interim financial information. Exhibit 27: Financial Data Schedule. (b) Reports on Form 8-K. The registrant filed a Current Report on Form 8-K on January 9, 1997 to report that it agreed to sell $125 million of its 8.73% Capital Securities to be issued by Orion Capital Trust I, a Delaware statutory business trust sponsored by registrant. Page 21 SIGNATURES ----------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORION CAPITAL CORPORATION Date: May 6, 1997 By: /s/ W. Marston Becker ---------------------------- Chairman of the Board and Chief Executive Officer Date: May 6, 1997 By: /s/ Daniel L. Barry -------------------------------- Senior Vice President and Chief Financial Officer Page 22 EXHIBIT INDEX Page No. Exhibit 11: Computation of Earnings 24 Per Common Share Exhibit 15: Deloitte & Touche LLP Letter 25 re unaudited interim financial information Exhibit 27: Financial Data Schedule 26 Page 23 EX-11 2 EXHIBIT 11 ORION CAPITAL CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (UNAUDITED) (000s omitted-except for per common share data) Three Months Ended March 31, ---------------------------- 1997 1996 ---- ---- Computation of weighted average number of common and equivalent shares outstanding: PRIMARY - Weighted average number of shares outstanding ............................. 13,652 13,815 Dilutive effect of stock options and stock awards .................................. 247 182 ------- ------- Weighted average number of common and equivalent shares ....................... 13,899 13,997 ======= ======= Net earnings attributable to common stockholders ............................ $29,478 $17,887 ======= ======= Net earnings per common share ............. $ 2.12 $ 1.28 ======= ======= FULLY DILUTED - Weighted average number of shares outstanding ............................. 13,652 13,815 Dilutive effect of stock options and stock awards .................................. 247 182 ------- ------- Weighted average number of common and equivalent shares ....................... 13,899 13,997 ======= ======= Net earnings attributable to common stockholders ............................ $29,478 $17,887 ======= ======= Net earnings per common share ............. $ 2.12 $ 1.28 ======= ======= Page 24 EX-15 3 EXHIBIT 15 April 23, 1997 Orion Capital Corporation 600 Fifth Avenue New York, New York We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Orion Capital Corporation and subsidiaries for the periods ended March 31, 1997 and 1996, as indicated in our report dated April 23, 1997; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, is incorporated by reference in Registration Statements No. 2-65348 on Forms S-8 and S-16 relating to the Orion Capital Corporation 1976 and 1979 Stock Option Plans, No. 2-80636 on Form S-8 relating to the Orion Capital Corporation 1982 Long-Term Performance Incentive Plan, No. 2-63344 on Form S-8 relating to the Orion Capital Corporation Employees' Stock Savings and Retirement Plan and No. 33-59847 on Form S-8 relating to the Orion Capital Corporation 1994 Stock Option Plan for Non-Employee Directors. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Hartford, Connecticut Page 25 EX-27 4
7 EXHIBIT 27 THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ORION CAPITAL CORPORATION'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-1-1997 MAR-31-1997 1,361,948 328,279 331,541 363,986 1,307 0 2,450,764 5,606 414,233 139,478 3,608,456 1,794,801 497,114 0 20,780 310,734 173,930 0 0 403,499 3,608,456 323,963 40,221 15,789 4,939 219,002 94,798 11,183 43,364 9,921 29,478 0 0 0 29,478 2.12 2.12 1,368,420 217,460 1,542 81,395 125,299 1,380,728 1,542
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