-----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, QC/Mk0tqcdxxW5DifV071QhrduzeKd6Ex8/MKVcGc8tS4ZofqajyNplDHVWbRjne 7QyZaf5swuDwaKRXFarNEA== 0000074931-99-000003.txt : 19990518 0000074931-99-000003.hdr.sgml : 19990518 ACCESSION NUMBER: 0000074931-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: SEC FILE NUMBER: 001-07801 FILM NUMBER: 99626525 BUSINESS ADDRESS: STREET 1: 600 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 8606746600 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, 1999 ( ) TRANSITION REPORT, PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-7801 ORION CAPITAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-6069054 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 9 Farm Springs Road, Farmington, Connecticut 06032 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (860) 674-6600 Former name, former address and former fiscal year if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (x) No ( ) Approximately 27.2 million shares of Common Stock, $1.00 par value, of the registrant were outstanding on May 1, 1999. Page 1 of 33 Exhibit Index Appears at Page 33 1 ORION CAPITAL CORPORATION FORM 10-Q INDEX For the Quarter Ended March 31, 1999 Page PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheet at March 31, 1999 (Unaudited) and December 31, 1998 3 - 4 Consolidated Statement of Operations for the three months ended March 31, 1999 and 1998 (Unaudited) 5 Consolidated Statement of Stockholders' Equity for the three months ended March 31, 1999 and 1998 (Unaudited), and for the year-ended December 31, 1998 6 Consolidated Statement of Cash Flows for the three months ended March 31, 1999 and 1998 (Unaudited) 7 - 8 Notes to Consolidated Financial Statements (Unaudited) 9 - 14 Independent Accountants' Review Report 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 - 31 PART II. OTHER INFORMATION 31 2 PART I. FINANCIAL INFORMATION ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS March 31, 1999 December 31, (In millions) (Unaudited) 1998 - -------------------------------------------------------------------------------- Assets: Investments: - Fixed maturities, at amortized cost (market $270.3 - 1999 and $272.7 - 1998) .......... $ 260.2 $ 260.6 Fixed maturities, at market (amortized cost $1,391.7 - 1999 and $1,305.5 - 1998) .............. 1,429.8 1,349.9 Common stocks, at market (cost $164.0 - 1999 and $200.3 - 1998) ........................... 189.6 242.4 Non-redeemable preferred stocks, at market (cost $248.1 - 1999 and $269.1 - 1998) ............ 245.5 268.5 Other long-term investments .......................... 95.7 116.2 Short-term investments ............................... 198.7 248.7 ---------- ---------- Total investments .............................. 2,419.5 2,486.3 Cash ................................................. 35.4 18.0 Accrued investment income ............................ 26.8 27.0 Investment in affiliate .............................. 22.8 22.8 Accounts and notes receivable ........................ 154.8 217.2 Reinsurance recoverables and prepaid reinsurance ..... 910.4 801.5 Deferred policy acquisition costs .................... 147.4 155.6 Property and equipment ............................... 100.7 95.4 Excess of cost over fair value of net assets acquired 166.1 167.7 Federal income taxes receivable ...................... 49.8 22.4 Deferred federal income taxes ........................ 53.7 26.7 Other assets ......................................... 118.5 123.8 ---------- ---------- Total assets ................................... $ 4,205.9 $ 4,164.4 ========== ========== [FN] See Notes to Consolidated Financial Statements (Unaudited) 3 ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 1999 December 31, (In millions, except for share data) (Unaudited) 1998 - ------------------------------------------------------------------------------------ Liabilities: Policy liabilities: - Losses ................................................ $ 1,680.1 $ 1,602.1 Loss adjustment expenses .............................. 472.4 415.6 Unearned premiums ..................................... 560.3 564.0 Policyholders' dividends .............................. 18.1 17.9 ---------- ---------- Total policy liabilities ................................ 2,730.9 2,599.6 Notes payable ........................................... 209.4 217.4 Other liabilities ....................................... 400.0 370.1 ---------- ---------- Total liabilities ....................................... 3,340.3 3,187.1 ---------- ---------- Contingencies (Note 6) Company-obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely the junior subordinated debentures of the Company .... 250.0 250.0 Stockholders' equity: Preferred stock, authorized 5,000,000 shares; issued and outstanding - none Common stock, $1 par value; authorized 50,000,000 shares; issued 30,675,300 shares ..................... 30.7 30.7 Capital surplus ......................................... 147.7 149.6 Retained earnings ....................................... 455.8 553.2 Accumulated other comprehensive income .................. 42.4 58.5 Treasury stock, at cost (3,396,817 shares - 1999 and 3,505,091 shares - 1998)..................... (53.7) (57.8) Deferred compensation on restricted stock ............... (7.3) (6.9) ---------- ---------- Total stockholders' equity .......................... 615.6 727.3 ---------- ---------- Total liabilities and stockholders' equity .......... $ 4,205.9 $ 4,164.4 ========== ==========
[FN] See Notes to Consolidated Financial Statements (Unaudited) 4 ORION CAPITAL CORPORATON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) Three Months Ended March 31, ---------------------------- (In millions, except for per share data) 1999 1998 - ------------------------------------------------------------------------------- Revenues: Premiums earned ....................................... $ 299.1 $ 348.8 Net investment income ................................. 34.4 41.4 Realized investment gains ............................. 1.7 29.0 Other income .......................................... 1.1 5.6 --------- --------- Total revenues ....................................... 336.3 424.8 --------- --------- Expenses: Losses incurred and loss adjustment expenses .......... 365.6 232.3 Amortization of deferred policy acquisition costs ..... 87.7 100.8 Other insurance expenses .............................. 1.8 6.9 Dividends to policyholders ............................ 6.0 6.4 Interest expense ...................................... 4.6 5.8 Other expenses ........................................ 7.3 11.1 --------- --------- Total expenses ....................................... 473.0 363.3 --------- --------- Earnings (loss) before equity in earnings (loss) of affiliate, federal income taxes, minority interest expense and cumulative effect of adoption of new accounting principle ..... (136.7) 61.5 Equity in earnings (loss) of affiliate ................ -- (0.6) --------- --------- Earnings (loss) before federal income taxes, minority interest expense and cumulative effect of adoption of new accounting principle ................ (136.7) 60.9 Federal income tax expense (benefit) .................. (52.1) 16.0 Minority interest expense of subsidiary trust preferred securities, net of federal income taxes .. 3.4 2.7 --------- --------- Earnings (loss) before cumulative effect of adoption of new accounting principle ........................... (88.0) 42.2 Cumulative effect of adoption of new accounting principle, net of tax............................... (4.6) -- --------- --------- Net earnings (loss) .................................. $ (92.6) $ 42.2 ========= ========= Net earnings (loss) per common share: Earnings (loss) before cumulative effect of adoption of new accounting principle ........................... $ (3.26) $ 1.54 Cumulative effect of adoption of new accounting principle .......................................... (0.17) -- --------- --------- Basic ................................................ $ (3.43) $ 1.54 ========= ========= Earnings (loss) before cumulative effect of adoption of new accounting principle ........................... $ (3.26) $ 1.50 Cumulative effect of adoption of new accounting principle .......................................... (0.17) -- --------- --------- Diluted .............................................. $ (3.43) $ 1.50 ========= ========= [FN] See Notes to Consolidated Financial Statements (Unaudited) 5 ORION CAPITAL CORPORATON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended Three Months Ended Year Ended March 31, 1999 March 31, 1998 December 31, 1998 (In millions) (Unaudited) (Unaudited) - ------------------------------------------------------------------------------------------------------------- Common Stock $ 30.7 $ 30.7 $ 30.7 ======= ======= ======= Capital Surplus: Balance, beginning of period $ 149.6 $ 152.1 $ 152.1 Exercise of stock options and net issuance of restricted stock (1.9) 0.7 (2.5) ------- ------- ------- Balance, end of period $ 147.7 $ 152.8 $ 149.6 ======= ======= ======= Retained Earnings: Balance, beginning of period $ 553.2 $ 469.5 $ 469.5 Net earnings (loss) (92.6) $ (92.6) 42.2 $ 42.2 102.8 $ 102.8 ------- ------- ------- Dividends declared (4.8) (4.4) (19.1) ------- ------- ------- Balance, end of period $ 455.8 $ 507.3 $ 553.2 ======= ======= ======= Accumulated Other Comprehensive Income: Balance, beginning of period $ 58.5 $ 109.2 $ 109.2 Unrealized investment gains (losses), net of taxes (16.5) 5.5 (52.4) Unrealized foreign exchange translation gains, net of taxes 0.4 - 1.7 ------- ------- ------- Other comprehensive income (loss) (16.1) (16.1) 5.5 5.5 (50.7) (50.7) ------- ------- ------- ------- ------- ------- Comprehensive income (loss) $(108.7) $ 47.7 $ 52.1 ======= ======= ======= Balance, end of period $ 42.4 $ 114.7 $ 58.5 ======= ======= ======= Treasury Stock: Balance, beginning of period $ (57.8) $ (34.3) $ (34.3) Exercise of stock options and net issuance of restricted stock 4.1 1.6 13.4 Common stock issued pursuant to employee stock purchase plan - - 1.1 Acquisition of treasury stock - (6.7) (38.0) ------- ------- ------- Balance, end of period $ (53.7) $ (39.4) $ (57.8) ======= ======= ======= Deferred Compensation on Restricted Stock: Balance, beginning of period $ (6.9) $ (4.1) $ (4.1) Net issuance of restricted stock (1.0) (1.6) (4.3) Amortization of deferred compensation on restricted stock 0.6 0.4 1.5 ------- ------- ------- Balance, end of period $ (7.3) $ (5.3) $ (6.9) ======= ======= =======
[FN] See Notes to Consolidated Financial Statements (Unaudited) 6 ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Three Months Ended March 31, ---------------------------- (In millions) 1999 1998 - -------------------------------------------------------------------------------- Cash flows from operating activities: Premiums collected $ 357.5 $ 386.1 Net investment income collected 31.0 40.1 Losses and loss adjustment expenses paid (288.9) (241.5) Policy acquisition costs paid (90.5) (115.6) Dividends paid to policyholders (5.8) (7.2) Interest paid (8.7) (9.7) Payments on trust preferred securities (5.5) (5.5) Federal income tax refunds (payments) 20.0 (8.5) Other payments (7.2) (15.4) ------- ------- Net cash provided by operating activities 1.9 22.8 ------- ------- Cash flows from investing activities: Maturities of fixed maturity investments 31.4 54.9 Sales of fixed maturity investments 156.8 198.8 Sales of equity securities 165.2 108.0 Investments in fixed maturities (292.1) (240.5) Investments in equity securities (98.1) (104.1) Net sales (purchases) of short-term investments 55.5 (39.0) Acquisition and divestiture activities (4.3) (2.9) Purchase of property and equipment, net (9.2) (4.5) Other receipts (payments) 21.9 (12.7) ------- ------- Net cash provided by (used in) investing activities 27.1 (42.0) ------- ------- Cash flows from financing activities: Net proceeds from issuance of trust preferred securities - 121.9 Proceeds from exercise of stock options 1.2 0.7 Repayment of notes payable (8.0) (100.2) Dividends paid to stockholders (4.8) (4.4) Purchases of common stock - (6.6) Other payments - (0.4) ------- ------- Net cash (used in) provided by financing activities (11.6) 11.0 ------- ------- Net increase (decrease) in cash 17.4 (8.2) Cash balance, beginning of period 18.0 9.3 ------- ------- Cash balance, end of period $ 35.4 $ 1.1 ======= ======= [FN] See Notes to Consolidated Financial Statements (Unaudited) 7 ORION CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued) (UNAUDITED) Three Months Ended March 31, ---------------------------- (In millions) 1999 1998 - -------------------------------------------------------------------------------- Reconciliation of net earnings (loss) to net cash provided by operating activities: Net earnings (loss) $ (92.6) $ 42.2 ------- ------- Adjustments: Cumulative effect of adoption of new accounting principle 4.6 - Depreciation and amortization 4.7 3.6 Amortization of excess of cost over fair value of net assets acquired 1.5 1.3 Deferred federal income taxes (15.6) (0.9) Amortization of fixed maturity investments 1.0 (0.6) Non-cash investment income (2.2) (5.4) Realized investment gains (1.7) (29.0) Equity in loss of affiliate - 0.6 Changes in assets and liabilities, net of acquisition and divestiture activities: Decrease in accrued investment income 0.2 2.3 Decrease in accounts and notes receivable 15.4 4.1 Increase in reinsurance recoverable and prepaid reinsurance (116.1) (76.9) Increase in deferred policy acquisition costs (4.4) (6.3) Decrease (increase) in federal income taxes receivable (29.3) 8.5 Increase in other assets (9.5) (0.8) Increase in losses and loss adjustment expenses 171.4 5.0 Increase in unearned premiums 36.3 14.1 Increase in policyholders' dividends 0.2 0.2 Increase in other liabilities 38.0 60.8 ------- ------- Total adjustments and changes 94.5 (19.4) ------- ------- Net cash provided by operating activities $ 1.9 $ 22.8 ======= ======= [FN] See Notes to Consolidated Financial Statements (Unaudited) 8 ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Three Months Ended March 31, 1999 and 1998 Note 1 - Basis of Financial Statement Presentation The consolidated financial statements and notes thereto are prepared in accordance with generally accepted accounting principles for property and casualty insurance companies. The consolidated financial statements include Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries (collectively the "Company"). All material intercompany balances and transactions have been eliminated. As of January 1, 1999, the Company adopted Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, issued by the American Institute of Certified Public Accountants ("AICPA"). This Statement requires that certain costs incurred in developing internal-use computer software be capitalized, and provides guidance for determining whether computer software is considered to be for internal use. The Company will amortize these costs over the software's useful life, which is generally a period of 3 to 6 years. Previously, the Company expensed internal cost of computer software as incurred. The adoption of this statement resulted in an after-tax benefit of $0.9 million, or $0.03 per common share, for the three months ended March 31, 1999. On January 1, 1999, the Company adopted SOP 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments, which provides guidance for determining when an insurance or other enterprise should recognize a liability for guaranty-fund and other insurance-related assessments and guidance for measuring the liability. This Statement requires recognition of a liability when it is probable that an assessment will be imposed, the amount of the assessment can be reasonably estimated, and the event obligating a company to pay has occurred. Previously, the Company expensed guaranty-fund and other insurance-related assessments as reported to the Company. The cumulative effect recorded at January 1, 1999, as if this new accounting standard was applied retroactively for all periods, resulted in an after-tax charge of $4.6 million, or $0.17 per common share. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the Company's results of operations, financial position and cash flows for all periods presented. Although these consolidated financial statements are unaudited, they have been reviewed by the Company's independent accountants, Deloitte & Touche LLP, for conformity with accounting requirements for interim financial reporting. Their report on such review is included herein. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1998 Annual Report on Form 10-K. Note 2 - Realignment Events As part of the final steps in a two-year reshaping of Orion Capital, the Company recently completed a detailed study of its loss and loss adjustment expense reserve position as of March 31, 1999. The loss reserve study, performed with the assistance of independent actuarial advisors, focused on the businesses that the Company has exited or plans to exit. As a result of this study, the Company recorded a net pre-tax charge of $164.5 million in the first quarter of 1999 primarily 9 ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) related to the Specialty Commercial and Workers Compensation segments. The net charge primarily comprised a provision for loss and loss adjustment expenses of $139.0 million relating to 1998 and prior accident years, which was net of reinsurance, and included a $25.5 million net ceded premium adjustment based upon the Company's loss experience. Approximately $123.4 million of the loss reserve provision is attributed to exited businesses. The study also reviewed the reserve position for the Company's ongoing business in light of current industry conditions. The Company recorded loss reserve strengthening of approximately $15.6 million relating to its ongoing businesses including $8.4 million for EBI, $4.2 million for DPIC and $3.0 million for OrionAuto. Further, the Company has adjusted loss ratios for the 1999 accident year in consideration of the reserve study findings. As part of the Company's reshaping to focus its resources on more profitable business, on April 9, 1999 the Company sold Wm. H. McGee & Co. for $59.4 million in cash resulting in a pre-tax gain of $40.2 million and an after-tax gain of $26.3 million, which will be reported in the second quarter of 1999. In connection with the sale, the Company entered into reinsurance agreements with the buyer transferring the Company's participation in McGee's United States and Canadian pools effective as of January 1, 1999, resulting in negative net premiums written of $40.0 million in the first quarter of 1999. These transfers have resulted in a $23.5 million cash payment to the buyer on the sale date for the transfer of the Company's net liabilities and assets of the McGee pools. Additionally, the buyer was designated as the clearing company for McGee pools effective January 1, 1999 under McGee's Inter-Office Reinsurance Agreements. At December 31, 1998 and for the year then ended, the Company reflected net premiums written and total revenue of approximately $104.4 million and $100.2 million, respectively, and total assets of approximately $112.0 million related to sold business of McGee. In the third quarter of 1998, the Company established a restructuring reserve in connection with a realignment of Orion Specialty resulting in exiting of approximately $100 million of unprofitable commodity business, primarily commercial automobile and transportation. This restructuring included the reduction of approximately 90 employees related to exited business. Activity for the three months ended March 31, 1999 within this restructuring reserve was as follows: (In millions) - ----------------------------------------------------------- Balance at December 31, 1998 $ 5.1 Actions taken: Severance and program termination costs (0.9) -------- Balance at March 31, 1999 $ 4.2 ======== The Company is performing a strategic review of the $150 million book of specialty commercial program and binding authority business of Orion Specialty. See "Recent Activities" on page 17. Note 3 - Investment in Affiliate As of March 31, 1999, the carrying value of the Company's 26% investment in Intercargo Corporation ("Intercargo") was $22.8 million, representing the amount that the Company agreed to 10 ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) sell Intercargo in cash pursuant to Intercargo's merger with a subsidiary of XL Capital, Ltd. See note 9 "Subsequent Event." In 1998, the Company recorded its share of Intercargo's operating results on a quarterly lag basis, after Intercargo has reported its financial results. For the three months ended March 31, 1998, Intercargo reported $18.8 million of revenues and $2.1 million of net loss. The Company's proportionate share of Intercargo net loss including goodwill amortization was $0.6 million for the first quarter of 1998. Note 4 - Reinsurance In the normal course of business, the Company's insurance subsidiaries reinsure certain risks, generally on an excess-of-loss or pro rata basis, with other companies to limit its exposure to losses. Reinsurance does not discharge the primary liability of the original insurer. The table below summarizes certain reinsurance information for the three months ended March 31: (In millions) 1999 1998 - -------------------------------------------------------------------------- Direct premiums written ............................$ 480.8 $ 441.7 Reinsurance assumed ................................ 32.6 14.1 ------ ------ Gross premiums written ............................. 513.4 455.8 Reinsurance ceded .................................. (238.5) (86.8) ------ ------ Net premiums written ...............................$ 274.9 $ 369.0 ====== ====== Direct premiums earned .............................$ 494.4 $ 435.6 Reinsurance assumed ................................ 15.4 10.9 ------ ------ Gross premiums earned .............................. 509.8 446.5 Reinsurance ceded .................................. (210.7) (97.7) ------ ------ Net premiums earned ................................$ 299.1 $ 348.8 ====== ====== Loss and loss adjustment expenses incurred recoverable from reinsurers .....................$ 158.5 $ 70.4 ====== ====== Note 5 - Stockholders' Equity and Earnings Per Common Share During the first quarter of 1999, the Company repurchased 6,414 shares at an aggregate cost of $0.2 million related to its employee benefit plans. During the first quarter of 1998, the Company repurchased 132,000 shares of its common stock at an aggregate cost of $6.6 million under the stock repurchase program authorized by the Board of Directors and repurchased 2,377 shares at an aggregate cost of $0.1 million related to its employee benefit plans. The remaining authorization from the Company's Board of Directors for the purchase of common stock was $42.5 million as of March 31, 1999. Orion declared dividends on its common stock of $4.8 million and $4.4 million or $0.18 and $0.16 per common share for the three months ended March 31, 1999 and 1998, respectively. 11 ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A reconciliation of basic and diluted earnings (loss) per share ("EPS") for the three months ended March 31, 1999 and 1998 was as follows:
Net Earnings Average Per Share (In millions, except for per share amounts) (loss) shares Amount - ---------------------------------------------------------------------------------- 1999 - Basic EPS: Net earnings (loss) available to common stockholders .................... $ (92.6) 27.0 $ (3.43) ======== Stock options and awards .................. -- -- -------- -------- Diluted EPS: Net earnings (loss) available to common stockholders with assumed exercises .... $ (92.6 27.0 $ (3.43) ======== ======== ======== 1998 - Basic EPS: Net earnings available to common stockholders .................... $ 42.2 27.4 $ 1.54 ======== Stock options and awards .................. -- 0.7 -------- -------- Diluted EPS: Net earnings available to common stockholders with assumed exercises .... $ 42.2 28.1 $ 1.50 ======== ======== ========
The average shares for 1999 excludes equivalent shares of 279,000 in the computation of diluted earnings per common share because to include them would have been antidilutive. Note 6 - 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 therefore, are likely to result in judgments for amounts that are material to the financial condition, liquidity or results of operations of Orion and its consolidated subsidiaries, taken as a whole. 12 ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 7 - Accumulated Other Comprehensive Income Accumulated other comprehensive income balances, net of taxes, are as follows:
Unrealized Unrealized Foreign Accumulated Other Investment Gains Translation Comprehensive (In millions) (Losses) Gains (Losses) Income (Loss) - ------------------------------------------------------------------------------------- Quarter ended March 31, 1999: Balance, beginning of period ..... $ 61.2 $ (2.7) $ 58.5 Current period change ..... (16.5) 0.4 (16.1) --------- --------- --------- Balance, end of period ..... $ 44.7 $ (2.3) $ 42.4 ========= ========= ========= Quarter ended March 31, 1998: Balance, beginning of period ..... $ 113.6 $ (4.4) $ 109.2 Current period change ..... 5.5 -- 5.5 --------- ---------- --------- Balance, end of period ..... $ 119.1 $ (4.4) $ 114.7 ========= ========= ========= Year ended December 31, 1998: Balance, beginning of year ..... $ 113.6 $ (4.4) $ 109.2 Current year change ..... (52.4) 1.7 (50.7) --------- --------- --------- Balance, end of year ..... $ 61.2 $ (2.7) $ 58.5 ========= ========= =========
The pretax unrealized investment gains (losses) arising during the period were $(25.4) million and $8.6 million for the three months ended March 31, 1999 and 1998, respectively, and $(80.4) million for the year ended December 31, 1998. The pretax unrealized foreign exchange translation gains arising during the period were $0.6 million for the three months ended March 31, 1999 and $2.6 million for the year ended December 31, 1998. Note 8 - Segment Information The Company reports its insurance operations in three segments at March 31, 1999. These reportable segments comprise operating units of the Company that have different insurance products and services, market focus and operational structure. The Company's reportable segments comprise: Workers Compensation - this segment provides workers compensation insurance products and services sold by the EBI Companies ("EBI")and includes package commercial insurance policies that are no longer written by the Company. Nonstandard Automobile - this segment specializes in nonstandard personal automobile insurance sold by OrionAuto (formerly known as Guaranty National Corporation). 13 ORION CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Specialty Commercial - this segment markets various specialty commercial products and services, primarily professional liability insurance through DPIC Companies and client-focused specialty insurance programs through Orion Specialty; and also includes the run-off operations of the Company's assumed reinsurance business, SecurityRe, which was sold in late 1996. The Company exited the marine business by selling its 26% interest in Intercargo (see Notes 3 and 9) and Wm. H. McGee (see Note 2). Financial information for the Company's segments for the three months ended March 31 is shown below and discussed in detail in "Results of Operations" on page 18: (In millions) 1999 1998 - ---------------------------------------------------------------------------- Revenues: Workers Compensation ................................ $ 93.7 $ 119.8 Nonstandard Automobile .............................. 121.4 99.8 Specialty Commercial ................................ 118.4 203.1 Other ............................................... 2.8 2.1 -------- -------- Consolidated ..................................... $ 336.3 $ 424.8 ======== ======== Pre-tax Earnings (Loss) before Minority Interest (a): Workers Compensation ................................ $ (39.1) $ 28.4 Nonstandard Automobile .............................. 5.8 7.9 Specialty Commercial ................................ (98.9) 29.7 Other ............................................... (4.5) (5.1) -------- -------- Consolidated ..................................... $ (136.7) $ 60.9 ======== ======== (a) Excludes cumulative effect of adoption of new accounting principle in 1999 (see note 1). The miscellaneous income and expenses (primarily interest, general and administrative expenses and other consolidating elimination entries) of the parent company are reported as "Other" in the above table. Note 9 - Subsequent Event In December 1998, the Company agreed to sell its 26% interest in Intercargo in cash pursuant to Intercargo's merger with a subsidiary of XL Capital, Ltd. Intercargo announced that its merger was consummated on May 7, 1999. The Company will receive $22.8 million in cash from the sale in the near future. Also see Note 2 regarding the sale of McGee. 14 INDEPENDENT ACCOUNTANT'S REVIEW REPORT Board of Directors and Stockholders Orion Capital Corporation Farmington, Connecticut We have reviewed the accompanying consolidated balance sheet of Orion Capital Corporation and subsidiaries (the "Company") as of March 31, 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for the three-month periods ended March 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Orion Capital Corporation and subsidiaries as of December 31, 1998, and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended; and in our report dated February 22, 1999 (except for Note 20, as to which the date is March 11, 1999), we expressed an unqualified opinion on those consolidated financial statements. The consolidated statements of earnings and cash flows for the year ended December 31, 1998 are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1998 and related consolidated statement of stockholders' equity for the year then ended is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. DELOITTE & TOUCHE LLP Hartford, Connecticut May 7, 1999 15 ORION CAPITAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 AND 1998 GENERAL Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries (collectively the "Company") operate principally in the property and casualty insurance business. The Company reports its insurance operations in three segments as of March 31, 1999 as follows: Workers Compensation - this segment markets the workers compensation insurance products and services sold by the EBI Companies ("EBI")and includes package commercial insurance policies that are no longer written by the Company. Nonstandard Automobile - this segment specializes in nonstandard personal automobile insurance sold by OrionAuto, formerly known as Guaranty National Corporation. Specialty Commercial - this segment presently markets various specialty commercial products and services, primarily professional liability insurance through DPIC Companies ("DPIC") and client-focused specialty insurance programs through Orion Specialty; and also includes the run-off operations of the Company's assumed reinsurance business, SecurityRe, which was sold in late 1996. Over the past two years, Orion has been reshaping its business to focus its resources on high potential lines of business. Business in Orion's workers compensation segment is conducted through EBI, a specialty monoline workers compensation operation. Orion has been reshaping EBI from a regional to a national monoline workers compensation specialist. In Orion's nonstandard personal automobile segment, Orion increased its ownership in Guaranty National Corporation ("Guaranty National") to 100% in December 1997 and then transformed Guaranty National (OrionAuto) into a focused personal nonstandard automobile company. The commercial lines business of Guaranty National was shifted to a newly-formed unit, Orion Specialty Group, Inc. and integrated with Connecticut Specialty Insurance Group, Inc. Guaranty National was recently renamed OrionAuto, Inc. The Company added scale to its nonstandard automobile operation by acquiring two businesses, Unisun Insurance Company in December 1997 and portions of Strickland Insurance Group in April 1998 expanding its geographic market to 35 states. The Company continued the reshaping in its specialty commercial segment. As of March 31, 1999, this segment included DPIC, Orion's professional liability business, Wm. H. McGee & Co., Inc., the marine business, and Orion Specialty, which includes ARTIS, our alternative risk business formed in June 1997, Orion Financial (formerly Intercon), our collateral protection business and the commercial lines business from Guaranty National and Connecticut Specialty. In July 1998, the Company added a specialty insurance company serving the independent grocery industry with the purchase of Grocers Insurance Group. The Company sold a unit of Orion Specialty, Colorado Casualty Insurance Company, in September 1998. Additionally, during the third quarter of 1998, the Company took steps to exit a block of commercial automobile and transportation business, representing approximately $100 million in net written premiums, that was highly price-driven and was performing below our levels of expectations. 16 In November 1996, the Company exited the assumed reinsurance business when it sold the ongoing operations of our subsidiary, SecurityRe Companies, Inc. As a result of the sale, SecurityRe ceased actively writing business and became an inactive company. RECENT ACTIVITIES As part of its final reshaping initiatives, the Company in early May completed a reserve study focused on business that has been or is in the process of being exited. The reserve study was performed with the assistance of independent actuarial advisors. In the first quarter of 1999, the Company strengthened its loss and loss adjustment reserves by recording a net charge of $164.5 million on a pre-tax basis and $106.9 million on an after-tax basis, or $3.96 per diluted common share, in connection with the reserve study. The net charge is substantially related to exited business. See section "Expense and Other - Operating Ratios" on page 24. Orion continues its reshaping of the specialty commercial segment to focus resources on more profitable lines of business. As part of that effort, the Company exited the marine business by selling our 26% interest in Intercargo Corporation and Wm. H. McGee & Co., Inc. On April 9, 1999 the Company sold Wm. H. McGee & Co. for $59.4 million in cash resulting in a pre-tax gain of $40.2 million and an after-tax gain of $26.3 million, which will be recorded in the second quarter of 1999. In connection with the sale, the Company entered into reinsurance agreements with the buyer transferring the Company's participation in McGee's United States and Canadian pools effective January 1, 1999 resulting in negative net premiums written of $40.0 million in the first quarter of 1999. Additionally, the buyer was designated as the clearing company of the McGee pools effective as of January 1, 1999 under McGee's Inter-Office Reinsurance Agreements. The Company reflected net premiums written and total revenue of approximately $104.4 million and $100.2 million, respectively, for the year ended December 31, 1998 and total assets of approximately $112.0 million at December 31, 1998 related to sold business of McGee. In December 1998, the Company agreed to sell its investment in Intercargo for $22.8 million (its current carrying value), or $12 per share, in cash pursuant to the terms of Intercargo's merger with a subsidiary of XL Capital, Ltd. Intercargo announced that its merger was consummated on May 7, 1999. The Company will receive $22.8 million in cash from the sale in the near future. In April 1999, the Company announced that it is working with financial advisors on the final initiatives in its reshaping process, which includes a review of strategic alternatives for the $150 million book of specialty commercial program and binding authority business of Orion Specialty. The Company believes that the specialty commercial program and binding authority business is the last piece of Orion's operation that lacks market leadership or competitive advantage and will explore a full range of options for it. Announcement of the results of that review is anticipated during the third quarter of 1999. Excluding the Orion Specialty business under strategic review, after all these steps have been completed, the Specialty Commercial segment will include DPIC, Orion Financial, Grocers Insurance, and ARTIS, and will have approximately $420 million of gross written premiums and approximately $298 million of net written premiums based on 1998 volume. 17 RESULTS OF OPERATIONS OVERVIEW Earnings (loss) by segment before federal income taxes, minority interest expense and cumulative effect of adoption of new accounting principle for the three months ended March 31 are summarized as follows: (In millions) 1999 1998 - -------------------------------------------------------------- Workers Compensation $ (39.1) $ 28.4 Nonstandard Automobile 5.8 7.9 Specialty Commercial (98.9) 29.7 Other (4.5) (5.1) ----------- ------------ $ (136.7) $ 60.9 =========== ============ Miscellaneous income and expenses (primarily interest, general and administrative expenses and other consolidating elimination entries) of the parent company are reported as "Other" in the above table. Operating earnings (loss), after-tax realized investment gains, net earnings (loss) and per diluted common share amounts for the three months ended March 31 are summarized as follows: (In millions, except for per share amounts and %) 1999 1998 - -------------------------------------------------------------------------------- Operating earnings (loss) .................. $ (89.1) $ 23.4 After-tax investment gains ................. 1.1 18.8 Cumulative effect of adoption of new accounting principle ................ (4.6) -- ------------ ----------- Net earnings (loss) ..................... $ (92.6) $ 42.2 ============ =========== Per diluted common share: Operating earnings (loss) .................. $ (3.30) $ 0.83 After-tax investment gains ................. 0.04 0.67 Cumulative effect of adoption of new accounting principle ................ (0.17) -- ------------ ----------- Net earnings (loss) ..................... $ (3.43) $ 1.50 ============ =========== Operating earnings (loss) represents earnings (loss) after taxes, excluding net realized investment gains and the cumulative effect of an accounting change. For the first quarter of 1999, operating earnings were adversely effected by a $106.9 million after-tax charge, or $3.96 per diluted share, related to an increase in loss reserves in connection with a recently completed loss reserve study. Excluding this charge, the Company's after-tax operating earnings would be $17.8 million, or $0.66 per share. The Company's results of operations for 1999 reflects a $4.6 million after-tax charge, or $0.17 per diluted common share, for the cumulative effect of adoption of a new accounting principle, AICPA Statement of Position 97-3 "Accounting by Insurance and Other Enterprises for Insurance Related Assessments." See note 1 to the Company's condensed financial statements for discussion of new accounting principles adopted by the Company in 1999. 18 Weighted average common shares and diluted equivalents outstanding were 26,993,000 and 28,130,000 for the three months ended March 31, 1999 and 1998, respectively. The average share for 1999 excludes equivalent shares of 279,000 in the computation of diluted earnings per common share because to include them would have been antidilutive. REVENUES Revenues for the three months ended March 31 are summarized as follows: Percentage (In millions) 1999 1998 Change - ----------------------------------------------------------------------------- Net Premiums written ........... $ 274.9 $ 369.0 (25.5)% ========= ========= ===== Premiums earned ................ $ 299.1 $ 348.8 (14.2)% Net investment income .......... 34.4 41.4 (16.8) Realized investment gains ...... 1.7 29.0 (94.0) Other .......................... 1.1 5.6 (82.3) --------- --------- ----- Total revenues .............. $ 336.3 $ 424.8 (20.8)% ========= ========= ===== PREMIUMS The Company's gross premiums written by segment for the three months ended March 31 are as follows: Percentage (In millions) 1999 1998 Change - --------------------------------------------------------------------------- Workers Compensation $ 147.1 $ 115.6 27.2% Nonstandard Automobile 152.4 127.6 19.4 Specialty Commercial 213.9 212.6 0.6 --------- --------- ---- Consolidated $ 513.4 $ 455.8 12.6% ========= ========= ==== The Company's net premiums written by segment for the three months ended March 31 are as follows: Percentage (In millions) 1999 1998 Change - --------------------------------------------------------------------------- Workers Compensation ..................$ 94.7 $ 110.7 (14.5)% Nonstandard Automobile ................ 124.8 96.0 29.9 Specialty Commercial .................. 55.4 162.3 (65.8) --------- --------- ----- Consolidated ....................$ 274.9 $ 369.0 (25.5)% ========= ========= ===== Consolidated, excluding McGee ...$ 314.9 $ 352.4 (10.7)% ========= ========= ===== In connection with the sale of McGee in April 1999, the Company transferred its participation in McGee's United States and Canadian pools effective January 1, 19 1999, resulting in a $40.0 million reduction to net written premiums and no effect on premiums earned in the first quarter of 1999. In the first quarter of 1999, based on the Company's loss experience, the Company also ceded an additional $35.2 million of premiums under a corporate-wide aggregate stop loss reinsurance agreement entered into in 1998 related to the 1998 accident year. The Company does not expect to use corporate-wide aggregate stop loss agreements for the 1999 accident year. Workers Compensation Net premiums written for Workers Compensation decreased by 14.5% in the first quarter of 1999 compared to the same 1998 period reflecting lower premium retention of $46.7 million primarily from a change in EBI's reinsurance programs effective October 1998. The effect of this change was partly offset by gross premium growth of $30.7 million from new business written through EBI's multi-state accounts program and continued geographic expansion and penetration. In order to improve profitability, EBI has instituted rate increases, which is expected to reduce the growth of EBI's gross premiums written for the remainder of 1999. NONSTANDARD AUTOMOBILE Net premiums written for Nonstandard Automobile increased by 29.9% in the first quarter of 1999 compared to the same 1998 period primarily due to increased premiums of $12.1 million from the acquisition of Strickland in April 1998 and higher net premiums in South Carolina of $9.0 million from transitioning to a voluntary market environment in that state on March 1, 1999. OrionAuto generated net premium growth in 25 of the 35 states where it writes business in the first quarter of 1999 compared to the same 1998 period. Excluding the acquisitions of Strickland and Unisun, Nonstandard Automobile's gross premiums written and net premiums written growth was 5.6% and 7.6% in the first quarter of 1999 compared to the same 1998 period. SPECIALTY COMMERCIAL Gross premiums written, excluding McGee, for the three months ended March 31 are as follows: Percentage (In millions) 1999 1998 Change - --------------------------------------------------------------------------- Orion Specialty ......................... $ 135.1 $ 115.0 17.5% DPIC .................................... 52.0 49.9 4.1 Assumed reinsurance and eliminations .... (1.5) (0.8) ------- ------- ---- $ 185.6 $ 164.1 13.1% ======= ======= ==== 20 Net premiums written for the three months ended March 31 are as follows: Percentage (In millions) 1999 1998 Change - --------------------------------------------------------------------------- Orion Specialty ........................ $ 57.0 $ 103.5 (44.9)% DPIC ................................... 38.4 42.3 (9.1) McGee .................................. (40.0) 16.6 -------- ------- ----- 55.4 162.4 (65.9) Assumed reinsurance .................... -- (0.1) -------- ------- ----- Specialty Commercial ................ $ 55.4 $ 162.3 (65.8)% ======== ======= ===== Specialty Commercial, excluding McGee $ 95.4 $ 145.7 (34.5)% ======== ======= ===== Net premiums written by DPIC for professional liability insurance, the largest special program, decreased 9.1% in the first quarter of 1999 compared to the same 1998 period primarily as a result of increased use of reinsurance in its lawyers and accountants programs, offset in part by continued high levels of policy renewals. Net premiums written by Orion Specialty decreased by 44.9% in the first quarter of 1999 compared to the same 1998 period primarily due to the effect of exiting unprofitable commodity business in connection with the third quarter 1998 realignment of this unit, $23.9 million of ceded premiums in 1999 under the corporate-wide reinsurance agreement previously mentioned and lower premiums of $13.6 million from the sale of Colorado Casualty Insurance Company in September 1998. The decreases were partly offset by increased net written premiums of $13.7 million from the acquisition of Grocers Insurance Group in July 1998. Orion Specialty's Financial Services Division, which primarily writes collateral protection insurance, had gross premiums written of $31.7 million and $25.2 million for the three months ended March 31, 1999 and 1998, respectively, and corresponding net premiums written of $20.4 million in 1999 and $21.4 million in 1998. ARTIS, our alternative risk business formed in June 1997, had gross and net premiums written of $26.7 million and $0.7 million in the first quarter of 1999, respectively, as compared to $5.7 million of gross and no net premiums written for the same 1998 period. In the first quarter of 1999, McGee recorded negative net premiums written of $40.0 million reflecting the unearned premium portfolio transferred as of January 1, 1999 in connection with the sale of McGee. PREMIUMS EARNED The Company's premiums earned decreased 14.2% to $299.1 million in the first quarter of 1999 from $348.8 million ($334.6 million excluding McGee) in the corresponding 1998 period. Premiums earned reflect the recognition of income from the changing levels of net premium writings. OTHER INCOME Other income is $1.1 million and $5.6 million for the first quarters of 1999 and 1998, respectively. The decrease is due to lower commission income resulting from the sale of McGee. As part of the McGee sale, the buyer was designated as the clearing company of the pools managed by McGee effective January 1, 1999. 21 INVESTMENT PERFORMANCE The Company manages its investment portfolio on a total return basis which emphasizes both current net investment income and realized investment gains as well as unrealized investment results. The pre-tax performance of the Company's investments, including net investment income, net realized gains (losses) and net unrealized appreciation (depreciation) for the three months ended March 31 is as follows: (In millions, except for %) 1999 1998 - ------------------------------------------------------------------------------ Net investment income ............................$ 34.4 $ 41.4 Realized investment gains ........................ 1.7 29.0 Unrealized appreciation (depreciation) ........... (27.4) 8.1 ------------ ----------- $ 8.7 $ 78.5 ============ =========== Investment yields on average portfolio: Pre-tax ....................................... 5.7% 7.0% After-tax ..................................... 4.5% 5.5% Carrying value: ................................March 31, 1999 December 31, 1998 -------------------------------- Fixed maturities and short-term investments .$ 1,888.7 $ 1,859.2 Equity securities ........................... 435.1 510.9 Other long-term investments ................. 95.7 116.2 ------------ ----------- $ 2,419.5 $ 2,486.3 ============ =========== NET INVESTMENT INCOME Pre-tax net investment income decreased by $7.0 million in the first quarter of 1999 compared to the same 1998 period primarily due to lower earnings on limited partnership investments accounted for on an equity basis, a continued shift in the fixed income portfolio from taxable to tax-advantaged securities and the impact of lower reinvestment rates in 1998 and in the first quarter of 1999 resulting in reduced investment yields of the Company's fixed income portfolio. Net investment income includes equity earnings in limited partnership investments of $2.0 million in the first quarter of 1999 and $5.2 million for the same 1998 period, partially the result of planned reductions in these investments. Earnings from limited partnership investments can vary considerably from year-to-year. Although, the Company's long-term experience with limited partnership investments has been quite favorable; they represent 3.8% and 4.5% of total investments at March 31, 1999 and December 31, 1998, respectively. Fixed maturity investments which the Company has both the positive intent and the ability to hold to maturity are recorded at amortized cost. Fixed maturity investments which may be sold in response to, among other things, changes in interest rates, prepayment risk, income tax strategies or liquidity needs are classified as available-for-sale and are carried at market value. The carrying value of fixed maturity and short-term investments is $1,888.7 million at March 31, 1999 and $1,859.2 million at December 31, 1998, or approximately 76.9% and 74.2% of the Company's cash and investments, respectively. The Company manages its total investments, so that at all times, there are fixed income securities that are adequate in amount and duration to meet the cash 22 requirements of current operations and longer term liabilities, as well as to meet insurance regulatory requirements with respect to investments under specific state insurance laws. The Company invests primarily in investment grade securities and additionally invests a portion of its portfolio in a diversified group of non-investment grade fixed maturity securities or securities that are not rated to increase the portfolio average return. The risk of loss due to default is generally considered greater for non-investment grade securities than for investment grade securities because the former, among other things, are often subordinated to other indebtedness of the issuer and are often issued by highly leveraged companies. At March 31, 1999 and December 31, 1998, the Company's investment in non-investment grade and non-rated fixed maturity securities were as follows: (In millions, except for %) March 31, 1999 December 31, 1998 - -------------------------------------------------------------------------------- Non-investment grade and non-rated fixed maturity securities $ 156.9 $ 208.7 As percentage of total cash and investments 6.4% 8.3% As percentage of total assets 3.7% 5.0% REALIZED AND UNREALIZED INVESTMENT RESULTS Net realized investment gains are $1.7 million and $29.0 million for the three months ended March 31, 1999 and 1998, respectively. Approximately one-half of the first quarter 1998 net realized investment gains resulted from the sale of two investments in entities which were acquired or taken public during that quarter. Realized investment gains may be reduced by provisions for losses on securities deemed to be other-than-temporarily impaired. Any such provision is based on available information at the time and is made in consideration of the decline in the financial condition of the issuers of such securities. Realized investment gains (losses) vary from period to period, depending on market conditions relative to the Company's investment holdings, the timing of investment sales generating gains and losses, the occurrence of events which give rise to other-than-temporary impairment of investments, and other factors. The Company has a new outside investment manager that is repositioning part of the Company's investment portfolio and expects the repositioning to be complete by June 30, 1999. Net unrealized investment appreciation (depreciation) for equity securities and fixed maturities classified as available-for-sale are recorded in stockholders' equity, net of federal taxes, and included as a component of other comprehensive income (see note 7 to condensed financial statements). Unrealized investment appreciation (depreciation) can vary significantly depending upon fluctuations in interest rates, changes in credit spreads and in equity prices. 23 EXPENSES AND OTHER OPERATING RATIOS The following table sets forth certain ratios of insurance operating expenses to premiums earned for the three months ended March 31: 1999 1998 - ------------------------------------------------------------------------------- Loss and loss adjustment expenses 122.2% 66.5% Policy acquisition costs and other insurance expenses 29.9 31.0 -------- -------- Total before policyholders' dividends 152.1 97.5 Policyholders' dividends 2.0 1.8 -------- -------- Combined ratio 154.1% 99.3% ======== ======== Loss and loss adjustment expenses ratio by segment: Workers Compensation 115.6% 56.6% Nonstandard Automobile 72.9 72.0 Specialty Commercial 185.3 69.6 In the third quarter of 1998, the Company announced a realignment of Orion Specialty to address lines of business that had not met growth and profitability expectations. The realignment continued Orion Specialty's shift away from commodity business. The Company's recent trends in the loss development of the previously cancelled program business at Orion Specialty indicated a deterioration of claims experience and prompted the recently completed loss reserve study. In the first quarter of 1999, the ratio of loss and loss adjustment expenses to premiums earned (the "loss ratio") of 122.2% reflects significant strengthening of the Company's reserve position as of March 31, 1999 based upon a recently completed loss reserve study. Excluding the provision for loss and loss adjustment expenses recorded in connection with the loss reserve study, the loss and loss adjustment expenses ratio by segment for the three months ended March 31, 1999 would have been 62.3% for Workers Compensation, 70.3% for Nonstandard Automobile, and 69.6% for Specialty Commercial. The Company made the decision to conduct a review of its loss reserves for exited business and to review strategic alternatives for Orion Specialty's remaining program and binding authority business in the first quarter of 1999 as part of the final steps in an aggressive two-year reshaping of the Company's business. The Company expanded the analysis to a full-scale review of all reserves and elected to add the perspective of an independent actuarial review. As a result of this study, in the first quarter of 1999, the Company recorded a provision for loss and loss adjustment expenses of $139.0 million related to the 1998 and prior accident years, which was net of reinsurance, and included a $25.5 million net ceded premium adjustment based upon the Company's loss experience. The loss reserve study focused on the business that the Company has exited or plans to exit and the provision included costs of settling outstanding claims for exited business. Approximately 89% of the net provision were attributed to businesses that the Company has exited and will be exiting. The loss reserve study also reviewed the reserve positions for the Company's ongoing business in light of current market conditions and industry trends. Approximately 11% of the loss reserve strengthening is related to ongoing business, including $8.4 million for EBI, $4.2 million for DPIC and $3.0 million for OrionAuto. Further, the Company has adjusted loss ratios for the 1999 accident year in consideration of the reserve study findings. 24 The 1999 first-quarter loss ratio for Workers Compensation reflects $31.9 million of reserve strengthening related to non-workers compensation lines that originated in this segment, but are no longer written by the Company. Additionally, EBI strengthened its net reserves in the first quarter 1999 by recording a loss and loss adjustment expense provision of $8.4 million primarily relating to the 1998 accident year as a result of the loss reserve study. The benefit of EBI's service-oriented approach, working with its customers to prevent losses and reduce claim costs, has allowed EBI to report better than industry results. The 1999 loss ratio for Nonstandard Automobile reflects an increase in loss costs resulting from the loss reserve study substantially offset by a decrease in loss adjustment expenses from continued improvements in efficiencies. In connection with the loss reserve study, in the first quarter of 1999, Specialty Commercial strengthened its loss reserve positions by recording a net provision for loss and loss adjustment expenses of $95.7 million related to 1998 and prior accident years. Approximately $47.1 million of this net charge is related to the assumed reinsurance business that the Company exited in late 1996, $44.4 million is related to the exited program and binding authority business at Orion Specialty, and $4.2 million is related to the ongoing business at DPIC. The ratio of policy acquisition costs and other insurance expenses to premiums earned (the "expense ratio") improved to 29.9% from 31.0% for the three months ended March 31, 1999 and 1998, respectively. The lower expense ratio is primarily due to a favorable change in the Company's total business mix with an increasing percentage of business in Nonstandard Automobile and a declining percentage in Specialty Commercial, as well as the Company's actions to decrease operating expenses. Policy acquisition costs include direct costs, such as commissions, premium taxes, and salaries that relate to and vary with the production of new business. These costs are deferred and amortized as the related premiums are earned, subject to a periodic test for recoverability. The Company regularly evaluates its reserves for loss and loss adjustment expenses. Loss reserve amounts are based on management's informed estimates and judgements, using data currently available. As part of the evaluation of its first quarter loss reserve position, the Company took the additional action of having an independent actuarial review of its loss reserves. The results of which were considered in the increases in loss reserves during the first quarter of 1999. Management believes that the Company's reserves for loss and loss adjustment expenses make reasonable and sufficient provision for the ultimate cost of all losses on claims incurred. Although there can be no assurance that changes in loss trends will not result in additional development of prior years' reserves in the future, the Company believes that the current and prospective loss reserving reflects an increased level of conservatism. Variability in claim emergence and settlement patterns and other trends in loss experience can result in future development patterns different than expected. The Company believes that any such variability or development will generally be at low levels, considering actions that have been taken to increase loss reserving levels, improve underwriting standards and emphasize loss prevention and control. The Company limits both current losses and future development of losses by ceding business to reinsurers. The Company continually monitors the financial strength of its reinsurers and, to the Company's knowledge, has no material exposure with regard to potential unrecognized losses due to reinsurers having known financial difficulties. 25 INTEREST EXPENSE Interest expense is $4.6 million and $5.8 million for the first quarters of 1999 and 1998, respectively. Interest expense declined as a result of the repayment of the $100 million bank indebtedness of Guaranty National in February 1998 with proceeds from the issuance of the Company's 7.701% trust preferred securities. OTHER EXPENSES Other expenses are $7.3 million and $11.1 million for the first quarters of 1999 and 1998, respectively. The decrease is primarily due to the elimination of McGee agency expense resulting from the sale of this unit. EQUITY IN EARNINGS (LOSS) OF AFFILIATE Equity in loss of affiliate consists of a loss of $0.6 million in the first quarter of 1998 from the Company's 26% investment in Intercargo. In December 1998, the Company has agreed to sell its investment in Intercargo pursuant to the terms of a merger agreement between Intercargo and a subsidiary of XL Capital, Ltd., and reduced its carrying value of Intercargo to the sale price of $22.8 million. The Company continued to carry its investment in Intercargo at $22.8 million in the first quarter of 1999. Intercargo announced that its merger was consummated on May 7, 1999. The Company will receive $22.8 million in cash from the sale in the near future. FEDERAL INCOME TAXES (BENEFITS) Federal income taxes (benefits), including tax benefits from trust preferred securities and excluding tax benefits from an accounting change, and the related effective tax rates are $(53.9) million (-38.0%) and $14.5 million (25.6%) for the first quarters of 1999 and 1998, respectively. The Company's effective tax rates for 1999 and 1998 are different than the statutory tax rate of 35% primarily because of income derived from tax-advantaged securities. The 1999 first quarter effective tax rate has been calculated on a discrete period basis giving effect of expected tax benefits to be realized during the year. MINORITY INTEREST EXPENSE Minority interest expense in subsidiary trust preferred securities of $3.4 million and $2.7 million for the first quarters of 1999 and 1998, respectively, represents the financing cost, after the federal income tax deduction, on Orion's 8.73% and 7.701% trust preferred securities. The increase in 1999 reflects minority interest expense associated with the issuance of $125 million 7.701% trust preferred securities in February 1998. 26 LIQUIDITY AND CAPITAL RESOURCES The Company's cash flows for the three months ended March 31 is as follows: (In millions) 1999 1998 - -------------------------------------------------------------- Cash flows: Operating activities $ 1.9 $ 22.8 Investing activities 27.1 (42.0) Financing activities (11.6) 11.0 ----------- ----------- $ 17.4 $ (8.2) =========== =========== Cash provided by operating activities decreased by $20.9 million to $1.9 million in the first quarter of 1999 from $22.8 million in the first quarter of 1998. The decrease in operating cash flow in 1999 is primarily the result of higher payments for losses and loss adjustment expenses, largely influenced by the runoff of exited business, and reductions in premium and investment income collections as well as certain timing differences related to reinsurance. Partially offsetting these cash flow changes were declines in policy acquisition costs and federal income tax payments, as well as a $20.0 million federal tax refund received by the Company. The sale of McGee did not result in a significant change to operating cash flow in the first quarter of 1999 as compared to the same 1998 period. However, McGee generated $15.6 million of operating cash for the 1998 year. Due to the anticipated level of claim payments from exited business, operating cash flow for 1999 is expected to be less than 1998. The Company's existing cash and expected investment maturities are anticipated to be adequate to cover any additional operating cash flow needs in 1999. Cash provided by investment activities increased by $69.1 million in the first quarter of 1999 to $27.1 million from cash used in investment activities of $42.0 million in the first quarter of 1998. Cash is used in or provided by investment activities primarily for purchases or sales and maturities of investments, and for acquisition and from divestiture activities, and for purchases of property and equipment. Investment purchases are funded by maturities and sales of investments, as well as by the net cash from operating cash flows after cash provided by or used in financing activities. In April 1999, the Company received approximately $33.9 million of net cash in connection with the sale of McGee. Additionally, the Company will receive $22.8 million of cash related to the sale of Intercargo in the second quarter of 1999. Cash (used in) provided by financing activities were $(11.6) million and $11.0 million for the three months ended March 31, 1999 and 1998, respectively. The Company repaid the outstanding balance of $8.0 million under its bank credit agreement in the first quarter of 1999. The issuance of 7.701% trust preferred securities by the Company provided $121.9 million of cash in the first quarter of 1998. Net proceeds from that issuance were used to repay the $100 million bank indebtedness of Guaranty National in February 1998. Orion's uses of cash consist of debt service, dividends to stockholders and overhead expenses. These cash uses are funded from existing available cash, financing transactions and receipt of dividends, reimbursement of overhead expenses, debt service costs from loans due from subsidiaries, and amounts in lieu of federal income taxes from Orion's insurance subsidiaries. Payments of dividends by Orion's insurance subsidiaries must comply with insurance regulatory limitations concerning 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. 27 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 $204.2 million and $242.4 million at March 31, 1999 and December 31, 1998, respectively. The consolidated policyholders' surplus of Orion's insurance subsidiaries is $637.7 million and $732.1 million at March 31, 1999 and December 31, 1998, respectively. The Company's statutory operating leverage ratios of trailing twelve months net premiums written to policyholders' surplus is 2.2:1 and 2.1:1 at March 31, 1999 and December 31, 1998, respectively. In July 1998, the Company entered into a five year credit agreement with a group of banks which provides for unsecured borrowings up to $150 million. No borrowings are outstanding at March 31, 1999. The Company intends to use the credit facility for general corporate purposes, which may include acquisitions. Borrowings under the credit agreement bear interest at LIBOR (London Interbank Offered Rate) plus a margin based upon the Company's credit ratings. The credit agreement, as amended, requires the Company to maintain certain defined financial covenants and may limit the Company's ability to incur secured indebtedness or certain contingent obligations. The Company is in compliance with the terms of this credit agreement. Management does not believe that the credit agreement's covenants or limitations unduly restrict the Company's operations or limit Orion's ability to acquire additional indebtedness. The terms of Orion's indentures for its $100 million of 7.25% Senior Notes due 2005 and its $110 million of 9.125% Senior Notes due 2002 limit the amount of liens and guarantees by the Company, and the Company's ability to incur secured indebtedness without equally and ratably securing the senior notes. Management does not believe that these limitations unduly restrict the Company's operations or limit Orion's ability to pay dividends on its stock. At March 31, 1999 the Company is in compliance with the terms of its senior note indentures. In February 1998, Orion issued $125 million of 7.701% Trust Preferred Securities due April 15, 2028. In January 1997, Orion also issued $125 million of 8.73% Trust Preferred Securities due January 1, 2037. The 8.73% and 7.701% Trust Preferred Securities are subordinated to all liabilities of the Company. The Company may defer interest distributions on these Trust Preferred Securities; 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. Management believes that the Company continues to have substantial sources of capital and liquidity from the capital markets and bank borrowings. The Company has repurchased 132,000 shares of its common stock at an aggregate cost of $6.6 million under the stock repurchase program in the first quarter of 1998. No repurchases under this program were made in 1999. At March 31, 1999 the Company's remaining stock purchase authorization from its Board of Directors amounted to $42.5 million. LEGAL PROCEEDINGS Orion and its subsidiaries are routinely engaged in litigation incidental to their businesses. Management believes that there are no significant legal proceedings pending against the Company which, net of reserves established therefor, are likely to result in judgments for amounts that are material to the financial condition, liquidity or results of operations of Orion and its consolidated subsidiaries, taken as a whole. 28 YEAR 2000 COMPLIANCE The "Year 2000 problem" exists because many computer programs which companies use rely on only the last two digits to refer to a particular year. As a result, these computer programs may interpret the Year 2000 as 1900. If not corrected, computer software may fail or create erroneous results. The potential impact of the Year 2000 problem on business, financial and governmental entities throughout the world is not known and, if not timely corrected, may broadly affect the national economy in which we operate. The Company concluded that as an extensive user of technology, it has a material exposure to the Year 2000 problem and has taken steps to assess and address that exposure. In response to this issue, the Company has inventoried and assessed, for all its operations and locations, its insurance policy issuance, billing and collection, claims paying, and other operational systems, along with the hardware and software used in its computing facilities, embedded chips used in its physical structures, third party data-exchanges, and reliance on external business relations. This work has been carried out by the Company through central coordination supported by dedicated teams working at each Company site. Progress has been reviewed regularly by senior management. The process by which the Company is managing its Year 2000 efforts has also been reviewed by independent consultants. The Company began addressing its computer programs in 1996 at the locations where its most significant technology concentration exists. Similar work commenced shortly thereafter at other locations. As of March 31, 1999, the Company had completed approximately 97% of its scheduled remediation of critical production systems for processing Year 2000 dates. This places the Company on or ahead of its plan for meeting Year 2000 processing needs. Non-critical systems will be tested and critical systems will be re-tested during 1999. The total costs to test or modify these existing systems, which include both internal and external costs of programming and testing, is estimated to be approximately $20.0 million, of which $0.5 million has been expensed in the first quarter of 1999 and $15.8 million in 1998 and prior periods. With a timely start on correcting the Year 2000 problem, the Company has been able to address this potential exposure while continuing to replace outdated systems with newer versions offering greater functionality and cost efficiencies. The Company completed replacing its financial, personnel, and payroll systems in 1998 and began phasing in new integrated processing systems for certain other operations in 1999. Those major technology improvement projects, which were substantially completed in 1998, totaled approximately $13.0 million and have been or will be capitalized as fixed assets. The Company does not expect to incur any significant Year 2000 capital expenditures in 1999. In addition to addressing its own hardware, software and processing exposure, the Company has been engaged since 1996 in a process of identifying and prioritizing critical suppliers and customers at the direct interface level, and communicating with them about their plans and progress in addressing the Year 2000 problem. The Company has mailed letters to significant vendors and service providers and has verbally communicated with many strategic customers to determine the extent to which interfaces with such entities are vulnerable to Year 2000 problems and whether the products and services purchased from or by such entities are Year 2000 compliant. As of March 31, 1999, the Company had received responses from approximately 89% of the third parties of whom it has inquired and 97% of the companies that have responded have provided written assurances that they expect to address all their significant Year 2000 problems on a timely basis. 29 Evaluations of the most critical third parties have been initiated. These evaluations will be followed by the development of contingency plans, which have already been prepared for third parties having near term Year 2000 impact. During the first quarter of 1999, contingency plans were finalized for all critical production systems. Focus has been shifting to third parties and non-technical functions. During the third quarter of 1999, appropriate contingency plans will be completed for all critical third party relationships and business functions. The Company believes that this aspect of its Year 2000 effort was on schedule at March 31, 1999. A follow-up mailing to significant vendors and service providers that did not initially respond, or whose responses were deemed unsatisfactory by the Company, was completed by March 31,1999. The Company also expanded its survey to vendors and service providers who do not directly interface with the Company's systems. In the third quarter of 1999, the Company plans to re-survey all critical third parties. The Company presently believes that the Year 2000 problems will not pose significant operational problems for the Company. However, if a Year 2000 problem is not properly identified so that assessment, remediation and testing can be effected timely, there can be no assurance that the Year 2000 issue will not materially adversely impact the Company's results of operations or adversely affect the Company's relationships with customers, vendors, or others. The Company is unable to determine at this time whether the consequences of counter-parties' Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The possibility exists that a portion of its third-party distribution channels may not be ready, that communications with its agents could be disrupted, that underwriting data, such as motor vehicle reports, could be unobtainable, that the claim settling process could be delayed or that the frequency and severity of losses may increase due to external factors. Where concern appears justified about an aspect of readiness, contingency plans have been and will be prepared. However, there can be no assurance that unanticipated Year 2000 issues of other entities will not have a material adverse impact on the Company's systems or results of operations. This is a Year 2000 Readiness Disclosure statement. Readers are cautioned that forward-looking statements contained in "Year 2000 Compliance" should be read in conjunction with the Company's disclosures under the heading: "Forward-Looking Statements." ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED In June 1998, the Financial Accounting Standards Board issued FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This standard requires companies to record all derivatives on the balance sheet as either assets or liabilities and measure those instruments at fair value. The manner in which companies are to record gains or losses resulting from changes in the values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. This standard is effective for the Company's financial statements beginning January 1, 2000, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this statement and the potential effect on its financial position or results of operations. 30 FORWARD-LOOKING STATEMENTS All statements made in this quarterly report that do not reflect historical information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition and regulatory environment in which the Company operates; (iv) claims frequency; (v) claims severity; (vi) medical cost inflation; (vii) increases in the cost of property repair; (viii) the number of new and renewal policy applications submitted to the Company; (ix) Year 2000 problems and (x) other factors over which the Company has little or no control. The Company's expectation that its plan for Year 2000 Compliance will be completed on schedule depends, in large part, on the Company's own efforts and expenditures on hardware, software and systems, which is on schedule as to those exposures which the Company has been able to identify. However, Year 2000 problems could also arise because of unanticipated non-compliance on the part of vendors, agents, customers and other third parties including governmental entities. Significant Year 2000 problems could materially and adversely affect future performance and results of operations. The Company disclaims any obligation to update or to publicly announce the impact of any such factors or any revisions to any forward-looking statements to reflect future events or developments. PART II. OTHER INFORMATION Items 1 - 5. None. Item 6. Exhibits and reports on Form 8-K Exhibits Exhibit 4(i): First Amendment to Credit Agreement, dated May 4, 1999 between Orion Capital Corporation and the lenders named therein, First Union National Bank, as Administrative Agent. Exhibit 10(i) Stock Purchase Agreement by and between Fireman's Fund Insurance Company, and Orion Capital Corporation regarding the Sale of the Shares of Wm. H. McGee & Co., Inc. dated March 9, 1999. Exhibit 15: Deloitte & Touche LLP Letter re: unaudited interim financial information. Exhibit 27: Financial Data Schedule. (b) Report on Form 8-K None. 31 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 14, 1999 By: /s/ W. Marston Becker ------------------------- Chairman of the Board and Chief Executive Officer Date: May 14, 1999 By: /s/ Michael L. Pautler -------------------------- Senior Vice President and Chief Financial Officer 32 EXHIBIT INDEX Exhibit 4(i): First Amendment to Credit Agreement, dated May 4, 1999 between Orion Capital Corporation and the lenders named therein, First Union National Bank, as Administrative Agent. Exhibit 10(i) Stock Purchase Agreement by and between Fireman's Fund Insurance Company, and Orion Capital Corporation regarding the Sale of the Shares of Wm. H. McGee & Co., Inc. dated March 9, 1999. Exhibit 15: Deloitte & Touche LLP Letter Re: unaudited interim financial information Exhibit 27: Financial Data Schedule 33 EX-4 2 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of the 4th day of May, 1999 (this "Amendment"), is made among ORION CAPITAL CORPORATION, a Delaware corporation (the "Borrower"), the banks and financial institutions from time to time party to the Credit Agreement (as defined herein) (collectively, the "Lenders"), and FIRST UNION NATIONAL BANK ("First Union"), as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). RECITALS The Borrower, the Lenders and the Administrative Agent are parties to a Credit Agreement, dated as of July 8, 1998 (as amended, the "Credit Agreement"), providing for the availability of certain credit facilities to the Borrower upon the terms and conditions set forth therein. Capitalized terms used herein without definition shall have the meanings given to them in the Credit Agreement. The Borrower has requested certain amendments to the Credit Agreement, and the Lenders have agreed to effect such amendments and waivers upon the terms and conditions set forth herein. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I AMENDMENTS 1.1 No Material Adverse Change. Section 4.10 of the Credit Agreement is hereby amended and restated in its entirety as follows: 4.10 Material Adverse Change. There has been no Material Adverse Change since December 31, 1998, and there exists no event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change; provided, however, that an increase to the Borrower's reserves and the resultant pre-tax charge as of March 31, 1999 in an amount not to exceed $170,000,000 shall not, in and of itself, be deemed to be a Material Adverse Change. 1.2 Capitalization Ratio. Section 6.1 of the Credit Agreement is hereby amended and restated in its entirety as follows: 1 6.1 Capitalization Ratio. The Borrower will not permit the Capitalization Ratio to be greater than 0.35 to 1.0 as of the last day of any fiscal quarter, beginning with the fiscal quarter ending December 31, 1998. 1.3 Combined Statutory Surplus. Section 6.2 of the Credit Agreement is hereby amended by (a) deleting the reference to "$650,000,000" and replacing it with "$600,000,000" (b) deleting the reference to "December 31, 1998" and replacing it with "December 31, 1999". ARTICLE II REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants to the Administrative Agent and each Lender as follows: 2.1 Representations and Warranties. After giving effect to this Amendment, each of the representations and warranties of the Borrower contained in the Credit Agreement and in the other Credit Documents is true and correct on and as of the date hereof with the same effect as if made on and as of the date hereof (except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty is true and correct as of such date). 2.2 No Default. After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. ARTICLE III MISCELLANEOUS 3.1 Effect of Amendment. From and after the effective date of the amendments to the Credit Agreement set forth herein, all references to the Credit Agreement set forth in any other Credit Document or other agreement or instrument shall, unless otherwise specifically provided, be references to the Credit Agreement as amended by this Amendment and as may be further amended, modified, restated or supplemented from time to time. This Amendment is limited as specified and shall not constitute or be deemed to constitute an amendment, modification or waiver of any provision of the Credit Agreement except as expressly set forth herein. Except as expressly amended hereby, the Credit Agreement shall remain in full force and effect in accordance with its terms. 3.2 Governing Law. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of North Carolina (without regard to the conflicts of law provisions thereof). 3.3 Expenses. The Borrower agrees to pay upon demand all reasonable out-of-pocket costs and expenses of the Administrative Agent and each Lender (including, without limitation, the reasonable fees and expenses of counsel to the Administrative Agent and each Lender) in connection with the preparation, negotiation, execution and delivery of this Amendment and the other Credit Documents delivered in connection herewith. 2 3.4 Severability. To the extent any provision of this Amendment is prohibited by or invalid under the applicable law of any jurisdiction, such provision shall be ineffective only to the extent of such prohibition or invalidity and only in any such jurisdiction, without prohibiting or invalidating such provision in any other jurisdiction or the remaining provisions of this Amendment in any jurisdiction. 3.5 Successors and Assigns. This Amendment shall be binding upon, inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto. 3.6 Construction. The headings of the various sections and subsections of this Amendment have been inserted for convenience only and shall not in any way affect the meaning or construction of any of the provisions hereof. 3.7 Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. After execution and delivery by the parties hereto, this Amendment shall be deemed to be effective as of January 1, 1999. [the remainder of this page intentionally left blank] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers as of the date first above written. FIRST UNION NATIONAL BANK, as Administrative Agent and as Lender By: _______________________________ Title: _______________________________ [Signatures Continued] 4 ORION CAPITAL CORPORATION By: _______________________________ Title: _______________________________ [Signatures Continued] 5 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: _______________________________ Title: _______________________________ [Signatures Continued] 6 FLEET NATIONAL BANK By: _______________________________ Title: _______________________________ [Signatures Continued] 7 FIRST NATIONAL BANK OF CHICAGO By: _______________________________ Title: _______________________________ [Signatures Continued] 8 MELLON BANK, N.A. By: _______________________________ Title: _______________________________ [Signatures Continued] 9 STATE STREET BANK AND TRUST COMPANY By: _______________________________ Title: _______________________________ 10 EX-10 3 STOCK PURCHASE AGREEMENT by and between FIREMAN'S FUND INSURANCE COMPANY, and ORION CAPITAL CORPORATION REGARDING THE SALE OF THE SHARES OF WM. H. MCGEE & CO., INC Dated: March 9, 1999 1 STOCK PURCHASE AGREEMENT AGREEMENT (the "Agreement"), dated March 9, 1999, by and between ORION CAPITAL CORPORATION, a Delaware corporation ("Seller"), as Seller, and FIREMAN'S FUND INSURANCE COMPANY, a California corporation ("Buyer"), as Buyer, W I T N E S S E T H: 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, Seller owns 100% of the Common Stock, all of which is to be sold to and purchased by Buyer pursuant hereto; NOW, THEREFORE, the parties hereto agree as follows, intending that defined terms used herein shall have the meanings set forth in Article XII: I. THE TRANSACTION Section 1.1. Purchase of Common Stock. Upon the terms and subject to all of the conditions set forth herein, Seller agrees to sell to Buyer and Buyer agrees to acquire from Seller on the Closing Date 100% of the Common Stock. Section 1.2. Consideration. In full consideration for the sale of the Common Stock by Seller to Buyer provided for herein, together with the other undertakings and commitments made and delivered by Seller to Buyer herein, at the Closing Buyer shall deliver to Seller the sum of Fifty-Nine Million Four Hundred Thousand and 00/100 ($59,400,000.00) Dollars in immediately available funds by wire transfer to the account designated by Seller. Section 1.3. Management Fee. In full consideration for the provision of management services by SICH to McGee and its Subsidiaries for the period from January 1, 1999 until Closing, at the Closing Buyer shall pay to SICH, in immediately available funds by wire transfer to the account designated by SICH, an aggregate amount equal to (a) if the Closing occurs on or prior to April 30, 1999, Eight Hundred Thousand and 00/100 Dollars ($800,000.00), or (b) if the Closing occurs after April 30, 1999, the sum of (i) Eight Hundred Thousand and 00/100 Dollars ($800,000.00), plus (ii) Two Hundred Thousand and 00/100 Dollars ($200,000.00) for each full or partial calendar month during the period from April 30, 1999 through and including the Closing Date. II. 2 THE CLOSING Section 2.1. Closing. (a) The closing of the transactions provided for herein (the "Closing") shall occur at the offices of Cummings & Lockwood at CityPlace I, 185 Asylum Street, 36th Floor, Hartford, Connecticut or at such other place as shall be determined by Buyer and Seller, on April 30, 1999; provided, however, that if any of the conditions provided for in Articles VII and VIII hereof shall not have been met or waived by Seller or by Buyer, as the case may be, by the scheduled Closing Date, 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 June 30, 1999. At the Closing, Seller and Buyer 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." (b) At the Closing, Seller shall deliver to Buyer: (i) stock certificates representing all of the Common Stock, (ii) a mutual release between Seller and its affiliates (other than SICH) and McGee in the form of Exhibit A-1; (iii) a mutual release between SICH and McGee in the form of Exhibit A-2; (iv) a mutual release between CI and McGee in the form of Exhibit A-3 (collectively, the "Releases"); and (v) a noncompetition agreement in the form attached hereto as Exhibit B (the "Noncompetition Agreement"). III. 3 REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer that: Section 3.1. 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 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, except where the failure so to qualify would not have a material adverse effect on the business, properties, financial condition or results of operations of McGee and its Subsidiaries taken as a whole or the ability of any of them to carry on the business of the Pool as it is carried on by McGee and its Subsidiaries taken as a whole (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, except where the failure so to qualify would not have a Material Adverse Effect. Seller has heretofore made available to Buyer true and complete copies of (a) the Certificate of Incorporation and By-laws of McGee and each of its Subsidiaries, (b) (i) 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 since June 30, 1995, and (ii) to the Seller's Knowledge, 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 and organization and prior to June 30, 1995 and all powers of attorney, if any, issued by McGee or any of its Subsidiaries which are presently outstanding and in effect. Section 3.2. Capitalization. McGee has an authorized capital stock consisting of 11,000 shares of common stock, without par value, of which, 4,400 shares are issued and outstanding. No shares of McGee Common Stock are held in treasury. All of the Common Stock is duly authorized, validly issued, fully paid and non-assessable and is owned by Seller 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 Seller nor McGee (a) is a party to or is bound by any agreement, or has since June 30, 1995 made any commitment, to sell or issue any securities of McGee other than the Common Stock which is the subject of this Agreement, or (b) has taken any corporate action to approve any of the foregoing except for the approval of this Agreement. The Common Stock is not subject to preemptive rights or to any 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 of each Subsidiary of McGee (other than directors' qualifying shares, in the case of Wm. H. McGee & Company of Puerto Rico, Inc.) as set forth on Schedule 3.2, and such ownership is 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 and 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 none of McGee nor Seller 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. 4 Section 3.3. Regulatory Status. To Seller's Knowledge, McGee, and each of its Subsidiaries, has 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, except where the failure to have the same could not reasonably be expected to have a Material Adverse Effect. All material licenses, permits and other governmental authorizations held by McGee are set forth on Schedule 3.3. Section 3.4. Compliance with Law. To Seller's Knowledge, except as set forth on Schedule 3.4, McGee, and each of its Subsidiaries, has conducted, and is now conducting, its business and operations in material compliance with all existing laws, rules, regulations, ordinances, orders, judgments and decrees (including, without limitation, those of state insurance departments) applicable to its business, properties or operations as presently conducted. Section 3.5. Authorization. (a) This Agreement has been duly authorized by all necessary corporate action of Seller. This Agreement will, when duly executed and delivered, be a valid and binding agreement of Seller, enforceable against Seller 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. (b) Each of the Ancillary Agreements to which Seller or a Subsidiary of Seller is a party, has been, or prior to the Closing will be, duly authorized by all necessary corporate action of Seller or such Subsidiary, does not violate any provision of the Certificate of Incorporation, or similar charter document, or By-Laws of any of them or any agreement by which any of them or the properties of any of them is bound and will, when duly executed and delivered, be a valid and binding agreement of such entity 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. 5 Section 3.6. Books and Records. The consolidated and consolidating unaudited balance sheets of McGee and its Subsidiaries as of December 31, 1998, 1997 and 1996 and the related consolidated and consolidating unaudited statements of income and stockholders' equity for the fiscal year ended on such date and, in each case, the related schedules, have been delivered by Seller to Buyer. The unaudited consolidated and consolidating financial statements have been prepared in accordance with generally accepted accounting principles consistently applied (except that such unaudited financial statements lack or do not reflect footnote disclosures, deferred federal income taxes, goodwill, any obligations to settle claims of Pool Participants, tax valuation, and allowances on a stand-alone basis) and present fairly the financial position of McGee and its Subsidiaries as of such date and the results of their operations for such periods. Section 3.7. Litigation and Other Proceedings. (a) Except as set forth in Schedule 3.7(a), there are no actions, suits, investigations or proceedings pending against, or to Seller's Knowledge threatened against, 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. To Seller's Knowledge, neither Seller 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, nor has any of them received written notice of any assertion of a default where such default or violation has had or is reasonably likely to have a Material Adverse Effect. To Seller's knowledge, neither McGee nor any of its Subsidiaries is in default under any contract or commitment, nor has any of them received written notice of any assertion of a default which default has had or is reasonably likely to have a Material Adverse Effect. (b) Except as set forth in Schedule 3.7(b), there are no actions, suits, investigations or proceedings pending against, or to Seller's knowledge threatened against, Pool Participants arising out of participation in the Pool relating to extra-contractual, asbestos or environmental claims. 6 Section 3.8. Title to Properties. (a) 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(a). Except as set forth in Schedule 3.8(a), McGee has good and marketable fee title to all owned real property reflected on Schedule 3.8(a), 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 Seller's Knowledge, each lease reflected on Schedule 3.8(a) is valid and subsisting in accordance with its terms, no default 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 Seller'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. (b) Schedule 3.8(b) contains a true and complete summary, by office location and type of property, of each item of personal property (other than investments reflected in Schedule 3.11) having a value on the books of McGee in excess of $10,000 which is used by McGee or any Subsidiary of McGee in its business and a list of all equipment leases and capital leases under which McGee holds any property with rental payments exceeding $10,000 per year. Except as set forth in Schedule 3.8(b), 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 liens 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. (c) To Seller's Knowledge, Schedule 3.8(c) contains a true and complete description of all copyrights, patents, trademarks, service marks, trade names, franchises, computer programs (other than computer programs subject to "shrink-wrap" licenses), processes and applications, and other intellectual property (in each case, whether or not registered) owned or licensed by, and applications for any of the foregoing made by, McGee and each Subsidiary of McGee ("Intellectual Property"). To Seller's Knowledge, no Intellectual Property is subject to any lien, charge, encumbrance or adverse claim of any kind. To Seller's Knowledge, and except as set forth in Schedule 3.8(c), all rights in such Intellectual Property 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 McGee and its Subsidiaries, taken as a whole). To Seller'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 intellectual intangible property right owned or alleged to be owned by others, nor has any written notice of any claim been received from any third party alleging infringement or unlawful use, nor, except as set forth in Schedule 3.8(c), has any Intellectual Property been licensed to any other person. 7 Section 3.9. No Conflicts. (a) Neither the execution nor the delivery by Seller of this Agreement and the Ancillary Agreements, nor the consummation of the transactions contemplated hereby or thereby, nor the compliance with or fulfillment of the terms and provisions hereof or thereof by Seller, 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 Seller 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 Seller, 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 Seller 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 Seller to perform its obligations hereunder. Except as set forth in Schedule 3.9(a) hereto, no consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of Seller or McGee or any Subsidiary of McGee is required in connection with the execution, delivery and performance of this Agreement and the Ancillary Agreements or the offer, sale or delivery of the Common Stock as provided herein. (b) Neither the execution nor the delivery by any Subsidiary of Seller of any of the Ancillary Agreements to which such Subsidiary is a party, nor the consummation by any such Subsidiary 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 is otherwise bound; or (iii) result in a violation of or the acceleration of any obligation under any agreement, indenture, mortgage, lien, instrument, 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. 9 Section 3.10. Taxes. Except as disclosed in Schedule 3.10: (a) Since June 30, 1995, 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 material federal, state, local and foreign returns, filings and reports with respect to Taxes and any required material information returns or reports of any kind (the "Tax Returns") which were required by applicable law to be filed on or before the Closing Date, and all Tax Returns are true, correct and complete. The term "Taxes," as used in this Agreement, shall mean all federal, state, local and foreign gross receipts, franchise, premium, income and capital taxes, value added taxes, sales, use and consumption taxes, employment, payroll, withholding, ad valorem and property taxes, and all other 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 payable by or in respect of the business or operations of McGee. (b) Neither McGee nor any of its Subsidiaries is delinquent in any material respect 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. (c) There is no agreement, waiver or consent providing for an extension of time with respect to (i) the filing of any Tax Return, election or designation by McGee or any of its Subsidiaries, (ii) the payment or issuance of any assessment of any Tax by or against McGee or any of its Subsidiaries or (iii) the issuance of any deficiency against McGee or any of its Subsidiaries with respect to Taxes. In addition, (except as disclosed to Buyer pursuant to this Agreement) there is not currently in force any power of attorney granted by McGee or any of its Subsidiaries with respect to any Tax matter. (d) There is no (i) claim or deficiency for any Taxes which has been asserted or, to Seller's Knowledge, threatened against McGee or any of its Subsidiaries or the Consolidated Group, (ii) action, suit, proceeding, investigation, audit or claim now pending or, to Seller's Knowledge, threatened 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. 11 (e) The federal income Tax Returns of McGee and its Subsidiaries (including any consolidated federal income 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 Seller has received no written notice of any issue having 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 McGee Canada for all fiscal years up to and including the fiscal year ended 1997. Seller has received no written notice of any issue having 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) Since June 30, 1995 (i) neither McGee nor any of its Subsidiaries has 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 January 1, 1996, 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 January 1, 1996, 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 Buyer 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 nor Seller nor any of its Subsidiaries, with respect to any person in his or her capacity as an officer or employee of McGee, is a party to any agreement pursuant to which it has committed, by reason of the transactions contemplated in this Agreement or other related agreements executed on the Closing Date, to make any payment to such person which (exclusive of such payments as may be made by or at the direction of Buyer) would constitute a "parachute payment" for purposes of Sections 280G 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 Seller or McGee; (vii) neither McGee nor any of its Subsidiaries is a "gain corporation" within the meaning of Section 384(c)(4) of the Code; (viii) neither Seller nor SICH is a "foreign person" within the meaning of Section 1445 of the Code; (ix) 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; (x) 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; (xi) neither McGee nor any of its Subsidiaries is a party to any agreement relating to the sharing of any liability for, or payment of, Taxes with any other person or entity, except for the Tax Sharing Agreement dated July 1, 1995 between Seller and McGee; and (xii) neither McGee nor any of its Subsidiaries has any liability for Taxes of any other person as a transferee, successor or otherwise, by law or contract, except for the Tax Sharing Agreement dated July 1, 1995 between Seller and McGee. 12 (g) Since June 30, 1995: (i) Each of Seller and its Subsidiary, Orion Capital Companies, Inc., and each of McGee and its Subsidiaries, in the case of any person in his or her capacity as an officer or employee of McGee and its Subsidiaries, has, in all material respects, withheld from each payment made to any of its officers, directors and 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 Tax Returns with respect thereto. (ii) Neither McGee nor McGee Canada has, prior to the date hereof, made or filed any elections or designations for purposes of the Income Tax Act (Canada) or any relevant provincial taxing statute. (iii) Neither McGee nor McGee Canada 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) McGee Canada has no outstanding loans to or indebtedness incurred by directors, officers or shareholders of that company or to 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 McGee Canada for income tax purposes is, and since June 30, 1995 has been, December 31. 13 (vi) McGee does not carry on business in Canada through a permanent establishment within the meaning of that term in the Canada-Income Tax Convention. (h) All representations and warranties of Seller as to Taxes or matters with respect thereto are provided for in this Section 3.10, and no other section of this Article III shall be construed or interpreted as a representation or warranty of Seller as to Taxes or matters with respect thereto. Section 3.11. Investments. Schedule 3.11 lists (and shows the custodial location of) all investments in cash, cash equivalents, bonds, stocks and other securities owned by McGee and each of its Subsidiaries, or held by McGee or any of its Subsidiaries on behalf of the Pool, as at February 28, 1999, 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, except for investments held on behalf of the Pool. Section 3.12. Employment Matters. Except as set forth on Schedule 3.12 or as disclosed to Buyer in writing, 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 Seller's Knowledge, there is not, and has not since January 1, 1996 been, any effort to unionize or organize any employees of McGee or any of its ------------------ Subsidiaries. No claim under any federal, state, provincial or local employment-related law, order, ordinance or regulation, or any unfair labor practice, discrimination, wage-and-hour or employment equity claim to which McGee or any of its Subsidiaries is subject is pending and, to Seller's Knowledge, no threat of such has been asserted in writing against or with respect to McGee or any of its Subsidiaries. Section 3.13. Employee Benefit Plans; ERISA. (a) Schedule 3.13(a) 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 Subsidiaries 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"). 14 (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 or multiple employer plan. (c) Seller has delivered or made available to Buyer, 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 3.13(a), 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 two (2) most recent annual returns/reports on IRS Form 5500, 5500-C/R, 5500-C or 5500-R filed for each of the Benefit Plans. (d) Except as set forth in Schedule 3.13(d), 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 498OB(f) of the Code; (iii) no such plan has undisclosed reserves, assets, surpluses or prepaid premiums; and (iv) there is no material claim pending or, to Seller's Knowledge, threatened involving the Benefit Plan. (e) Except as disclosed in Schedule 3.13(e), none of the Benefit Plans has participated in, engaged in or been a party to any prohibited transaction as defined in ERISA or the Code, and, except for routine claims for covered benefits, there are no material claims pending or overtly threatened, involving any Benefit Plan listed in Schedule 3.13(a). Except as disclosed in the Special Note to Schedule 3.13(a), there have been no material violations of any reporting or disclosure requirements with respect to any Benefit Plan. 15 (f) To Seller's Knowledge, neither McGee, nor any of its Subsidiaries, nor any fiduciary or disqualified person with respect to any Benefit Plan has any liability for any excise tax imposed by Sections 4971 through 4980B of the Code. Section 3.14. Contracts. (a) Schedule 3.14(a) contains a list of each contract, agreement and undertaking, written or oral, (other than those listed in Schedule 3.8 or Schedule 3.14(b)) to which McGee or any Subsidiary of McGee is a party or by which it or its property is bound and which involves indebtedness, or a commitment, of $50,000 or more or has a remaining term of more than one year and which cannot be terminated on not more than ninety (90) days notice. (b) Except as disclosed to the Buyer in writing, Schedule 3.14(b) contains a list of each contract, agreement and undertaking, written or oral, to which McGee or any Subsidiary of McGee is a party or by which it or its property is bound and which relates to McGee's operation of the Pool (but excluding contracts of insurance and reinsurance (other than contracts of reinsurance among participants of the Pool) by or on behalf of the Pool. (c) To Seller's Knowledge, all of the contracts, agreements and undertakings listed in Schedules 3.14(a) and (b) are free of any default or breach or any alleged 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 such contract, lease, agreement or undertaking, other than, in each of the foregoing cases, a breach which is not likely to have a Material Adverse Effect. To Seller's Knowledge, and except as listed and described in Schedules 3.14(a) and (b), 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 Schedules 3.12 and 3.13) of officers and directors of McGee and the Subsidiaries of McGee. Except as listed and described in Schedules 3.14(a) and (b), none of such parents, affiliates, officers or directors is indebted to McGee or any Subsidiary of McGee. 16 Section 3.15. Capital Expenditures. Except as disclosed in Schedule 3.15 and Schedule 3.14(a), neither McGee nor any Subsidiary of McGee has an outstanding commitment to any person 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 3.16. Banks. Schedule 3.16 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 3.17. Agents and Brokers. Schedule 3.17 contains a list of the names and addresses of each agent or broker who has authority to bind either SICH or the Connecticut Indemnity Company in its capacity as an issuer of policies of insurance or reinsurance for 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. Section 3.18. Insurance. Schedule 3.18 contains a true and complete list of all policies of insurance issued to McGee or to any Subsidiary of McGee and 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 canceled and each policy listed will continue in effect after the Closing Date on the terms indicated in Schedule 3.18 unless canceled by the insured after the Closing Date. Section 3.19. Absence of Material Changes and Adverse Factors. Since December 31, 1998, and except for the transactions provided for herein or as otherwise disclosed to Buyer in writing, 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 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 which has had or is reasonably likely to have a Material Adverse Effect; (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; 17 (d) any indebtedness or other liability or obligation (whether absolute, accrued, contingent or otherwise) incurred or other transaction (except as reflected in this Agreement) incurred by it other than in the ordinary course of business; (e) any increase in the salary or benefits of any employee except in the ordinary course of business; (f) any sale of any material asset or any acquisition of any material property, securities, or other asset except, in each case, in the ordinary course of business; (g) any material adverse change in the operations or results of operations of McGee or in its or its Subsidiary's relationships with and goodwill of its Pool Participants, customers, suppliers, agents, general agents, other insurers and reinsurers and other persons having business dealings with such company; (h) any failure to maintain in force all existing casualty and liability insurance and reinsurance policies and fidelity bonds or policies or bonds providing substantially the same coverage; or (i) any material adverse change in the operations or operating results of the Pool, the participation levels of the respective Pool Participants or, to the Knowledge of Seller, the financial and actuarial information provided to Buyer as reflected in Section 3.21. Section 3.20. Environmental Matters. To Seller's Knowledge, McGee and each of McGee's Subsidiaries is in compliance with all applicable environmental laws governing its business failure to comply with which is reasonably likely to have a Material Adverse Effect. All licenses, permits, registrations or approvals required for the business of McGee and each of McGee's Subsidiaries under any environmental law have, to Seller'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 reasonably likely to have a Material Adverse Effect. There are no environmental claims or proceedings to which McGee is a party pending or, to Seller's Knowledge, threatened, which (a) question the validity or term of, or entitlement of McGee or any of McGee's Subsidiaries to, 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 Seller's Knowledge, there are no facts, 18 circumstances, conditions or occurrences on any real property owned or leased by McGee or any of McGee's Subsidiaries, 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 Seller's Knowledge, hazardous toxic materials have not at any time been (i) generated, used, treated or stored on, or transported by McGee or any of McGee's Subsidiaries to or from, any real property owned or leased by McGee or any of McGee's Subsidiaries except in compliance with applicable environmental laws or (ii) released by McGee or any of McGee's Subsidiaries on any such real property, in each case where such occurrence or event is reasonably likely to have a Material Adverse Effect. None of McGee or any Subsidiary of McGee is party to any agreement regarding remediation or cleanup relating to any environmental claim or environmental law. Section 3.21. Calculation of Liability with respect to Pool Participation. (a) The financial statements of the Pool at December 31, 1996 and 1997 and the years then ended, prepared by Deloitte & Touche LLP, and copies of which have been delivered to Buyer, fairly present the financial condition of the Pool at such dates and the results of the Pool's operations for the years then ended in accordance with New York statutory accounting principles consistently applied. (b) The unaudited December 31, 1998 operating statement and balance sheet of the Pool and the unaudited December 31, 1998 balance sheet of the SICH participation in the Pool, copies of which have been delivered to Buyer, were prepared in accordance with generally accepted accounting principles (except that such balance sheets lack footnote disclosures) and in accordance with the relevant terms of the respective Pool Agreements. (c) Without derogation from the representations and warranties of Seller in Sections 3.21(a) and 3.21(b) as to preparation in accordance with statutory accounting principles and generally accepted accounting principles of the financial statements referred to therein, Seller notes that such principles do not necessarily result in adequacy of reserves and Seller makes no representation or warranty that the reserves of the Pool set forth on the foregoing balance sheets described in Section 3.21(a) and 3.21(b) above are adequate or sufficient. Section 3.22. Finders and Brokers. Neither Seller nor any Subsidiary nor any officer or director of Seller nor any of its Subsidiaries has engaged or authorized any broker, finder, investment banker or other third party, other than Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), to act on behalf of Seller, 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. Seller has no Knowledge of any claim by any person against Seller or any of its Subsidiaries or Buyer for compensation for so acting or of any basis for such a claim and Seller shall hold Buyer totally harmless against any costs or expenses to Buyer arising out of any such claim on Seller's behalf. 19 Section 3.23. Disclosure. No representation or warranty of Seller 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 3.24. Relationship between Seller and McGee. (a) Except as set forth on Schedule 3.24, McGee does not currently make use of any property or services of Seller in the conduct of its business. (b) Except as set forth on Schedule 3.24, since December 31, 1998, there has not been any transfer of funds or other property between McGee or any of its Subsidiaries and Seller. Section 3.25. Agreements regarding Pool. Schedule 3.25 contains a list of each material agreement and undertaking, written or oral, to which McGee is a party relating to the Pool. Section 3.26. Participation of SICH in Pool. As of January 1, 1999, SICH's net percentage participation in the Pool was 75 percent in the United States Pool and 85.5 percent in the Canadian Pool. ----------------------------- Section 3.27. No Undisclosed Liabilities. To Seller's Knowledge, there are no debts, liabilities or obligations or claimed debts, liabilities or obligations of McGee, contingent or absolute, other than liabilities reflected in the balance sheet as of December 31, 1998 delivered in accordance with Section 3.6, that are reasonably likely to be asserted and, if asserted, would be reasonably likely to result in a material liability of McGee. IV. 20 REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF BUYER Buyer represents, warrants and agrees as follows: Section 4.1. Organization and Standing. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Buyer has all requisite corporate power and authority to own its properties and to carry on its business as now being conducted. Section 4.2. Certificate of Incorporation and By-Laws. The copies of the Certificate of Incorporation and By-Laws of Buyer which have heretofore been delivered to Seller are true, accurate and complete and reflect all amendments or changes in effect as of the date hereof. Section 4.3. Authorization. (a) This Agreement has been duly authorized by all necessary corporate action of Buyer. This Agreement will, when duly executed and delivered, be a valid and binding agreement of Buyer, enforceable against Buyer 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. (b) Each of the Ancillary Agreements to which Buyer is a party has been or, prior to the Closing will be, duly authorized by all necessary corporate action of Buyer. Each of the Ancillary Agreements to which Buyer is a party will, when duly executed and delivered, be a valid and binding agreement of Buyer 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 4.4. No Conflicts. (a) Neither the execution nor the delivery by Buyer of this Agreement or any Ancillary Agreement, nor the consummation of the transactions contemplated hereby or thereby, nor the compliance with or fulfillment of the terms and 21 provisions hereof or thereof by Buyer, 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 Buyer or any of Buyer'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 Buyer or any Subsidiary of Buyer 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 Buyer or any of the Subsidiaries of Buyer 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 Buyer to perform its obligations hereunder. Except as set forth in Schedule 4.4 hereto, no consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of Buyer or any Subsidiary of Buyer 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 Buyer of any of the Ancillary Agreements to which such Subsidiary is a party, nor the consummation by any such Subsidiary 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 provision of any lease or other or restriction of any kind to which such Subsidiary is a party or by which it or any of its assets is otherwise bound; or (iii) violate any order, acceleration of any obligation under any agreement, indenture, mortgage, lien, instrument, 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 4.5. Finders and Brokers. All negotiations on behalf of Buyer relative to this Agreement and the transactions contemplated hereby have been carried on directly by Buyer without the intervention of any broker, finder, investment banker or other third party representing Buyer. Neither Buyer nor any Subsidiary nor any officer or director of Buyer or any of its Subsidiaries, has engaged or authorized any broker, finder, investment banker or other third party to act on Buyer'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. Buyer knows of no claim by any person against Buyer or any of its Subsidiaries for compensation for so acting or of any basis for such a claim and Buyer shall hold Seller totally harmless against any costs or expenses to Seller arising out of any such claim. 22 Section 4.6. Investor Status. Buyer is an "Accredited Investor" within the meaning of SEC Rule 501(a). Buyer is purchasing the Common Stock for its own account and not with a view to distribution within the meaning of Section 2(11) of the Securities Act of 1933. V. COVENANTS OF BUYER AND SELLER Section 5.1. Access to Properties, Books and Records. Prior to the Closing Date, Seller shall afford or cause McGee to afford to the officers, attorneys, accountants and other authorized representatives of Buyer, 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 Seller in order to afford Buyer the opportunity to make such investigations of the affairs of McGee and its Subsidiaries as they may reasonably deem necessary. Seller shall also furnish, or cause McGee and its Subsidiaries to furnish, to Buyer such information relating to their respective businesses and affairs as Buyer shall from time to time reasonably request. All information made available to Buyer and its representatives pursuant to this Section 5.1 shall be subject to the terms of the confidentiality letter agreement dated December 28, 1998 between Seller and Buyer (which is incorporated herein by reference thereto). Section 5.2. Conduct of Business. (a) Except as otherwise permitted by this Agreement, or with the prior written consent of Buyer, after the date hereof and prior to the Closing Date Seller 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; 24 (ii) create, incur, assume, guarantee or otherwise become liable with respect to any obligation or liability to any person, fixed or contingent, in excess of $50,000; (iii) declare or make any payment or distribution with respect to its capital stock to its stockholders or purchase or redeem any shares of the capital stock 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 (A) with respect to deposits with State insurance departments and (B) 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; (viii) amend, terminate or waive any right of any substantial value, other than in connection with the settlement of claims, including reinsurance claims, or otherwise in the ordinary course of business; (ix) make any material change in the methods of valuation or accounting or of determining reserves for McGee or any Subsidiary of McGee or for the Pool from the methods applied during and for the period ended December 31, 1998; (x) make any substantial change in the standard form of contract currently in force between McGee or any of its Subsidiaries and brokers and agents representing McGee or any of its Subsidiaries or in the compensation arrangements in connection therewith or enter into any contract with any agent or broker other than in substantially the form now used; (xi) except as disclosed at the time to the Buyer, and with Buyer's consent in writing, amend the Pool Agreements; (xii) change risk retention levels net of reinsurance in connection with the Pool business; 25 (xiii) except as disclosed at the time to the Buyer, and with Buyer's consent in writing, revise current percentage participations in the Pool; (xiv) grant any salary increase to any officer or any general salary increase to its employees other than, in each case, normal merit increases, or enter into any new, or amend or alter in any material respect any existing, employment or consulting agreement or any bonus, incentive compensation, profit sharing, retirement, pension, group insurance, death benefit or other fringe benefit plan, trust agreement or similar arrangement adopted by it with respect to its own employees or its agents, general agents or underwriting managers; (xv) amend its Certificate of Incorporation or By-Laws or merge or consolidate with any other corporation; (xvi) acquire or increase its beneficial ownership of stock or assets of any other person, firm, association, corporation or other business organization, except for investments made in the ordinary course and consistent with prior investment practice; (xvii) except in the ordinary course of business or as required by this Agreement, enter into or assume any contract, agreement, obligation, lease, license or commitment having a term in excess of one year or involving an aggregate monetary commitment or exposure in excess of $50,000; (xviii) arrange for or solicit the issuance or renewal of insurance of any risk other than those insurance risks which are undertaken in the ordinary course of business; (xix) 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; (xx) make any capital expenditure, capital addition or capital improvement, or any commitment for any of the foregoing, in excess of $50,000, except for commitments in effect on the date hereof as reflected on Schedule 3.15; (xxi) amend any Tax Return, settle any tax audit or tax controversy, make any tax election or change any tax accounting method; or (xxii) make intercompany advances and settlement thereof other than in the ordinary course of business and consistent with past business practice except that reimbursement from McGee to the Seller and/or affiliates of the Seller will be limited as it relates to: 26 a) 1998 bonuses paid in 1999, to the amount accrued in McGee's December 31, 1998 balance sheet; b) 1998 pension contribution paid in 1999, to the amount accrued in McGee's December 31, 1998 balance sheet; c) amounts paid pursuant to transaction related incentive programs of Seller described in writing to Buyer, to zero; d) amounts representing the administrative expense of participation by McGee employees in the Orion Capital Corporation Stock Purchase Plan, by excluding the amount of discounts from fair market value of shares purchased under the program; e) overhead expenses of Seller, capital charges and other similar charges of Seller, to zero. Advances and settlements made as described in this subparagraph (xxii) shall be reported periodically by Seller to Buyer before and on the Closing Date and Buyer shall have the right to question the ordinary course nature of any transaction and its consistency with prior practice and this Section 5.2(a)(xxii). (b) Except as otherwise permitted by this Agreement or with the prior written consent of Buyer, prior to the Closing Date, Seller shall cause McGee and each of its Subsidiaries to use commercially reasonable best efforts to: (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 in compliance with applicable law in the jurisdiction of its incorporation and 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 material 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 in all material respects with all federal, provincial, state and local laws applicable to McGee or any of its Subsidiaries or the Pool; 28 (iii) operate its business substantially as presently operated and only in the ordinary course and (A) preserve substantially intact the present business organization, (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; (vi) advise Buyer 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; (viii) 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 5.3. Regulatory and Other Filings and Approvals. Each of Buyer and Seller shall duly make (and Seller 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 as reflected on Schedule 5.3 to the Agreement. Each of Buyer and Seller shall use its commercially reasonable best efforts at all times prior to January 1, 2001 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 Buyer and Buyer's Subsidiaries of any necessary approvals by insurance commissioners or superintendents of insurance of policy forms to be used following the Closing. 29 Section 5.4. 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 Buyer and Seller 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 Industry Canada or the Competition Bureau (Canada), if applicable (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 Buyer and Seller will promptly comply with all requests, if any, of any of the Premerger Notification Agencies for additional information or documentation in connection with each notification, report and application filed by or on behalf of either Buyer or Seller with any of the Premerger Notification Agencies, unless in the opinion of both McCutchen, Doyle, Brown & Enersen, LLP and Cummings & Lockwood (or of Canadian Counsel for the Buyer and Seller, respectively in the case of filings made under the Investment Canada Act or the Competition Act, if applicable) 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 5.5. Further Assurances. (a) Each of Buyer and Seller 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 Seller is necessary to vest Buyer with Seller's full title to the Common Stock, Seller shall take all such action. (b) In furtherance of and in addition to other obligations of Seller pursuant to this Agreement and the transactions entered into pursuant hereto, from and after the Closing Date, Seller shall not (i) use or purport to license or allow any other person to license any mark, trade name or trade dress of McGee or any Subsidiary of McGee so long as McGee, any of its Subsidiaries, or any successor thereto has valid rights therein or (ii) from and after the date hereof and until June 30, 2000, in any way damage or disparage, and shall undertake and ensure that no Subsidiary of Seller 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. 30 (c) Buyer agrees, following the Closing, to not use, advertise or promote, or license any use, advertisement or promotion, and shall cause its Subsidiaries not to use, advertise or promote, or license any use, advertisement or promotion, of the "Seahorse Service Mark In the Orion Ring" of U.S. Trademark Registration No. 2,180,334 identified on Schedule 3.8(c) (hereinafter the "Seahorse/Orion Ring" mark), and agrees to cause McGee to surrender for cancellation, with prejudice, and to abandon all use of, the Seahorse/Orion Ring mark and any registrations thereof in a form acceptable to counsel for the Seller within ninety (90) days of the Closing Date. Buyer agrees, following the Closing, that Seller shall retain ownership of its entire right, title and interest in and to the "Orion Ring" component of the Seahorse/Orion Ring mark, and that Buyer shall not use, advertise or promote the "Orion Ring" component, or any mark confusingly or deceptively similar to the "Orion Ring" component for so long as Seller continues to use, or does not abandon use of the "Orion Ring" as a mark or component of a mark. Seller agrees, following the Closing, that McGee shall receive Seller's entire right, title and interest in and to the "Seahorse" and "Wm. H. McGee" components of the Seahorse/Orion Ring mark together with all goodwill of McGee's business symbolized by those components, and that Seller shall not use, advertise or promote these components together or separately, or any mark confusingly or deceptively similar to these components, for so long as Buyer continues to use, or does not abandon use of either component as a mark or component of a mark. Seller agrees, for a period of twenty-four (24) months following the Closing, so long as McGee or any Subsidiary of McGee or any successor to either has valid rights therein, that neither Seller nor any Subsidiary of Seller will use any customer list that is the property of McGee or was received from McGee. Section 5.6. Tax Matters. Each of Buyer and Seller covenants that: (a) (i) Seller shall have the right and obligation timely to prepare and file, or cause timely to be prepared and filed, when due (giving effect to any extension of time), all Tax Returns with respect to McGee or its Subsidiaries for any Tax periods ending on or before the Closing Date. (ii) Buyer shall have the right and obligation timely to prepare and file, or cause timely to be prepared and filed, when due (giving effect to any extension of time), all Tax Returns with respect to McGee or its Subsidiaries for any Tax periods ending after the Closing Date and any Tax period that begins before the Closing Date and ends after the Closing Date (a "Straddle Period")). (iii) Any Tax Return which includes McGee or its Subsidiaries for any tax period ending on or before December 31, 1998 (a "Pre-Year End Period"), and any Tax Return which includes McGee or its Subsidiaries for any tax period beginning on or after January 1, 1999 (a "Post-Year End Period") to the extent the items reported on such Tax Return might increase any Tax liability of Seller for any Pre-Year End Period or any Straddle Period, shall be prepared in accordance with past Tax accounting practices used with respect to the Tax Returns in question as determined by Seller in Seller's discretion, and to the extent any items are not covered by past practices, in accordance with reasonable Tax accounting practices selected by the filing party with respect to such Tax Return under this subsection 5.6(a) with the consent (not to be unreasonably withheld or delayed) of the non-filing party. 31 (iv) In the case of any Tax Return for any Straddle Period, Buyer shall provide Seller with copies of the completed Tax Return for such Tax period, together with such related work papers and other documents as Seller shall reasonably request, no later than sixty (60) days before the due date (including any extensions) for the filing of such Tax Return and materials. Seller and its authorized representatives shall have the right to review such Tax Return. Seller and Buyer agree to consult each other and resolve in good faith any issues arising under the terms of this subsection 5.6(a)(iv) as a result of the review of any such Tax Returns and/or materials for any Straddle Period. If the parties are unable to resolve any dispute within thirty (30) days after such Tax Returns are provided to Seller, the parties shall resort to the method of dispute resolution provided in Section 13.11 hereof. If such disputes have not been resolved prior to the due date for filing of such Tax Return, the Tax Return in question, to the extent any issues thereon remain unresolved, shall be timely filed in accordance with the positions taken by Seller. If a determination is made through the dispute resolution process after a Tax Return is filed that Seller's position was inappropriate, Buyer shall promptly file an amended Tax Return (to the extent permitted by applicable law) reflecting the final decision of the Arbitrator and Seller shall pay to Buyer any appropriate additional Tax amounts resulting from such amended return provided that such payment shall be made only to the extent the provision for Taxes as of December 31, 1998 shall have been exceeded. (v) In the case of the Tax period of McGee or its Subsidiaries which began on January 1, 1999 and shall end on the Closing Date, Seller shall provide Buyer with copies of the completed Tax Return for such Tax period, together with such related work papers and other documents as Buyer shall reasonably request, no later than sixty (60) days before the due date (including any extensions) for 32 the filing of such Tax Return and materials. Buyer and its authorized representatives shall have the right to review such Tax Return. Seller and Buyer agree to consult each other and resolve in good faith any issues arising under the terms of this subsection 5.6(a)(v) as a result of the review of any such Tax Returns and/or materials for any such Tax period. If the parties are unable to resolve any dispute within thirty (30) days after such Tax Returns are provided to Buyer, the parties shall resort to the method of dispute resolution provided in Section 13.11 hereof. If such disputes have not been resolved prior to the due date for filing of such Tax Return, the Tax Return in question, to the extent any issues thereon remain unresolved, shall be timely filed in accordance with the positions taken by Seller. If a determination is made through the dispute resolution process after a Tax Return is filed that Seller's position was inappropriate, Seller shall promptly file an amended Tax Return (to the extent permitted by applicable law) reflecting the final decision of the Arbitrator and Buyer shall pay to Seller, within thirty (30) days after payment of such Tax amounts and filing of such amended Tax Return, any appropriate additional Tax amounts, or Seller shall pay to Buyer, within thirty (30) days following the receipt of such Tax refund amounts, any appropriate Tax refund amounts, resulting from such amended return. (b) (i) Seller shall be liable for, and shall indemnify and hold Buyer harmless from and against, any and all Taxes imposed on or with respect to McGee or its Subsidiaries for Pre-Year End Periods; provided that Buyer shall be liable for and shall hold Seller harmless from and against any and all such Taxes which result from an amendment, restatement, or recalculation of any Tax Return with respect to such Taxes occasioned by any action taken by Buyer after December 31, 1998 or by McGee after the Closing Date. (ii) Buyer shall be liable for, and shall indemnify and hold Seller harmless from and against, any and all Taxes imposed on or with respect to McGee or its Subsidiaries for Post-Year End Periods. (iii) In the case of a Straddle Period, Seller shall be solely responsible for all Taxes attributable to any Pre-Year End Period, and Buyer shall be solely responsible for all Taxes attributable to Post-Year End Periods. Tax items shall be apportioned between Pre-Year End Periods and Post-Year End Periods based on a closing of the books and records of McGee or its Subsidiaries as of December 31, 1998 (provided that (A) any Tax item incurred by reason of the transactions occurring on or before the Closing Date as contemplated by this Agreement shall be treated as occurring in a Pre-Year End Period and (B) exemptions, allowances, deductions or credits that are calculated on an annual basis shall be 33 apportioned on a daily pro rata basis). Notwithstanding anything to the contrary in the preceding sentence, the parties agree that for U.S. federal income tax purposes, Tax items for any Straddle Period shall be apportioned between Pre-Year End Periods and Pos Year End Periods in accordance with U.S. Treasury Regulations Section 1.1502-76(b), which regulations shall be reasonably interpreted by the parties in a manner intended to achieve the method of apportionment described in the preceding sentence. Seller and Buyer will not exercise any option or election (including any election ratably to allocate a Tax year's items under Treasury Regulations Section 1.1502-76(b)(2)(ii)) to allocate Tax items in a manner inconsistent with this subsection 5.6(b). (iv) Notwithstanding paragraphs (i), (ii) and (iii) of this subsection 5.6(b) and paragraph (iv) of subsection 5.6(a) hereof, Seller shall have no obligation to pay, or indemnify Buyer in respect of any unpaid Taxes due to be paid by Seller unless, and then only to the extent that, the amount of such unpaid Taxes exceeds the provision for Taxes on the financial statements of McGee and its Subsidiaries as of December 31, 1998 (with the exclusion of any deferred Taxes). Seller shall determine, from time to time when reasonably necessary, whether such provision for Taxes has been exceeded. Buyer shall cooperate with Seller with regard to such determination, including as provided in Section 5.6(h) below. Seller and Buyer agree to consult each other and resolve in good faith any issues arising under the terms of this subsection 5.6(b)(iv). If the parties are unable to resolve any dispute within twenty (20) days after such determination by Seller, the parties shall resort to the method of dispute resolution provided in Section 13.11 hereof. (c) (i) If Buyer receives a Tax refund with respect to Taxes arising in a Pre-Year End Period, Buyer shall pay, within thirty (30) days following the receipt of such Tax refund, the amount of such Tax refund to Seller. If Seller receives a Tax refund with respect to Taxes arising in any Post-Year End Period, within thirty (30) days following the receipt of such Tax refund, Seller will pay the amount of such Tax refund to Buyer. Additionally, if Seller pays any Taxes imposed on or with respect to McGee or its Subsidiaries for the Tax period which began on January 1, 1999 and shall end on the Closing Date, Buyer shall pay, within thirty (30) days following the filing of any Tax Return giving rise to such Tax and the payment thereof, the amount of such Tax to Seller. If Seller receives any Tax benefit with respect to McGee or its Subsidiaries for the Tax period which began on January 1, 1999 and shall end on the Closing Date, Seller shall pay, within thirty (30) days following the filing of any Tax Return giving rise to such Tax benefit, the amount of such Tax benefit to Buyer. 34 (ii) Buyer 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 Buyer to carry back, any net operating loss, loss from operations or other Tax attributed to any Tax 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 Tax period beginning before and ending after the Closing Date to the extent of the portion of such period ending on the Closing Date. Buyer agrees that Seller shall not have any obligation under this Agreement to return or remit any refund or other Tax benefit attributable to a breach by Buyer of the foregoing undertaking. (iii) Any amended Tax Return or claim for Tax refund for any period ending on or before the Closing Date other than a Straddle Period shall be filed, or caused to be filed, only by Seller. Seller shall not, without the prior written consent of Buyer (which consent shall not be unreasonably withheld or delayed) make or cause to be made, any such filing, to the extent such filing, if accepted, reasonably might change the Tax liability of Buyer for any Tax period. (iv) An amended Tax Return or claim for Tax refund for any Straddle Period shall be filed by the party responsible for filing the original Tax Return hereunder if either Buyer or Seller so requests, except that such filing shall not be done without the consent (which shall not be unreasonably withheld or delayed) of Buyer (if the request is made by Seller) or of Seller (if the request is made by Buyer). (v) Any amended Tax Return or claim for Tax refund for any period beginning after the Closing Date other than a Straddle Period shall be filed, or caused to be filed, only by Buyer, who shall not be obligated to make (or cause to be made) such filing. Buyer shall not, without the prior written consent of Seller (which consent may be withheld by Seller in Seller's sole and absolute discretion) file, or cause to be filed, any amended Tax Return or claim for Tax refund for any Post-Year End Period to the extent that such filing, if accepted, might change the Tax liability of Seller for any Tax periods ending on or before the Closing Date as determined by Seller. 35 (d) Buyer shall be liable for and shall pay, and shall hold Seller and its Subsidiaries harmless against, any Taxes attributable to any election under Section 338 of the Internal Revenue Code of 1986, as amended, (the "Code") or any comparable or resulting election under state, local or foreign law (a "Section 338 Election"), with respect to the transactions contemplated hereunder. Notwithstanding the prior sentence, Buyer shall not make any Section 338 Election without the prior written consent of Seller which consent Seller may withhold in its sole and absolute discretion. (e) Buyer shall be liable for and shall pay, and shall hold Seller 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 Seller and its Subsidiaries. (f) Seller and Buyer agree that for all federal income tax purposes the Tax period of McGee or its Subsidiaries which began on January 1, 1999 shall be terminated as of the close of business on the Closing Date in accordance with Treasury Regulations Section 1.1502-76(b)(1) and subsection 256(9) of the Income Tax Act (Canada). (g) Seller and Buyer shall provide to each other notice within ten (10) days of receipt of any audit or similar investigation or proceeding in which the IRS or any other governmental entity makes or proposes to make a Tax adjustment to any Tax period which includes any period up to the Closing Date. Seller shall control any such proceeding as to Tax periods ending on or prior to the Closing Date, and Buyer shall control any such proceeding as to Tax periods beginning after the Closing Date, provided that, with respect to any such audit, the other party or its representative shall have the right, at its expense, to participate in any such audit or similar investigation. The parties agree that they will not settle, compromise or agree to any Tax adjustment which affects or could affect the other party's Tax liability without the prior written consent of the other party, which consent shall not be unreasonably withheld. The parties agree to cooperate with each other for the purposes of any audit or similar investigation, which cooperation shall include, but not be limited to (i) providing all relevant information that is available to Buyer, Seller and/or McGee, as the case may be, with respect to such audit or investigation, (ii) making personnel available at reasonable times, and (iii) preparation and responses to requests for information, provided that the foregoing shall be done in a manner so as to not interfere unreasonably with the conduct of business by Buyer, Seller or McGee, as the case may be. (h) Seller on the one hand, and Buyer and McGee, on the other, shall cooperate (and cause their affiliates to cooperate) with each other and with each other's agents, including accounting firms and legal counsel, in connection with Tax matters relating to McGee or its Subsidiaries, including (i) preparation and filing of Tax Returns, (ii) determining the liability for, and amount of, any Taxes due or the right to, and amount of, any refund of Taxes, 36 (iii) examinations of Tax Returns, and (iv) any administrative or judicial proceeding in respect of Taxes assessed or proposed to be assessed. Such cooperation shall include each party making all information and documents in its possession relating to McGee or its Subsidiaries available to the other party. The parties shall retain all Tax Returns, schedules and work papers, and all material records and other documents relating thereto, until at least one year after the expiration of the applicable statute of limitations (including, to the extent notified by any party, any extension thereof) of the Tax period to which such Tax Returns and other documents and information relate. Each of the parties shall also make available to the other party, as reasonably requested and available, personnel (including officers, directors, employees and agents) responsible for preparing, maintaining, and interpreting information and documents relevant to Taxes, and personnel reasonably required for purposes of providing information or documents in connection with any administrative or judicial proceedings relating to Taxes. (i) The Tax Sharing Agreement dated July 1, 1995 by and between Seller and McGee shall be terminated effective as of the close of business on December 31, 1998. Any resulting unsettled accruals or adjustments in respect of the Taxes of McGee or its subsidiaries shall be settled as of the Closing Date. (j) Seller and Buyer agree that any payment made under this Section 5.6 shall be treated by the parties for all purposes (to the extent permitted under applicable tax law), as an adjustment to the consideration being provided for the Common Stock hereunder. (k) Notwithstanding any other provision in this Agreement to the contrary (including without limitation Article 13), the obligations of Seller and Buyer under this Section 5.6 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 (i) the lapse of the statute of limitations for the collection of such Tax or (ii) sixty (60) days after the final administrative or judicial determination that such Tax is collectable against Seller or its Subsidiaries; provided, however, that any claim in respect of an obligation under this Section 5.6 asserted in writing prior to the lapse of the statute of limitations or sixty (60) days after the final administrative or judicial determination shall continue to survive. (l) After the Closing, neither party shall have any liability or obligation with respect to the matters set forth in this Section 5.6, except pursuant to this Section 5.6. 5.7. Pool Financial Statements. Within five (5) days of the delivery to Seller of the audited statutory financial statements of the Pool at December 31, 1998, accompanied by the report of Deloitte & Touche, LLP, Seller will delivery a copy of such financial statements to Buyer. VI. - 38 AGREEMENTS WITH RESPECT - TO POOL OPERATION - Section 6.1. Pool Participations; Reinsurance. (a) At or prior to the Closing, Seller shall cause SICH and CI to enter into Reinsurance Agreements with Buyer substantially in the form of Exhibit C. (b) At the Closing Buyer shall cause McGee, subject to applicable regulatory requirements, to designate Buyer as the Clearing Company, as that term is defined in the Inter-Office Reinsurance Agreements, pursuant to McGee's authority under the Inter-Office Reinsurance Agreements effective 12:00:01 a.m. New York Time on January 1, 1999. (c) At the Closing Buyer shall cause McGee, subject to applicable regulatory requirements, to amend the 1999 Schedule of Participation of the Inter-Office Reinsurance Agreements to transfer to Buyer, and Buyer shall assume (i) SICH's Pool Participation in the United States Pool and (ii) SICH's Pool Participation in the Canadian Pool, effective 12:00:01 a.m. New York Time on January 1, 1999, thereby assuming all of SICH's rights, liabilities and obligations as a Pool Participant on and after January 1, 1999. Section 6.2. Underwriting Operations of the Pool. (a) From the date hereof through the Closing Date: (i) Seller 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) Seller 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. (b) From and after the Closing and through 12:00 a.m. New York Time on December 31, 2000, McGee shall, and Buyer shall use commercially reasonable best 39 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 and until December 31, 2000, SICH and CI will, as requested by McGee, issue, pursuant to and in accordance with, the terms of an underwriting management agreement to be entered into by each of them with McGee, such policies of insurance as are placed by McGee on behalf of the Pool; provided that Buyer shall not cause or permit McGee, on behalf of or for the account of SICH or CI, to introduce or commence the offering of any new product or service or the underwriting of any type of risk or any line of insurance not written by SICH or CI on behalf of 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, neither CI nor SICH shall be obliged to file or qualify any new form of policy. In consideration of the issuance by SICH and CI of such policies, Buyer shall pay to SICH and CI, as their interests may appear, on the fifteenth day of the month following the month in which such policies shall have been issued, a fee equal to one percent (1%) of the gross direct written premiums in respect of all such policies issued on or after January 1, 1999 and through December 31, 1999, and, in respect of all such policies issued on or after January 1, 2000 and through December 31, 2000, to a fee equal to two percent (2%) of the gross direct written premiums. (c) Buyer shall furnish, or shall cause McGee to furnish, to SICH, not later than April 1 of each year, inter-office reinsurance financial statements for the Pool which shall be audited for each year through December 31, 2001 and thereafter, through December 31, 2008, shall either be audited or certified by the Chief Financial Officer of Buyer. At all times prior to December 31, 2008, Seller 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 requested by Seller; provided that each of Buyer and McGee shall have received at least ten days' notice of each such visit. (d) From and after the Closing Date, Buyer shall take, and shall use commercially reasonable best efforts to cause McGee and the insurance Subsidiaries of Buyer to take, all steps necessary (a) to enable McGee to make with all necessary insurance regulatory authorities such policy-form and rate filings as shall be necessary so that Buyer or one or more insurance Subsidiaries of Buyer is able to issue all forms of policies now being issued on behalf of the Pool by SICH and CI and (b) to enable Seller to make such statutory reports as Seller shall be required to make in respect of or arising out of the operations of the Pool and the Reinsurance Agreement. 40 (e) At all times prior to December 31, 2001 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 $1,000,000 per occurrence with one or more insurers rated "A" or better by A.M. Best Company; and reasonably satisfactory to Seller; provided that Buyer or any insurance Subsidiary of Buyer which is so rated shall be presumed to be approved by Seller and; provided further that if the annual premiums for such coverage shall exceed in the year beginning January 1, 2000, 103% of such premiums in the year beginning January 1, 1998 or in the year beginning January 1, 2001 shall be more than 106% of such 1998 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. (f) None of Seller, SICH or CI shall have any liability for the payment to McGee of any commission, "overriding" commission, "contingent" or "profit" commission as defined in the Pool Agreements in respect of operations of the Pool incurred either prior to the Closing Date or during the period defined in Section 6.2(b). VII. - CONDITIONS TO OBLIGATIONS OF BUYER - The obligations of Buyer 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. Seller and each Subsidiary of Seller shall have performed and complied with all the terms, covenants and conditions required by this Agreement to be performed or complied with by Seller on or before the Closing Date, and Buyer shall have received from Seller, at the Closing, a certificate executed by an officer of Seller to that effect, dated the Closing Date. Section 7.2. Representations and Warranties. The representations and warranties made by Seller 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 Buyer shall have received from Seller one or more certificates, dated the Closing Date, to that effect executed by one or more officers of Seller. 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 order, ruling or request of any nature issued by a court or governmental agency of competent jurisdiction 41 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 Buyer, if such claim shall arise from or relate to the consummation of 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, the Investment Canada Act or the Competition Act (Canada), if applicable, 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. No Material Adverse Effect. Seller shall have furnished to Buyer a certificate of an officer of Seller 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 7.6. Additional Agreements. Reinsurance Agreements substantially in the form of Exhibit C shall have been entered into and shall be in full force and effect, and the Releases in the form of Exhibits A-1, A-2 and A-3 and the Noncompetition Agreement in the form of Exhibit B shall have been entered into and shall be in full force and effect. Section 7.7. Opinion of Counsel for Seller and McGee. Buyer shall have received an opinion from John J. McCann, Esq., Executive Vice President and Chief Legal Officer of Seller, with respect to matters relating to Seller, its Subsidiaries and its and their obligations under this Agreement, 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 this Agreement, each dated the Closing Date, and each such opinion shall be in form and substance reasonably satisfactory to Buyer and its counsel. VIII. - 42 CONDITIONS TO OBLIGATIONS OF SELLER - The obligations of Seller 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 8.1. Covenants. Buyer 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 Seller shall have received from Buyer, at the Closing, a certificate executed by an officer of Buyer to that effect, dated the Closing Date. Section 8.2. Representations and Warranties. The representations and warranties made by Buyer 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 Seller shall have received from Buyer a certificate, dated the Closing Date, to that effect executed by an officer of Buyer. Section 8.3. 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 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 Seller or any of its Subsidiaries, if such claim shall arise from or relate to the consummation of this Agreement or the transactions contemplated hereby. Section 8.4. Premerger Notification. Any applicable period of time necessary before the transactions contemplated hereby can be consummated, as provided by the Hart-Scott-Rodino Act, the Investment Canada Act or the Competition Act (Canada), if applicable, 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. 43 Section 8.5. Additional Agreements. Reinsurance Agreements substantially in the form of Exhibit C shall have been entered into and shall be in full force and effect and the Releases in the form of Exhibits A-1, A-2 and A-3 and the Noncompetition Agreement in the form of Exhibit B shall have been entered into and shall be in full force and effect. Section 8.6. Opinion of Counsel for Buyer. Seller shall have received an opinion of the general counsel of Buyer, dated the Closing Date, in form and substance reasonably satisfactory to Seller and its counsel. IX. - TERMINATION - Section 9.1. 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 Seller and Buyer: ----------- (a) by mutual written consent of the parties hereto; or (b) by Seller or Buyer, if the Closing shall not have occurred on or before June 30, 1999. Section 9.2. 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 Sections 5.1 (last sentence only), 13.1 and 13.6. X. - EMPLOYMENT AND BENEFIT MATTERS - Section 10.1. Employees. Buyer will cause McGee and its Subsidiaries to continue to employ all persons who are currently employees of McGee or become such prior to the Closing (the "Affected Employees") at their current rate of base compensation and on the same terms and conditions of employment (including those relating to termination and severance benefits) that they now enjoy, subject to the provisions of Section 10.2, for a period following the Closing Date at least equal to the notice period (without exceptions to such notice period) for the Worker Adjustment and Retraining Notification Act. For purposes 44 of this Article X, all former employees of McGee who have retired, separated from service with a terminated vested interest or are otherwise terminated or separated and entitled, presently or upon the passage of time, to retirement or other benefits, shall be considered to be "Affected Employees." In addition, Buyer has informed Seller that it intends to cause McGee to offer to senior executive and other key employees of McGee employment and Seller will use its best efforts (which, except as set forth below, shall not include the making of payments or financial commitments by Seller) to assist Buyer in obtaining acceptance of such offer by such executives and key employees. Seller agrees to reimburse Buyer, within thirty (30) days after Buyer's payment or Seller's receipt of Buyer's invoice, whichever is later, for one-half of retention payments paid by Buyer or McGee within 13 months after the Closing to senior executives and other key employees of McGee, up to a maximum liability to Seller under this sentence of $400,000, and prior to Closing, Buyer shall provide Seller a list of such intended payments and the recipients thereof. Section 10.2. Participation in Benefit Plans. Buyer shall make provision such that, effective as of the Closing Date, the Affected Employees will commence participation immediately in welfare benefit plans which will have been adopted by McGee and which, taken as a whole, are comparable to the plans presently in effect for the Affected Employees. The Affected Employees will either continue participation in McGee's pension plans or commence participation in Buyer's pension plans, which, taken as a whole, are comparable to the plans presently available to or in effect for the Affected Employees. Buyer will, and will cause McGee to, recognize each Affected Employee's service prior to the Closing Date with respect to McGee and its Subsidiaries as service with McGee (or the Buyer or any Subsidiary of the Buyer which may become the employer of any Affected Employees, as the case may be) in connection with (i) any waiting period, eligibility requirements or any elimination period under any welfare benefit plan available to any Affected Employees, (ii) any waiting period, eligibility requirements and benefit accrual with regard to participation in any sick, holiday, vacation, personal time off, or other similar service-based plan or program available to any Affected Employees, and (iii) any eligibility or vesting requirements under any qualified or non-qualified plan available to any Affected Employees. Should the Affected Employees commence participation in the defined benefit plan of the Buyer, then in no event shall an Affected Employee's benefit under the defined benefit plan of the Buyer be reduced (in any manner) by any benefits accrued by the Affected Employee under the pension plans maintained by McGee. 45 Section 10.3. Severance Pay. Buyer shall, or shall cause McGee to, pay to the Affected Employees whose employment is terminated within one hundred eighty (180) days after the Closing Date severance benefits not less favorable than those now available to employees of McGee. Section 10.4. Non-Solicitation. Seller agrees that, from and after the Closing Date until June 30, 2002, neither it nor any of its Subsidiaries will solicit, nor cause any other person to solicit, any person named on Schedule 10.4 so long as such person is an employee of McGee or Buyer or any affiliate of Buyer; provided, however, that nothing in this Section shall be deemed to prohibit any solicitation not specifically targeted at such employees or Affected Employees, including general advertisement by means of newspaper or other advertisements. XI. - AMENDMENT; WAIVERS - Section 11.1. 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 11.2. 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. XII. - 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 set forth in Section 4.6. 46 "Affected Employees" shall have the meaning set forth in Section 10.1. "Ancillary Agreements" shall mean the Reinsurance Agreement, the Releases and the Noncompetition Agreement in the respective forms attached as Exhibits hereto. "Benefit Plans" shall have the meaning set forth in Section 3.13. "Buyer" shall mean Fireman's Fund Insurance Company, a California corporation. "Canadian Pool" shall have the meaning ascribed in the definition of "Pool." "CI" shall mean The Connecticut Indemnity Company, a Connecticut corporation and a wholly-owned Subsidiary of Seller. "Common Stock" shall have the meaning set forth in the first 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 3.10(a). "Damages" shall have the meaning set forth in Section 13.6. "DLJ" shall have the meaning set forth in Section 3.22. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall have the meaning set forth in Section 3.13. "Hart-Scott-Rodino Act" shall have the meaning set forth in Section 5.4. "IRS" shall mean the Internal Revenue Service. "Indemnitee(s)" shall have the meaning set forth in Section 13.6. "Indemnitor" shall have the meaning set forth in Section 13.6. "Intellectual Property" shall have the meaning set forth in Section 3.8(c). "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 mean Wm. H. McGee & Co. (Bermuda) Ltd., a Bermuda corporation. "McGee Canada" shall mean Wm. H. McGee & Co. of Canada Ltd., a corporation formed under the laws of Ontario. "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. "Noncompetition Agreement" shall have the meaning set forth in Section 2.1(b). "PBGC" shall mean the Pension Benefit Guaranty 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, McGee Canada. and McGee Bermuda and the insurers participating in such arrangements as set forth in the Pool Agreements and among them, the present participants' gross participations in the Canadian Pool and United States Pool being as follows: United States Pool Canadian Pool Pool Participants % Pool Participants % The Baloise Insurance Company of America 1 Providence Washington 1 Insurance Company Providence Washington Insurance Company 1 SICH 75 SICH 94 LG Insurance Company, Ltd. (United States Branch) 8 Mitsui Marine & Fire 5 Mitsui Marine & Fire 15 Insurance Company of Ltd. Insurance Company America 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. "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 and the Inter-Office Reinsurance Agreement dated as of January 1, 1975, as amended by and supplemented by annual Schedules of Participations thereto among McGee Canada and the Pool Participants (the "Inter-Office Reinsurance Agreements"), and (ii) the Underwriting Management Agreements, General Agency & Management Agreements and Management Agreements and related agreements referred to therein, each as amended, between or among McGee and the Pool Participants, which are listed in Schedule 3.14(b) 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. "Post-Year End Periods" shall have the meaning set forth in Section 5.6(a)(iii). "Premerger Notification Agencies" shall have the meaning set forth in Section 5.4. "Pre-Year End Periods" shall have the meaning set forth in Section 5.6(a)(iii). "Reinsurance Agreements" shall mean the quota share reinsurance agreement referred to in Section 6(1)(a). "Releases" shall have the meaning set forth in Section 2.1(b). "Section 338 Election" shall have the meaning set forth in Section 5.6(d). "Seller" shall mean Orion Capital Corporation, a Delaware corporation. "Seller's Knowledge" shall mean, when used to qualify a representation or warranty of Seller, that such is being made or given only on the basis of and to the extent of the knowledge of Seller's senior executive officers, reasonable inquiry having been made of the senior officers of McGee by them or on their behalf in respect of the subject matter of the representation or warranty. "SICH" shall mean Security Insurance Company of Hartford, a Connecticut corporation and a wholly owned Subsidiary of Seller. "Straddle Period" shall have the meaning set forth in Section 5.6(a)(ii). "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 "Taxes" shall have the meaning set forth in Section 3.10(a). "Tax Return" shall have the meaning set forth in Section 3.10(a). "Underwriting Management Agreement" shall mean the General Agency Agreement dated January 1, 1964 between and among The Security Insurance Company, United States Casualty Company, New Amsterdam Casualty Company, The Connecticut Indemnity Company and Wm. H. McGee & Co., Inc. as amended to the date hereof. "United States Pool" shall have the meaning ascribed in the definition of "Pool." XIII. . MISCELLANEOUS PROVISIONS . Section 13.1. 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 other transactions contemplated hereby (including, without limitation, disbursements and expenses of its attorneys, accountants and advisors (including financial advisors), and printing and filing costs and fees). Seller shall be solely responsible for the fees of DLJ and Buyer shall be solely responsible for the fees of Stamford Financial Group. Section 13.2. Notices. All notices or other communications required or permitted under this Agreement shall be in writing and sufficient if delivered personally or by recognized overnight delivery service or by registered or certified mail, postage prepaid, addressed as follows: ------- If to Seller, to Orion Capital Corporation 9 Farm Springs Road Farmington, CT 06032 Attn: Treasurer with a copy to Cummings & Lockwood CityPlace I 185 Asylum Street, 36th Floor 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 and such change will be effective upon receipt. Section 13.3. 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 13.4. 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 Buyer may assign its rights (but not delegate its duties except as permitted herein) hereunder to any wholly-owned Subsidiary of Buyer. Section 13.5. Survival of Representations and Warranties and Covenants. (a) All representations and warranties of the parties hereto which are contained in this Agreement or in confirming certificates delivered at the Closing (other than those representations and warranties relating to the due authorization, execution and delivery of this Agreement and the Ancillary Agreement and those relating to Seller's title to the Common Stock which is the subject of this Agreement which shall survive for the applicable statutory period of limitation), shall remain operative and in full force and effect until June 30, 2000, regardless of any investigation made by or on behalf of any of the parties hereto, following the Closing. (b) All covenants made by Buyer or Seller in Article V of this Agreement to be performed after the date hereof will survive the Closing, and will remain in full force and effect thereafter: (i) in the case of all covenants that have specified terms or periods until the later of (x) expiration of the terms or periods respectively specified therein, or (y) June 30, 2000; or (ii) June 30, 2000 for all other covenants. (c) If within the survival periods specified in Sections 13.5(a) and 13.5(b) above, a claim for indemnification shall be made in respect of the breach of any representation, warranty or covenant, the expiration of such period of survival shall not affect the right of indemnified party to indemnification if the party claiming indemnification for such breach shall have delivered to the other party written notice setting forth with reasonable specificity the basis of such claim prior to the expiration of such time pursuant to this Section 13.5. Section 13.6. Indemnification and Payments. Each of Buyer on the one hand and Seller on the other hand (each an "Indemnitor") agrees to indemnify and hold harmless the other and its respective related persons (collectively, the "Indemnitees") for, and will pay to the Indemnitees the amount of, any loss, liability, claim, damage (excluding incidental and consequential damages), and expenses (including reasonable costs of investigation and defense and reasonable attorneys' fees), whether or not involving a third-party claim (collectively, "Damages"), arising from any breach of any representation or warranty made by the Indemnitor in this Agreement or any certificate delivered by the Indemnitor pursuant to this Agreement or any covenant or obligation of such Indemnitor in this Agreement. All damages and other amounts sought by any Indemnitee hereunder shall be net of all insurance proceeds received or collectible by any such Indemnitee with respect to such claim, including, with respect to Buyer, all insurance proceeds received or receivable by McGee. Section 13.7. Limitations on Amount. (a) An Indemnitor will have no liability (for indemnification or otherwise) with respect to Damages arising from a breach of any representation or warranty made by the Indemnitor in this Agreement on the date of this Agreement and on the Closing Date (other than those representations and warranties relating to the due authorization, execution and delivery of this Agreement and the Ancillary Agreement and those relating to Seller's title to the Common Stock which is the subject of this Agreement) until the total of all such Damages with respect to Buyer and its related persons or with respect to Seller and its related persons, as the case may be, exceeds $500,000, and then only for the amount by which such Damages exceed $500,000. (b) In no event shall the aggregate liability of Buyer on the one hand or Seller on the other hand with respect to indemnified Damages under this Agreement (including Section 5.6 hereof) arising from a breach of any representation, warranty or covenant made by the Indemnitor in this Agreement, exceed the Purchase Price. Section 13.8. Procedure for Indemnification. (a) Promptly after receipt by an Indemnitee of notice of the commencement of any proceeding or of any threatened proceeding or claim, or other notification thereof against it, or after otherwise becoming aware that an indemnifiable event has occurred, such Indemnitee will give notice to the Indemnitor of such claim and the estimated dollar amount thereof, but the failure to notify the Indemnitor will not relieve the Indemnitor of liability that it may have to any Indemnitee, except to the extent that the Indemnitor is prejudiced by the Indemnitee's failure to give such notice. (b) The Indemnitor will be entitled to participate in such proceeding and, to the extent that it wishes, to assume the defense of such proceeding with counsel reasonably satisfactory to the Indemnitee and, after notice from the Indemnitor to the Indemnitee of its election to assume the defense of such proceeding, the Indemnitor will not, as long as it diligently conducts such defense, be liable to the Indemnitee for any fees of other counsel or any other expenses with respect to the defense of such proceeding subsequently incurred by the Indemnitee. If the Indemnitor assumes the defense of a proceeding, the Indemnitee will have no liability with respect to any compromise or settlement of such claims effected without its consent Section 13.9. Procedure for Indemnification - Other Claims. The parties acknowledge and agree that the remedies and procedures provided in this Agreement for breach of any representations, warranties, or covenants are exclusive of all other remedies which would otherwise be available, at law or equity. Section 13.10. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Connecticut applicable to agreements made and to be performed entirely within such State, except (i) 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 (ii) matters related to compliance of the transactions contemplated by the Agreement with ------------- applicable insurance regulatory statutes. Section 13.11. 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 Buyer and Seller 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 (15) 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. Buyer and Seller shall bear their own costs and share equally the costs of the mediation. The mediation shall take place in Chicago, Illinois unless otherwise agreed by the parties. (c) Buyer and Seller 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 (20) 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 thirty (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 sixty (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 Buyer and Seller selecting one arbitrator of a panel of three (3) and the two (2) arbitrators so selected designating the third member of the panel of arbitrators. In the event that such two arbitrators cannot agree on a third arbitrator within thirty (30) days, one shall be designated by the American Arbitration Association upon application by either of the two arbitrators. The arbitrators shall render their decision within ninety (90) days after the appointment of the third arbitrator and the decision of the arbitrators shall be final and binding upon the parties and judgment upon the award entered by the arbitrators may be entered in any court having jurisdiction thereof. Buyer and Seller 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. The arbitration shall take place in San Francisco, California if initiated by Seller and in Hartford, Connecticut if initiated by Buyer. Section 13.12. Press Releases. Buyer and Seller 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 Buyer and Seller will, except in the case of such disclosure as may be required by applicable law or securities exchange requirements, obtain the consent of the other with respect to the form, content and timing thereof, which consent shall not unreasonably be withheld. Section 13.13. 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 13.14. 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. -------- Section 13.15. Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. Section 13.16. Further Assurances. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement. [The remainder of this page is intentionally left blank] IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly executed on the date first above written. ORION CAPITAL CORPORATION By: ....................................... Name: Craig A. Nyman Title: Vice President and Treasurer Attest: By: .......................................... Secretary FIREMAN'S FUND INSURANCE COMPANY By: ............................. Name: Bruce F. Friedberg Title: Senior Vice President Attest: By: .......................................... Secretary SCHEDULES Disclosure Letter Schedule 3.2 - Capitalization Schedule 3.3 - Regulatory Status Schedule 3.4 - Compliance with Law Schedule 3.7 - Litigation and Other Proceedings Schedule 3.8 - Title to Properties Schedule 3.9 - No Conflicts (Seller) Schedule 3.10 - Taxes Schedule 3.11 - Investments Schedule 3.12 - Employment Matters Schedule 3.13 - Employee Benefit Plans; ERISA Schedule 3.14 - Contracts Schedule 3.15 - Capital Expenditures Schedule 3.16 - Banks Schedule 3.17 - Agents and Brokers Schedule 3.18 - Insurance Schedule 3.24 - Relationship between Seller and McGee Schedule 3.25 - Agreement Regarding Pool Schedule 4.4 - No Conflicts (Buyer) Schedule 5.3 - Regulatory and Other Filings and Approvals Schedule 10.4 - Executives and Key Employees -i- EXHIBITS Exhibit A-1 - Mutual Release (Seller and McGee) Exhibit A-2 - Mutual Release (SICH and McGee) Exhibit A-3 - Mutual Release (CI and McGee) Exhibit B - Noncompetition Agreement Exhibit C - Reinsurance Agreement -ii- TABLE OF CONTENTS I. THE TRANSACTION 1.1. Purchase of Common Stock.....................................1 1.2. Consideration................................................1 1.3. Management Fee...............................................1 II. THE CLOSING 2 2.1. Closing......................................................2 III. REPRESENTATIONS AND WARRANTIES OF SELLER 3 3.1. Organization and Good Standing...............................3 3.2. Capitalization...............................................3 3.3. Regulatory Status............................................4 3.4. Compliance with Law..........................................4 3.5. Authorization................................................4 3.6. Books and Records............................................5 3.7. Litigation and Other Proceedings.............................5 3.8. Title to Properties..........................................6 3.9. No Conflicts.................................................7 3.10. Taxes........................................................8 3.11 Investments.................................................11 3.12. Employment Matters..........................................11 3.13. Employee Benefit Plans; ERISA...............................11 3.14. Contracts...................................................13 3.15. Capital Expenditures........................................14 3.16. Banks.......................................................14 3.17. Agents and Brokers..........................................14 3.18. Insurance...................................................14 3.19. Absence of Material Changes and Adverse Factors.............14 3.20. Environmental Matters.......................................15 3.21. Calculation of Liability with respect to Pool Participation 16 3.22. Finders and Brokers.........................................16 3.23. Disclosure 17 3.24. Relationship between Seller and McGee 17 3.25. Agreements regarding Pool 17 3.26. Participation of SICH in Pool 17 3.27 No Undisclosed Liabilities..................................17 IV. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF BUYER 18 4.1. Organization and Standing...................................18 4.2. Certificate of Incorporation and By-Laws....................18 4.3. Authorization...............................................18 4.4. No Conflicts................................................18 4.5. Finders and Brokers.........................................19 4.6. Investor Status.............................................20 V. COVENANTS OF BUYER AND SELLER 20 5.1. Access to Properties, Books and Records.....................20 5.2. Conduct of Business.........................................20 5.3. Regulatory and Other Filings and Approvals..................24 5.4. Premerger Notification and Clearance........................25 5.5. Further Assurances..........................................25 5.6. Tax Matters.................................................26 5.7 Pool Financial Statements...................................32 VI. AGREEMENTS WITH RESPECT TO POOL OPERATION 33 6.1. Pool Participations; Reinsurance............................33 6.2. Underwriting Operations of the Pool.........................33 VII. CONDITIONS TO OBLIGATIONS OF BUYER 35 7.1. Covenants...................................................35 7.2. Representations and Warranties..............................35 7.3. Absence of Litigation and Required Regulatory Approvals 35 7.4. Premerger Notification......................................36 7.5. No Material Adverse Effect..................................36 7.6. Additional Agreements.......................................36 7.7. Opinion of Counsel for Seller and McGee.....................36 VIII. CONDITIONS TO OBLIGATIONS OF SELLER 37 8.1. Covenants...................................................37 8.2. Representations and Warranties..............................37 8.3. Absence of Litigation and Required Regulatory Approvals 37 8.4. Premerger Notification......................................37 8.5. Additional Agreements.......................................38 8.7. Opinion of Counsel for Buyer................................38 IX. TERMINATION 38 9.1. Termination.................................................38 9.2. Effect of Termination.......................................38 X. EMPLOYMENT AND BENEFIT MATTERS 38 10.1. Employees 38 10.2. Participation in Benefit Plans 39 10.3. Severance Pay 40 10.4. Non-Solicitation 40 XI. AMENDMENT; WAIVERS 40 11.1. Amendments, Modifications, Etc. 40 11.2. Waivers 40 XII. DEFINED TERMS 40 XIII. MISCELLANEOUS PROVISIONS 45 13.1. Expenses 45 13.2. Notices 45 13.3. Entire Agreement 46 13.4. No Assignment 46 13.5. Survival of Representations and Warranties and Covenants 46 13.6. Indemnification and Payments 47 13.7. Limitations on Amount 47 13.8. Procedure for Indemnification 47 13.9. Procedure for Indemnification - Other Claims 48 13.10. Governing Law 48 13.11. Dispute Resolution 49 13.12. Press Releases 49 13.13. Counterparts 49 13.14. Headings 49 13.15. Severability 50 13.16. Further Assurances 50 S5071611.DOC -i- EX-15 4 Exhibit 15 May 14, 1999 Orion Capital Corporation Farmington, Connecticut We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Orion Capital Corporation and subsidiaries for the periods ended March 31, 1999 and 1998, as indicated in our report dated May 7, 1999; because we did not perform an audit, we expressed no opinion on that information. We consent to the incorporation by reference in Registration Statements No. 2-80636 and No. 333-58941 on Form S-8 relating to the Orion Capital Corporation 1982 Long-Term Performance Incentive Plan, No. 333-58905 on Form S-8 relating to Orion Capital Corporation Equity Incentive Plan, No. 2-63344 and No. 333-58889 on Form S-8 relating to the Orion Capital 401(K) and Profit Sharing Plan, No. 33-59847 and No. 333-58939 on Form S-8 relating to the Orion Capital Corporation 1994 Stock Option Plan for Non- Employee Directors, No. 333-44901 on Form S-8 relating to the Wm. H. McGee & Co., Inc. 401(K) and Profit Sharing Plan, No. 333-55671 on Form S-8 relating to Orion Capital Corporation Employees' Stock Purchase Plan, and No.333-62951 on Form S-8 relating to Retirement Savings Plan for Employees of Guaranty National Insurance Company, of our report dated May 7, 1999, appearing in this quarterly report on Form10-Q of Orion Capital Corporation for the quarter ended March 31, 1999. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Hartford, Connecticut EX-27 5
7 THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ORION CAPITAL CORPORATION'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1999 JAN-1-1999 MAR-31-1999 1,430 260 270 435 2 0 2,420 35 760 147 4,206 2,153 560 0 18 209 178 0 0 437 4,206 299 34 2 1 366 88 8 (137) (52) (88) 0 0 (5) (93) (3.43) (3.43) 1,418 227 139 64 225 1,458 139 -----END PRIVACY-ENHANCED MESSAGE-----