FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(x) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1998
( ) 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 ( )
27,562,439 shares of Common Stock, $1.00 par value, of the registrant were
outstanding on August 7, 1998.
Page 1 of 34
Exhibit Index Appears at Page 32
1
ORION CAPITAL CORPORATION
FORM 10-Q INDEX
For the Quarter Ended June 30, 1998
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet at June 30, 1998 (Unaudited)
and December 31, 1997 3 - 4
Consolidated Statement of Earnings for the three and six-
months ended June 30, 1998 and 1997 (Unaudited) 5
Consolidated Statement of Stockholders' Equity for the
six-months ended June 30, 1998 and 1997 (Unaudited),
and for the year ended December 31, 1997 6
Consolidated Statement of Cash Flows for the six-months
ended June 30, 1998 and 1997 (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 - 27
PART II. OTHER INFORMATION 28
2
PART I. FINANCIAL INFORMATION
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
June 30,1998 December 31,
(In millions) (Unaudited) 1997
- -------------------------------------------------------------------------------------
ASSETS:
Investments: -
Fixed maturities, at amortized cost
(market $312.5 - 1998 and $322.4 - 1997) .............. $ 303.5 $ 312.8
Fixed maturities, at market (amortized cost
$1,362.7 - 1998 and $1,395.4 - 1997) .................. 1,428.8 1,469.8
Common stocks, at market (cost $150.4 -
1998 and $163.0 - 1997) ............................... 216.0 245.4
Non-redeemable preferred stocks, at market
(cost $172.0 - 1998 and $183.6 - 1997) ................ 184.8 193.1
Other long-term investments .............................. 118.7 94.3
Short-term investments ................................... 302.4 228.3
---------- ----------
Total investments .................................. 2,554.2 2,543.7
Cash ..................................................... 21.3 9.3
Accrued investment income ................................ 25.6 29.6
Investment in affiliate .................................. 30.7 31.3
Accounts and notes receivable ............................ 200.1 189.3
Reinsurance recoverables and prepaid reinsurance ......... 821.6 622.2
Deferred policy acquisition costs ........................ 158.6 147.1
Property and equipment ................................... 80.1 70.8
Excess of cost over fair value of net assets acquired .... 166.6 140.0
Other assets ............................................. 140.8 100.8
---------- ----------
Total assets ....................................... $ 4,199.6 $ 3,884.1
========== ==========
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
3
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 1998 December 31,
(In millions, except for share data) (Unaudited) 1997
- --------------------------------------------------------------------------------------
LIABILITIES:
Policy liabilities: -
Losses ................................................ $ 1,553.4 $ 1,476.4
Loss adjustment expenses .............................. 410.0 395.3
Unearned premiums ..................................... 617.0 551.6
Policyholders' dividends .............................. 21.0 20.5
---------- ----------
Total policy liabilities ................................ 2,601.4 2,443.8
Notes payable ........................................... 209.9 310.2
Other liabilities ....................................... 363.6 282.0
---------- ----------
Total liabilities ....................................... 3,174.9 3,036.0
---------- ----------
Contingencies (Note 7)
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
the junior subordinated debentures of the Company .... 250.0 125.0
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 ......................................... 149.6 152.1
Retained earnings ....................................... 540.4 469.5
Accumulated other comprehensive income .................. 95.1 109.2
Treasury stock, at cost (3,001,907 shares -
1998 and 3,069,756 shares - 1997) ..................... (36.2) (34.3)
Deferred compensation on restricted stock ............... (4.9) (4.1)
---------- ----------
Total stockholders equity .......................... 774.7 723.1
---------- ----------
Total liabilities and stockholders equity .......... $ 4,199.6 $ 3,884.1
========== ==========
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
4
ORION CAPITAL CORPORATON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
(In millions, except for per share data) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
REVENUES:
Premiums earned ................................. $ 370.4 $ 335.2 $ 719.2 $ 659.2
Net investment income ........................... 42.5 41.3 83.9 81.5
Realized investment gains ....................... 22.7 8.4 51.7 24.2
Other income .................................... 7.0 5.2 12.6 10.1
--------- --------- --------- ---------
Total revenues ................................. 442.6 390.1 867.4 775.0
--------- --------- --------- ---------
EXPENSES:
Losses incurred ................................. 199.1 173.5 377.7 343.5
Loss adjustment expenses ........................ 51.6 52.2 105.3 101.1
Amortization of deferred policy acquisition costs 103.1 93.3 203.9 188.1
Other insurance expenses ........................ 7.8 10.5 14.7 16.6
Dividends to policyholders ...................... 7.2 4.8 13.6 9.9
Interest expense ................................ 3.1 6.2 8.9 12.3
Other expenses .................................. 12.5 10.6 23.5 21.7
--------- --------- --------- ---------
Total expenses ................................. 384.4 351.1 747.6 693.2
--------- --------- --------- ---------
Earnings before equity in earnings (loss) of
affiliate, federal income taxes and minority
interest expense .............................. 58.2 39.0 119.8 81.8
Equity in earnings (loss) of affiliate .......... -- 0.3 (0.7) 0.9
--------- --------- --------- ---------
Earnings before federal income taxes and
minority interest expense ..................... 58.2 39.3 119.1 82.7
Federal income taxes ............................ 16.7 10.0 32.7 20.8
Minority interest expense:
Subsidiary trust preferred securities, net
of federal income taxes ..................... 3.3 1.8 6.1 3.3
Subsidiary net earnings ....................... -- 2.1 -- 3.7
--------- --------- --------- ---------
Net earnings ................................... $ 38.2 $ 25.4 $ 80.3 $ 54.9
========= ========= ========= =========
Net earnings per basic common share ............ $ 1.39 $ 0.93 $ 2.93 $ 2.01
========= ========= ========= =========
Net earnings per diluted common share .......... $ 1.36 $ 0.91 $ 2.85 $ 1.97
========= ========= ========= =========
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
5
ORION CAPITAL CORPORATON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended Six Months Ended Year Ended
June 30, 1998 June 30, 1997 December 31, 1997
(In millions) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance, beginning of period $ 30.7 $ 15.3 $ 15.3
Stock issued in 2-for-1
common stock split - 15.4 15.4
------- ------- -------
Balance, end of period $ 30.7 $ 30.7 $ 30.7
======= ======= =======
CAPITAL SURPLUS:
Balance, beginning of period $ 152.1 $ 158.6 $ 158.6
Exercise of stock options and net
issuance of restricted stock (2.5) (0.4) 0.5
Acquisition of Guaranty National - - 8.4
Stock issued in 2-for-1
common stock split - (15.4) (15.4)
------- ------- -------
Balance, end of period $ 149.6 $ 142.8 $ 152.1
======= ======= =======
RETAINED EARNINGS:
Balance, beginning of period $ 469.5 $ 370.8 $ 370.8
Net earnings 80.3 $ 80.3 54.9 $ 54.9 115.8 $ 115.8
------ ------ -------
Dividends declared (9.4) (8.3) (17.1)
------- ------- -------
Balance, end of period $ 540.4 $ 417.4 $ 469.5
======= ======= =======
ACCUMULATED OTHER
COMPREHENSIVE INCOME:
Balance, beginning of period $ 109.2 $ 70.1 $ 70.1
Unrealized investment
gains (losses), net of taxes (14.1) 7.9 41.3
Unrealized foreign exchange
translation losses, net of taxes - (0.4) (2.2)
------ ------ -------
Other comprehensive income (loss) (14.1) (14.1) 7.5 7.5 39.1 39.1
------- ------ ------- ------ ------- -------
Comprehensive income $ 66.2 $ 62.4 $ 154.9
====== ====== =======
Balance, end of period $ 95.1 $ 77.6 $ 109.2
======= ======= =======
TREASURY STOCK:
Balance, beginning of period $ (34.3) $ (35.0) $ (35.0)
Exercise of stock options and net
issuance of restricted stock 6.6 0.6 3.2
Acquisition of treasury stock (8.5) (0.9) (2.5)
------- ------- -------
Balance, end of period $ (36.2) $ (35.3) $ (34.3)
======= ======= =======
DEFERRED COMPENSATION ON
RESTRICTED STOCK:
Balance, beginning of period $ (4.1) $ (3.1) $ (3.1)
Net issuance of restricted stock (1.6) 0.2 (1.9)
Amortization of deferred
compensation on restricted stock 0.8 0.4 0.9
------- ------- -------
Balance, end of period $ (4.9) $ (2.5) $ (4.1)
======= ======= =======
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
6
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-------------------------
(In millions) 1998 1997
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected ......................................... $ 741.6 $ 667.7
Net investment income collected ............................ 82.0 69.2
Losses and loss adjustment expenses paid ................... (501.0) (429.9)
Policy acquisition costs paid .............................. (228.8) (207.9)
Dividends paid to policyholders ............................ (13.1) (10.9)
Interest paid .............................................. (11.3) (12.0)
Payments on trust preferred securities ..................... (7.3) --
Federal income tax payments ................................ (31.6) (18.0)
Other payments ............................................. (17.7) (23.3)
-------- --------
Net cash provided by operating activities .................. 12.8 34.9
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of fixed maturity investments ................... 63.3 62.8
Sales of fixed maturity investments ........................ 526.8 158.4
Sales of equity securities ................................. 258.7 95.5
Investments in fixed maturities ............................ (502.2) (342.1)
Investments in equity securities ........................... (205.0) (79.6)
Acquisition of businesses, net of cash acquired ............ (36.0) --
Net purchases of short-term investments .................... (76.6) (49.4)
Other receipts (payments) .................................. (27.5) 6.7
-------- --------
Net cash provided by (used in) investing activities ........ 1.5 (147.7)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of trust preferred securities ... 121.9 123.0
Proceeds from exercise of stock options .................... 0.8 0.3
Repayment of notes payable ................................. (109.5) (0.4)
Dividends paid to stockholders ............................. (8.9) (7.7)
Purchases of common stock .................................. (6.6) (0.7)
Other receipts ............................................. -- 0.3
-------- --------
Net cash provided by (used in) financing activities ........ (2.3) 114.8
-------- --------
Net increase in cash ....................................... 12.0 2.0
Cash balance, beginning of period .......................... 9.3 11.6
-------- --------
Cash balance, end of period ................................ $ 21.3 $ 13.6
======== ========
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
7
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
(UNAUDITED)
Six Months Ended June 30,
-------------------------
(In millions) 1998 1997
- --------------------------------------------------------------------------------------
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net earnings ............................................ $ 80.3 $ 54.9
-------- --------
ADJUSTMENTS:
Depreciation and amortization ........................... 9.0 6.1
Amortization of excess of cost over fair
value of net assets acquired ......................... 2.7 1.5
Deferred federal income taxes ........................... (4.0) (1.9)
Amortization of fixed maturity investments .............. (0.5) (1.2)
Non-cash investment income .............................. (9.0) (9.2)
Equity in (earnings) loss of affiliate,
net of dividends received ............................ 0.7 (0.7)
Realized investment gains ............................... (51.6) (24.1)
Minority interest in subsidiary earnings ................ -- 3.7
Other ................................................... 0.1 --
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in accrued investment income ........ 4.2 (2.6)
Increase in accounts and notes receivable ............... (12.4) (17.3)
Decrease (increase) in reinsurance recoverable
and prepaid reinsurance .............................. (84.3) 16.6
Increase in deferred policy acquisition costs ........... (10.1) (5.6)
Increase in other assets ................................ (3.0) (4.5)
Increase (decrease) in losses ........................... 17.7 (14.9)
Increase in loss adjustment expenses .................... 14.9 22.6
Increase in unearned premiums ........................... 43.2 6.6
Increase (decrease) in policyholders' dividends ......... 0.5 (1.0)
Increase in other liabilities ........................... 14.4 5.9
-------- --------
Total adjustments and changes .......................... (67.5) (20.0)
-------- --------
Net cash provided by operating activities ............... $ 12.8 $ 34.9
======== ========
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
8
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six Months Ended June 30, 1998 and 1997
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"). The Company's investment in its unconsolidated
affiliate is accounted for using the equity method. All material intercompany
balances and transactions have been eliminated.
The Company completed two tender offers, which increased its ownership of
Guaranty National Corporation ("Guaranty National") from 49.5% to 81% in July
1996 and to 100% in December 1997. A minority interest charge was recorded by
the Company for the portion of Guaranty National's earnings attributable to the
shares not owned by the Company in 1997 until it became a wholly-owned
subsidiary.
As of January 1, 1998 the Company adopted Financial Accounting Standard No.
130, "Reporting Comprehensive Income". This statement establishes standards for
the reporting and presentation of comprehensive income and its components in
financial statements. Comprehensive income encompasses all changes in
shareholders' equity (except those arising from transactions with shareholders)
and includes net income, net unrealized capital gains or losses on
available-for-sale securities and foreign currency translation adjustments. This
new standard requires additional disclosures and does not affect the Company's
financial position or results of operations.
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 1997 Annual Report on Form 10-K.
NOTE 2 - ACQUISITIONS
On April 30, 1998 the Company completed the acquisition of the non-standard
personal automobile insurance business of North Carolina - based Strickland
Insurance Group, Inc. ("Strickland"). The acquisition included two insurance
companies, a premium finance company, a claim adjusting firm and a general
agency in Florida. In 1997, Strickland reported approximately $99 million of
personal automobile gross premiums written and $46 million of net premiums
written. The purchase price was $44.0 million in cash, subject to adjustment,
and included acquisition expenses of $0.2 million. The Company made cash
payments of $38.5 million, to Strickland on April 30, 1998 and $2.0 million in
1997 with $3.3 million of the purchase price retained by the Company in part to
secure obligations of Strickland. Simultaneous with the acquisition, the
9
Company repaid $9.4 million of Strickland bank debt. The acquisition includes a
purchase price contingency for loss development incurred by the acquired
business during the period from the acquisition date to December 31, 2000
pertaining to accident years prior to the acquisition date. The Company used
cash and short-term investments to fund the acquisition and debt payments. The
acquisition was accounted for as a purchase and accordingly, the acquired
business has been included in the Company's consolidated financial statements
since the date of acquisition. The total consideration exceeded the fair value
of the net assets acquired by approximately $28.9 million, subject to
adjustment, and is being amortized over 25 years.
As described in Note 9, the Company completed the acquisition of Grocers
Insurance Company from United Grocers, Inc. on July 9, 1998.
NOTE 3 - INVESTMENT IN AFFILIATE
As of June 30, 1998 the Company owned 24.7% of the common stock of
Intercargo Corporation ("Intercargo"), a publicly held company. The Company
records its share of Intercargo's operating results on a quarterly lag, after
Intercargo has reported its financial results. Summarized financial information
of Intercargo reflected by the Company for the three and six month periods ended
June 30, 1998 and 1997 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------
REVENUES:
Premiums earned ........................ $ 11.7 $ 13.7 $ 28.5 $ 30.1
Investment and other income ............ 1.8 1.3 3.8 5.0
------- ------- ------- -------
13.5 15.0 32.3 35.1
------- ------- ------- -------
EXPENSES:
Insurance expenses ..................... 12.9 13.6 31.7 31.3
Interest ............................... -- 0.2 -- 0.5
------- ------- ------- -------
12.9 13.8 31.7 31.8
------- ------- ------- -------
Earnings before equity in earnings
of affiliate and federal income taxes 0.6 1.1 0.6 3.3
Equity in earnings of affiliate ........ -- 1.0 -- 2.0
Federal income taxes ................... (0.2) (0.3) (2.3) (0.6)
------- ------- ------- -------
Net earnings (loss) .................... $ 0.4 $ 1.8 $ (1.7) $ 4.7
======= ======= ======= =======
Company's proportionate share,
including goodwill amortization ..... $ - $ 0.3 $ (0.7) $ 0.9
======= ======= ======= =======
10
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 exposure to losses. Reinsurance does not discharge the
primary liability of the original insurer. The table below summarizes certain
reinsurance information.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(In millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------
Direct premiums written $ 445.5 $ 376.7 $ 887.3 $ 748.3
Reinsurance assumed 54.8 30.0 68.9 55.2
------- ------- ------- -------
Gross premiums written 500.3 406.7 956.2 803.5
Reinsurance ceded (115.5) (66.5) (202.4) (129.0)
------- ------- ------- -------
Net premiums written $ 384.8 $ 340.2 $ 753.8 $ 674.5
======= ======= ======= =======
Direct premiums earned $ 442.5 $ 372.0 $ 878.1 $ 734.1
Reinsurance assumed 29.3 29.1 40.2 62.6
------- ------- ------- -------
Gross premiums earned 471.8 401.1 918.3 796.7
Reinsurance ceded (101.4) (65.9) (199.1) (137.5)
------- ------- ------- -------
Net premiums earned $ 370.4 $ 335.2 $ 719.2 $ 659.2
======= ======= ======= =======
Loss and loss adjustment expenses
incurred recoverable from reinsurers $ 95.5 $ 41.6 $ 165.8 $ 74.2
======= ======= ======= =======
NOTE 5 - TRUST PREFERRED SECURITIES
The Company-obligated mandatorily redeemable preferred capital securities of
subsidiary trusts holding solely the junior subordinated debentures of the
Company ("Trust Preferred Securities") comprise the following:
June 30, December 31,
(In millions) 1998 1997
- -----------------------------------------------------------------------------
8.73% Trust Preferred Securities
due January 1, 2037 $ 125.0 $ 125.0
7.701% Trust Preferred Securities
due April 15, 2028 125.0 -
--------- ---------
$ 250.0 $ 125.0
========= =========
On February 2, 1998 Orion issued $125 million of 7.701% Junior Subordinated
Deferrable Interest Debentures due April 15, 2028 to Orion Capital Trust II, a
Delaware statutory business trust sponsored by the Company. Orion Capital Trust
II then sold $125 million of 7.701% capital securities, which mature on April
15, 2028 ("Capital Securities"), in a private placement. Approximately $100
million of the net proceeds from the sale of the junior subordinated debentures
were used to retire bank indebtedness of Guaranty National. Orion registered the
Capital Securities under the Securities Act of 1933 pursuant to an exchange
offer which expired on June 4, 1998. On January 13, 1997 Orion issued $125
million of 8.73% Trust Preferred Securities which may be redeemed without
premium on or after January 1, 2007.
11
The Trust Preferred Securities are subordinate to all liabilities of
the Company. The Company may defer interest distributions on the Trust Preferred
Securities; however, during any period when such cumulative distributions have
been deferred, Orion may not declare or pay any dividends or distributions on
its common stock. The Trusts are consolidated in the Company's financial
statements because they are wholly-owned by the Company. The sole assets of the
Trusts are the Debentures issued by Orion. Orion has given its partial
guarantee, which when taken together with the Company's obligations under the
declaration of the Trusts, the Debentures, and the indentures pursuant to which
the Trust Preferred Securities are issued including its obligations to pay
costs, expenses, debts and liabilities of the Trusts (other than with respect to
the Trust Preferred Securities), provides a full and unconditional guarantee of
amounts due on the Trust Preferred Securities.
NOTE 6 - STOCKHOLDERS' EQUITY AND EARNINGS PER COMMON SHARE
In the first half of 1998, the Company repurchased 132,000 shares of
its common stock at an aggregate cost of $6.6 million under a stock repurchase
program approved by the Board of Directors (see Note 9) and 34,744 shares at an
aggregate cost of $1.9 million relating to employee benefit plans.
Basic earnings per share computations are based on the weighted average
number of shares of common stock outstanding during the period excluding
dilution. Diluted earnings per share reflects the potential decrease that could
occur if all stock options and other stock-based awards were exercised and
converted into common stock, if their effect is dilutive. The weighted average
common shares were 27,457,000 and 27,299,000 for the three months ended, and
27,429,000 and 27,302,000 for the six months ended June 30, 1998 and 1997,
respectively. The weighted average common and diluted equivalent shares were
28,160,000 and 27,803,000 for the three months ended, and 28,145,000 and
27,801,000 for the six months ended June 30, 1998 and 1997, respectively.
NOTE 7 - CONTINGENCIES
Orion and its subsidiaries are routinely engaged in litigation incidental
to their businesses. Management believes that there are no significant legal
proceedings pending against the Company which, net of reserves established
therefor, are likely to result in judgments for amounts that are material to the
financial condition, liquidity or results of operations of Orion and its
consolidated subsidiaries, taken as a whole.
12
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income balances, net of taxes, are as follows:
Unrealized Unrealized Foreign Accumulated Other
Investment Gains Exchange Translation Comprehensive
(Losses) Gains (Losses) Income (Loss)
(In millions)
- ------------------------------------------------------------------------------------------------------
Six Months ended June 30, 1998:
Balance, beginning of period ........... $ 113.6 $ (4.4) $ 109.2
Current period change .................. (14.1) -- (14.1)
--------- --------- ---------
Balance, end of period ................. $ 99.5 $ (4.4) $ 95.1
========= ========= =========
Six Months ended June 30, 1997:
Balance, beginning of period ........... $ 72.3 $ (2.2) $ 70.1
Current period change .................. 7.9 (0.4) 7.5
--------- --------- ---------
Balance, end of period ................. $ 80.2 $ (2.6) $ 77.6
========= ========= =========
Year ended December 31, 1997:
Balance, beginning of year ............. $ 72.3 $ (2.2) $ 70.1
Current year change .................... 41.3 (2.2) 39.1
--------- --------- ---------
Balance, end of year ................... $ 113.6 $ (4.4) $ 109.2
========= ========= =========
The pretax unrealized investment gains (losses) were $(21.7) million and
$12.1 million for the six months ended June 30, 1998 and 1997, respectively, and
$62.9 million for the year ended December 31, 1997. The pre-tax unrealized
foreign exchange translation losses were $0.6 million for the three months ended
June 30, 1997 and $3.4 million for the year ended December 31, 1997.
NOTE 9 - SUBSEQUENT EVENTS
On July 8, 1998 the Company entered into a credit agreement with a group of
banks which provides for unsecured borrowings up to $150 million. The credit
agreement expires on July 8, 2003 and provides for two one-year extensions. The
Company intends to use the credit facility for general corporate purposes which
may include acquisitions. The credit agreement carries an annual facility fee on
unused amounts of the limit. Borrowings under the credit agreement bear interest
at LIBOR (London Interbank Offerred Rate) plus a margin based upon the Company's
credit ratings. The credit agreement requires the Company to maintain certain
financial covenants and limits the Company's ability to incur secured
indebtedness or certain contingent obligations except for certain secured
indebtedness. There are currently no borrowings under this credit agreement.
On July 9, 1998 the Company completed the acquisition of Grocers Insurance
Group ("Grocers") from United Grocers, Inc ("United"). Grocers is an
Oregon-based specialty insurance holding company serving the grocery and food
service industry. In 1997, Grocers reported approximately $23 million of net
13
premiums written, principally general liability, property and workers
compensation with the majority of its volume concentrated in the Northwestern
states. The purchase price was $36.3 million in cash. The Company paid
approximately $32.3 million to United on July 9, 1998. The Company retained $4.0
million of the purchase price to secure obligations of United and Grocers. The
Company used cash and short-term investments to fund the purchase. The
acquisition will be accounted for as a purchase and accordingly, Grocers will be
included in the Company's consolidated financial statements from the date of
acquisition.
The Company recently announced plans to accelerate the realignment
of Orion Specialty because it has not met the Company's profitability
expectations. The realignment is anticipated to negatively impact the
Company's operating results in the second half of 1998 by approximately
$12.5 million on a pre-tax basis or $.35 per diluted share on an after-tax
basis. The realignment is planned to result in Orion Specialty's
continued shift away from commodity business, primarily commercial
auto and transportation, to a smaller number of more client-focused
programs and specialty niches. The realignment is expected to result in the
cancellation of business with current net premium volume of approximately $100
million on an annual basis. Under the realignment plan, the Company will
record a charge of $36.7 million in the third quarter related to the cancelled
business. Major components of this charge will include loss reserve
strengthening of $27.8 million, which is based upon a recently completed
actuarial study, severance and program termination expenses of $7.0 million,
and asset write downs of $1.9 million.
Part of the realignment plan will include the sale of Orion
Specialty's Colorado Casualty unit, which produces approximately $55
million in annual net premiums written, but consists largely of business
which does not fit the Company's specialization strategy. On August 12, 1998,
the Company reached an agreement to sell Colorado Casualty to Liberty
Mutual Insurance Company. The transaction is expected to result in a pre-tax
operating gain of approximately $24.2 million. The Company anticipates that
sale will be completed in the late third quarter or early fourth quarter
of 1998, subject to regulatory approvals.
The Company's Board of Directors increased authorization for purchases
of its common stock by an additional $50 million on August 4, 1998, increasing
the remaining stock purchases authorization to $66.4 million at August 7, 1998.
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 June 30, 1998, and
the related consolidated statements of earnings for the three-month and
six-month periods ended June 30, 1998 and 1997, and the statements of
stockholders' equity and cash flows for the six-month periods ended June 30,
1998 and 1997. 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, 1997, and the related consolidated
statements of earnings, stockholders' equity and cash flows for the year then
ended; and in our report dated February 11, 1998, we expressed an unqualified
opinion on those consolidated financial statements. The consolidated statements
of earnings and cash flows for the year ended December 31, 1997 are not
presented herein. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1997 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
July 29, 1998
15
ORION CAPITAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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. In addition, the miscellaneous income and expenses (primarily
interest, general and administrative expenses and other consolidating
elimination entries) of the parent company are reported as a fourth segment. As
result of the acquisition of Guaranty National, the 1997 segment disclosures
have been revised to conform with the current basis of presentation. The three
insurance segments as of June 30, 1998 are as follows:
REGIONAL OPERATIONS - this segment includes the workers compensation insurance
products and services sold by the EBI Companies ("EBI").
SPECIAL PROGRAMS - this segment comprises the following:
DPIC Companies ("DPIC"), which markets professional liability insurance;
Orion Specialty, which writes specialty insurance programs and commercial
non-standard automobile insurance;
Wm. H. McGee ("McGee"), an underwriting management company that
specializes in ocean marine, inland marine and commercial property
insurance; and
The Company's 24.7% interest in Intercargo Corporation ("Intercargo"),
which sells insurance coverages for international trade.
GUARANTY NATIONAL COMPANIES ("Guaranty National") - this segment specializes in
non-standard personal automobile insurance.
The Company increased its ownership of Guaranty National to 100% in December
1997. Beginning in 1998, the commercial business lines of Guaranty National were
consolidated with Connecticut Specialty to form a new company named Orion
Specialty. Orion Specialty focuses on specialty commercial insurance.
Following the formation of Orion Specialty, Guaranty National became
substantially a personal non-standard automobile insurance operation. The
Company increased its ownership in Guaranty National, in part, to provide
Guaranty National with additional financing options, on terms that may not be
available to it as an independent entity, so that it can continue its expansion
in the non-standard personal automobile insurance business.
16
On April 30, 1998 the Company completed the acquisition of the non-standard
personal automobile insurance business of North Carolina - based Strickland
Insurance Group, Inc. ("Strickland"). The acquisition included two insurance
companies, a premium finance company, a claim adjusting firm and a general
agency in Florida. In 1997, Strickland reported approximately $99 million of
personal automobile gross premiums written and $46 million of net premiums
written. The purchase price was $44.0 million in cash subject to adjustment. The
acquisition was accounted for as a purchase and accordingly, the acquired
business has been included in the Company's consolidated financial statements
from the date of acquisition. The total consideration exceeded the fair value of
the acquired net assets by approximately $28.9 million, subject to adjustment,
and is being amortized over 25 years.
On July 9, 1998 the Company completed the acquisition of Grocers Insurance Group
("Grocers") from United Grocers, Inc. for $36.3 million in cash. Grocers is an
Oregon-based specialty insurance holding company serving the grocery and food
service industry. In 1997, Grocers wrote approximately $23 million of net
premiums, principally general liability, property and workers compensation with
the majority of its volume concentrated in the Northwestern states. The
acquisition will be accounted for as a purchase. Grocers will be included in the
Company's consolidated financial statements from the date of acquisition.
The Company recently announced plans to accelerate the realignment of Orion
Specialty because it has not met the Company's profitability
expectations. The realignment is anticipated to negatively impact the Company's
operating results in the second half of 1998 by approximately $12.5 million on
a pre-tax basis or $.35 per diluted share on an after-tax basis. The realign-
ment is planned to result in Orion Specialty's continued shift away
from commodity business, primarily commercial auto and transportation,
to a smaller number of more client-focused programs and specialty niches.
The realignment is expected to result in the cancellation of business with
current net premium volume of approximately $100 million on an annual basis.
Under the realignment plan, the Company will record a charge of $36.7 million
in the third quarter of 1998 related to the cancelled business. Major
components of this charge will include loss reserve strengthening of $27.8
million, which is based upon a recently completed actuarial study, severance
and program termination expenses of $7.0 million and asset write downs of
$1.9 million.
Part of the realignment will include the sale of Orion Specialty's Colorado
Casualty unit, which produces approximately $55 million in net premiums
written annually, but consists largely of business which does not fit the
Company's specialization strategy. On August 12, 1998, the Company reached
an agreement to sell Colorado Casualty to Liberty Mutual Insurance Company.
The transaction is expected to result in a pre-tax operating gain of
approximately $24.2 million. The Company anticipates that sale will be
completed in the late third quarter or early fourth quarter of 1998, subject to
regulatory approvals.
17
RESULTS OF OPERATIONS
OVERVIEW
Earnings (loss) by segment before federal income taxes and minority interest
expense are summarized as follows:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ----------------------------------
(In millions) 1998 1997 % Change 1998 1997 % Change
- -------------------------------------------------------------------------------------------------------------
Regional Operations ........ $ 24.5 $ 16.8 45.8% $ 52.9 $ 37.5 41.1%
Special Programs ........... 27.7 16.5 67.9% 57.4 37.6 52.7%
Guaranty National .......... 10.4 9.8 6.1% 18.3 16.7 9.6%
------ ------ ----- ------ ------ -----
62.6 43.1 45.2% 128.6 91.8 40.1%
Other ...................... (4.4) (3.8) 15.8% (9.5) (9.1) 4.4%
------ ------ ----- ------ ------ -----
$ 58.2 $ 39.3 48.1% $119.1 $ 82.7 44.0%
====== ====== ===== ====== ====== =====
Operating earnings, after-tax realized investment gains, net earnings and per
diluted common share amounts are summarized as follows:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------- --------------------------------------
(In millions, except share data) 1998 1997 % Change 1998 1997 % Change
- ------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 23.4 $ 20.3 15.3% $ 46.7 $ 39.7 18.0%
After-tax realized investment
gains 14.8 5.1 189.9% 33.6 15.2 120.6%
-------- -------- ------ -------- -------- ------
Net earnings $ 38.2 $ 25.4 50.3% $ 80.3 $ 54.9 46.5%
======== ======== ====== ======== ======== ======
Per diluted common share:
Operating earnings $ 0.83 $ 0.73 13.7% $ 1.66 $ 1.42 16.9%
After-tax realized investment
gains 0.53 0.18 194.4% 1.19 0.55 116.4%
-------- -------- ------ -------- -------- ------
Net earnings $ 1.36 $ 0.91 49.5% $ 2.85 $ 1.97 44.7%
======== ======== ====== ======== ======== ======
The Company's operating earnings increased 15.3% in the second quarter of 1998
and 18.0% in the first half of 1998 compared to the same 1997 periods. Operating
earnings represents earnings after taxes, excluding net realized investment
gains. On a diluted per common share basis, operating earnings increased 13.7%
in the second quarter of 1998 and 16.9% in the first half of 1998 compared to
the same 1997 periods. The strong performance from the Company's insurance
operations, in particular EBI, DPIC and Guaranty National, combined with
significant increases in after-tax realized investment gains resulted in a 50.3%
and 46.5% increase in net earnings for the second quarter and first half of
1998, respectively, compared to the same 1997 periods. Weighted average common
shares and diluted equivalents outstanding were 28,160,000 for the second
quarter of 1998 and 28,145,000 for the six months ended June 30, 1998 and
27,803,000 and 27,801,000, for the corresponding 1997 periods, respectively.
18
REVENUES
Revenues are summarized as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ----------------------------------------
(In millions) 1998 1997 % Change 1998 1997 % Change
- ---------------------------------------------------------------------------------------------------------------------
Net premiums written $ 384.8 $ 340.2 13.1% $ 753.8 $ 674.5 11.8%
======== ======== ====== ======== ======== ======
Net premiums earned $ 370.4 $ 335.2 10.5% $ 719.2 $ 659.2 9.1%
Net investment income 42.5 41.3 2.9% 83.9 81.5 2.9%
Realized investment gains 22.7 8.4 170.2% 51.7 24.2 113.6%
Other 7.0 5.2 34.6% 12.6 10.1 24.8%
-------- -------- ------ -------- -------- ------
$ 442.6 $ 390.1 13.5% $ 867.4 $ 775.0 11.9%
======== ======== ====== ======== ======== ======
PREMIUMS WRITTEN
The Company's net premiums written by segment are as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ----------------------------------------
(In millions) 1998 1997 % Change 1998 1997 % Change
- ---------------------------------------------------------------------------------------------------------------------
Regional Operations $ 106.8 $ 90.0 18.6% $ 217.4 $ 177.8 22.3%
Special Programs 171.5 167.9 2.1% 333.8 332.3 0.5%
Guaranty National 106.5 82.3 29.4% 202.6 164.4 23.2%
-------- -------- ----- -------- -------- -----
$ 384.8 $ 340.2 13.1% $ 753.8 $ 674.5 11.8%
======== ======== ===== ======== ======== =====
In November 1996, the Company sold the renewal book of business of its assumed
reinsurance operation to concentrate on businesses where the Company can better
service its specialized niche markets. Excluding premiums from this operation,
the Company's net premiums written increased by 14.3% in the second quarter of
1998 and 13.3% in the first half of 1998 over the same 1997 periods.
Regional Operations
Net premiums written for Regional Operations increased by 18.6% in the second
quarter of 1998 and 22.3% in the first half of 1998 from comparable 1997 periods
largely due to growth generated by EBI's multi-state program established in
1997. Additionally, the increase in net premiums written in 1998 is attributed
to EBI's continued geographic expansion and penetration, partly offset by the
impact of statutory rate reductions of last year.
19
SPECIAL PROGRAMS
Net premiums written from Special Programs are as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ----------------------------------------
(In millions) 1998 1997 % Change 1998 1997 % Change
- ---------------------------------------------------------------------------------------------------------------------
Orion Specialty $ 101.8 $ 101.7 0.1% $ 205.3 $ 203.7 0.8%
DPIC 49.7 47.0 5.6% 92.0 91.0 1.1%
McGee 20.2 15.9 27.6% 36.8 28.6 28.8%
------- ------- ------- ------- ------- -------
171.7 164.6 4.3% 334.1 323.3 3.3%
Assumed reinsurance (0.2) 3.3 -106.3% (0.3) 9.0 -103.6%
------- ------- ------- ------- ------- -------
$ 171.5 $ 167.9 2.1% $ 333.8 $ 332.3 0.5%
======= ======= ======= ======= ======= =======
Net premiums written by DPIC for professional liability insurance, the largest
special program, increased in 1998 primarily as a result of continual high
levels of policy renewals and growth in project policies offset in part by rate
reductions in a very competitive professional liability insurance market.
Orion Specialty's net premiums written increased slightly due to increases in
net premiums from the contract and brokerage division and standard commercial
insurance operations, partly offset by lower premiums from the cancelled truck
liability, cancelled ocean marine and coal mine programs.
McGee's net premiums written increase in 1998 reflects the Company's greater
participation in the underwriting pools managed by McGee. The Company's
participation in McGee's United States pool is approximately 71% and 52% in 1998
and 1997, respectively. Participation in McGee's Canadian pool is approximately
72% and 61% in 1998 and 1997, respectively.
GUARANTY NATIONAL
The net premiums written growth in 1998 over the comparable 1997 period is
primarily due to the acquisitions of Strickland's non-standard personal
automobile insurance business and Unisun Insurance Company, growth in the
monthly product business in California, and increases in premiums from the
Northwestern states, offset in part, by modest rate reductions due from a very
competitive market. Premium growth in California is primarily attributed to
enacted legislation requiring all drivers to maintain liability insurance.
PREMIUMS EARNED
The Company's premiums earned increased 10.5% and 9.1% in the second quarter and
first half of 1998 compared to the same 1997 periods, respectively. Premiums
earned reflect the recognition of income from the changing levels of net premium
writings.
20
NET INVESTMENT INCOME
Pre-tax net investment income was $83.9 million and $81.5 million for the first
half of 1998 and 1997, and $42.5 million and $41.3 million for the corresponding
second quarter periods, respectively. The pre-tax yields on the average
investment portfolio were 7.0% for the first six months of 1998 and 7.1% for the
first six months of 1997, with after-tax yields of 5.3% and 5.4%, respectively.
Net investment income increased 2.9% in both the first half and second quarter
of 1998 primarily due to a higher investment base. The higher investment base
for 1998 reflects the investment of proceeds from the issuance of $125 million
7.701% Trust Preferred Securities in February 1998 and the effects of positive
operating cash flow. These increases have been partly offset by cash used for
acquisitions as well as repayment of the $100 million bank indebtedness of
Guaranty National.
Net investment income reflects equity earnings in limited partnership
investments of $3.8 million for the second quarter of 1998 and $3.9 million for
the same 1997 period, and $9.0 million for the first half of 1998 and $8.6
million for the same 1997 period. Over 50% of the equity earnings in 1998
resulted from three limited partnership investments. Earnings from limited
partnership investments can vary considerably from year-to-year. The Company's
long-term experience with limited partnership investments has been quite
favorable; however, they represent only 4.5% and 3.6% of total investments at
June 30, 1998 and December 31, 1997, 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 $2,034.7 million at June
30, 1998 and $2,010.9 million at December 31, 1997, or approximately 79.0% and
78.8% of the Company's cash and investments, respectively.
The Company's investment philosophy is to achieve a superior rate of return
after taxes, while maintaining a proper balance of safety, liquidity, maturity
and marketability. The Company invests primarily in investment grade securities
and strives to enhance the average return of its portfolio through limited
investment in a diversified group of non-investment grade fixed maturity
securities or securities that are not rated. 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 June 30, 1998 and December 31, 1997, the Company's
investment in non-investment grade and non-rated fixed maturity securities were
carried at $238.3 million and $256.7 million, respectively. These investments
represented a total of 9.3% and 10.1% of cash and investments and 5.7% and 6.6%
of total assets at June 30, 1998 and December 31, 1997, respectively.
REALIZED INVESTMENT GAINS
Net realized investment gains are $51.7 million and $24.2 million for the first
six months of 1998 and 1997, and $22.7 million and $8.4 million for
corresponding second quarter period, respectively. Approximately 25% of the
year-to-date 1998 net realized investment gains resulted from the sale of two
21
investments in entities which were acquired or taken public during the first
quarter. Realized investment gains may be reduced by provisions for losses on
securities deemed to be other-than-temporarily impaired. Impairment provisions
of $2.5 million and $1.8 million were recognized in the six months ended June
30, 1998 and 1997, respectively. 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.
EXPENSES AND OTHER
Operating Ratios
The following table sets forth certain ratios of insurance operating expenses to
premiums earned:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- --------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Loss and loss adjustment expenses 67.7% 67.3% 67.2% 67.5%
Policy acquisition costs and other
insurance expenses 30.0% 31.0% 30.3% 31.0%
------ ------ ------ ------
Total before policyholders' dividends 97.7% 98.3% 97.5% 98.5%
Policyholders' dividends 1.9% 1.4% 1.9% 1.5%
------ ------ ------ ------
Combined ratio 99.6% 99.7% 99.4% 100.0%
====== ====== ====== ======
Loss and loss adjustment expenses ratio by segment:
Regional Operations 58.1% 59.0% 57.3% 58.8%
Special Programs 73.2% 69.9% 71.5% 70.2%
Guaranty National 68.9% 71.3% 70.4% 71.4%
The improvement in the loss ratio for Regional Operations results from the
favorable loss experience and lower loss expenses achieved by EBI through its
service-oriented approach offset in part by less favorable loss development
relating to prior accident years. EBI's service oriented approach is to work
with its customers to prevent losses and reduce claim costs.
The increase in the 1998 loss ratio for Special Programs compared to 1997 is
primarily attributable to higher losses from program business at Orion
Specialty, including cancelled programs, and an increased unfavorable effect of
the assumed reinsurance business exited in late 1996. Net earned premiums from
the exited reinsurance business declined at a greater rate than losses in 1998
compared to 1997. The loss ratio at DPIC has improved in 1998 in relation to
1997 as a result of its loss prevention competencies.
Guaranty National's loss ratio improved in 1998 compared to 1997 primarily due
to a decline in claims frequency and claims severity.
22
The ratios of policy acquisition costs and other insurance expenses to premiums
earned (the "expense ratio") are 30.0% and 30.3% for the three months and six
months ended June 30, 1998, respectively, and 31.0% for the respective 1997
periods. 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.
Management believes that the Company's reserves for loss and loss adjustment
expenses make reasonable and sufficient provision for the ultimate cost of all
losses on claims incurred. However, there can be no assurance that changes in
loss trends will not result in additional development of prior years' reserves
in the future. The Company will record $27.8 million of loss reserve
strengthening relating to the Orion Specialty realignment plan in the third
quarter of 1998. Provisions for losses and loss adjustment expenses include
development of loss and loss adjustment expense reserves relating to prior
accident years, which increased the calendar year combined ratio by 1.1
percentage points in the first half of 1998 and 0.6 percentage points in
the same period of 1997.Variability in claim emergence and settlement patterns
and other trends in loss experience can result in future development patterns
different than expected. After considering the additonal reserve strengthening
to be recorded for Orion Specialty realignment, the Company believes that any
such variability or development will generally continue at the low levels
experienced in recent years, considering actions that have been taken to
increase 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.
INTEREST EXPENSE
Interest expense is $3.1 million and $6.2 million for the second quarters of
1998 and 1997, and $8.9 million and $12.3 million for the first half of 1998 and
1997, respectively. Interest expense declined in 1998 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 $12.5 million and $10.6 million for the second quarters of
1998 and 1997, respectively, and $23.5 million and $21.7 million for the first
half of 1998 and 1997, respectively. The increase is partly due to higher
goodwill amortization from acquisitions in 1997 and 1998.
EQUITY IN EARNINGS (LOSS) OF AFFILIATE
Equity in earnings (loss) of affiliate consists of earnings (loss) from the
Company's 24.7% investment in Intercargo. The Company records its share of
Intercargo's results in the subsequent quarter.
23
FEDERAL INCOME TAXES
Federal income taxes (including tax benefits from subsidiary trust preferred
securities) and the related effective tax rates are $14.9 million (28.1%) and
$9.0 million (24.7%) for the second quarters of 1998 and 1997, respectively. The
corresponding amounts for the first six months of 1998 and 1997 are $29.4
million (26.8%) and $19.0 million (24.5%), respectively. The Company's effective
tax rates for 1998 and 1997 are less than the statutory tax rate of 35%
primarily because of income derived from tax- advantaged securities.
MINORITY INTEREST EXPENSE
Minority interest expense in subsidiary Trust Preferred Securities of $3.3
million and $6.1 million for three months and six months ended June 30, 1998,
and $1.8 million and $3.3 million for corresponding 1997 periods, respectively.
Minority interest expense in subsidiary Trust Preferred Securities represents
the financing cost, after the federal income tax benefit, on Orion's 8.73% and
7.701% Trust Preferred Securities. The increase in 1998 reflects minority
interest expense associated with the issuance of $125 million 7.701% Trust
Preferred Securities in February 1998.
Minority interest expense of $2.1 million and $3.7 million was recorded for the
after-tax portion of Guaranty National's 1997 second quarter and six month
earnings attributable to stockholders of Guaranty National other than the
Company, respectively. Guaranty National became a wholly-owned subsidiary of the
Company in December 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities decreased by $22.1 million to $12.8
million in the first six months of 1998 from $34.9 million in the same 1997
period. The decrease in operating cash flow for 1998 is the result of higher
payments for losses, policy acquisition costs, federal income taxes, minority
interest from subsidiary trust preferred securities and policyholders'
dividends, and includes loss payments for the assumed reinsurance business
exited by the Company in 1996 and acceleration of claim settlements.
Furthermore, reinsurance recoverable has increased as a result of recent
acquisitions. Partially offsetting these increased cash outflows are higher
premiums collected, reflective of the Company's current rate of growth, as well
as higher investment income collected and funds held for others.
The Company's investment activities provided $1.5 million of cash in the first
six months of 1998 and used $147.7 million of cash in the first six months of
1997. Cash is used in investment activities primarily for purchases of
investments and acquisition activities. 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. Cash used for
acquisitions totaled $46.8 million (excluding acquired cash of $10.8 million) in
the first six months of 1998. The Company paid $38.5 million, to Strickland for
the purchase its non-standard personal automobile insurance business on April
30,1998 and $2.0 million in 1997 with $3.3 million of the purchase price
retained by the Company in part to secure obligations of Strickland. On July 9,
1998 the Company paid approximately $32.5 million to United Grocers, Inc. for
the purchase of Grocers Insurance with $4.0 million of the purchase price
retained by the Company to secure obligations of United and Grocers.
24
The Company's financing activities used $2.3 million of cash for the first six
months of 1998 and provided $114.8 million of cash for the same 1997 period. The
net proceeds from the issuance of trust preferred securities by the Company
provided $121.9 million and $123.0 million of cash in 1998 and 1997,
respectively. Net proceeds from the issuance of the 7.701% Trust Preferred
Securities were used to repay the $100 million bank indebtedness of Guaranty
National in February 1998. Simultaneous with the acquisition of Strickland's
non-standard personal automobile business, the Company repaid $9.4 million of
assumed bank debt in the acquisition. Cash used in financing activities also
includes dividend payments, scheduled debt repayments and payments related to
the Company common stock repurchase program. Orion increased the quarterly
dividend rate on its common stock by 12.5% and 14.3% in the second quarters of
1998 and 1997, respectively.
Orion's uses of cash consist of debt service, dividends to stockholders and
overhead expenses. These cash uses are funded from existing available cash,
financing transactions and receipt of dividends, reimbursement of overhead
expenses and amounts 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.
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 $239.3 million
and $160.4 million at June 30, 1998 and December 31, 1997, respectively. The
consolidated policyholders' surplus of Orion's insurance subsidiaries is $808.1
million and $789.0 million at June 30, 1998 and December 31, 1997, respectively.
The Company's statutory operating leverage ratios of trailing twelve months net
premiums written to policyholders' surplus is 1.8:1 at both June 30, 1998 and
December 31, 1997.
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 its ability to incur secured
indebtedness without equally and ratably securing the senior notes. Management
does not believe that these limitations unduly restrict the Company's operations
or limit Orion's ability to pay dividends on its stock. At June 30, 1998 the
Company is in compliance with the terms of its senior note indentures.
Management believes that the Company continues to have substantial sources of
capital and liquidity from the capital markets and bank borrowings.
On January 13, 1997 Orion issued $125 million of 8.73% Junior Subordinated
Deferrable Interest Debentures due January 1, 2037 (the "8.73% Debentures") to
Orion Capital Trust I ("Trust I"), a Delaware statutory business trust sponsored
by Orion. Trust I simultaneously sold $125 million of 8.73% capital securities
(the "8.73% Trust Preferred Securities") which have substantially the same terms
as the 8.73% Debentures. The net proceeds from the sale of the 8.73% Trust
Preferred Securities were used in part for the acquisition of Guaranty National
common stock in December 1997. The 8.73% Trust Preferred Securities may be
redeemed without premium on or after January 1, 2007.
25
On February 2, 1998 Orion issued $125 million of 7.701% Junior Subordinated
Deferrable Interest Debentures due April 15, 2028 (the "7.701% Debenture") to
Orion Capital Trust II ("Trust II"), a Delaware statutory business trust
sponsored by Orion. Trust II then sold $125 million of 7.701% capital securities
(the "7.701% Trust Preferred Securities"), which have substantially the same
terms as the 7.701% Debentures, in a private placement. The net proceeds from
the sales of the 7.701% Trust Preferred Securities were used to repay $100
million bank indebtedness of Guaranty National in February 1998.
The 8.73% and 7.701% capital securities are subordinated to all liabilities of
the Company. The Company may defer interest distributions on these capital
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.
On July 8, 1998 the Company entered into a credit agreement with a group of
banks which provides for unsecured borrowings up to $150 million. The credit
agreement expires on July 8, 2003 and provides for two one-year extension
periods. The Company intends to use the credit facility for general corporate
purposes which may include acquisitions. The credit agreement carries an annual
facility fee on the unused amounts of the credit facility. Borrowings under the
credit agreement bear interest at LIBOR (London Interbank Offerred Rate) plus a
margin based upon the Company's credit ratings. The credit agreement requires
the Company to maintain certain financial covenants including a maximum debt to
total capitalization ratio of 0.4 to 1.0, as defined, and a minimum combined
statutory surplus of $650 million plus 30% of the Company's aggregate combined
annual statutory net income. The credit agreement limits the Company's ability
to incur secured indebtedness or certain contingent obligations except for
indebtedness secured by liens specifically permitted by the credit agreement and
additional secured indebtedness with a principal amount not exceeding 10% of the
Company's consolidated net worth, as defined. There are currently no borrowings
under 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.
For the year-to-date period to August 7, 1998 the Company has repurchased
235,800 shares of its common stock at an aggregate cost of $11.6 million under a
stock repurchase program approved by the Board of Directors. The Company's Board
of Directors increased authorization for purchases of its common stock by an
additional $50 million on August 4, 1998, increasing the remaining stock
purchase authorization to $66.4 million at August 7, 1998.
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.
26
ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information", which
changes the way public companies report information about segments. This
statement will be adopted by the Company in the fourth quarter of 1998.
Financial statement disclosures for prior periods are required to be restated.
The Company is in the process of evaluating the disclosure requirements and
presently expects that the adoption of this standard will have no impact on the
Company's consolidated results of operation, financial position or cash flows.
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; and (ix) other
factors over which the Company has little or no control. The Company disclaims
any obligation to update or to publicly announce the impact of any such factors
or any revisions to any forward-looking statements to reflect future events or
developments.
27
PART II. OTHER INFORMATION
ITEM 1. - NONE
ITEM 2. - SECURITIES OF THE REGISTRANT.
On September 11, 1996 the Board of Directors adopted the 1996 Equity
Incentive Plan, pursuant to which options to purchase 700,000 shares were
authorized for issuance. The Plan was approved by the stockholders on April 9,
1997.
A Registration Statement on Form S-8 was filed with respect to the Plan on
July 10, 1998 covering 1,400,000 shares (the original authorization, adjusted to
give effect to a two-for-one stock split in July, 1997). Through June 30, 1998,
21,605 shares were, upon exercise of options awarded pursuant to the Plan,
acquired by and issued to participants in the Plan.
ITEM 3. - NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Orion Annual Meeting of Stockholders held on May 28, 1998 ("Annual
Meeting"), 27,529,520 shares of Orion Common Stock were outstanding and entitled
to vote (the "Outstanding Common Stock") and 26,895,878 shares of Outstanding
Common Stock or 97.7% consisting of a quorum, were represented at the Annual
Meeting, in person or by proxy.
PROPOSAL 1
At the Annual Meeting the directors nominated were elected by the following
votes:
Number of Shares Number of Shares
Voted For Withheld
W. Marston Becker 26,702,949 192,929
Gordon F. Cheesbrough 26,757,717 138,161
John C. Colman 26,756,418 139,460
David H. Elliott 26,741,773 154,105
Victoria R. Fash 26,760,198 135,680
Robert H. Jeffrey 26,757,129 138,749
Gordon W. Kreh 26,761,521 134,357
Warren B. Lyons 26,758,417 137,461
James K. McWilliams 26,755,067 140,811
Ronald W. Moore 26,760,941 134,937
William B. Weaver 26,747,290 148,588
28
PROPOSAL 2
Shareholders ratified the selection of Deloitte & Touche LLP as the independent
certified public accountants, as auditors for the Company for the year 1998. The
vote was as follows:
26,797,844 shares or 99.64% of the Company's Common Stock represented at the
meeting were voted FOR. 16,665 shares or .06% of the Company's Common Stock
represented at the meeting were voted AGAINST.
81,369 shares or .30% of the Company's Common Stock represented at the meeting
ABSTAINED.
There were no Broker Non-Votes on this proposal.
PROPOSAL 3
Shareholders approved the Orion Capital Corporation Employees' Stock Purchase
Plan. The vote was as follows:
26,091,584 shares or 94.78% of the Company's outstanding Common Stock were voted
FOR.
515,684 shares or 1.87% of the Company's outstanding Common Stock were voted
AGAINST.
288,610 shares or 1.05% of the Company's outstanding Common Stock ABSTAINED.
There were no Broker Non-Votes on this proposal.
ITEM 5. - NONE
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit 3(ii): By-Laws of the Company, as amended on July
29, 1998.
Exhibit 4: Credit Agreement, dated as of July 8, 1998,
between the Company, the lenders named therein,
First Union National Bank, as Administrative Agent,
Bank of America National Trust and Savings Association,
as Documentation Agent, and Fleet National Bank, as
Syndication Agent.
Exhibit 11: Computation of Earnings Per Common Share.
29
Exhibit 15: Deloitte & Touche LLP Letter re:unaudited interim
financial information.
Exhibit 27: Financial Data Schedule.
Report on Form 8-K
None.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORION CAPITAL CORPORATION
Date: August 12, 1998 By: /s/ W. Marston Becker
--------------------------
Chairman of the Board and
Chief Executive Officer
Date: August 12, 1998 By: /s/ Donald W. Ebbert, Jr.
-----------------------------
Executive Vice President and
Chief Financial Officer
31
EXHIBIT INDEX
Exhibit 3(ii): By-Laws of the Company, as amended on July
29, 1998.
Exhibit 4: Credit Agreement, dated as of July 8, 1998,
between the Company, the lenders named therein,
First Union National Bank, as Administrative
Agent, Bank of America National Trust and Savings
Association, as Documentation Agent, and Fleet
National Bank, as Syndication Agent.
Exhibit 11: Computation of Earnings Per Common Share
Exhibit 15: Deloitte & Touche LLP Letter
Re:unaudited interim financial information
Exhibit 27: Financial Data Schedule
32