In November 1996, the Company sold the renewal book of business of its assumed reinsurance operation to concentrate on businesses where the Company could better service its specialized niche markets. Excluding premiums from this operation, the Company's net premiums written increased by 13.1% in 1998 and 8.1% in 1997 compared to prior year periods.
As of December 31, 1998 and 1997, the Company has environmental claims-related loss and loss adjustment expense reserves, net of reinsurance recoverables, of $65.7 million and $67.9 million, respectively. Claim counts are 515 and 551 at December 31, 1998 and 1997, respectively, for direct business written by the Company that excludes pools and associations. Following industry practice, counts for asbestos claims are generally established for each insured for each policy. Counts for environmental claims are based upon each site. In estimating liabilities for environmental-related claims, the Company considers all pertinent information, as it becomes available. The net reserve for environmental claims and IBNR increased $10.9 million in 1997 primarily due to higher claims reported to the Company by certain reinsurance pools and associations, which is the basis of establishing such reserve, and higher loss reserve estimates.
Cash used in financing activities included repayment of $100 million bank indebtedness of Guaranty National from net proceeds of the 7.701% Trust Preferred Securities issued in February 1998. The issuance of trust preferred securities by the Company provided $121.9 million and $123.0 million of cash in 1998 and 1997, respectively. During 1998, the Company used $8.0 million from unsecured borrowings under its bank credit facility to fund uses of cash and repaid $9.4 million of assumed bank debt related to the acquisition of Strickland. Cash used in financing activities also includes dividend payments, scheduled debt repayments and payments related to the Company's common stock repurchase program. Orion increased the quarterly dividend rate on its common stock by 12.5% and 14.3% in the second quarters of 1998 and 1997, respectively.
The Company's exposure to foreign exchange risk arising from the possibility that changes in foreign currency exchange rate will impact the value of financial instruments is not significant.
December 31, ---------------------- (In millions, except for share amounts) 1998 1997 - ------------------------------------------------------------------------------- Liabilities: Policy liabilities: - Losses ................................................$ 1,602.1 $ 1,476.4 Loss adjustment expenses .............................. 415.6 395.3 Unearned premiums ..................................... 564.0 551.6 Policyholders' dividends .............................. 17.9 20.5 --------- --------- Total policy liabilities ................................ 2,599.6 2,443.8 Notes payable ........................................... 217.4 310.2 Other liabilities ....................................... 370.1 282.0 --------- --------- Total liabilities ....................................... 3,187.1 3,036.0 --------- --------- Commitments and Contingencies (Notes 13 and 14)
Basis of Financial Statement Presentation - Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries (collectively the "Company") operate principally in the property and casualty insurance business. The consolidated financial statements and notes thereto are presented in accordance with generally accepted accounting principles ("GAAP") for property and casualty insurance companies and include the accounts of Orion and its wholly-owned subsidiaries. The Company's investment in its unconsolidated affiliate is accounted for using the equity method (See Note 4). All material intercompany balances and transactions have been eliminated. The preparation of the Company's consolidated financial statements in conformity with GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Balance at December 31, 1997 $ - Restructuring expenses 8.9 Actions taken: Asset write-downs (1.9) Severance and program termination costs (1.9) ---------- Balance at December 31, 1998 $ 5.1 ==========
As of December 31, 1998, the Company owned 26% of the common stock of Intercargo Corporation ("Intercargo"), a publicly held company. The Company records its share of Intercago's operating results on a quarterly lag basis, after Intercargo has reported its financial results. In December 1998, the Company agreed to sell its investment in Intercargo for $22.8 million or $12 per share in cash pursuant to Intercargo's merger with X. L. America, Inc., a subsidiary of EXEL Limited. The Company reduced the carrying value of its investment in Intercargo to $22.8 million resulting in $7.0 million pre-tax realized investment loss during December 1998. The sale of Intercargo is expected to be complete in the late first quarter or early second quarter of 1999, subject to regulatory approval.
(In millions) 1998 1997 1996 - --------------------------------------------------------------------- Year Ended December 31: Revenues ............................. $ 63.7 $ 117.8 $ 74.5 Expenses ............................. 62.6 65.2 74.8 ------- ------- ------- 1.1 52.6 (0.3) Federal income (taxes) benefit ....... (2.3) (15.9) 0.2 ------- ------- ------- Net earnings (loss) .................. $ (1.2) $ 36.7 $ (0.1) ======= ======= ======= Company's proportionate share, including goodwill amortization (a) $ (0.7) $ 8.6 $ (0.4) ======= ======= =======
(In millions, except for %) 1998 1997 1996 - ------------------------------------------------------------------------------- Direct premiums written ............... $ 1,862.0 $ 1,521.3 $ 1,431.4 Reinsurance assumed ................... 117.8 72.0 174.7 ---------- ---------- ---------- Gross premiums written ................ 1,979.8 1,593.3 1,606.1 Reinsurance ceded ..................... (446.2) (226.2) (272.0) ---------- ---------- ---------- Net premiums written .................. $ 1,533.6 $ 1,367.1 $ 1,334.1 ========== ========== ========== Percentage of amount assumed to net ... 7.7% 5.3% 13.1% ========== ========== ========== Direct premiums earned ................ $ 1,810.6 $ 1,500.8 $ 1,388.9 Reinsurance assumed ................... 116.8 106.1 182.5 ---------- ---------- ---------- Gross premiums earned ................. 1,927.4 1,606.9 1,571.4 Reinsurance ceded ..................... (424.4) (249.2) (270.6) ---------- ---------- ---------- Net premiums earned ................... $ 1,503.0 $ 1,357.7 $ 1,300.8 ========== ========== ========== Loss and loss adjustment expenses incurred recoverable from reinsurers $ 457.2 $ 165.4 $ 174.3 ========== ========== ==========
As of December 31, 1998 maturities of the Company's notes payable are as follows: 2002 - $110.0 million, 2003 - $8.0 million, and 2005 - $100.0 million.
Orion granted 130,263 shares of restricted stock at a weighted average fair value of $40.91 per share during 1998, 57,202 shares at $43.95 per share during 1997 and 92,636 shares at $25.61 per share for 1996. As of December 31, 1998, the restrictions have not lapsed on 224,013 shares of restricted stock. The fair market value of restricted stock on the date of issuance is amortized over the vesting period during which the restrictions lapse.
(In millions) - -------------------------------------------------------------- Unrealized investment holding gains (losses) arising during the period, net of taxes $ 2.6 Reclassification adjustment for gains (losses) Included in net earnings, net of taxes (55.0) Net investment gains (losses) recognized in ---------- other comprehensive income $ (52.4) ==========