The Company's executive office is located at 9 Farm Springs Road, Farmington, Connecticut. The Company's executive office facility consists of approximately 140,000 square feet and is leased at an annual rental of approximately $4,100,000. DPIC owns its office building, which consists of approximately 42,000 square feet, in Monterey, California. Guaranty National owns facilities in Englewood, Colorado; Salem, Oregon; and Freeport, Illinois. Those facilities consist, in the aggregate, of approximately 208,000 square feet.
- Wm. H. McGee ("McGee"), an underwriting management company that specializes in ocean marine, inland marine and commercial property insurance; and
Net earnings are $115,806,000 for 1997, $86,631,000 for 1996 and $67,622,000 for 1995. On a per share diluted basis, net earnings are $4.15, $3.12 and $2.38 for 1997, 1996 and 1995, respectively. Net earnings for 1997 include after-tax realized investment gains of $30,115,000, or $1.08 per share, compared to $13,687,000, or $0.49 per share, in 1996 and $7,708,000 or $0.27 per share in 1995.
Earnings per share has been calculated based upon a new accounting standard, SFAS No. 128, "Earnings per Share." Additionally, all common stock and per common share data presented in this document has been restated to give effect to the 2-for-1 split of the Company's common stock issued on July 7, 1997.
Net premiums written for Regional Operations increased by 3.4% for 1997 and 6.1% for 1996 from EBI's selective geographic expansion and penetration, including a net increase of thirteen branch offices in 1995 through 1997. The offices were opened in territories where the Company believes it will benefit from its service-oriented approach.
McGee's net premiums written increased 37.4% for 1997 and 177.6% for 1996 reflecting the Company's greater participation in the underwriting pools managed by McGee. The Company's participation in McGee's United States pool is approximately 15%, 37% and 52% in 1995, 1996 and 1997, respectively. Participation in McGee's Canadian pool is approximately 15% in 1995, 49% in 1996 and 61% in 1997. The Company has agreed to increase its rate of participation for 1998 to 71% in the United States pool and 72% in the Canadian pool.
Personal Lines.............. $332,774 $ 255,334 30.3% 30.4% Commercial Lines............ 140,598 157,033 (10.5) 5.9 Collateral Protection....... 91,748 78,865 16.3 46.3% -------- --------- $565,120 $ 491,232 15.0% 23.5% ======== =========
The performance of the Company's investments, including net investment income, net realized gains (losses) and unrealized appreciation (depreciation) is as follows:
Pre-tax net investment income is $164,908,000, $145,391,000 and $99,040,000 in 1997, 1996 and 1995, respectively. The pre-tax yields on the average investment portfolio are 7.0% in 1997, 6.9% in 1996 and 7.1% in 1995, with after-tax yields of 5.3%, 5.4% and 5.5%, respectively. Net investment income increased 13.4% in 1997 primarily due to a higher investment base and a slight increase in pre-tax investment yields. The higher investment base for 1997 reflects the proceeds from the issuance of $125,000,000 of trust preferred securities in January 1997 and the effects of positive operating cash flow. These increases have been offset in part by the July 1996 cash outlay of approximately $88,000,000 for the purchase of Guaranty National common shares. Net investment income increased 46.8% in 1996 from the inclusion of Guaranty National's net investment income of $40,089,000, as well as by increased earnings on a higher investment base from positive operating
cash flow. This increase occurred notwithstanding a growing portfolio of lower yielding tax-advantaged securities and the cash outlay to acquire Guaranty National common stock.
Realized gains (losses) vary from period to period, depending on market conditions relative to the Company's investment holdings, the timing of investment sales generating gains and losses, the occurrence of events which give rise to other than temporary impairment of investments, and other factors. At December 31, 1997 the Company held equity securities with unrealized appreciation of $91,904,000 and the market value of the fixed maturities portfolio exceeds amortized cost by $84,050,000. Such amounts can vary significantly depending upon fluctuations in the financial markets. Equity securities and fixed maturities had unrealized appreciation of $18,381,000 and $40,640,000, respectively, for 1997, even after taking $50,193,000 of realized net gains excluding impairment adjustments. The increase in market values of fixed maturities during 1997 is primarily attributable to a decline in interest rates during the year. The average maturity of the Company's fixed maturities has increased from 7.1 years at December 31, 1996 to 8.1 years at December 31, 1997.
The following table sets forth certain ratios of insurance operating expenses to premiums earned: Year Ended December 31, ------------------------------- 1997 1996 1995 ---- ---- ---- Loss and loss adjustment expenses ....... 66.7% 67.9% 68.4% Policy acquisition and other insurance expenses............................... 31.2 30.1 29.0 ---- ---- ----- Total before policyholders' dividends.... 97.9 98.0 97.4 Policyholders' dividends ................ 1.8 1.8 2.9 ---- ---- ----- Combined ratio........................... 99.7% 99.8% 100.3% ==== ==== ===== Loss and loss adjustment expenses: Regional Operations.................... 53.7% 58.8% 62.4% Special Programs....................... 73.7 72.6 72.9 Guaranty National...................... 69.5 70.1 75.3
The continued improvement in the loss ratio for Regional Operations results from the favorable loss development and loss experience achieved by EBI through its service-oriented approach. EBI's service oriented approach is to work with its customers to prevent losses and reduce claim costs.
Guaranty National's loss ratio has declined due to an improvement in its Personal Lines loss ratio to 70.0% for 1997 from 71.3% for 1996 and from the more favorable effect of a change in this segments mix of business to Personal Lines. This improvement has been partly offset by an increase in the Commercial Line loss ratio from 72.1% for 1996 to 73.2% for 1997. The improvement in the Personal Lines loss ratio for 1997 is primarily attributable to lower claims frequency. This improvement has been offset in part by costs incurred to improve claim handling and reduce insurance fraud in Personal Lines and by higher estimates for losses and loss adjustment expenses for the commercial automobile line of business. The lower loss ratio for 1996 as compared to 1995 was primarily attributable to Guaranty National having significantly strengthened its loss reserves for both Personal and Commercial Lines in 1995 in response to adverse claim trends during 1995. The 1995 adverse claims trends resulted in higher than expected development due to higher claims severity in 1992 through 1994 for commercial automobile and higher claims frequency for personal automobile lines of business. Also during 1996, Personal Lines experienced lower claims severity and Commercial Lines had lower overall claims severity and frequency.
The Company's environmental claims principally relate to asbestos and hazardous waste, arising from certain liability business written prior to the mid 1980's, which business was never a major element of the Company's operations. Environmental claims are also received from certain reinsurance pools and associations where reserves are established based on information reported to the Company by the managers of those pools and associations. The Company discontinued its participation in these reinsurance pools and associations in the mid 1980's.
Establishing reserve liabilities for environmental claims is subject to significant uncertainties that make reserve estimation difficult. Legal decisions have tended to expand insurance coverage beyond the intent of the policies. The disposition of such claims often requires lengthy and costly litigation. Uncertainties as to required clean-up remedies and difficulties in identifying the responsible parties add further to the complexity of reserve estimation for these claims. In recent years, the Company has intensified its efforts to settle and close environmental claims. In recognition of these efforts, reserves have also been increased to provide for the costs related to settling claims. To help minimize the cost of losses and claims, the Company maintains a dedicated environmental claims staff which administers and continually evaluates each claim and its defense and settlement possibilities. In 1997, 1996 and 1995 (1995 excludes Guaranty National), the Company paid $6,833,000, $4,771,000 and $5,675,000, respectively, for the costs of defending and settling such claims. Payments in 1997, 1996 and 1995 related to 209, 160 and 213 claims, respectively, for the Company's direct business. Claim counts have been aggregated by year of coverage for each occurrence for which policyholders are being defended, and often include numerous claimants.
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 is $24,704,000 in 1997, $24,687,000 in 1996 and $15,943,000 in 1995, increasing 0.1% in 1997 and 54.8% in 1996. Interest expense increased in 1996 due to the inclusion of interest on Guaranty National's $100,000,000 bank debt, and higher average debt outstanding after the issuance of $100,000,000 of Senior Notes by Orion on July 17, 1995, offset in part by the repayment of Orion's bank debt at that time.
Minority interest expense in subsidiary trust preferred securities of $6,857,000 for 1997 represents the financing cost, after the federal income tax deduction, on Orion's $125,000,000 of 8.73% trust preferred securities issued in January 1997.
Federal income taxes on pre-tax operating results and the related effective tax rates are 25.8% for 1997, 25.2% for 1996 and 23.2% for 1995. The Company's effective tax rates for 1997, 1996 and 1995 are less than the statutory tax rate of 35% primarily because of income derived from tax- advantaged securities.
The Company has included Guaranty National in its consolidated tax return since 1996, as a result of acquiring over 80% ownership. The liability for deferred taxes established by the Company through June 30, 1996 for its share of Guaranty National's undistributed earnings has been reversed, resulting in a reduction of $21,547,000 in the amount of goodwill recorded from the purchase of Guaranty National shares, with no effect on net income.
On July 17, 1995, Orion issued 7 1/4% Senior Notes due 2005 with a face value of $100,000,000 in a public offering pursuant to a shelf registration filed with the Securities and Exchange Commission in 1994. The senior notes issued are non-callable to maturity, and were sold at 99.23% of par to yield 7.36% per annum. The net proceeds from the offering were $98,113,000, of which $46,500,000 was used to repay all of Orion's debt under its bank loan agreement.
The terms of Orion's indentures for its $100,000,000 of 7 1/4% Senior Notes due 2005 and its $110,000,000 of 9 1/8% Senior Notes due 2002 limit the amount of liens and guarantees by the Company, and the Company's ability to incur secured indebtedness without equally and ratably securing the senior notes. Management does not believe that these limitations unduly restrict the Company's operations or limit Orion's ability to pay dividends on its stock. At December 31, 1997 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 June 2, 1995 Guaranty National entered into a $110,000,000 credit agreement (the "Credit Agreement") with several participating banks. The Credit Agreement provides for an unsecured reducing revolving credit facility, which was used to fund the Viking acquisition, to retire the outstanding balance of $29,000,000 under Guaranty National's previous revolving line of credit, and for working capital and general corporate purposes. As of December 31, 1997, the outstanding loan balance under the Credit Agreement was $100,000,000. Guaranty National had two interest rate swap agreements with banks which effectively change the interest rate exposure on $80,000,000 of this loan to a fixed rate of 6.3%. As discussed below, this loan was fully repaid with part of the net proceeds from the 7.701% Trust Preferred Securities issued in February 1998. The interest rate swap agreements were also settled at a modest gain upon the repayment of the Guaranty National loan.
On February 2, 1998 Orion issued $125,000,000 of 7.701% Junior Subordinated 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 $125,000,000 of 7.701% Capital Securities, which mature on April 15, 2028, in a private placement. Approximately $100,000,000 of the net proceeds from the sale of the junior subordinated debentures were used to retire bank indebtedness of Guaranty National. The remaining net proceeds will be used for general corporate purposes. Orion agreed to register the capital securities under the Securities Act of 1933, and will file a registration statement with the Securities and Exchange Commission.
In August 1997, several of the Company's subsidiaries were named as defendants in a class action lawsuit titled Bristol Hotel Management Corporation, et al., vs. Aetna Casualty & Surety Company, which was filed in the U.S. District Court for the Southern District of Florida. The lawsuit, brought on behalf of an alleged class of retrospectively rated workers compensation purchasers, claims, among other allegations, a conspiracy among insurers to charge illegally high prices for workers compensation insurance, breach of contract and fraud. Since that time, additional class action lawsuits with similar allegations have been brought against various subsidiaries of the Company in Georgia, Illinois, New Jersey, Pennsylvania and Tennessee as well as other insurers who did business in those states. The Company intends to vigorously defend these lawsuits.
The Company settled a previously disclosed complaint naming the Company, as defendant, in connection with the tender offer of Guaranty National. The settlement amount was not material to the financial condition or results of operations of the Company.
In June 1997 the Financial Accounting Standards Board ("FASB")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 is effective for financial statements for periods beginning after December 15, 1997. Financial statement disclosures for prior periods are required to be restated. The Company is in the process of evaluating the disclosure requirements. The adoption of this standard will have no impact on the Company's consolidated results of operation, financial position or cash flows.
W. Marston Becker Peter M. Vinci Chairman & Chief Executive Officer Chief Accounting Officer
Regulation - The Company's insurance subsidiaries are subject to comprehensive regulation by various state insurance departments including regulations limiting dividend payments to Orion and intercompany transactions. Under these regulations, the maximum dividends permitted at December 31, 1997 for the ensuing twelve months, without prior approval, aggregated $129,342,000. However, state insurance regulators have broad discretionary authority with respect to approving the payment of dividends by insurance companies. Policyholders' surplus of Orion's insurance subsidiaries determined in accordance with prescribed statutory accounting practices amounted to $789,036,000 and $670,572,000 at December 31, 1997 and 1996, respectively. Statutory net income amounted to $146,093,000, $107,866,000 and $83,842,000 for 1997, 1996 and 1995, respectively.
the market value of these available-for-sale securities are recorded as unrealized investment gains or losses and credited or charged to stockholders' equity. Other long-term investments principally include equity ownership interests in limited partnerships, which are recorded using the equity method of accounting. Short-term investments include certificates of deposit and commercial paper which mature within one year of the balance sheet date, money market accounts and United States Treasury Bills. Short-term investments are recorded at market value which approximates cost. Market values are generally based on quoted market prices or dealer quotes. Realized investment gains and losses, including provision for other than temporary impairment of investment securities, are recognized on the specific identification method.
Deferred Policy Acquisition Costs - Costs that vary with, and are directly related to, the production of new and renewal business are deferred and amortized as the related premiums are earned. These costs primarily comprise commissions, premium taxes and salaries. The test for recoverability of such deferred costs includes the consideration of net investment income.
On July 2, 1996, the Company completed a tender offer for 4,600,000 shares of Guaranty National common stock ("1996 GNC Purchase"). Together with the open-market purchase of 120,000 additional shares on July 17, 1996, the Company increased its ownership of Guaranty National by 31.5% from 49.5% to approximately 81%. The aggregate purchase price of approximately $88,206,000, including expenses, was paid in cash.
The increase in the Company's ownership in 1996 to over 80% of Guaranty National allows the inclusion of Guaranty National in Orion's consolidated federal income tax return, as well as the reversal of a deferred tax liability previously established by the Company for its share of the undistributed earnings of Guaranty National. The excess of cost over the estimated fair value of the 31.5% interest in Guaranty National's net assets acquired during 1996 was $9,080,000, after the reversal of $21,547,000 of deferred taxes, and will be amortized over 28 years, which was the remaining amortization period for goodwill recorded upon Orion's initial investment in Guaranty National.
On July 18, 1995 Guaranty National acquired Viking Insurance Holdings, Inc., and its subsidiaries ("Viking"), in a business combination accounted for as a purchase. Viking is a property and casualty insurance company writing nonstandard personal automobile insurance, primarily in the state of California. The results of operations of Viking are included in Guaranty National's financial statements since the date of acquisition. The total cost of the acquisition was $97,225,000, with total cash paid of approximately $95,559,000, including acquisition expenses. The total consideration exceeded the fair value of the net assets of Viking by approximately $10,612,000, which is being amortized over 40 years.
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 losses. Reinsurance does not discharge the primary liability of the original insurer. As of December 31, 1997 and 1996, recoverables for reinsurance ceded to the Company's two largest reinsurers were an aggregate of $132,797,000 and $106,168,000, respectively. As of December 31, recoverables for reinsurance ceded to the two largest McGee pool members other than the Company aggregated $54,720,000 for 1997, and $104,857,000 for 1996, and the Company had ceded balances payable to these pool members of $21,010,000 and $31,007,000, respectively. The table below illustrates the effect of reinsurance on premiums written and premiums earned:
Reinsurance recoverables and prepaid reinsurance includes prepaid reinsurance of $125,462,000 at December 31, 1997 and $86,916,000 at December 31, 1996.
Loss reserve estimates are based on forecasts of the ultimate settlement of claims and are subject to uncertainty with respect to future events. Loss reserve amounts are based on management's informed estimates and judgments, using data currently available. Reserve amounts and the underlying actuarial factors and assumptions are regularly analyzed and adjusted to reflect new information. Such reevaluation is a normal, recurring activity that is inherent in the process of loss reserve estimation and therefore, no assurances can be given that reserve development will not occur in the future. A substantial portion of the loss development experienced by the Company during the three years ended December 31, 1997 resulted from pools and associations, reinsurance, certain discontinued lines and program business, reduced by favorable development in workers compensation and other lines of insurance.
An analysis of the Company's loss and loss adjustment expense environmental reserves and claim counts is presented below. Claim counts (excluding reinsurance pools and associations) have been aggregated by year of coverage for each occurrence for which policyholders are being defended, and often include numerous claimants.
The Company's environmental claims principally relate to asbestos and hazardous waste, arising from certain liability business written prior to the mid 1980's, which business was never a major element of the Company's operations. Environmental claims are also received from certain reinsurance pools and associations where reserves are established based on information reported to the Company by the managers of those pools and associations. In view of the lines of insurance that the Company has traditionally written, environmental claims have not represented, and are not expected to represent in the future, a material portion of the Company's total claims.
Establishing reserve liabilities for environmental claims is subject to significant uncertainties that make reserve estimation difficult. Legal decisions have tended to expand insurance coverage beyond the intent of the policies. The Company does not use discounting in determining its reserves for environmental claims. IBNR of $50,977,000 and $38,699,000 is included in net reserves for environmental claims at December 31, 1997 and 1996, respectively. The net reserve for environmental claims and IBNR increased $10,851,000 in 1997 and $22,469,000 in 1996 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. The 1996 reserve increase also reflects the inclusion of Guaranty National.
On July 17, 1995, Orion issued 7 1/4% Senior Notes due 2005 with a face value of $100,000,000 ("7 1/4% Senior Notes") in a public offering. The net proceeds from the offering were approximately $98,113,000, of which $46,500,000 was used to repay Orion's debt under a bank loan agreement and the balance was used for general corporate purposes. The indentures for the 7 1/4% Senior Notes and for Orion's 9 1/8% Senior Notes due 2002 limit the amount of liens and guarantees by the Company, and the Company's ability to incur secured indebtedness without equally and ratably securing the senior notes.
On June 2, 1995, Guaranty National entered into a $110,000,000 credit agreement ("Credit Agreement") with several participating banks. The Credit Agreement provided for an unsecured reducing revolving credit facility, which was used to fund the Viking acquisition, to retire the outstanding balance of $29,000,000 under Guaranty National's previous revolving line of credit, and for working capital and general corporate purposes. At both December 31, 1997 and 1996, the outstanding loan balance under the Credit Agreement was $100,000,000, with an effective interest rate of 6.27%. As discussed in Note R, this loan was fully repaid in February, 1998.
As of December 31, 1997, maturities of the Company's notes payable are as follows: 1998 - $563,000; 1999 - $22,375,000; 2000 - $24,000,000; 2001 - $26,000,000; 2002 - $138,000,000; and 2005 - $100,000,000. After giving effect for the bank loan repayment, as discussed above and in Note R, the maturities of the Company's notes payable will be as follows: 1998 - $563,000; 1999 - $375,000; 2002 - $110,000,000; and 2005 - $100,000,000.
Orion and its wholly-owned subsidiaries file a consolidated federal income tax return, including Guaranty National from July 2, 1996. The consolidated federal income tax current provisions for 1997, 1996 and 1995 were based on the regular tax method. Substantially all federal income taxes incurred by Orion and its subsidiaries relate to domestic operations.
In October 1996 the Internal Revenue Service ("IRS") completed an examination of the Company's federal income tax returns through 1992. As described in previously issued financial statements of the Company, certain tax benefits from tax attributes existing at the date of the Company's reorganization in 1976 were not recognized pending completion of the IRS examination. Accordingly, the Company recorded a credit to capital surplus in 1996 for tax benefits of $11,900,000 with respect to the 1976 quasi reorganization. The recording of this credit had no impact on the Company's earnings.
The components of the provision (benefit) for federal income taxes on income from operations, and allocations of taxes (benefits) to other items for the three years ended December 31, 1997 are as follows:
Minimum lease commitments at December 31, 1997, with the majority having initial lease periods from one to twenty-five years, are as follows:
(000s omitted) 1998 ....................................... $ 19,927 1999 ....................................... 16,802 2000 ....................................... 13,501 2001 ....................................... 9,288 2002 ....................................... 8,948 2003 and thereafter ........................ 53,121 -------- Minimum lease commitments ................ $121,587 ========
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.
During 1997, the Company repurchased 42,916 shares of its common stock at an aggregate cost of $1,533,000 under the stock repurchase program authorized by the Board of Directors. The Company repurchased 482,228 shares for $11,148,000 in 1996 and 346,362 shares for $7,183,000 in 1995.
A reconciliation of basic and diluted earnings per share ("EPS") for the three years ended December 31, 1997, is as follows:
Net Average Per Share Earnings Shares Amount -------- ------- --------- (000s omitted except per shares amounts) 1997 - Basic EPS: Net earnings available to common stockholders........ $115,806 27,333 $ 4.24 ======== Stock options and awards.... - 567 -------- ------ Diluted EPS: Net earnings available to common stockholders with assumed exercises.......... $115,806 27,900 $ 4.15 ======== ====== ======== 1996 - Basic EPS: Net earnings available to common stockholders......... $ 86,631 27,400 $ 3.16 ======== Stock options and awards..... - 388 -------- ------ Diluted EPS: Net earnings available to common stockholders with assumed exercises........... $ 86,631 27,788 $ 3.12 ======== ====== ======== 1995 - Basic EPS: Net earnings available to common stockholders......... $ 67,622 28,110 $ 2.41 ======== Stock options and awards..... - 264 -------- ------ Diluted EPS: Net earnings available to common stockholders with assumed exercises........... $ 67,622 28,374 $ 2.38 ======== ====== ========
Options to purchase 2,000 shares of common stock at $47.56 per share were outstanding during 1997 but were not included in the computation of diluted earnings per share because the options' excercise price was greater than the average market price of the common shares.
McGee maintains a Profit Sharing Plan ("McGee Plan") which is also a 401(k) plan for eligible employees of McGee. Employee and employer contributions are limited by the McGee Plan and federal income tax law. Employer contributions vest over a seven-year period. McGee has noncontributory defined benefit retirement plans covering all eligible employees, and a nonqualified supplemental retirement plan for certain key employees. At December 31, 1997 and 1996 the accumulated benefit obligation of McGee's defined benefit plan was approximately $20,252,000 and $20,620,000, and plan assets were approximately $20,845,000 and $20,695,000, respectively.
A summary of the status of Orion's stock option plans as of December 31, 1997, 1996 and 1995 and changes during the years ending on those dates is presented below:
The weighted average fair value of options granted was $14.08 per share for 1997 and $14.58 per share for 1996. The fair value of options granted was estimated on the date of grant using the binomial option- pricing model with the following weighted-average assumptions: dividend yield of 1.5% - 1997 and 1.9% - 1996, expected volatility of 23% - 1997 and 19% - 1996, risk free interest rate of 5.5% - 1997 and 6.0% - 1996 and expected life of 7.0 years - 1997 and 7.1 years - 1996.
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for stock options granted under the Incentive Plans. Accordingly, no compensation cost has been recognized for stock options awarded to employees. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement No. 123, the Company's net earnings and earnings per share for the year ended December 31, 1997 and 1996 would have been $114,934,000 or $4.12 per diluted and $86,477,000 or $3.11 per diluted share, respectively.
Orion maintains a non-qualified defined benefit retirement plan for members of the Board of Directors who are not employees. On December 31, 1997, the Company terminated this plan resulting in $294,000 of benefits payments in January 1998 with the remaining accrued benefits of $438,000 to be paid with interest in future periods. Benefits are based on years of service and director fee levels at retirement. In 1995, Orion's stockholders authorized 200,000 shares for a stock option plan for non- employee directors. During 1997 and 1996 Orion granted 69,000 and 18,000 stock options, respectively, to directors at fair market value, which become exercisable one year from the date of grant and expire in ten years.
The total expense for 1997, 1996 and 1995 for the above savings, retirement and pension benefit plans for employees and directors amounted to $10,882,000, $9,473,000 and $6,588,000, respectively.
December 31, ---------------- 1997 1996 ---- ---- (000s omitted) Retirees ................................. $ 3,840 $ 3,864 Fully eligible active plan participants .. 524 1,352 Other active plan participants ........... 846 3,510 Unrecognized net gains ................... 8,488 4,275 ------- ------- $13,698 $13,001 ======= =======
The Company's industry segments are described above in Note A. Guaranty National's results of operations are included on a consolidated basis for 1997 and 1996 and accounted for using the equity method for 1995. Identifiable assets of the Regional Operations and Special Programs segments are primarily allocated based on the cash flows of these segments. Financial information for the Company's segments for 1997, 1996 and 1995 is shown below:
On February 2, 1998 Orion issued $125,000,000 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 $125,000,000 of 7.701% capital securities, which mature on April 15, 2028 ("Capital Securities") in a private placement. The Capital Securities are subordinate to all liabilities of the Company. Approximately $100,000,000 of the net proceeds from the sale of the junior subordinated debentures were used to retire bank indebtedness of Guaranty National. Orion agreed to register the Capital Securities under the Securities Act of 1933, and will file a registration statement with the Securities and Exchange Commission.