The Company believes that its current facilities are suitable and adequate for its present use and its presently anticipated requirements.
During 1993 Orion completed the recapitalization and debt restructuring which it began in 1992. The Company issued $110,000,000 of 9 1/8% Senior Notes due September 1, 2002 (the "9 1/8% Senior Notes"), redeemed both its 13 1/2% Senior Subordinated Debentures and its 12 1/2% Subordinated Debentures with face values of $19,375,000 and $20,000,000, respectively, entered into a new bank loan agreement and called for the redemption of all of its preferred stock. Substantially all of the outstanding shares of the $1.90 Convertible Exchangeable Preferred Stock were converted into 2,554,594 shares of common stock. Shares of the $2.125 Convertible Exchangeable Preferred Stock were converted into 1,427,123 shares of common stock, and the Adjustable Rate Preferred Stock was redeemed for $18,520,000. As a result of the refinancing, the Company recorded a loss on the redemption of its Debentures prior to maturity of $2,920,000, net of a tax benefit of $60,000, as an extraordinary item in 1992. The Company's objectives in this refinancing were to reduce the amount of the Company's debt maturing in the next five years, lower the interest rate on its long-term debt and increase the earnings available to common stockholders by lowering the cost of capital.
- Regional Operations' net premiums written decreased 1.7% ($4,468,000) to $265,082,000 in 1993 from $269,550,000 in 1992 and 1.2% ($3,208,000) in 1992 from $272,758,000 in 1991. The reduction in premium volume for 1993, while operating results continue to improve, reflects this segment's emphasis on underwriting profitability rather than premium growth and the impact of legislative reforms in certain states which has led to lower premium rates. Such reforms have also had the effect of reducing loss expenses, generally leading to more profitable business. Premiums written in 1993 and 1992 were reduced in states where the business or regulatory environment has become less favorable and by the closure of offices during these years in certain areas, offset by growth in geographic areas where the Company has had favorable loss experience stemming from its service-oriented approach.
The Company sold 6,250,000 shares of Guaranty National's common stock in a public offering on November 20, 1991, (the "Guaranty Sale") reducing ownership of its common stock to 49.3%. The sale resulted in a gain of $33,931,000, and reduced the operating leverage and strengthened the capital positions of the Company's other insurance subsidiaries. The Guaranty National Companies' operations have been consolidated in the Company's financial statements through November 20, 1991. For periods subsequent to that date, the financial statements of the Company include the portion of Guaranty National's earnings attributable to the Company's ownership on an equity accounting basis. The shares of Guaranty National owned by the Company at December 31, 1993 and 1992 carried on an equity basis had book values of $75,394,000 and $64,436,000, respectively; the market values of these shares, based on the New York Stock Exchange closing price on those dates, were $107,510,000 and $121,332,000, respectively.
Pre-tax net investment income amounted to $91,803,000, $82,483,000 and $100,206,000 in 1993, 1992 and 1991, respectively. Included in net investment income is $23,060,000 for the 1991 period attributable to the consolidation of Guaranty National. The increase in net investment income for 1993 was attributable to an increase in average investable assets of approximately $132,000,000, and an increase in equity earnings from limited partnerships of $5,708,000 compared to 1992 due to both increased investment and a higher rate of return from these partnerships. The pre-tax yields on the average
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 December 31, 1993 and 1992, the Company's investment in non-investment grade and unrated fixed maturity securities were carried at $97,653,000 and $89,156,000 with market values of $97,306,000 and $89,064,000, respectively. These investments represented a total of 7.2% and 7.6% of cash and investments at December 31, 1993 and 1992, respectively, and 4.6% of total assets as of both year end dates.
The Company closely monitors the financial condition of the issuers of securities that it owns. When conditions are deemed appropriate, the Company ceases to accrete discount, or accrue interest and dividends, and, in cases where the value of such investments is deemed to be other than temporarily impaired, recognizes losses. The Company's non-investment grade investments are highly diversified, with an average investment per issuer of approximately $1,935,000 at December 31, 1993. Only four non-investment grade investments aggregating $23,422,000 were in excess of $5,000,000 at December 31, 1993.
Net realized investment gains (losses) amounted to $9,478,000 in 1993, $3,667,000 in 1992 and ($1,009,000) in 1991 excluding the $33,931,000 gain on the Guaranty Sale. Sales of equity securities resulted in net gains of $11,273,000, $5,864,000 and $4,960,000 and sales of fixed maturities resulted in net gains of $6,662,000, $5,365,000 and $6,925,000 in 1993, 1992 and 1991, respectively. Realized investment gains were reduced by provisions for losses on securities deemed to be other than temporarily impaired. These provisions amounted to $6,310,000 in 1993, $5,429,000 in 1992 and $5,124,000 in 1991 for equity securities and $2,147,000, $2,133,000 and $7,770,000 in 1993, 1992 and 1991, respectively, for fixed maturity investments. Such provisions, based on available information at the time, were made in consideration of the decline in the financial condition of the issuers of these securities.
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, 1993 the Company held equity securities with unrealized appreciation of $32,332,000, as compared to $15,864,000 for equity securities held at December 31, 1992. The market value of the fixed maturities portfolio at December 31, 1993 exceeded their amortized cost values by $48,367,000. This compares with an excess of market value over amortized cost of $26,811,000 for fixed maturities at December 31, 1992. Such amounts can vary significantly depending upon fluctuations in the financial markets. The average maturity of the Company's fixed maturity investments has not varied significantly in recent years, and no material change in average maturity is expected in the foreseeable future.
1993 1992 1991 ---- ---- ---- (000s omitted) Net investment income ..................... $ 91,803 $ 82,483 $100,206 -------- -------- -------- Net realized gains (losses) - Fixed maturities ........................ 4,515 3,232 (845) Equity securities ....................... 4,963 435 (164) -------- -------- -------- 9,478 3,667 (1,009) -------- -------- -------- Net unrealized appreciation - Fixed maturities ........................ 21,556 11,954 71,787 Equity securities ....................... 16,468 22,584 25,515 -------- -------- -------- 38,024 34,538 97,302 -------- -------- -------- $139,305 $120,688 $196,499 ======== ======== ========
The following table sets forth certain ratios of insurance operating expenses to premiums earned for the Company:
The loss ratio for Regional Operations was 72.0% in 1993, 80.1% in 1992 and 85.5% in 1991 (80.9% excluding the effect of the cumulative loss provision). These loss ratios reflect continued improvement in workers compensation insurance, reduced losses due to the cancellation in 1992 of participation in a workers compensation loss sharing pool and lower losses for runoff, principally from closed offices and discontinued commercial package business.
Reinsurance/Special Programs' loss ratio was 76.1% in 1993, 71.7% in 1992 and 73.9% in 1991, (68.9% excluding the effect of the cumulative loss provision). The increase for 1993 is primarily due to higher levels of initial reserving. The segment's loss ratio for 1992 was favorably impacted by lower assignments from assigned risk pools and increased premium volume for programs with lower loss ratios, offset by higher levels of loss reserving for the DPIC program.
The ratio of deferred acquisition costs and other insurance expenses to premiums earned (the "expense ratio") was 26.8%, 27.3% and 30.2% in 1993, 1992 and 1991, respectively. The 1993 expense ratio was favorably impacted by the spreading of costs over a higher premium volume. The higher ratio for 1991 results from increased provisions for assessments from statutory assigned risk plans, particularly in Texas.
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 original 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. To help minimize the cost of losses and claims, the Company maintains a dedicated environmental claims staff which administers the defense and
As of December 31, 1993, the Company has environmental claims-related loss and loss adjustment expense reserves, net of reinsurance recoverables, of $17,189,000, which include 512 claims for direct business written by the Company. In estimating liabilities for environmental-related claims, the Company considers all pertinent information as it becomes available.
The Company's portion of Guaranty National's net earnings before the cumulative effect of adopting changes in accounting principles was $9,509,000 in 1993, $9,994,000 for 1992 and $1,207,000 for the period from November 20 to December 31, 1991. The Company's portion of Intercargo's net loss for 1993 was $122,000. Guaranty National's full year net earnings were $19,285,000, $20,271,000 and $17,813,000 for 1993, 1992 and 1991, respectively. Gross premiums written for Guaranty National increased to $321,766,000 in 1993 from $273,400,000 in 1992 and $229,139,000 in 1991. Guaranty National's combined ratios were 99.6% in 1993, 97.7% in 1992 and 99.2% in 1991.
Federal income taxes on pre-tax operating results and the related effective tax rates amounted to $15,517,000 (21.4%), $922,000 (2.0%) and $1,401,000 (3.0%) in 1993, 1992 and 1991, respectively. The Company files consolidated federal income tax returns, which include the taxable income of
Cash used in investment activities increased $65,162,000 to $124,415,000 in 1993 from $59,253,000 in 1992 and decreased by $46,081,000 in 1992 from $105,334,000 in 1991. The use of investment cash is attributable to purchases of investments which exceeded maturities and sales of investments, reflecting positive operating cash flows. Investable cash of $84,885,000 was provided on November 20, 1991 by the Guaranty Sale which significantly increased short- term investments at the end of that year.
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. In 1993 Orion received $25,512,000 in dividends, $5,230,000 for overhead expenses and federal tax payments of $5,600,000 from its insurance subsidiaries. Orion also received an extraordinary dividend of $65,470,000 (principally securities) from a California-domiciled subsidiary which was simultaneously contributed as capital to a Connecticut-domiciled subsidiary to effect a change in pooling percentages among its 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 $92,421,000 and $115,527,000 at December 31, 1993 and 1992, respectively. Orion's insurance subsidiaries had consolidated policyholders' surplus of $460,986,000 at December 31, 1993 and $385,803,000 at December 31, 1992, and statutory operating leverage ratios of net premiums written to policyholders'
In March 1993 Orion entered into a bank loan arrangement (the "Loan Agreement") that provided for initial borrowings of up to $60,000,000, consisting of a $50,000,000 term loan (reduced by $4,500,000 in scheduled commitment reductions through December 31, 1993) and a $10,000,000 line of credit. These borrowings are unsecured and bear interest at or below prime. Borrowings under the Loan Agreement amounted to $50,500,000 at December 31, 1993. The proceeds were used to repay the Bridge Loan and to redeem the Company's Adjustable Rate Preferred Stock. At December 31, 1993, the Company has available $5,000,000 in unused commitments under the line of credit.
As of December 31, 1993 there were no significant contingencies or commitments outstanding which, net of reserves established therefor and giving effect to reinsurance, are likely to have a material effect on the liquidity or financial position of Orion and its consolidated subsidiaries, taken as a whole (See Notes G and H to the consolidated financial statements).
The Board of Directors and Stockholders ORION CAPITAL CORPORATION New York, New York
We have audited the accompanying consolidated balance sheets of Orion Capital Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a)2. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Orion Capital Corporation and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Other long-term investments had aggregate carrying values of $50,682,000 at December 31, 1993 and $36,419,000 at December 31, 1992 including mortgage loans on real estate of $1,690,000 and $434,000, respectively. Estimated market values of mortgage loans and other long-term investments approximate their carrying values.
The carrying value of securities on deposit with state regulatory authorities in accordance with statutory requirements totalled $283,537,000 and $340,699,000 at December 31, 1993 and 1992, respectively. Excluding investments in Guaranty National and securities of the United States Government and its agencies, the Company did not have any investments in securities of any one issuer that exceeded $20,000,000.
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 in order to limit losses. Reinsurance does not discharge the primary liability of the original insurer. As of December 31, 1993 and 1992, recoverables for reinsurance ceded to the Company's three largest reinsurers were an aggregate of $106,414,000 and $112,553,000, respectively. At December 31, 1993, these reinsurers provided qualified trust accounts for the benefit of the Company of $46,167,000 and letters of credit totalling $4,372,000. At December 31, 1992, the Company held $36,855,000 in funds of one of these reinsurers, and another provided a qualified trust account for the benefit of the Company of $31,129,000 and a letter of credit for $3,131,000. The table below illustrates the effect of reinsurance on premiums written and premiums earned:
Orion issued 9 1/8% Senior Notes due 2002 (the "9 1/8% Senior Notes") in a public offering on September 8, 1992. The proceeds were used to extinguish the Company's debt under its loan agreement with various banks at that date, and to redeem its 13 1/2% Senior Subordinated Debentures on October 9, 1992. The Company entered into a loan agreement (the "Bridge Loan") with two banks on November 30, 1992, and borrowed $20,000,000 under this agreement in December 1992, the proceeds of which were used to redeem the Company's 12 1/2% Subordinated Debentures on December 31, 1992. The costs of the early extinguishment of the Company's bank debt and debentures in 1992 were approximately $2,980,000. These costs are reported as an extraordinary item in the Company's financial statements, net of a $60,000 tax benefit. Debt extinguishment costs include the premiums required to call the debentures, the unamortized discount of the debentures and unamortized deferred financing costs of the debentures and bank debt.
Orion and its wholly-owned subsidiaries file consolidated federal income tax returns. The Company adopted SFAS No. 109 effective January 1, 1993. The new standard provides for the recognition of deferred tax assets that were not recognized under the prior standard, SFAS No. 96. The cumulative effect of adopting SFAS No. 109 was a benefit of $16,881,000. Accounting for income taxes using SFAS No. 109 increased income taxes on continuing operations for 1993 by $3,909,000. The consolidated federal income tax current provisions for 1991 through 1993 were computed by the regular tax method, reduced by alternative minimum and other tax credits in 1991. The deferred tax benefit for 1993 results primarily from the increase in the discount on loss reserves for income tax purposes offset by the undistributed earnings of Guaranty National. The 1993 tax provision reflects a tax benefit of $450,000 from the
The tax effects of the temporary differences comprising the Company's net deferred tax asset as of December 31, 1993 and January 1, 1993 are as follows:
Minimum lease commitments at December 31, 1993, with the majority having initial lease periods from one to twenty-five years, are as follows:
Rent expense amounted to $11,976,000, $12,224,000 and $13,521,000 net of sublease rentals of $419,000, $765,000 and $791,000 in 1993, 1992 and 1991, respectively. Substantially all leases are for office space and equipment. A number of lease commitments contain renewal options ranging from one to thirty years.
On December 21, 1992, Orion called for the redemption of its $2.125 Convertible Exchangeable Preferred Stock (the "$2.125 Preferred Stock") on January 21, 1993. The market price of the shares of common stock that a holder would receive upon conversion of the preferred stock was substantially higher than the redemption price of $25.76 per share. Consequently, most holders converted into common stock prior to the redemption date, resulting in the issuance of 3,579 shares of common stock in December 1992 and 1,423,544 shares of common stock in January 1993. Holders of 21,605 shares of $2.125 Preferred Stock, who did not elect to convert, redeemed their shares for an aggregate of $557,000.
On April 7, 1993, the Company redeemed all of the outstanding shares of its Adjustable Rate Preferred Stock for $18,520,000 in cash. The redemption was funded with borrowings under the Loan Agreement.
Dividends declared on Orion's common and preferred stock for 1993, 1992 and 1991 were as follows:
The Company provides postretirement medical benefits to full-time employees who have worked for 10 years and attained age 55 while in service with the Company. The effect on income from continuing operations after federal income taxes for 1993 of accounting for retirement benefits using SFAS No. 106 was to increase expenses by $211,000, net of federal income taxes. The Company's postretirement health care plan is not funded. The accumulated postretirement benefit obligation of the plan at December 31, 1993 included in other liabilities in the consolidated balance sheet is as follows:
Net postretirement benefit cost for the year ended December 31, 1993 was $598,000 and consisted of service cost benefits earned of $130,000 and interest on the accumulated postretirement benefit obligation of $468,000.