The Company's executive office is located at 600 Fifth Avenue, New York, New York. The home office of the insurance operations of the Company is located in Farmington, Connecticut. The Company's New York executive office facilities consist of approximately 12,000 square feet and are leased at an average annual rental, over ten years, of $465,000. The
Farmington office consists of approximately 140,000 square feet and is leased at an annual rental of $4,310,000. The DPIC Companies owns its office building, which consists of approximately 42,000 square feet, in Monterey, California.
All of the other insurance operations of the Company are conducted from leased premises in or adjacent to major urban centers throughout the United States, Puerto Rico, Canada and in Bermuda. These operations, in the aggregate, occupy approximately 480,000 square feet, at an annual rental of approximately $8,843,000.
Earnings (loss) by segment before federal income taxes and cumulative effect of the adoption of new accounting principles are summarized as follows for the three years ended December 31, 1995:
Premiums earned increased 8.4% ($57,780,000) to $749,003,000 in 1995 from $691,223,000 in 1994 and 12.0% ($73,819,000) in 1994 from $617,404,000 in 1993. Premiums earned reflects the recognition in income of the changing levels of net premium writings.
Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which establishes the available-for-sale category of investment securities and requires such securities to be recorded at market value, with unrealized gains and losses reported in a separate component of stockholders' equity. As a result of the adoption of this standard on December 31, 1993, the Company reclassified investments with a market value of $452,102,000 from fixed maturities recorded at amortized cost to fixed maturities recorded at market, and increased unrealized appreciation on investments, a component of stockholders' equity, by $20,720,000, net of deferred income taxes. In December of 1995, the Company reclassified additional investments with a market value of $102,581,000 from fixed maturities recorded at amortized cost to fixed maturities recorded at market, increasing stockholders' equity by $1,329,000. This one-time transfer from the held-to-maturity portfolio was permitted by the implementation guide for SFAS No. 115. Fixed maturity investments which the Company has both the positive intent and the ability to hold to maturity are recorded at amortized cost. 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 amounted to $1,235,051,000 and $1,002,042,000 at December 31, 1995 and 1994, respectively, or approximately 76.9% and 75.6% of the Company's cash and investments.
The Company 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 $1,545,000 at December 31, 1995. Only four non-investment grade investments aggregating $24,246,000 were in excess of $5,000,000 at December 31, 1995.
The following table sets forth certain ratios of insurance operating expenses to premiums earned for the Company: Year Ended December 31, -------------------------------- 1995 1994 1993 ---- ---- ---- Loss and loss adjustment expenses ....... 68.4% 72.1% 74.4% Policy acquisition and other insurance expenses .............................. 29.0 27.0 26.8 ----- ----- ----- Total before policyholders' dividends . 97.4 99.1 101.2 Policyholders' dividends ................ 2.9 2.1 2.0 ----- ----- ----- Total after policyholders' dividends .. 100.3% 101.2% 103.2% ===== ===== =====
The loss ratio for Regional Operations was 62.4% in 1995, 67.1% in 1994 and 72.0% in 1993. These loss ratios reflect the continued success of the Company's service oriented approach for workers compensation insurance, and the growth in high-deductible policies where experience has been favorable.
Reinsurance/Special Programs' loss ratio was 72.9% in 1995, 75.4% in 1994 and 76.1% in 1993. The improvement in the 1995 loss ratio for this segment is primarily the result of favorable loss experience for DPIC and the cancellation of Connecticut Specialty's personal injury protection and physical damage programs which had unfavorable loss experience in 1994. The decrease for 1994 is attributable to increased writings in programs with lower loss ratios, offset in part by increased losses incurred in the two Connecticut Specialty cancelled programs.
The ratio of deferred acquisition costs and other insurance expenses to premiums earned (the "expense ratio") was 29.0%, 27.0% and 26.8% in 1995, 1994 and 1993, respectively. The increase in the expense ratio in 1995 is attributable to a number of factors including EBI Companies opening offices in new territories, a change in the mix of business toward policies with lower premiums and losses relative to policyholder servicing expenses and general inflationary increases in fixed operating expenses. The 1994 and 1993 expense ratios reflect low levels of assessments from certain assigned risk pools. The ratio of policyholders' dividends to premiums earned (the "dividend ratio") was 2.9%, 2.1% and 2.0% in 1995, 1994 and 1993, respectively. The increase in the dividend ratio for 1995 is reflective of the lower loss ratios on workers compensation insurance coverages. The combined ratio was 100.3% in 1995, 101.2% in 1994 and 103.2% in 1993.
The Company limits both current loss expense 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.
Earnings before income taxes were $88,035,000, $71,546,000 and $72,505,000 for 1995, 1994 and 1993, respectively. The 23.0% increase in pre- tax earnings from 1994 to 1995 reflects an improvement in insurance operations profitability of $8,041,000 and an increase in realized investment gains of $8,448,000. The 1.3% decrease in pre-tax earnings from 1993 to 1994 reflects an increase in insurance operations profitability of $5,082,000 and a decrease in realized investment gains of $6,041,000.
Cash used in investment activities increased $102,263,000 to $188,448,000 in 1995 from $86,185,000 in 1994 and decreased $38,230,000 in 1994 from $124,415,000 in 1993. Cash is used in investment activities primarily for purchases of investments. The purchases are funded by maturities and sales of investments, as well as by the net cash remaining from positive operating cash flows after cash provided by or used in financing activities. In June 1995 Orion paid $22,000,000 in cash plus acquisition costs to acquire McGee (see discussion above).
Cash provided by financing activities was $37,778,000 for 1995. Cash used in financing activities was $32,582,000 and $5,046,000 in 1994 and 1993, respectively. Orion borrowed $12,000,000 under its bank line of credit in June 1995 to finance part of the McGee acquisition. In July 1995 Orion issued $100,000,000 of senior debt (discussed below) and repaid all of its outstanding bank debt. Cash provided in 1993 from an increase in bank borrowings was used to fund the redemption of Orion's Adjustable Rate Preferred Stock. Cash used in financing activities 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%, 11.1% and 15.0% in the third quarters of 1993, 1994 and 1995, respectively. An additional increase of 8.7% was authorized by the Board of Directors in the first quarter of 1996.
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. Orion received $30,546,000, $30,013,000 and $25,512,000 in dividends, $6,232,000, $5,735,000 and $5,230,000 for overhead expenses and federal tax payments of $4,500,000, $6,000,000 and $5,600,000 from its insurance subsidiaries in 1995, 1994 and 1993, respectively. In 1993 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 $123,457,000 and $96,572,000 at December 31, 1995 and 1994, respectively. Orion's insurance subsidiaries had consolidated policyholders' surplus of $521,510,000 at December 31, 1995 and $458,676,000 at December 31, 1994, and statutory operating leverage ratios of net premiums written to policyholders' surplus of 1.5:1 and 1.6:1 at December 31, 1995 and 1994, respectively.
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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 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.
In June 1995 Guaranty National sold 1,550,000 shares of its common stock in an offering under Regulation S of the Securities Act of 1933, as amended, at a net offering price of $15.76 per share. The Company converted $20,896,000 of Guaranty National subordinated notes it held into 1,326,128 shares of Guaranty National common stock at the net price received by Guaranty National from the offering. The sale of stock and conversion of the subordinated notes increased the stockholders' equity of Guaranty National and facilitated the procurement of financing for Guaranty National's acquisition of Viking Insurance Holdings, Inc. in July 1995.
In 1993 the Company acquired 1,526,484 shares, or 20%, of the common stock of Intercargo. The aggregate purchase price, including expenses, was $19,315,000. The excess of cost over the fair value of the underlying equity in net assets acquired was $11,158,000, which is being amortized over a 25 year period.
Other long-term investments had aggregate carrying values of $62,925,000 at December 31, 1995 and $52,564,000 at December 31, 1994 including mortgage loans on real estate of $1,979,000 and $1,764,000, respectively. Estimated market values of mortgage loans and other long-term investments approximate their carrying values. The carrying value of the Company's investments in principal-only securities and interest-only securities totalled approximately $7,685,000, or 0.5% of total invested assets, at December 31, 1995.
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, 1995 and 1994, recoverables for reinsurance ceded to the Company's four largest reinsurers, excluding direct business written for the McGee pool, were an aggregate of $84,654,000 and $99,476,000, respectively. At December 31, 1995 and 1994 these reinsurers provided qualified trust accounts for the benefit of the Company of $39,223,000 and $43,526,000, respectively. As of December 31, 1995, recoverables for reinsurance ceded to the clearing company for the McGee pool were $60,745,000, versus $1,777,000 for 1994, and the Company had ceded balances payable to the clearing company of $22,660,000. The table below illustrates the effect of reinsurance on premiums written and premiums earned:
An analysis of the Company's calendar year loss and loss adjustment expense reserves is summarized as follows:
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, 1995 resulted from pools and associations and other reinsurance, where development is related to the ceding companies' experience, and from discontinued programs or lines of business. Reserve strengthening, higher initial reserving and increased stabilization in the Company's business have resulted in a decreasing level of loss development.
An analysis of the Company's loss and loss adjustment expense environmental reserves and related claim counts for the three years ended December 31, 1995 is presented below:
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 $21,739,000 and $13,791,000 is included in net reserves for environmental claims at December 31, 1995 and 1994, respectively.
On July 17, 1995, Orion issued 7 1/4% Senior Notes due 2005 with a face value of $100,000,000 (the "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. Orion had $42,500,000 of notes payable under its bank loan agreement as of December 31, 1994, at interest rates between 6.71% and 6.90%. 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. As of December 31, 1995, $110,000,000 of Orion's debt is scheduled to be repaid on September 1, 2002 and the remaining $100,000,000 is due on July 15, 2005.
Orion and its wholly-owned subsidiaries file consolidated federal income tax returns. The consolidated federal income tax current provisions for 1995 and 1993 were based on the regular tax method. The current provision for 1994 was computed by the alternative minimum tax method. The 1993 tax provision reflects a tax benefit of $450,000 from the effect of the increase in the federal tax rate on the Company's deferred tax asset. 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. Substantially all federal income taxes incurred by Orion and its subsidiaries relate to domestic operations.
(000s omitted) 1996 ....................................... $15,661 1997 ....................................... 11,473 1998 ....................................... 9,331 1999 ....................................... 6,937 2000 ....................................... 6,003 2001 and thereafter ........................ 36,441 ------- Minimum lease commitments ................ $85,846 =======
Orion declared a 5-for-4 split of its common stock which was paid on November 15, 1993 to shareholders of record on October 15, 1993. All common stock and per common share data presented in the financial statements give effect to the stock split.
On December 21, 1992, Orion called for redemption 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 weighted average common shares outstanding for purposes of computing earnings per share amounted to 14,187,000, 14,348,000 and 14,598,000 shares for 1995, 1994 and 1993, respectively. Dividends on preferred stock were deducted from earnings in 1993 to compute earnings per common share.
The Company maintains a Stock Savings and Retirement Plan (the "Plan"), qualified under Internal Revenue Code Section 401(k), for eligible employees of the Company (except for employees of McGee). Employee and employer matched contributions to the savings funds are limited to the extent allowable under the Plan and federal income tax law. The Plan also provides for defined contribution savings and retirement benefits that allow the Company to make annual contributions to the Plan based on a percentage of employees' compensation. Employees vest in the Company's contributions over a six-year period. The Company has adopted a Surplus Benefit Plan which provides deferred benefits for those employees who received less than the full employer contribution to the Company's 401(k) plan as a result of federal tax limitations on participation in the Plan.
exercisable from the first through fourth anniversaries of the date of grant, and expire ten years after the date of grant. As of December 31, 1995, the number of shares of stock reserved under the Incentive Plan is 471,545 of which 177,374 shares are available for future awards and 294,171 shares are for outstanding stock options, including 175,180 stock options that are exercisable. A summary of the option transactions is as follows:
December 31, ---------------- 1995 1994 ---- ---- (000s omitted) Retirees ................................. $ 3,353 $2,143 Fully eligible active plan participants .. 1,713 976 Other active plan participants ........... 3,585 3,234 Unrecognized net gains ................... 3,528 2,496 ------- ------ $12,179 $8,849 ======= ======
Net postretirement benefit cost for the years ended December 31, 1995, 1994 and 1993 was $1,203,000, $1,243,000 and $598,000 consisting of service cost benefits earned of $695,000, $813,000 and $130,000 and interest on the accumulated postretirement benefit obligation of $612,000, $539,000 and $468,000, respectively, and amortization of unrecognized net gains of $104,000 in 1995 and $109,000 in 1994.
Financial information for the Company's segments for 1995, 1994 and 1993 is shown below: