The DPIC Companies owns its office building, which consists of approximately 42,000 square feet, in Monterey, California. The DPIC Companies purchased the building on January 26, 1990 for approximately $11,950,000. In November 1990 the DPIC Companies mortgaged the leasehold interest in its office building to other subsidiaries of the Company and to Guaranty National Insurance Company for an aggregate of $9,000,000.
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 and in Canada. These operations, in the aggregate, occupy approximately 245,000 square feet, at an annual rental of approximately $4,450,000.
- Regional Operations' net premiums written increased 5.5% ($14,656,000) to $279,738,000 in 1994 from $265,082,000 in 1993 and decreased 1.7% ($4,468,000) in 1993 from $269,550,000 in 1992. Premiums written increased in geographic areas where the Company has had favorable loss experience stemming from its service-oriented approach. The increase in 1994 was partially offset by, and the decrease in 1993 was attributable to, the impact of legislative reforms in certain states which have led to lower premium rates and a reduction in losses and expenses, resulting in higher profit margins. The increase in this segment for 1994 was also offset by a reduction in net premiums at Nations' Care, resulting from its transition toward high-deductible and fee-based workers compensation products.
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. 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 $1,002,042,000 and $1,029,211,000 at December 31, 1994 and 1993, respectively, or approximately 75.6% and 77.4% of the Company's cash and investments.
The Company's investment philosophy is to achieve a superior rate of return after taxes and maintain a high degree of safety and liquidity. 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, 1994 and 1993, the Company's investment in non-investment grade and unrated fixed maturity securities were carried at $119,853,000 and $97,653,000 with market values of $119,277,000 and $97,306,000, respectively. These investments represented a total of 9.0% and
7.3% of cash and investments and 5.7% and 4.6% of total assets at December 31, 1994 and 1993, respectively. The increase in non-investment grade securities during 1994 reflects both net purchases of such investments as well as rating agency downgrades of securities issued by Long Island Lighting Company and Cleveland Electric Illuminating Company (which had a combined carrying value of $15,793,000, or 1.2% of total cash and investments, at December 31, 1994).
Net realized investment gains amounted to $3,437,000 in 1994, $9,478,000 in 1993 and $3,667,000 in 1992. Sales of equity securities resulted in net gains of $3,845,000, $11,273,000 and $5,864,000 and sales of fixed maturities resulted in net gains of $723,000, $6,662,000 and $5,365,000 in 1994, 1993 and 1992, respectively. Realized investment gains were reduced by provisions for losses on securities deemed to be other than temporarily impaired. These provisions amounted to $381,000 in 1994, $6,310,000 in 1993 and $5,429,000 in 1992 for equity securities and $750,000, $2,147,000 and $2,133,000 in 1994, 1993 and 1992, 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, 1994 the Company held equity securities with unrealized appreciation of $13,505,000, as compared to $32,332,000 for equity securities held at December 31, 1993. The amortized cost of the fixed maturities portfolio at December 31, 1994 exceeded market value by $43,958,000. This compares with an excess of market value over amortized cost of $48,367,000 for fixed maturities at December 31, 1993. Such amounts can vary significantly depending upon fluctuations in the financial markets. The decline in market values during 1994 is primarily attributable to the significant rise in interest rates during the year. The average maturity of the Company's fixed maturities has not varied significantly in recent years, and no material change in average maturity is expected in the foreseeable future.
Year Ended December 31, -------------------------------- 1994 1993 1992 ---- ---- ---- (000s omitted)
The ratio of loss and loss adjustment expenses to premiums earned (the "loss ratio") was 72.1%, 74.4% and 75.7% in 1994, 1993 and 1992, respectively. The decrease in the 1994 loss ratio was attributable to improvements in both the Regional Operations and Reinsurance/Special Programs segments, while the improvement in the 1993 loss ratio was attributable to a decrease in the loss ratio for the Regional Operations segment offset by higher levels of initial reserving in the Reinsurance/Special Programs segment.
Reinsurance/Special Programs' loss ratio was 75.4% in 1994, 76.1% in 1993 and 71.7% in 1992. The decrease for 1994 is attributable to increased writings in programs with lower loss ratios, offset in part by increased losses incurred in Connecticut Specialty's personal injury protection and physical damage programs which were cancelled in 1994. The increase for 1993 as compared to 1992 is primarily due to higher levels of initial reserving.
The ratio of deferred acquisition costs and other insurance expenses to premiums earned (the "expense ratio") was 27.0%, 26.8% and 27.3% in 1994, 1993 and 1992, respectively. 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 2.1%, 2.0% and 2.4% in 1994, 1993 and 1992, respectively. The combined ratio was 101.2% in 1994, 103.2% in 1993 and 105.4% in 1992.
The Company limits both current loss expense and future development of losses by ceding business to reinsurers (See Note D to Consolidated Financial Statements). 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.
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.
Common stock and per common share data have been restated to give effect to the 5-for-4 stock splits paid on both November 15, 1993 and December 7, 1992. Primary earnings per share amounted to $3.85 in 1994, $4.69 ($3.88 before the effect of adopting new accounting principles) in 1993 and $3.35 ($3.62 before extraordinary item) in 1992. Reflected in the calculation of 1993 and 1992 earnings per common share are dividends of $409,000 and $6,358,000, respectively, on the Company's Adjustable Rate Preferred Stock,
(redeemed in 1993), $1.90 Preferred Stock (converted into common stock or redeemed in 1992) and $2.125 Preferred Stock (converted into common stock or redeemed in 1993). All of these conversions and redemptions were effected pursuant to the terms of the preferred stocks. The $1.90 Preferred Stock and the $2.125 Preferred Stock were assumed to be converted, if dilutive, for the purpose of computing fully-diluted earnings per common share. Fully-diluted earnings per share amounted to $3.85 in 1994, $4.67 ($3.86 before the effect of adopting new accounting principles in 1993 and $2.85 ($3.05 before extraordinary item) in 1992. Reflected in the calculation of fully-diluted earnings per share in 1993 and 1992 are Adjustable Rate Preferred Stock dividends of $407,000 and $1,581,000, respectively.
Cash used in investment activities decreased $38,230,000 to $86,185,000 in 1994 from $124,415,000 in 1993 and increased $65,162,000 in 1993 from $59,253,000 in 1992. Cash is used in investment activities primarily for purchases of investments, which are funded by maturities and sales of investments, as well as by the net cash remaining from positive operating cash flows after payments made to fund financing activities as described below.
Cash used in financing activities increased $27,536,000 to $32,582,000 in 1994 from $5,046,000 in 1993 and decreased $16,250,000 in 1993 from $21,296,000 in 1992. Cash used in financing activities includes dividend payments, scheduled debt repayments and payments related to the Company's common stock repurchase program. Cash provided in 1993 from an increase in bank borrowings was used to fund the redemption of Orion's Adjustable Rate Preferred Stock. Dividends paid to stockholders were lower in 1994 and 1993 due to the conversions and redemptions of the $1.90 Preferred Stock and $2.125 Preferred Stock into common stock and the redemption of the Adjustable Rate Preferred Stock. Proceeds from financing activities in 1992 include $107,834,000 from the issuance of 9 1/8% Senior Notes in September 1992, $19,930,000 from the issuance of bank debt in December 1992 and proceeds of $9,497,000 from the issuance of common stock in April 1992. These sources of cash were offset by debt repayments in 1992, including repayment of the Company's bank loan and the retirement of the Company's 13 1/2% Senior Subordinated Debentures and its 12 1/2% Subordinated Debentures.
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 $30,013,000, $25,512,000 and $15,645,000 in dividends, $5,735,000, $5,230,000 and $4,500,000 for overhead expenses and federal tax payments of $6,000,000, $5,600,000 and $6,250,000 from its insurance subsidiaries in 1994, 1993 and 1992, 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 $96,572,000 and $92,421,000 at December 31, 1994 and 1993, respectively. Orion's insurance subsidiaries had consolidated policyholders' surplus of $458,676,000 at December 31, 1994 and $460,986,000 at December 31, 1993, and statutory operating leverage ratios of net premiums written to policyholders' surplus of 1.6:1 and 1.4:1 at December 31, 1994 and 1993, respectively.
In August 1994, Orion's shelf registration statement relating to the offering of up to $100 million of its debt and/or equity securities was declared effective by the Securities and Exchange Commission ("SEC"). The shelf registration provides for securities to be issued from time to time, with specified terms of an issue of securities set forth in a prospectus supplement at the time of issuance. The proceeds from the sale of securities may be used for general corporate purposes, including working capital, investment in subsidiaries, the repayment of existing bank debt, the repurchase of shares of common stock, or for such other purpose as may be specified in a prospectus supplement.
During 1992 and 1993, Orion reconfigured its debt structure to take advantage of generally lower interest rates and the stronger capital position of the Company, and to reduce the amount of debt maturing within five years. On September 8, 1992, Orion issued 9 1/8% Senior Notes due 2002 with a face value of $110,000,000 in a public offering. The net proceeds from the offering of $107,834,000 were used to repay bank debt of $80,100,000, and to retire Orion's 13 1/2% Senior Subordinated Debentures on October 9, 1992 for $20,160,000 plus accrued interest. On November 30, 1992 Orion entered into a bridge loan facility (the "Bridge Loan") with two banks aggregating $25,000,000, under which it borrowed $20,000,000 to redeem its 12 1/2% Subordinated Debentures on December 31, 1992 for $20,500,000 plus accrued interest.
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 $12,500,000 in scheduled
commitment reductions through December 31, 1994) and a $10,000,000 line of credit. These borrowings are unsecured and bear interest at or below prime. The proceeds were used to repay the Bridge Loan and to redeem Orion's Adjustable Rate Preferred Stock. In November 1994 Orion amended the Loan Agreement to increase the credit line to $30,000,000. At December 31, 1994, borrowings under the Loan Agreement amounted to $42,500,000 and the Company has available $25,000,000 in unused commitments under the line of credit.
On April 15, 1992, Orion sold 515,625 shares of its common stock for $9,497,000, net of expenses. The sale was made in a private transaction, subject to the provisions of Regulation S of the Securities Act of 1933, as amended. The proceeds from the sale were used for general corporate purposes.
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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 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.
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. A substantial portion of the loss development experienced by the Company during the three years ended December 31, 1994 results 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 has resulted in a decreasing level of loss development.
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. Such claims were not specifically segregated in the Company's claims systems prior to 1993. The information above is not presented for 1992 due to the relative insignificance of the Company's exposure to environmental liability and the cost of obtaining the data.
Orion entered into a bank loan agreement (the "Loan Agreement") in March 1993 which was amended in 1994 to increase the credit line. The proceeds were used to repay the Bridge Loan and to redeem the Company's Adjustable Rate Preferred Stock. As of December 31, 1994, the Company had $42,500,000 outstanding under the Loan Agreement, and $25,000,000 in unused commitments available under the line of credit. There is a commitment fee of 1/4% of 1% per annum on the unused portion of the revolving credit facility. The Company can elect to borrow at the prime rate, or at certain other short-term borrowing rates. The rates for notes payable under the Loan Agreement were between 6.71% and 6.90% at December 31, 1994 and between 4.59% and 4.90% at December 31, 1993. The terms of the Loan Agreement limit the amount of additional borrowings, prepayments on existing indebtedness, liens and guarantees by the Company, and require the Company to meet minimum net worth and certain financial ratio tests. The 9 1/8% Senior Notes Indenture limits the Company's ability to incur secured indebtedness without equally and ratably securing the 9 1/8% Senior Notes.
Orion and its wholly-owned subsidiaries file consolidated federal income tax returns. The consolidated federal income tax current provision for 1994 was based on the alternative minimum tax method. The current provisions for 1993 and 1992 were computed by the regular 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 the Company and its subsidiaries relate to domestic operations.
In November 1988, California voters passed an initiative known as Proposition 103 which amended the California Insurance Code to provide, among other things, that for at least one year rates for automobile and many other insurance policies issued or renewed on or after November 8, 1988, be rolled back to the levels of November 8, 1987 and then reduced by 20%. In 1989, the California Supreme Court ruled that an insurer could be compelled to make
During 1994, the Company repurchased 442,327 shares of its common stock at an aggregate cost of $13,746,000. The Company repurchased 177,658 shares for $5,472,000 in 1993 and 22,420 shares for $554,000 in 1992.
On April 15, 1992, Orion sold 515,625 shares of its common stock for $9,497,000, net of expenses. The sale was made in a private transaction, subject to the provisions of Regulation S of the Securities Act of 1933.
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
Dividends declared on Orion's common and preferred stock for 1994, 1993 and 1992 were as follows:
The weighted average common shares outstanding for purposes of computing earnings per share amounted to 14,348,000, 14,598,000 and 10,914,000 shares for 1994, 1993 and 1992, respectively. Dividends on preferred stock were deducted from earnings in 1993 and 1992 to compute primary earnings per common share. The $2.125 Preferred Stock for 1993 and 1992, and the $1.90 Preferred Stock for 1992, were assumed to be converted for the full year, if dilutive, for the purpose of computing fully-diluted earnings per common share. The weighted average common shares, on a fully-diluted basis, amounted to 14,367,000, 14,655,000 and 14,474,000 shares for 1994, 1993 and 1992, respectively.
Orion has a Stockholder Rights Plan (the "Rights Plan") under which each outstanding share of common stock includes 64% of one preferred stock purchase right (the "Rights"). The Rights Plan is designed to assure stockholders that they will receive equitable treatment in the event of a proposed takeover. Under the Rights Plan, each holder of a Right is entitled to buy one-hundredth of a share of Series A Participating Junior Preferred Stock. The Rights
The total expense for 1994, 1993 and 1992 for the above pension benefit plans for employees and directors amounted to $4,659,000, $3,277,000 and $2,694,000, respectively.
Net postretirement benefit cost for the years ended December 31, 1994 and 1993 was $1,243,000 and $598,000 consisting of service cost benefits earned of $813,000 and $130,000 and interest on the accumulated postretirement benefit obligation of $539,000 and $468,000, respectively, and amortization of unrecognized net gain of $109,000 in 1994.