SECURITIES AND EXCHANGE COMMISSION
OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10 - Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2001 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-4625
OLD REPUBLIC INTERNATIONAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 36-2678171
- ------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
307 North Michigan Avenue, Chicago, Illinois 60601
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 312-346-8100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Shares Outstanding
Class June 30, 2001
--------------------------- --------------------
Common Stock / $1 par value 118,787,747
There are 14 pages contained in this report.
2
OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / June 30, 2001
INDEX
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PAGE NO.
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PART I FINANCIAL INFORMATION:
CONSOLIDATED SUMMARY BALANCE SHEETS 3
CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 9
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 10 - 12
PART II OTHER INFORMATION 13 & 14
3
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited)
($ in Millions)
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June 30, December 31,
2001 2000
---------------- ----------------
<s> <c> <c>
Assets
Investments: Held to maturity:
Fixed maturity securities (at amortized cost) (fair value: $2,119.2 and $2,106.2) $2,066.7 $2,078.0
Other long-term investments (at cost) 64.3 55.2
---------------- ----------------
Total 2,131.1 2,133.3
---------------- ----------------
Available for sale:
Fixed maturity securities (at fair value) (cost: $2,378.0 and $2,219.2) 2,405.5 2,232.2
Equity securities (at fair value) (cost: $269.5 and $238.7) 309.4 295.5
Short-term investments (at fair value which approximates cost) 334.6 378.0
---------------- ----------------
Total 3,049.6 2,905.8
---------------- ----------------
Total investments 5,180.7 5,039.1
---------------- ----------------
Other Assets: Cash 37.2 33.0
Accrued investment income 73.3 72.0
Accounts and notes receivable 427.9 302.0
Reinsurance balances and funds held 63.7 71.0
Reinsurance recoverable: Paid losses 30.0 36.1
Policy and claim reserves 1,334.3 1,350.4
Deferred policy acquisition costs 170.1 148.1
Sundry assets 228.1 229.4
---------------- ----------------
2,365.0 2,242.2
---------------- ----------------
Total Assets $7,545.8 $7,281.4
================ ================
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, Preferred Stock and
Common Shareholders' Equity
Liabilities: Future policy benefits $110.0 $120.6
Losses, claims and settlement expenses 3,365.3 3,389.5
Unearned premiums 554.6 397.5
Other policyholders' benefits and funds 48.1 45.7
---------------- ----------------
Total policy liabilities and accruals 4,078.2 3,953.4
Commissions, expenses, fees and taxes 138.8 140.9
Reinsurance balances and funds 122.3 119.2
Federal income tax payable: Current 11.4 5.6
Deferred 325.7 289.8
Debt 201.7 238.0
Sundry liabilities 74.1 94.8
---------------- ----------------
Total liabilities 4,952.4 4,842.0
---------------- ----------------
Preferred
Stock: Convertible preferred stock 0.3 0.7
---------------- ----------------
Common Common stock 121.9 121.4
Shareholders' Additional paid-in capital 216.5 207.8
Equity: Retained earnings 2,247.5 2,106.4
Accumulated other comprehensive income 39.6 35.6
Treasury stock (at cost) (32.6) (32.6)
---------------- ----------------
Total Common Shareholders' Equity 2,593.0 2,438.7
---------------- ----------------
Total Liabilities, Preferred Stock
and Common Shareholders' Equity $7,545.8 $7,281.4
================ ================
See accompanying notes.
4
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited)
($ in Millions, Except Common Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
<s> <c> <c> <c> <c>
Revenues: Net premiums earned $435.6 $378.1 $841.9 $758.4
Title, escrow and other fees 66.9 50.2 116.8 89.2
---------------- ---------------- ---------------- ----------------
Sub-total 502.5 428.3 958.8 847.7
Net investment income 68.6 67.0 137.0 134.9
Realized investment gains 8.4 -- 23.0 0.9
Other income 9.6 6.6 17.8 11.7
---------------- ---------------- ---------------- ----------------
Net revenues 589.2 502.1 1,136.8 995.3
---------------- ---------------- ---------------- ----------------
Expenses: Benefits, claims and settlement expenses 208.0 186.5 409.8 385.0
Underwriting, acquisition and
insurance expenses 247.0 212.3 466.9 424.2
Interest and other expenses 4.9 5.2 10.1 10.2
---------------- ---------------- ---------------- ----------------
Total expenses 459.9 404.1 886.9 819.6
---------------- ---------------- ---------------- ----------------
Income before income taxes and items below 129.2 97.9 249.8 175.7
---------------- ---------------- ---------------- ----------------
Income Taxes: Currently payable 23.8 17.1 42.0 22.8
Deferred 14.2 11.8 33.6 29.2
---------------- ---------------- ---------------- ----------------
Total income taxes 38.0 29.0 75.7 52.0
---------------- ---------------- ---------------- ----------------
91.2 68.9 174.1 123.6
Other items - net 0.3 0.4 1.3 1.1
---------------- ---------------- ---------------- ----------------
Net Income: $91.5 $69.4 $175.5 $124.7
================ ================ ================ ================
Net Income
Per Share: Basic $0.77 $0.59 $1.48 $1.04
================ ================ ================ ================
Diluted $0.76 $0.58 $1.46 $1.04
================ ================ ================ ================
Dividends Per
Common Share: Cash dividends $0.15 $0.14 $0.29 $0.27
================ ================ ================ ================
Average number of common and common equivalent
shares outstanding:
Basic 118,783,068 118,007,337 118,774,400 119,460,759
================ ================ ================ ================
Diluted 120,354,542 118,863,932 120,309,880 120,085,273
================ ================ ================ ================
See accompanying notes.
5
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
($ in Millions)
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Quarters Ended Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
<s> <c> <c> <c> <c>
Net income as reported $91.5 $69.4 $175.5 $124.7
---------------- ---------------- ---------------- ----------------
Other comprehensive income (loss):
Foreign currency translation adjustment 1.6 (0.7) (0.2) (1.1)
---------------- ---------------- ---------------- ----------------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period (0.3) 8.2 29.5 0.5
Less: elimination of pre-tax realized gains
included in income as reported 8.4 -- 23.0 0.9
---------------- ---------------- ---------------- ----------------
Pre-tax unrealized gains (losses) on securities
carried at market value (8.7) 8.2 6.4 (0.3)
Deferred income taxes (credits) (3.1) 2.9 2.2 --
---------------- ---------------- ---------------- ----------------
Net unrealized gains (losses) on securities (5.6) 5.3 4.2 (0.2)
---------------- ---------------- ---------------- ----------------
Net adjustments (4.0) 4.5 4.0 (1.3)
---------------- ---------------- ---------------- ----------------
Comprehensive income $87.5 $73.9 $179.5 $123.3
================ ================ ================ ================
See accompanying notes.
6
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
----------------------------------
2001 2000
---------------- ----------------
<s> <c> <c>
Cash flows from operating activities:
Net income $175.5 $124.7
Adjustment to reconcile net income to
net cash provided by operating activities:
Deferred policy acquisition costs (21.5) 5.1
Premiums and other receivables (15.4) 3.0
Unpaid claims and related items (2.8) (29.9)
Future policy benefits and policyholders' funds 27.7 (5.8)
Income taxes 39.7 44.0
Reinsurance balances and funds 19.5 12.6
Accounts payable, accrued expenses and other (7.1) (14.4)
---------------- ----------------
Total 215.4 139.4
---------------- ----------------
Cash flows from investing activities:
Sales of fixed maturity securities:
Held to maturity:
Maturities and early calls 139.8 155.7
Available for sale:
Maturities and early calls 108.3 97.7
Other 32.3 74.9
Sales of equity securities 41.9 17.2
Sales of other investments 1.6 1.4
Sales of fixed assets for company use 0.8 0.4
Purchases of fixed maturity securities:
Held to maturity (129.6) (7.7)
Available for sale (304.5) (282.0)
Purchases of equity securities (72.6) (46.4)
Purchases of other investments (1.8) (13.7)
Purchase of fixed assets for company use (6.6) (5.4)
Other-net (1.9) (6.9)
---------------- ----------------
Total (192.0) (14.7)
---------------- ----------------
Cash flows from financing activities:
Increase in term loans --- 47.0
Issuance of preferred and common stocks 6.7 2.1
Repayments of term loans (36.0) (30.0)
Redemption of debentures and notes (0.9) (2.3)
Dividends on common shares (34.3) (32.0)
Dividends on preferred shares --- ---
Purchase of treasury stock --- (66.4)
Other-net 2.0 0.3
---------------- ----------------
Total (62.5) (81.4)
---------------- ----------------
Increase (decrease) in cash and short-term investments (39.1) 43.2
Cash and short-term investments, beginning of period 411.0 294.1
---------------- ----------------
Cash and short-term investments, end of period $371.9 $337.3
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for: Interest $7.2 $7.9
================ ================
Income taxes $34.1 $8.5
================ ================
See accompanying notes.
7
OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)
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1. Accounting Policies and Basis of Presentation:
The accompanying consolidated summary financial statements have been
prepared in conformity with generally accepted accounting principles as
described in the Corporation's latest annual report to shareholders or as
disclosed herein. The financial accounting and reporting process relies on
estimates and on the exercise of judgement, but in the opinion of management
all adjustments, consisting of normal recurring accruals, necessary to a
fair presentation of the accompanying statements have been reflected
therein. Realized gains or losses on dispositions of investment securities
have been reflected in the operating results for each period presented.
2. Common Share Data:
Common share data has been retroactively adjusted to reflect all stock
dividends and splits. The following table provides a reconciliation of the
income before extraordinary items and number of shares used in basic and
diluted earnings per share calculations.
Quarters Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
<s> <c> <c> <c> <c>
Numerator:
Income before extraordinary item......................... $ 91.5 $ 69.4 $ 175.5 $ 124.7
Less Preferred stock dividends........................... -- -- -- --
------------ ------------ ------------ ------------
Numerator for basic earnings per share -
income available to common stockholders................ 91.5 69.3 175.5 124.7
Effect of dilutive securities:
Convertible preferred stock dividends.................... -- -- -- --
------------ ------------ ------------ ------------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions................................ $ 91.5 $ 69.4 $ 175.5 $ 124.7
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share -
weighted-average shares................................ 118,783,068 118,007,337 118,774,400 119,460,759
Effect of dilutive securities:
Stock options............................................ 1,525,552 724,661 1,488,707 490,279
Convertible preferred stock.............................. 45,922 131,934 46,773 134,235
------------ ------------ ------------ ------------
Dilutive potential common shares......................... 1,571,474 856,595 1,535,480 624,514
------------ ------------ ------------ ------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions...................................... 120,354,542 118,863,932 120,309,880 120,085,273
============ ============ ============ ============
Basic earnings per share................................... $ 0.77 $ 0.59 $ 1.48 $ 1.04
============ ============ ============ ============
Diluted earnings per share................................. $ 0.76 $ 0.58 $ 1.46 $ 1.04
============ ============ ============ ============
3. Unrealized Appreciation of Investments:
Cumulative net unrealized gains on fixed maturity securities available for
sale and equity securities credited to a separate account in common
shareholders' equity amounted to $49.5 at June 30, 2001. Unrealized
appreciation of investments, before applicable deferred income taxes of
$26.7, at June 30, 2001 included gross unrealized gains and (losses) of
$126.6 and ($50.4), respectively.
For the six months ended June 30, 2001 and 2000, net unrealized appreciation
(depreciation) of investments, net of deferred income taxes (credits),
amounted to $4.2 and ($0.2), respectively.
8
4. Information About Segments of Business
The Corporation's business segments are organized as the General Insurance
(property and liability insurance), Mortgage Guaranty, Title Insurance and
Life Insurance Groups. The contributions of Old Republic's insurance
industry segments to consolidated revenues and operating results, and
certain balance sheet data pertaining thereto are shown in the following
tables on the basis of generally accepted accounting principles ("GAAP").
Each of the Corporation's segments underwrites and services only those
insurance coverages which may be written by it pursuant to state insurance
regulations and corporate charter provisions.
Segment Reporting
---------------------------------------------------------------------------------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
<s> <c> <c> <c> <c>
General Insurance Group:
Net premiums earned.................................... $ 244.5 $ 210.0 $ 476.5 $ 420.7
Net investment income and other income(a).............. 49.4 49.8 98.6 98.9
------------- ------------- ------------- -------------
Total............................................. $ 294.0 $ 259.8 $ 575.1 $ 519.6
============= ============= ============= =============
Income before taxes.................................... $ 36.3 $ 28.7 $ 71.5 $ 50.5
============= ============= ============= =============
Income tax expense..................................... $ 9.1 $ 6.2 $ 17.6 $ 10.7
============= ============= ============= =============
Mortgage Guaranty Group:
Net premiums earned.................................... $ 88.6 $ 80.8 $ 175.0 $ 162.1
Net investment income and other income(a).............. 20.1 14.9 39.1 29.3
------------- ------------- ------------- -------------
Total............................................. $ 108.7 $ 95.8 $ 214.1 $ 191.5
============= ============= ============= =============
Income before taxes.................................... $ 65.6 $ 58.2 $ 127.2 $ 110.9
============= ============= ============= =============
Income tax expense..................................... $ 22.2 $ 19.5 $ 43.0 $ 37.2
============= ============= ============= =============
Title Insurance Group:
Net premiums earned.................................... $ 91.5 $ 74.3 $ 165.2 $ 146.8
Title, escrow and other fees ......................... 66.9 50.2 116.8 89.2
------------- ------------- ------------- -------------
Subtotal.......................................... 158.4 124.6 282.1 236.0
Net investment income and other income(a).............. 5.8 6.1 11.7 12.3
------------- ------------- ------------- -------------
Total............................................. $ 164.3 $ 130.8 $ 293.8 $ 248.3
============= ============= ============= =============
Income before taxes.................................... $ 20.5 $ 13.2 $ 31.5 $ 16.5
============= ============= ============= =============
Income tax expense..................................... $ 7.1 $ 4.4 $ 10.8 $ 5.4
============= ============= ============= =============
Life Insurance Group:
Net premiums earned.................................... $ 10.9 $ 12.8 $ 25.1 $ 28.7
Net investment income and other income(a).............. 2.0 2.1 4.0 4.3
------------- ------------- ------------- -------------
Total............................................. $ 12.9 $ 14.9 $ 29.2 $ 33.0
============= ============= ============= =============
Income before taxes (credits).......................... $ 1.2 $ 1.1 $ 2.7 $ 2.1
============= ============= ============= =============
Income tax expense (credit)............................ $ 0.4 $ -- $ 1.0 $ 0.2
============= ============= ============= =============
9
Reconciliations of Segments to Consolidated
---------------------------------------------------------------------------------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
<s> <c> <c> <c> <c>
Revenues:
Total revenues for reportable segments................. $ 580.0 $ 501.4 $ 1,112.3 $ 992.5
Net realized investment gains.......................... 8.4 -- 23.0 0.9
Other revenues......................................... 3.4 4.5 7.3 9.3
Elimination of intersegment revenues (b)............... (2.6) (3.8) (5.9) (7.4)
------------- ------------- ------------- -------------
Total consolidated revenues....................... $ 589.2 $ 502.1 $ 1,136.8 $ 995.3
============= ============= ============= =============
Income before taxes:
Total income before taxes of reportable segments....... $ 123.7 $ 101.4 $ 233.0 $ 180.1
Net realized investment gains.......................... 8.4 -- 23.0 0.9
Other revenues - net................................... (3.0) (3.4) (6.2) (5.3)
------------- ------------- ------------- -------------
Income before income taxes and
extraordinary items............................... $ 129.2 $ 97.9 $ 249.8 $ 175.7
============= ============= ============= =============
---------
In the above tables, net premiums earned on a GAAP basis differ slightly
from statutory amounts due to certain differences in calculations of
unearned premium reserves under each accounting method.
(a) Including unallocated investment income derived from invested capital
and surplus funds./(b) Represents results of holding company parent,
consolidation eliminating adjustments, and general corporate expenses, as
applicable.
5. Legal Proceedings
Legal proceedings against the Company arise in the normal course of business
and generally pertain to claim matters related to insurance policies and
contracts issued by the Corporation's insurance subsidiaries.
The Federal Department of Labor has revised the Federal Black Lung Program
regulations effective January 19, 2001. These new regulations, which might
require a re-evaluation of previously settled or denied workers'
compensation claims, are being challenged in court by the insurance and coal
mining industries. At this time, the outcome of this challenge is uncertain
and the potential impact on gross and net of reinsurance reserves or
retrospective rating policies due to the revised regulations is not
measurable.
In December 1999, a class action lawsuit was filed against one of the
Company's mortgage guaranty insurance subsidiaries in the Federal District
Court for the Southern District of Georgia. The suit alleges that the
subsidiary provided pool insurance and other services to mortgage lenders at
preferential, below market prices in return for mortgage insurance business,
and that such practices violated the Real Estate Settlement Procedures Act.
The Court ruled in favor of a summary judgement motion filed by the
Company's subsidiary and dismissed the law suit. The class plaintiffs have
appealed and the appeal is currently before the U.S. Court of Appeals for
the Eleventh Circuit. The ultimate outcome of this litigation is unknown at
the present time. Accordingly, no provision for any liability, including the
additional cost of defense, has been included in the Company's financial
statements.
The City and County of San Francisco and certain escrow customers of an
underwritten title agency subsidiary headquartered in the State of
California have filed law suits alleging that the subsidiary: 1) failed to
escheat unclaimed escrow funds; 2) charged for services not necessarily
provided; and 3) collected illegal interest payments or fees from banks on
the basis of funds held for escrow customers. The subsidiary has in turn
conducted an internal review of its records and concluded that it had
certain liabilities for part of the issues denoted at (1) and (2).
Management believes that the alleged practices denoted at (3) are common
within the industry, are not in conflict with various laws and regulations,
and that it has meritorious defenses which will ultimately lead to a
successful resolution of these practices. Through June 30, 2001, as the
litigation has progressed on several fronts and additional information has
come to its attention, the subsidiary has continually re-evaluated its
exposures and it has paid or otherwise provided cumulatively $45.3 million
since mid-1998 as its best estimate of litigation and related costs
associated with all these issues.
In mid October, 2000, the California Department of Insurance (CDI) filed a
complaint against the above referenced subsidiary. The complaint alleges
violations of certain sections of the Insurance Code that prohibit any form
of considerations to induce the referral of business to a title company. The
CDI is seeking a maximum monetary penalty of $3.8 million. The Company
believes it has meritorious defenses to the allegations and that its overall
claim and other expense accruals are sufficient to cover these and other
known exposures.
10
OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Six Months Ended June 30, 2001 and 2000
- --------------------------------------------------------------------------------
OVERVIEW
This analysis pertains to the consolidated accounts of Old Republic
International Corporation. The Company conducts its business through four major
segments, namely its General (property and liability coverages), Mortgage
Guaranty, Title, and Life insurance groups.
FINANCIAL POSITION
Old Republic's financial position at June 30, 2001, reflected increases in
assets, liabilities and common shareholders' equity when compared to the
immediately preceding year-end of 3.6%, 2.3% and 6.3%, respectively. Cash and
invested assets represented 70.1% and 70.6% of consolidated assets as of June
30, 2001 and December 31, 2000, respectively. Consolidated operating cash flow
was positive at $215.4 million in the latest six month period, compared to
$139.4 million in the same period of 2000.
Relatively high short-term maturity investment positions continued to be
maintained as of June 30, 2001, to provide necessary liquidity for specific
operating needs and to enhance flexibility in investment strategy. Changes in
short-term investments reflect a large variety of seasonal and intermediate-term
factors including expected operating cash flows and investment strategy.
Accordingly, the future level of short-term investments will vary and respond to
the interplay of these factors and may, as a result, increase or decrease from
current levels. During the first six months of 2001, the Corporation committed
substantially all investable funds in short to intermediate-term fixed maturity
securities. Old Republic continues to adhere to its long-term policy of
investing primarily in investment grade, marketable securities; investable funds
have not been directed to so-called "junk bonds" or types of securities
categorized as derivatives. During the first six months of 2001, Old Republic's
investment in equity securities increased slightly in relation to the related
invested balance at year-end 2000. At June 30, 2001, the carrying value of bond
and note investments in default as to principal and/or interest was immaterial
in relation to consolidated assets or shareholders' equity.
The parent holding company has met its liquidity and capital needs principally
through dividends paid by its subsidiaries. The insurance subsidiaries' ability
to pay cash dividends to the parent company is generally restricted by law or
subject to approval of the insurance regulatory authorities of the states in
which they are domiciled.
Old Republic's capitalization of $2.79 billion at June 30, 2001 consisted of
debt of $201.7 million, convertible preferred stock of $0.3 million, and common
shareholders' equity of $2.59 billion. The increase in the common shareholders'
equity account during the six months ended June 30, 2001, reflects primarily the
retention of earnings in excess of dividend requirements and a moderate increase
in the value of bonds and stocks carried at market value.
RESULTS OF OPERATIONS
Revenues:
Consolidated net premiums and fees earned for the second quarter of 2001
amounted to $502.5 million versus $428.3 million in the year ago period. For the
second quarter of 2001, the Company's General Insurance Group reported earned
premium volume of $244.5 million, up 16.4% from $210.0 million a year ago. The
Company believes that this positive trend reflects the pricing and risk
selection improvements it has been effecting for the past two years or so.
Premiums for the Mortgage Guaranty Group increased by 9.5% to $88.6 million from
$80.8 million in the year-ago quarter. Title Group premium and fee revenues
increased 27.2% to $158.4 million in the second quarter of 2001 when compared to
the same quarter of 2000 as a result of greater refinancing activity and a
relatively strong housing market. Life Group premium volume decreased to $10.9
million, a 15.2% decline when compared to the same quarter of 2000.
Consolidated net premiums and fees earned in the first half of 2001 amounted to
$958.8 million, a 13.1% increase from the amount reported for the same 2000
period. The General Insurance Group's net premiums earned increased 13.2% to
$476.5 million in the first half of 2001. The Mortgage Guaranty Group continued
to experience volume growth and reported net premiums earned of $175.0 million,
an increase of 7.9%. The Title Insurance Group reported premiums and fees in the
first half of $282.1 million, up from $236.0 million in the year-ago period.
Life Insurance Group premiums declined 12.3% to $25.1 million during the same
2001 period. The above-cited factors for the second quarter of 2001 had similar
effects on first half 2001 premium and fee revenues.
11
Consolidated net investment income was $137.0 million in the first half of 2001
and $68.6 million in the second quarter of 2001 compared to $134.9 million and
$67.0 million, respectively, in the same quarter and six month period of 2000.
The average annualized yield on investments was approximately 5.4% and 5.7% at
the end of June 30, 2001 and 2000, respectively. Yield trends reflect at once
the relatively short maturity of Old Republic's fixed maturity securities
portfolio, and declining yields during most of the first half of 2001.
The Company's investment policies have not been designed to maximize realized
investment gains. Realized gains of $23.0 million in the first half of 2001 were
mostly due to the sale of equity securities. Dispositions of securities are
primarily the result of scheduled maturities of bonds and notes as well as sales
of equity securities. For the first six months of 2001, 88.5% of total
dispositions represented maturities and early calls of bond and note holdings;
for the year ago period in 2000, these transactions amounted to 77.2% of the
total dispositions.
Expenses:
Consolidated benefit, claim and settlement costs, as a percentage of net
premiums and fees earned, were approximately 43% and 45% in the first six months
of 2001 and 2000, respectively. For the second quarter of each year, these
ratios were approximately 41% in 2001 and 44% in 2000. For both the second
quarter and year-to-date periods of the current year, the General Insurance
claims ratio was affected positively by the previously mentioned increase in
premiums earned. The Mortgage Guaranty claims ratio was lower during the first
six months of 2001 compared to the same period in 2000 mostly due to stable
employment conditions, good general economic conditions and higher cure rates
for loans exhibiting payment difficulties, all of which usually lead to reduced
mortgage defaults. Title claims costs were up moderately in 2001, while Life
Group claim costs were lower during the same period.
The ratio of consolidated underwriting, acquisition and insurance expenses to
net premiums and fees earned was approximately 49% and 50% in the first six
months of 2001 and 2000, respectively. These ratios were approximately 49% and
50% for the second quarters of 2001 and 2000, respectively. Variations in these
ratios reflect a continually changing mix of coverages sold and attendant costs
of producing business. The property and liability segment's expense ratio
declined due to a greater increase in premium revenues than operating expenses
for the first half of 2001 compared to the same period in 2000. The Mortgage
Guaranty segment's expense ratio declined moderately. The insurance expense
ratio for the title segment was lower in the first half of 2001 compared to the
same period in 2000 due in part to an increase in premium and fees volume
without a proportional increase in expenses. Consolidated interest and other
charges decreased slightly in the first half of 2001 versus the same period a
year ago due primarily to lower interest costs on a decreased debt level.
Pre-Tax and Net Income:
Consolidated income before taxes increased by 32.0% in the second quarter and
42.2% in the first six months of 2001 when compared to the same periods one year
ago. The continuation of more positive trends in General Insurance underwriting
performance, further improvements in Mortgage Guaranty income from underwriting
and investments and accelerated growth in premiums and fees from greater
refinancing activity, and a relatively strong housing market which benefitted
the Title Insurance Group contributed to the increase in pretax operating
earnings in both the second quarter and year-to-date periods. Realized gains, as
previously mentioned, were higher in both the second quarter and year-to-date
period when compared to the same periods a year ago.
The effective consolidated income tax rate was 29.4% and 30.3% in the second
quarter and six month period of 2001, respectively, and 29.6% and 29.5% for the
second quarter and six month period of 2000, respectively. The consolidated
income tax rate was enhanced by previously unrecognized tax settlement
recoveries of $2.9 million recorded in the second quarter of 2001. The rates for
each period reflect primarily the varying proportions of pre-tax operating
income derived from tax-sheltered investment income (principally tax-exempt
interest) on the one hand, and fully taxable investment and underwriting/service
income on the other hand.
OTHER INFORMATION
Reference is here made to "Financial Information Relating to Segments of
Business" appearing elsewhere herein.
Historical data pertaining to the operating performance, liquidity, and other
financial matters applicable to an insurance enterprise such as Old Republic are
not necessarily indicative of results to be achieved in succeeding years. In
addition to the factors cited below, the long-term nature of the insurance
business, seasonal and annual patterns in premium production and incidence of
claims, changes in yields obtained on invested assets, changes in government
policies and free markets affecting inflation rates and general economic
conditions, and changes in legal precedents or the application of law affecting
the settlement of disputed claims can have a bearing on period-to-period
comparisons and future operating results.
12
Any forward-looking commentary or inferences contained in this report involve,
of necessity, assumptions, uncertainties, and risks that may affect the
Company's future performance. With regard to Old Republic's General Insurance
segment, its results can be affected in particular by the level of market
competition which is typically a function of available capital and expected
returns on such capital among competitors, the levels of interest and inflation
rates, as well as periodic changes in claim frequency and severity patterns
caused by natural disasters, weather conditions, accidents, illnesses,
work-related injuries, and unanticipated external events. Mortgage Guaranty and
Title insurance results can be affected by such factors as changes in national
and regional housing demand and values, the availability and cost of mortgage
loans, employment trends, and default rates on mortgage loans; mortgage guaranty
results may also be affected by various risk-sharing arrangements with business
producers as well as the risk management and pricing policies of government
sponsored enterprises. Life and disability insurance results can be impacted by
the levels of employment and consumer spending, as well as mortality and health
trends. At the holding company level, operating earnings or losses are generally
affected by the amount of debt outstanding and its cost, as well as interest
income on temporary holdings of short-term investments.
Any forward-looking commentaries speak only as of their dates. Old Republic
undertakes no obligation to publicly update or revise such comments, whether as
a result of new information, future events or otherwise, and accordingly they
may not be unduly relied upon.
13
OLD REPUBLIC INTERNATIONAL CORPORATION
FORM 10 - Q
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
(a) The annual meeting of registrant's shareholders was held on May 25, 2001.
(b) Proxies for the meeting were solicited by management pursuant to Regulation
14A under the Security Exchange Act of 1934. There was no solicitation in
opposition to management's nominees for directors as listed in the proxy
statement and all such nominees were elected.
(c) At the meeting, the shareholders voted on the following matter:
1. The election of four Class II directors. There were at least 108,599,000
affirmative votes for each director and no more than 1,096,331 votes
withheld.
Item 6 - Reports on Form 8-K
- ----------------------------
(a) Reports on Form 8-K
1. The registrant has not filed any reports on Form 8-K during the quarter
for which this report is filed.
Items other than those listed are omitted because they are not required.
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Old Republic International Corporation
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(Registrant)
Date: August 9, 2001
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/s/ Paul D. Adams
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P. D. Adams
Senior Vice President &
Chief Financial Officer