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 September 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
- -------------------------------------------------------------------------------
(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 September 30, 2001
--------------------------- --------------------
Common Stock / $1 par value 118,935,654
There are 14 pages contained in this report.
2
OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / September 30, 2001
INDEX
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PAGE NO.
--------
PART I FINANCIAL INFORMATION:
CONSOLIDATED SUMMARY BALANCE SHEETS 3
CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 9
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 10 - 12
PART II OTHER INFORMATION 13 & 14
3
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2001 2000
---------------- ----------------
<s> <c> <c>
Assets
Investments: Held to maturity:
Fixed maturity securities (at amortized cost) (fair value: $2,203.9 and $2,106.2) $2,114.8 $2,078.0
Other long-term investments (at cost) 60.6 55.2
---------------- ----------------
Total 2,175.4 2,133.3
---------------- ----------------
Available for sale:
Fixed maturity securities (at fair value) (cost: $2,344.1 and $2,219.2) 2,434.3 2,232.2
Equity securities (at fair value) (cost: $293.3 and $238.7) 311.8 295.5
Short-term investments (at fair value which approximates cost) 444.0 378.0
---------------- ----------------
Total 3,190.2 2,905.8
---------------- ----------------
Total investments 5,365.7 5,039.1
---------------- ----------------
Other Assets: Cash 66.5 33.0
Accrued investment income 71.9 72.0
Accounts and notes receivable 455.9 302.0
Reinsurance balances and funds held 57.6 71.0
Reinsurance recoverable: Paid losses 33.5 36.1
Policy and claim reserves 1,337.6 1,350.4
Deferred policy acquisition costs 177.4 148.1
Sundry assets 229.8 229.4
---------------- ----------------
2,430.5 2,242.2
---------------- ----------------
Total Assets $7,796.2 $7,281.4
================ ================
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, Preferred Stock and
Common Shareholders' Equity
Liabilities: Future policy benefits $109.1 $120.6
Losses, claims and settlement expenses 3,384.7 3,389.5
Unearned premiums 606.0 397.5
Other policyholders' benefits and funds 51.1 45.7
---------------- ----------------
Total policy liabilities and accruals 4,151.0 3,953.4
Commissions, expenses, fees and taxes 150.1 140.9
Reinsurance balances and funds 119.7 119.2
Federal income tax payable: Current 40.8 5.6
Deferred 351.2 289.8
Debt 220.6 238.0
Sundry liabilities 75.8 94.8
---------------- ----------------
Total liabilities 5,109.6 4,842.0
---------------- ----------------
Preferred
Stock: Convertible preferred stock 0.3 0.7
---------------- ----------------
Common Common stock 122.1 121.4
Shareholders' Additional paid-in capital 219.1 207.8
Equity: Retained earnings 2,312.1 2,106.4
Accumulated other comprehensive income 65.5 35.6
Treasury stock (at cost) (32.6) (32.6)
---------------- ----------------
Total Common Shareholders' Equity 2,686.3 2,438.7
---------------- ----------------
Total Liabilities, Preferred Stock
and Common Shareholders' Equity $7,796.2 $7,281.4
================ ================
See accompanying notes.
4
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited)
($ in Millions, Except Common Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
<s> <c> <c> <c> <c>
Revenues: Net premiums earned $463.1 $386.1 $1,305.1 $1,144.6
Title, escrow and other fees 61.3 49.9 178.1 139.1
---------------- ---------------- ---------------- ----------------
Sub-total 524.4 436.0 1,483.2 1,283.7
Net investment income 68.0 68.0 205.1 203.0
Realized investment gains (losses) (2.4) 7.1 20.6 8.0
Other income 9.5 6.4 27.3 18.2
---------------- ---------------- ---------------- ----------------
Net revenues 599.5 517.8 1,736.3 1,513.2
---------------- ---------------- ---------------- ----------------
Expenses: Benefits, claims and settlement expenses 222.1 180.8 631.9 565.9
Underwriting, acquisition and
insurance expenses 253.3 216.0 720.2 640.3
Interest and other expenses 4.4 5.2 14.6 15.5
---------------- ---------------- ---------------- ----------------
Total expenses 479.9 402.1 1,366.8 1,221.8
---------------- ---------------- ---------------- ----------------
Income before income taxes and items below 119.6 115.6 369.5 291.3
---------------- ---------------- ---------------- ----------------
Income Taxes: Currently payable 27.8 24.6 69.9 47.4
Deferred 10.4 11.5 44.0 40.8
---------------- ---------------- ---------------- ----------------
Total income taxes 38.2 36.1 113.9 88.2
---------------- ---------------- ---------------- ----------------
81.3 79.4 255.5 203.0
Other items - net 1.0 0.6 2.4 1.8
---------------- ---------------- ---------------- ----------------
Net Income: $82.4 $80.0 $257.9 $204.8
================ ================ ================ ================
Net Income
Per Share: Basic $0.69 $0.68 $2.17 $1.72
================ ================ =============== ================
Diluted $0.69 $0.67 $2.14 $1.71
================ ================ =============== ================
Dividends Per
Common Share: Cash dividends $0.15 $0.14 $0.44 $0.41
================ ================ =============== ================
Average number of common and common equivalent
shares outstanding:
Basic 118,928,107 117,788,947 118,917,122 119,224,170
================ ================ =============== ================
Diluted 120,260,624 119,262,876 120,336,152 120,004,117
================ ================ =============== ================
See accompanying notes.
5
<table>
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Nine Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
2001 2000 2001 2000
---------------- ----------------- ----------------- -----------------
<s> <c> <c> <c> <c>
Net income as reported $82.4 $80.0 $257.9 $204.8
---------------- ----------------- ----------------- -----------------
Other comprehensive income (loss):
Foreign currency translation adjustment (1.7) (0.6) (1.9) (1.7)
---------------- ----------------- ----------------- -----------------
Unrealized gains (losses) on securities:
Unrealized gains arising during period 40.1 53.7 69.6 54.3
Less: elimination of pre-tax realized gains
(losses) included in income as reported (2.4) 7.1 20.6 8.0
---------------- ----------------- ----------------- -----------------
Pre-tax unrealized gains on securities
carried at market value 42.5 46.5 49.0 46.2
Deferred income taxes 14.9 16.4 17.1 16.4
---------------- ----------------- ----------------- -----------------
Net unrealized gains on securities 27.6 30.1 31.8 29.8
---------------- ----------------- ----------------- -----------------
Net adjustments 25.9 29.4 29.9 28.0
---------------- ----------------- ----------------- -----------------
Comprehensive income $108.3 $109.5 $287.9 $232.9
================ ================= ================= =================
See accompanying notes.
<table>
6
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
------------------------------------
2001 2000
----------------- -----------------
<s> <c> <c>
Cash flows from operating activities:
Net income $257.9 $204.8
Adjustment to reconcile net income to
net cash provided by operating activities:
Deferred policy acquisition costs (29.8) 1.2
Premiums and other receivables (43.1) (21.4)
Unpaid claims and related items 24.8 (37.8)
Future policy benefits and policyholders' funds 70.1 12.3
Income taxes 79.7 53.2
Reinsurance balances and funds 18.8 (6.8)
Accounts payable, accrued expenses and other 16.0 2.0
----------------- -----------------
Total 394.6 207.6
----------------- -----------------
Cash flows from investing activities:
Sales of fixed maturity securities:
Held to maturity:
Maturities and early calls 212.4 204.0
Available for sale:
Maturities and early calls 195.3 147.4
Other 39.7 87.0
Sales of equity securities 45.7 29.9
Sales of other investments 2.4 1.9
Sales of fixed assets for company use 1.3 0.8
Purchases of fixed maturity securities:
Held to maturity (250.9) (19.6)
Available for sale (364.9) (399.0)
Purchases of equity securities (100.1) (110.6)
Purchases of other investments (2.7) (14.7)
Purchases of fixed assets for company use (10.0) (9.0)
Other-net (3.6) (10.9)
----------------- -----------------
Total (235.5) (92.7)
----------------- -----------------
Cash flows from financing activities:
Increase in term loans 30.0 52.0
Issuance of preferred and common stocks 8.7 7.7
Repayments of term loans (47.0) (30.0)
Redemption of debentures and notes (0.9) (2.6)
Dividends on common shares (52.2) (48.4)
Dividends on preferred shares --- ---
Purchase of treasury stock --- (66.4)
Other-net 1.8 (0.9)
----------------- -----------------
Total (59.6) (88.7)
----------------- -----------------
Increase (decrease) in cash and short-term investments 99.4 26.1
Cash and short-term investments, beginning of period 411.0 294.1
----------------- -----------------
Cash and short-term investments, end of period $510.5 $320.2
================= =================
Supplemental disclosure of cash flow information:
Cash paid during the period for: Interest $8.2 $9.7
================= =================
Income taxes $31.8 $35.7
================= =================
See accompanying notes.
7
OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)
- --------------------------------------------------------------------------------
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.
<table>
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
<s> <c> <c> <c> <c>
Numerator:
Income before extraordinary item......................... $ 82.4 $ 80.0 $ 257.9 $ 204.8
Less Preferred stock dividends........................... -- -- -- --
Numerator for basic earnings per share -
income available to common stockholders................ 82.4 80.0 257.9 204.7
Effect of dilutive securities:
Convertible preferred stock dividends.................... -- -- -- --
------------- ------------- ------------- -------------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions................................ $ 82.4 $ 80.0 $ 257.9 $ 204.8
============= ============= ============= =============
Denominator:
Denominator for basic earnings per share -
weighted-average shares................................ 118,928,107 117,788,947 118,917,122 119,224,170
Effect of dilutive securities:
Stock options............................................ 1,288,446 1,341,995 1,373,168 646,484
Convertible preferred stock.............................. 44,071 131,934 45,862 133,463
------------- ------------- ------------- -------------
Dilutive potential common shares......................... 1,332,517 1,473,929 1,419,030 779,947
------------- ------------- ------------- -------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions...................................... 120,260,624 119,262,876 120,336,152 120,004,117
============= ============= ============= =============
Basic earnings per share................................... $ 0.69 $ 0.68 $ 2.17 $ 1.72
============= ============= ============= =============
Diluted earnings per share................................. $ 0.69 $ 0.67 $ 2.14 $ 1.71
============= ============= ============= =============
</table>
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 $77.1 at September 30, 2001. Unrealized
appreciation of investments, before applicable deferred income taxes of
$41.6, at September 30, 2001 included gross unrealized gains and (losses) of
$173.6 and ($54.8), respectively.
For the nine months ended September 30, 2001 and 2000, net unrealized
appreciation of investments, net of deferred income taxes, amounted to $31.8
and $29.8, 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.
<table>
Segment Reporting
--------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
<s> <c> <c> <c> <c>
General Insurance Group:
Net premiums earned.................................... $ 257.7 $ 211.3 $ 734.2 $ 632.1
Net investment income and other income (a)............. 48.0 49.2 146.7 148.1
------------- ------------- ------------- -------------
Total............................................. $ 305.8 $ 260.5 $ 880.9 $ 780.2
============= ============= ============= =============
Income before taxes.................................... $ 36.1 $ 29.7 $ 107.7 $ 80.3
============= ============= ============= =============
Income tax expense..................................... $ 9.0 $ 7.0 $ 26.7 $ 17.8
============= ============= ============= =============
Mortgage Guaranty Group:
Net premiums earned.................................... $ 86.9 $ 82.9 $ 262.0 $ 245.1
Net investment income and other income (a)............. 20.9 16.0 60.1 45.4
------------- ------------- ------------- -------------
Total............................................. $ 107.9 $ 98.9 $ 322.1 $ 290.5
============= ============= ============= =============
Income before taxes.................................... $ 65.9 $ 65.6 $ 193.1 $ 176.5
============= ============= ============= =============
Income tax expense..................................... $ 22.2 $ 22.2 $ 65.3 $ 59.4
============= ============= ============= =============
Title Insurance Group:
Net premiums earned.................................... $ 105.1 $ 79.6 $ 270.4 $ 226.4
Title, escrow and other fees ......................... 61.3 49.9 178.1 139.1
------------- ------------- ------------- -------------
Subtotal.......................................... 166.5 129.6 448.6 365.6
Net investment income and other income (a)............. 5.9 6.1 17.7 18.4
------------- ------------- ------------- -------------
Total............................................. $ 172.4 $ 135.7 $ 466.3 $ 384.1
============= ============= ============== =============
Income before taxes.................................... $ 21.3 $ 13.9 $ 52.8 $ 30.4
============= ============= ============== =============
Income tax expense..................................... $ 7.4 $ 4.7 $ 18.2 $ 10.1
============= ============= ============== =============
Life Insurance Group:
Net premiums earned.................................... $ 13.2 $ 12.1 $ 38.4 $ 40.8
Net investment income and other income (a)............. 1.9 2.1 5.9 6.4
------------- ------------- ------------- -------------
Total............................................. $ 15.1 $ 14.2 $ 44.4 $ 47.3
============= ============= ============= =============
Income before taxes.................................... $ 1.2 $ 1.5 $ 4.0 $ 3.7
============= ============= ============= =============
Income tax expense..................................... $ 0.4 $ 0.5 $ 1.4 $ 0.7
============= ============= ============= =============
</table>
9
<table>
Reconciliations of Segments to Consolidated
-----------------------------------------------------------------------------------------------------------------------------
Quarters Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
<s> <c> <c> <c> <c>
Revenues:
Total revenues for reportable segments................. $ 601.4 $ 509.6 $ 1,713.7 $ 1,502.2
Net realized investment gains (losses) ................ (2.4) 7.1 20.6 8.0
Other revenues......................................... 2.7 4.3 10.0 13.7
Elimination of intersegment revenues (b)............... (2.1) (3.3) (8.0) (10.8)
------------- ------------- ------------- -------------
Total consolidated revenues....................... $ 599.5 $ 517.8 $ 1,736.3 $ 1,513.2
============= ============= ============= =============
Income before taxes:
Total income before taxes of reportable segments....... $ 124.6 $ 110.9 $ 357.7 $ 291.0
Net realized investment gains (losses) ................ (2.4) 7.1 20.6 8.0
Other revenues - net................................... (2.5) (2.4) (8.8) (7.8)
------------- ------------- ------------- -------------
Income before income taxes and
extraordinary items............................... $ 119.6 $ 115.6 $ 369.5 $ 291.3
============= ============= ============= =============
</table>
--------
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 September 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.
10
OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Nine Months Ended September 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 September 30, 2001, reflected increases in
assets, liabilities and common shareholders' equity when compared to the
immediately preceding year-end of 7.1%, 5.5% and 10.2%, respectively. Cash and
invested assets represented 70.6% of consolidated assets as of both September
30, 2001 and December 31, 2000. Consolidated operating cash flow, including the
temporary benefit of $34.7 million resulting from a recent modification in the
federal income tax payment schedule, was positive at $394.6 million in the
latest nine month period, compared to $207.6 million in the same period of 2000.
Relatively high short-term maturity investment positions continued to be
maintained as of September 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 nine months of 2001, the Corporation committed
substantially all investable funds in short to intermediate-term fixed maturity
securities and equity 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 nine months of
2001, Old Republic's investment in equity securities increased slightly in
relation to the related invested balance at year-end 2000. At September 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 $2.90 billion at September 30, 2001, consisted
of debt of $220.6 million, convertible preferred stock of $0.3 million, and
common shareholders' equity of $2.68 billion. The increase in the common
shareholders' equity account during the nine months ended September 30, 2001,
reflects primarily the retention of earnings in excess of dividend requirements
and an increase in the value of bonds and stocks carried at market value.
RESULTS OF OPERATIONS
Revenues:
Consolidated net premiums and fees earned for the third quarter of 2001 amounted
to $524.4 million versus $436.0 million in the year ago period. For the third
quarter of 2001, the Company's General Insurance Group reported earned premium
volume of $257.7 million, up 21.9% from $211.3 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 4.9% to $86.9 million from $82.9
million in the year-ago quarter. Title Group premium and fee revenues increased
28.5% to $166.5 million in the third 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 increased to $13.2 million, up
8.9% when compared to the same quarter of 2000.
Consolidated net premiums and fees earned in the first nine months of 2001
amounted to $1.48 billion, a 15.5% increase from the amount reported for the
same 2000 period. The General Insurance Group's net premiums earned increased
16.2% to $734.2 million in the first nine months of 2001. The Mortgage Guaranty
Group continued to experience volume growth and reported net premiums earned of
$262.0 million, an increase of 6.9%. The Title Insurance Group reported premiums
and fees in the first nine months of 2001 of $448.6 million, up from $365.6
million in the year-ago period. Life Insurance Group premiums declined 6.0% to
$38.4 million during the same 2001 period. The above-cited factors for the third
quarter of 2001 had similar effects on premium and fee revenue trends for the
first nine months of 2001.
11
Consolidated net investment income was $205.1 million in the first nine months
of 2001 and $68.0 million in the third quarter of 2001 compared to $203.0
million and $68.0 million, respectively, in the same quarter and nine month
period of 2000. The average annualized yield on investments was approximately
5.2% and 5.6% at the end of September 30, 2001 and 2000, respectively. Yield
trends reflect at once the relatively short maturity of Old Republic's fixed
maturity securities portfolio, declining interest rates during most of the first
nine months of 2001, and an increase in equity investments.
Realized investment gains or losses, a largely discretionary source of revenues
and income affected by market timing and periodic changes in investment values,
registered a pre-tax realized loss of $2.4 million in this year's third quarter
versus a pre-tax realized gain of $7.1 million in the same quarter of 2000.
Year-to-date, however, realized investment gains were nearly 2.5 times greater
at $20.6 million pre-tax when compared to a pre-tax gain of $8.0 million posted
in the nine months ended September 30, 2000. Substantially all net realized
gains or losses emanate from the disposition of equity securities. Dispositions
of fixed maturity securities arise mostly from scheduled maturities and early
calls; for the first nine months of 2001 and 2000, 91.1% and 80.2%,
respectively, of all such dispositions resulted from these factors.
Expenses:
Consolidated benefit, claim and settlement costs, as a percentage of net
premiums and fees earned, were approximately 43% and 44% in the first nine
months of 2001and 2000, respectively. For the third quarter of each year, these
ratios were approximately 42% in 2001 and 41% in 2000. For both the third
quarter and year-to-date periods of the current year, the General Insurance
claims ratio was affected positively by the previously noted increase in
premiums earned. The Mortgage Guaranty claims ratio was higher during the third
quarter and first nine months of 2001 largely due to moderately higher loan
default rates. Title claims costs were up slightly in 2001, while Life Group
claim costs rose during the same periods by virtue of higher life and disability
claims provisions.
The ratio of consolidated underwriting, acquisition and insurance expenses to
net premiums and fees earned was approximately 49% and 50% in the first nine
months of 2001 and 2000, respectively. These ratios were approximately 48% and
50% for the third quarter 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 quarter and nine months ended September 30, 2001 when compared to the
same periods in 2000. The Mortgage Guaranty segment's expense ratio declined
moderately for this year's most recent quarterly and year to date periods as
premium and fee revenues grew by larger dollar amounts. The insurance expense
ratio for the title segment was lower in the third quarter and first nine months
of 2001 compared to the same period in 2000 due mostly to the increase in
premium and fees volume without a proportional increase in expenses.
Consolidated interest and other charges decreased slightly in the third quarter
and first nine months of 2001 principally due to lower interest costs on a
decreased debt level.
The Company's mix of coverages, industries served, and long-standing objective
of assuring wide dispersion of risks in selected geographical areas, have likely
minimized claim exposures related to the September 11, 2001 terrorist attack on
America. The income statements for the quarter and nine months ended September
30, 2001 nonetheless include precautionary charges aggregating $4.0 million to
cover the possibility of isolated property, workers' compensation, trip delay,
and life insurance claims. Of this total, pre-tax claim provisions of $3.0
million and $1.0 million have been charged to the General and Life insurance
segments, respectively. The resulting aggregate post tax charge of $2.6 million
reduced consolidated net income 2 cents per share for the third quarter and
first nine months of 2001.
Pre-Tax and Net Income:
Consolidated income before taxes increased by 3.5% in the third quarter and
26.8% in the first nine months of 2001 when compared to the same periods one
year ago. The continuation of more positive trends in General Insurance
underwriting performance, further growth of Mortgage Guaranty income from
underwriting and investments, and accelerated growth in premiums and fees from
greater refinancing activity which benefitted the Title Insurance Group in
particular, led to greater contributions to pre-tax operating earnings in both
the third quarter and year-to-date periods.
The effective consolidated income tax rate was 32.0% and 30.8% in the third
quarter and nine month period of 2001, respectively, and 31.3% and 30.3% for the
third quarter and nine 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.
12
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.
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 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
--------------------------------------
(Registrant)
Date: November 9, 2001
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/s/ John S. Adams
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John S. Adams
Senior Vice President &
Chief Financial Officer