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 March 31, 2002 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
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(Exact name of registrant as specified in its charter)
Delaware No. 36-2678171
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(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 March 31, 2002
--------------------------- --------------------------
Common Stock / $1 par value 120,275,795
There are 14 pages contained in this report.
2
OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / March 31, 2002
INDEX
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PAGE NO.
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PART I FINANCIAL INFORMATION:
CONSOLIDATED SUMMARY BALANCE SHEETS 3
CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 9
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 10 - 12
PART II OTHER INFORMATION 13 & 14
3
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited)
($ in Millions)
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March 31, December 31,
2002 2001
---------------- ----------------
<s> <c> <c>
Assets
Investments: Held to maturity:
Fixed maturity securities (at amortized cost)
(fair value: $2,126.9 and $2,173.6) $2,079.5 $2,111.8
Other long-term investments (at cost) 59.6 60.8
---------------- ----------------
Total 2,139.1 2,172.7
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Available for sale:
Fixed maturity securities (at fair value) (cost: $2,691.9 and $2,536.4) 2,733.9 2,610.2
Equity securities (at fair value) (cost: $321.6 and $318.3) 405.0 391.6
Short-term investments (at fair value which approximates cost) 292.1 298.5
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Total 3,431.1 3,300.4
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Total investments 5,570.3 5,473.1
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Other Assets: Cash 58.5 38.0
Accrued investment income 72.6 75.4
Accounts and notes receivable 456.4 447.5
Reinsurance balances and funds held 58.0 60.5
Reinsurance recoverable: Paid losses 40.5 25.0
Policy and claim reserves 1,396.9 1,390.3
Deferred policy acquisition costs 183.7 179.8
Sundry assets 233.1 230.1
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2,500.0 2,447.0
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Total Assets $8,070.3 $7,920.2
================ ================
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Liabilities, Preferred Stock and
Common Shareholders' Equity
Liabilities: Future policy benefits $105.0 $110.4
Losses, claims and settlement expenses 3,489.5 3,451.0
Unearned premiums 620.9 604.1
Other policyholders' benefits and funds 54.8 53.3
---------------- ----------------
Total policy liabilities and accruals 4,270.3 4,218.8
Commissions, expenses, fees and taxes 152.4 165.8
Reinsurance balances and funds 127.1 121.2
Federal income tax payable: Current 16.7 7.2
Deferred 383.2 376.5
Debt 154.1 159.0
Sundry liabilities 91.5 87.4
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Total liabilities 5,195.7 5,136.1
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Preferred
Stock: Convertible preferred stock --- 0.3
---------------- ----------------
Common Common stock 123.4 122.1
Shareholders' Additional paid-in capital 246.3 219.8
Equity: Retained earnings 2,460.9 2,383.2
Accumulated other comprehensive income 76.6 91.1
Treasury stock (at cost) (32.6) (32.6)
---------------- ----------------
Total Common Shareholders' Equity 2,874.6 2,783.7
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Total Liabilities, Preferred Stock
and Common Shareholders' Equity $8,070.3 $7,920.2
================ ================
See accompanying notes.
4
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited)
($ in Millions, Except Common Share Data)
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Quarters Ended
March 31,
-----------------------------------
2002 2001
----------------- -----------------
<s> <c> <c>
Revenues: Net premiums earned $489.0 $406.3
Title, escrow and other fees 62.6 49.8
----------------- -----------------
Sub-total 551.6 456.2
Net investment income 67.0 68.4
Realized investment gains 9.7 14.6
Other income 10.5 8.2
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Net revenues 639.0 547.5
----------------- -----------------
Expenses: Benefits, claims and settlement expenses 224.9 201.7
Underwriting, acquisition and
insurance expenses 271.2 219.9
Interest and other expenses 2.7 5.2
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Total expenses 498.9 426.9
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Income before income taxes and items below 140.1 120.6
----------------- -----------------
Income Taxes: Currently payable 29.3 18.2
Deferred 15.1 19.4
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Total income taxes 44.5 37.6
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95.6 82.9
Other items - net --- 1.0
----------------- -----------------
Net Income: $95.5 $83.9
================= =================
Net Income
Per Share: Basic $0.79 $0.71
================= =================
Diluted $0.79 $0.70
================= =================
Dividends Per
Common Share: Cash dividends $0.15 $0.14
================= =================
Average number of common and common
equivalent shares outstanding:
Basic 120,226,110 118,536,809
================= =================
Diluted 121,323,388 120,150,401
================= =================
See accompanying notes.
5
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
($ in Millions)
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Quarters Ended
March 31,
-----------------------------------
2002 2001
----------------- -----------------
<s> <c> <c>
Net income as reported $95.5 $83.9
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Other comprehensive income (loss):
Foreign currency translation adjustment 0.1 (1.8)
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Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period (13.3) 29.8
Less: elimination of pretax realized gains
included in income as reported 9.7 14.6
----------------- -----------------
Pretax unrealized gains (losses) on securities
carried at market value (23.0) 15.2
Deferred income taxes (credits) (8.3) 5.3
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Net unrealized gains (losses) on securities (14.6) 9.9
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Net adjustments (14.5) 8.0
----------------- -----------------
Comprehensive income $81.0 $91.9
================= =================
See accompanying notes.
6
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in Millions)
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Quarters Ended
March 31,
------------------------------------
2002 2001
----------------- -----------------
<s> <c> <c>
Cash flows from operating activities:
Net income $95.5 $83.9
Adjustment to reconcile net income to
net cash provided by operating activities:
Deferred policy acquisition costs (3.2) (15.6)
Premiums and other receivables (6.3) (110.2)
Unpaid claims and related items 25.1 (8.6)
Future policy benefits and policyholders' funds 16.2 116.0
Income taxes 24.2 27.7
Reinsurance balances and funds (6.8) 7.3
Accounts payable, accrued expenses and other 5.0 (13.0)
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Total 149.7 87.5
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Cash flows from investing activities:
Sales of fixed maturity securities:
Held to maturity:
Maturities and early calls 53.9 48.3
Available for sale:
Maturities and early calls 99.8 49.2
Other 7.9 28.3
Sales of equity securities 41.9 22.6
Sales of other investments 0.3 1.1
Sales of fixed assets for company use 0.1 0.4
Cash and short-term investments of subsidiary acquired 0.8 ---
Purchases of fixed maturity securities:
Held to maturity (23.2) (17.1)
Available for sale (262.9) (195.6)
Purchases of equity securities (44.4) (38.7)
Purchases of other investments (0.7) (1.1)
Purchases of fixed assets for company use (2.8) (2.8)
Other-net (0.7) 0.7
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Total (129.9) (104.6)
----------------- -----------------
Cash flows from financing activities:
Issuance of preferred and common stocks 16.5 3.3
Repayments of term loans (5.0) (9.0)
Redemption of debentures and notes (0.2) (0.2)
Dividends on common shares (17.9) (16.5)
Dividends on preferred shares --- ---
Purchase of treasury stock --- ---
Other-net 0.8 (0.6)
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Total (5.7) (23.1)
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Increase (decrease) in cash and short-term investments 14.0 (40.2)
Cash and short-term investments, beginning of period 336.6 411.0
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Cash and short-term investments, end of period $350.6 $370.8
================= =================
Supplemental disclosure of cash flow information:
Cash paid during the period for: Interest $0.3 $1.8
================= =================
Income taxes $13.5 $9.3
================= =================
See accompanying notes.
7
OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited)
($ 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
("GAAP") 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.
During the first quarter of 2002, the Company adopted Statement of
Financial Accounting Standards No. 142 (FAS 142) " Goodwill and Other
Intangible Assets". Under FAS 142, goodwill and certain intangible assets
are no longer being amortized against operations but must be tested
periodically for possible impairment of their carrying values. The Company
completed the transitional goodwill impairment test required by FAS 142 in
the first quarter of 2002 and determined that there was no indication of
goodwill or intangible asset impairment.
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 March 31,
---------------------------
2002 2001
------------ ------------
Numerator:
Income before extraordinary item............. $ 95.5 $ 83.9
Less preferred stock dividends............... -- --
------------ ------------
Numerator for basic earnings per share -
income available to common stockholders..... 95.5 83.9
Effect of dilutive securities:
Convertible preferred stock dividends........ -- --
------------ ------------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions.................... $ 95.5 $ 83.9
============ ============
Denominator:
Denominator for basic earnings per share -
weighted-average shares..................... 120,226,110 118,536,809
Effect of dilutive securities:
Stock options................................. 1,073,194 1,565,959
Convertible preferred stock................... 24,084 47,633
------------ ------------
Dilutive potential common shares.............. 1,097,278 1,613,592
------------ ------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions........................... 121,323,388 120,150,401
============ ============
Basic earnings per share........................ $ 0.79 $ 0.71
============ ============
Diluted earnings per share...................... $ 0.79 $ 0.70
============ ============
8
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 $88.5 at March 31, 2002. Unrealized
appreciation of investments, before applicable deferred income taxes of
$47.3, at March 31, 2002 included gross unrealized gains and (losses) of
$169.4 and $(33.5), respectively.
For the quarters ended March 31, 2002 and 2001, net unrealized appreciation
(depreciation) of investments, net of deferred income taxes (credits),
amounted to $(14.6) and $9.9, respectively.
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 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
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Quarters Ended March 31,
-------------------------------
2002 2001
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<s> <c> <c>
General Insurance Group:
Net premiums earned........................................................ $ 268.7 $ 231.9
Net investment income and other income (a)................................. 47.6 49.1
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Total.................................................................... $ 316.4 $ 281.1
============= ==============
Income before taxes........................................................ $ 40.1 $ 35.2
============= ==============
Income tax expense......................................................... $ 10.6 $ 8.5
============= ==============
Mortgage Guaranty Group:
Net premiums earned........................................................ $ 91.6 $ 86.3
Net investment income and other income (a)................................. 21.8 19.0
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Total.................................................................... $ 113.4 $ 105.4
============= ==============
Income before taxes........................................................ $ 70.3 $ 61.5
============= ==============
Income tax expense......................................................... $ 23.7 $ 20.8
============= ==============
Title Insurance Group:
Net premiums earned........................................................ $ 113.9 $ 73.7
Title, escrow and other fees ............................................. 62.6 49.8
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Sub-total................................................................ 176.5 123.6
Net investment income and other income (a)................................. 5.7 5.8
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Total.................................................................... $ 182.2 $ 129.4
============= ==============
Income before taxes........................................................ $ 20.1 $ 10.9
============= ==============
Income tax expense......................................................... $ 6.7 $ 3.7
============= ==============
Life Insurance Group:
Net premiums earned........................................................ $ 14.8 $ 14.2
Net investment income and other income (a)................................. 1.8 2.0
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Total.................................................................... $ 16.6 $ 16.3
============= ==============
Income before taxes........................................................ $ 1.6 $ 1.5
============= ==============
Income tax expense......................................................... $ 0.6 $ 0.5
============= ==============
9
Reconciliations of Segments to Consolidated
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Quarters Ended March 31,
-------------------------------
2002 2001
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<s> <c> <c>
Revenues:
Total revenues for reportable segments..................................... $ 628.7 $ 532.3
Net realized investment gains.............................................. 9.7 14.6
Other revenues............................................................. 1.6 3.8
Elimination of intersegment revenues (b)................................... (1.0) (3.2)
------------- --------------
Total consolidated revenues.............................................. $ 639.0 $ 547.5
============= ==============
Income before taxes:
Total income before taxes of reportable segments........................... $ 132.3 $ 109.3
Net realized investment gains.............................................. 9.7 14.6
Other sources - net........................................................ (1.9) (3.2)
------------- --------------
Income before income taxes and
extraordinary items...................................................... $ 140.1 $ 120.6
============== ==============
--------------
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 require
a re-evaluation of previously settled or denied occupational disease claims,
were challenged by the insurance and coal mining industries in a lawsuit
filed in the United States District Court for the District of Columbia. The
challenge was summarily dismissed by the Court and an appeal has been filed
by the insurance and coal mining industries before the United States Court
of Appeals, and is currently pending. At this time, the outcome of this
challenge is uncertain and the potential impact on gross and net of
reinsurance reserves or retrospectively rated 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 lawsuit. 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 lawsuits 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 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). The
subsidiary defended against the alleged practice denoted at (3) on the
grounds that such practices are common within the industry, are not in
conflict with any laws or regulations, and other meritorious defenses. The
consolidated lawsuits have been tried and a judgement rendered, affirming in
part and denying in part the subsidiary's defenses. In the aggregate, the
judgement, excluding post-judgement interest, amounts to approximately $33.0
million. The subsidiary has made preparations to appeal the judgement, and
management believes that the judgement will be substantially reduced on
appeal. Through March 31, 2002, the subsidiary has continually evaluated its
exposures since the litigation began and has paid or otherwise provided
cumulatively $46.6 million including its best estimate of its remaining
liability and costs associated with all these issues.
10
OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Quarters Ended March 31, 2002 and 2001
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OVERVIEW
This analysis pertains to the consolidated accounts of Old Republic
International Corporation which are presented on the basis of generally accepted
accounting principles ("GAAP"). The Company conducts its business through four
separate segments, namely its General (property and liability coverages),
Mortgage Guaranty, Title, and Life insurance groups.
CHANGE IN ACCOUNTING POLICIES
During the first quarter of 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 (FAS 142) " Goodwill and Other Intangible Assets".
Under FAS 142, goodwill and certain intangible assets are no longer being
amortized against operations but must be tested periodically for possible
impairment of their carrying values. The Company completed the transitional
goodwill impairment test required by FAS 142 in the first quarter of 2002 and
determined that there was no indication of goodwill or intangible asset
impairment.
FINANCIAL POSITION
Old Republic's financial position at March 31, 2002 reflected increases in
assets, liabilities and common shareholders' equity when compared to the
immediately preceding year-end of 1.9%, 1.2% and 3.3%, respectively. Cash and
invested assets represented 70.6% and 70.5% of consolidated assets as of March
31, 2002 and December 31, 2001, respectively. Consolidated operating cash flow
was positive at $149.7 million in the latest quarter, compared to $87.5 million
in the same period of 2001. The increase in consolidated operating cash flow was
largely due to greater contributions by the Company's three largest operating
segments. In 2002, the invested asset base increased 2.1% to $5.70 billion when
compared to the immediately preceding year-end principally as a result of
greater operating cash flow in each of its business segments.
Relatively high short-term maturity investment positions continued to be
maintained as of March 31, 2002. Short-term investment positions reflect a large
variety of seasonal and intermediate-term factors including current operating
needs, 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 quarter of 2002, 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 quarter of 2002, Old Republic's investment in equity securities
increased slightly in relation to the related invested balance at year-end 2001
due to portfolio additions and net unrealized gains. At March 31, 2002, 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 Company does not own or utilize derivative financial instruments for the
purpose of hedging, enhancing the overall return of its investment portfolio, or
reducing the cost of its debt obligations. Traditional investment management
tools and techniques are employed to address the yield and valuation exposures
of its invested assets base. The long-term fixed maturity investment portfolio
is managed so as to limit various risks inherent in the bond market. Credit risk
is addressed through asset diversification and the purchase of investment grade
securities. Reinvestment rate risk is controlled by concentrating on
non-callable issues, and by taking asset-liability matching practices into
account; purchases of mortgage and asset backed securities, which have variable
principal prepayment options, are generally avoided. Market value risk is
limited through the purchase of bonds of intermediate maturity. The combination
of these investment management tenets is expected to produce a more stable
long-term fixed maturity investment portfolio that is not subject to extreme
interest rate sensitivity and principal deterioration. The market value of the
Company's long-term fixed maturity investment portfolio is sensitive, however,
to fluctuations in the level of interest rates, but not materially affected by
changes in anticipated cash flows caused by any prepayments. The impact of
interest rate movements on the long-term fixed maturity investment portfolio
generally affects net realized gains or losses when securities are sold. With a
market value of approximately $4.86 billion, the long- term fixed maturity
investment portfolio has an average maturity of 4.2 years and an indicated
duration of 3.7. With regard to its $402.4 million common stock portfolio, the
Company does not own nor engage in any type of option writing. Possible declines
in values for Old Republic's bond and stock portfolios would affect negatively
the level of the common shareholders' equity account at any point in time, but
would not necessarily result in the recognition of realized investment losses as
a likely combination of positive operating cash flow and the scheduled emergence
of bond maturities should provide sufficient funds to meet obligations to
policyholders and claimants, as well as debt service and cash dividend
requirements at the holding company level.
11
Among other major assets, substantially all of the Company's accounts and notes
receivable are not past due, and reinsurance receivable balances on paid or
estimated unpaid losses are deemed to be fairly stated and recoverable from
responsible reinsurers.
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. During 2002, the Company used a part of available cash
flow to redeem a portion of its commercial paper outstanding, thereby reducing
consolidated debt by approximately $5.0 million.
Old Republic's capitalization of $3.02 billion at March 31, 2002 consisted of
debt of $154.1 million, a minor amount of convertible preferred stock, and
common shareholders' equity of $2.87 billion. The increase in the common
shareholders' equity account during the quarter ended March 31, 2002 reflects
primarily the retention of earnings in excess of dividend requirements,
partially offset by a decrease in the value of bonds and stocks carried at
market values. At its March 21, 2002 meeting, the Company's Board of Directors
authorized the reacquisition of up to $200.0 million of common shares as market
conditions warrant during the two year period from that date.
RESULTS OF OPERATIONS
Revenues:
Consolidated net premiums and fees earned in the first quarter of 2002 amounted
to $551.6 million versus $456.2 million in the year ago period. For the first
three months of 2002, the Company's General Insurance Group reported earned
premium volume of $268.7 million, up 15.8% from $231.9 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 three years. Premiums
for the Mortgage Guaranty Group increased by 6.0% to $91.6 million from $86.3
million in the year-ago quarter. Title Group premium and fee revenues increased
42.8% to $176.5 million in the first quarter of 2002 when compared to the same
quarter of 2001 as a result of higher mortgage financing and refinancing
activity. Life Group premium volume increased to $14.8 million, up 3.9%, when
compared to the same quarter of 2001.
Consolidated net investment income of $67.0 million in the first quarter of 2002
was down slightly when compared to the preceding year due to the prevailing
lower yield environment. The average annualized yield on investments was
approximately 4.9% and 5.4% at the end of March 31, 2002 and 2001, respectively.
Yield trends reflect at once the relatively short maturity of Old Republic's
fixed maturity securities portfolio, a prevailing lower yield environment during
the first quarter of 2002, and an increase in equity investments which typically
provide lower current yields.
The Company's investment policies have not been designed to maximize realized
investment gains. Net realized gains of $9.7 million in the first quarter of
2002, compared to $14.6 million in the prior year quarter, were substantially
all due to the disposition of equity securities. Dispositions of fixed maturity
securities arise mostly from scheduled maturities and early calls; for the first
three months of 2002 and 2001, 95.1% and 77.5%, 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 41% and 44% in the first quarters
of 2002 and 2001, respectively. The consolidated claims ratio for property and
liability coverages was affected positively by the previously noted increase in
premiums earned and improved risk selection. The Mortgage Guaranty Group's
claims ratio was significantly lower during the first quarter 2002 due to better
than expected trends in the loan default rates and resumption of payments on
loans temporarily in default. Title claims costs were up moderately in 2002,
while Life Group claim costs were slightly higher in the latest quarter.
Consolidated benefit, claim, and related settlement costs for each of the
Company's business segments are affected by the adequacy of reserves established
for current and prior years' claim occurrences. Such reserves are recorded on a
case by case basis and by means of a large number of formulas and calculations
to cover known as well as incurred but not as yet reported claims at each
balance sheet date. In the aggregate, the Company's record in establishing such
reserves has not indicated deficiencies for many years. However, the reserves
posted by insurers such as the Company are necessarily based on a wide variety
of estimates, can be affected by lagging claim emergence or reporting delays,
and their ultimate disposition is subject to a multitude of economic, political,
judicial and societal factors that cannot be anticipated or quantified
accurately. Accordingly, there can be no guaranty that such reserves will always
be on the mark, and any redundancies or deficiencies would be recorded in the
periods during which they emerge and are quantified.
The ratio of consolidated underwriting, acquisition and insurance expenses to
net premiums and fees earned was approximately 49% and 48% in the first quarters
of 2002 and 2001, 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 slightly due to a
greater increase in premium revenues than operating expenses, while the Mortgage
Guaranty segment's expense ratio rose moderately in this year's first quarter.
The insurance expense ratio for the title segment was lower in the first quarter
of 2002 compared to the same period in 2001 due in part to an increase in
premium and fees volume and good controls on operating expenses. Consolidated
interest and other corporate charges decreased in the current quarter due
primarily to reduced interest costs on a gradually lower debt level.
12
Pretax and Net Income:
Consolidated income before taxes increased by 16.2% in the first quarter of 2002
when compared to the same period one year ago. General insurance results
improved meaningfully in the first quarter due to better underwriting
experience. 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,
also led to greater contributions to pretax operating earnings in the current
year's first quarter.
The effective consolidated income tax rate was 31.8% and 31.3% in the first
quarters of 2002 and 2001, respectively. The rates for each period reflect
primarily the varying proportions of pretax operating income derived from
partially tax-sheltered investment income (principally tax-exempt interest) on
the one hand, and the combination of fully taxable investment income, realized
investments gains, 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.
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
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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: May 9, 2002
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/s/ John S. Adams
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John S. Adams
Senior Vice President &
Chief Financial Officer