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, 2004 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 001-10607
OLD REPUBLIC INTERNATIONAL CORPORATION
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(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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes _X_ No___
Shares Outstanding
Class March 31, 2004
- ----------------------------------- ------------------------------------
Common Stock / $1 par value 181,970,003
There are 28 pages contained in this report.
OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / March 31, 2004
INDEX
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PAGE NO.
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PART I FINANCIAL INFORMATION:
CONSOLIDATED SUMMARY BALANCE SHEETS 3
CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 12
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 13 - 24
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 25
CONTROLS AND PROCEDURES 25
PART II OTHER INFORMATION 26
SIGNATURE 27
EXHIBIT INDEX 28
2
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited)
($ in Millions)
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March 31, December 31,
2004 2003
---------------- ----------------
<s> <c> <c>
Assets
Investments: Available for sale:
Fixed maturity securities (at fair value) (cost: $5,633.7 and $5,463.9) $5,959.7 $5,741.1
Equity securities (at fair value) (cost: $425.2 and $439.2) 474.5 513.5
Short-term investments (at fair value which approximates cost) 439.8 403.9
Miscellaneous investments 55.6 53.2
---------------- ----------------
Total 6,929.7 6,711.8
---------------- ----------------
Held to maturity:
Miscellaneous investments 13.5 8.5
---------------- ----------------
Total 13.5 8.5
---------------- ----------------
Total investments 6,943.3 6,720.4
---------------- ----------------
Other Assets: Cash 58.9 47.2
Accrued investment income 80.2 81.5
Accounts and notes receivable 558.3 564.4
Federal income tax recoverable: Current --- 15.9
Reinsurance balances and funds held 76.2 69.9
Reinsurance recoverable: Paid losses 47.8 55.9
Policy and claim reserves 1,704.0 1,667.8
Deferred policy acquisition costs 224.6 221.9
Sundry assets 265.9 267.0
---------------- ----------------
3,016.3 2,991.8
---------------- ----------------
Total Assets $9,959.6 $9,712.3
================ ================
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Liabilities, Preferred Stock and Common Shareholders' Equity
Liabilities: Future policy benefits $100.2 $100.9
Losses, claims and settlement expenses 4,142.6 4,022.7
Unearned premiums 800.7 814.8
Other policyholders' benefits and funds 71.9 71.3
---------------- ----------------
Total policy liabilities and accruals 5,115.6 5,009.8
Commissions, expenses, fees and taxes 177.4 206.1
Reinsurance balances and funds 151.5 147.8
Federal income tax payable: Current 28.7 ---
Deferred 571.9 556.8
Debt 137.4 137.7
Sundry liabilities 108.8 100.2
Commitments and contingent liabilities --- ---
---------------- ----------------
Total liabilities 6,291.5 6,158.6
---------------- ----------------
Preferred
Stock: Convertible preferred stock (*) --- ---
---------------- ----------------
Common Common stock (*) 184.8 184.4
Shareholders' Additional paid-in capital 258.5 245.5
Equity: Retained earnings 2,982.6 2,896.8
Accumulated other comprehensive income 252.1 236.8
Treasury stock (at cost) (*) (10.0) (10.0)
---------------- ----------------
Total Common Shareholders' Equity 3,668.1 3,553.6
---------------- ----------------
Total Liabilities, Preferred Stock and Common Shareholders' Equity $9,959.6 $9,712.3
================ ================
(*) At March 31, 2004 and December 31, 2003 there were 75,000,000 shares of
$0.01 par value preferred stock authorized, of which no shares were
outstanding. As of the same dates, there were 500,000,000 shares of common
stock, $1.00 par value, authorized, of which 184,835,545 at March 31, 2004
and 184,471,698 at December 31, 2003 were issued and outstanding. At March
31, 2004 and December 31, 2003 there were 100,000,000 shares of Class B
Common Stock, $1.00 par value, authorized, of which no shares were issued.
Common shares classified as treasury stock were 2,865,542 as of both March
31, 2004 and December 31, 2003.
See accompanying notes.
3
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited)
($ in Millions, Except Common Share Data)
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Quarters Ended
March 31,
------------------------------------
2004 2003
----------------- -----------------
<s> <c> <c>
Revenues: Net premiums earned $660.7 $583.9
Title, escrow and other fees 65.8 79.6
----------------- -----------------
Total premiums and fees 726.6 663.6
Net investment income 70.5 69.4
Other income 9.6 12.7
----------------- -----------------
Total operating revenues 806.8 745.8
Realized investment gains (losses) 15.6 (6.7)
----------------- -----------------
Total revenues 822.4 739.0
----------------- -----------------
Expenses: Benefits, claims and settlement expenses 302.1 249.5
Underwriting, acquisition and
insurance expenses 360.0 333.8
Interest and other expenses 2.0 1.8
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Total expenses 664.2 585.2
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Income before income taxes and items below 158.2 153.8
----------------- -----------------
Income Taxes: Currently payable 45.6 42.9
Deferred 6.1 6.4
----------------- -----------------
Total income taxes 51.7 49.4
----------------- -----------------
106.4 104.4
Other items - net --- ---
----------------- -----------------
Net Income: $106.4 $104.3
================= =================
Net Income
Per Share: Basic $0.58 $0.57
================= =================
Diluted $0.57 $0.57
================= =================
Average shares outstanding:
Basic 181,962,757 180,932,204
================= =================
Diluted 184,504,465 181,985,790
================= =================
Dividends Per
Common Share: Cash dividends $0.113 $0.107
================= =================
See accompanying notes.
4
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
($ in Millions)
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Quarters Ended
March 31,
------------------------------------
2004 2003
----------------- -----------------
<s> <c> <c>
Net income as reported $106.4 $104.3
----------------- -----------------
Other comprehensive income (loss):
Foreign currency translation adjustment (1.3) 4.4
----------------- -----------------
Unrealized gains (losses) on securities:
Unrealized gains arising during period 41.2 81.6
Less: elimination of pretax realized gains (losses)
included in income as reported 15.6 (6.7)
----------------- -----------------
Pretax unrealized gains on securities
carried at market value 25.6 88.4
Deferred income taxes 8.9 30.8
----------------- -----------------
Net unrealized gains on securities 16.7 57.5
----------------- -----------------
Net adjustments 15.3 61.9
----------------- -----------------
Comprehensive income $121.7 $166.3
================= =================
See accompanying notes.
5
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in Millions)
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Quarters Ended
March 31,
------------------------------------
2004 2003
----------------- -----------------
<s> <c> <c>
Cash flows from operating activities:
Net income $106.4 $104.3
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred policy acquisition costs (2.7) (5.8)
Premiums and other receivables 11.1 (10.0)
Unpaid claims and related items 67.8 37.3
Future policy benefits and policyholders' funds 1.1 31.9
Income taxes 50.7 40.3
Reinsurance balances and funds 5.5 1.2
Accounts payable, accrued expenses and other (5.4) (2.9)
----------------- -----------------
Total 234.6 196.4
----------------- -----------------
Cash flows from investing activities:
Sales of fixed maturity securities:
Available for sale:
Maturities and early calls 187.1 183.2
Other 23.5 27.3
Sales of equity securities 13.9 10.4
Sales of other investments 0.5 0.8
Sales of fixed assets for company use 0.1 0.6
Purchases of fixed maturity securities:
Available for sale (388.9) (227.8)
Purchases of equity securities --- (5.2)
Purchases of other investments (0.7) (1.3)
Purchases of fixed assets for company use (3.2) (5.3)
Purchases of investment in affiliate (1.4) ---
Other-net 1.3 (1.8)
----------------- -----------------
Total (167.6) (19.0)
----------------- -----------------
Cash flows from financing activities:
Issuance of preferred and common stocks 6.3 0.4
Redemption of debentures and notes (0.3) (0.9)
Dividends on common shares (20.6) (19.2)
Dividends on preferred shares --- ---
Other-net (4.7) (5.8)
----------------- -----------------
Total (19.3) (25.6)
----------------- -----------------
Increase (decrease) in cash and short-term investments 47.6 151.7
Cash and short-term investments, beginning of period 451.2 291.1
----------------- -----------------
Cash and short-term investments, end of period $498.8 $442.8
================= =================
Supplemental disclosure of cash flow information:
Cash paid during the period for: Interest $0.1 $0.1
================= =================
Income taxes $0.3 $8.6
================= =================
See accompanying notes.
6
OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited)
($ 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 otherwise disclosed herein. The financial accounting and
reporting process relies on estimates and on the exercise of judgment, but
in the opinion of management all adjustments, consisting only of normal
recurring accruals, necessary for a fair statement of the results were
recorded for the interim periods.
The Company adopted Statement of Financial Accounting Standards No. 142
("FAS 142") "Goodwill and Other Intangible Assets". Under FAS 142, which
took effect for fiscal years beginning after December 15, 2001, all
goodwill resulting from business combinations will no longer be amortized
against operations but must be tested at least annually for possible
impairment of its continued value. Such a test was performed in the first
quarters of 2004 and 2003 and did not result in impairment charges. At
March 31, 2004 and December 31, 2003, the Company's consolidated
unamortized goodwill asset balance was $88.8 and $87.5, respectively.
Effective January 1, 2003, the Company elected to reclassify its fixed
maturity securities categorized as held to maturity to the available for
sale classification. The securities involved are primarily utility and
tax-exempt bonds that accounted for approximately 34 percent of Old
Republic's investment portfolio. The decision was prompted by restrictive
accounting rules affecting held to maturity investment securities. The
necessarily mechanical application of these rules can inhibit the
Corporation's ability to optimally manage its investments from a practical
business point of view. This change has no income statement impact, no
effect on Old Republic's ability to hold individual securities to maturity
as it may deem appropriate, and does not affect the Company's necessary
long-term orientation in the management of its business. Going forward, Old
Republic's shareholders' equity account could reflect somewhat greater
period-to-period volatility as the entire bond, note and stock investment
portfolio will now be marked to market on a quarterly basis. Nevertheless,
the Company believes that its ability to hold securities until they mature
or until such other time when they can be sold opportunistically are much
more significant factors than the balance sheet or income statement effect
of changes in market values at any point in time.
During the second quarter of 2003, the Company adopted Statement of
Financial Accounting Standards No. 148 ("FAS 148") "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FAS
No. 123" as described more fully in footnote 2(b) herein.
7
2. Common Share Data:
(a) Earnings Per Share - Common share data has been retroactively adjusted
to reflect all stock dividends and splits. The following table provides a
reconciliation of the income and number of shares used in basic and diluted
earnings per share calculations.
Quarters Ended March 31,
-------------------------------
2004 2003
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<s> <c> <c>
Numerator:
Net Income .............................................................. $ 106.4 $ 104.3
Less preferred stock dividends........................................... -- --
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Numerator for basic earnings per share -
income available to common stockholders............................... 106.4 104.3
Effect of dilutive securities:
Convertible preferred stock dividends.................................... -- --
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Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions................................................ $ 106.4 $ 104.3
============= =============
Denominator:
Denominator for basic earnings per share -
weighted-average shares............................................... 181,962,757 180,932,204
Effect of dilutive securities:
Stock options............................................................ 2,541,708 1,045,321
Convertible preferred stock.............................................. -- 8,265
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Dilutive potential common shares......................................... 2,541,708 1,053,586
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Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions...................................................... 184,504,465 181,985,790
============= =============
Basic earnings per share.................................................... $ 0.58 $ 0.57
============= =============
Diluted earnings per share.................................................. $ 0.57 $ 0.57
============= =============
8
(b) Stock Options - The Financial Accounting Standards Board has issued FAS
148 for periods starting after December 15, 2002. As of April 1, 2003, the
Company adopted the requirements of FAS 148 utilizing the prospective
method. Under this method, stock-based compensation expense is recognized
for awards granted after the beginning of the fiscal year of adoption. For
all other stock option awards outstanding, the Company continues to use the
intrinsic value method permitted under existing accounting pronouncements.
The following table shows a comparison of net income and related per share
information as reported, and on a pro-forma basis on the assumption that
the estimated value of stock options was treated as compensation cost. In
estimating the compensation cost of options, the fair value of options has
been calculated using the Black-Scholes option pricing model. Expense
recognition of stock options granted in 2003 and 2004 reduced earnings per
share by two cents per share in this year's first quarter.
Quarters Ended March 31,
--------------------------------
2004 2003
-------------- --------------
<s> <c> <c>
Comparative data:
Net income:
As reported........................................................... $ 106.4 $ 104.3
Add: Stock based compensation expense included in
reported income, net of related tax effects........................ 4.1 --
Deduct: Total stock-based employee compensation
expenses determined under the fair value based
method for all awards, net of related tax effects.................. 9.5 3.5
-------------- --------------
Pro-forma basis....................................................... $ 101.0 $ 100.7
============== ==============
Basic earnings per share:
As reported........................................................... $ 0.58 $ 0.57
Pro-forma basis....................................................... 0.56 0.56
Diluted earnings per share:
As reported........................................................... 0.57 0.57
Pro-forma basis....................................................... $ 0.55 $ 0.55
============== ==============
Options were granted during the first quarter of 2004 and 2003 for
1,990,500 and 1,852,500 shares of common stock, respectively. Options
outstanding as of March 31, 2004 and 2003 were 9,895,529 and 8,983,550,
respectively. The maximum number of options available for future issuance
as of March 31, 2004 is 1,022,671.
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 $250.9 at March 31, 2004. Unrealized
appreciation of investments, before applicable deferred income taxes of
$135.1, at March 31, 2004 included gross unrealized gains and (losses) of
$428.6 and ($42.5), respectively.
For the quarters ended March 31, 2004 and 2003, net unrealized appreciation
of investments, net of deferred income taxes (credits), amounted to $16.7
and $57.5, respectively.
9
4. Pension Plans:
The Corporation has three defined benefit pension plans covering a portion
of its work force. The three plans are the Old Republic International
Salaried Employees Restated Retirement Plan (the Old Republic Plan), the
Bituminous Casualty Corporation Retirement Income Plan (the Bituminous
plan) and the Old Republic National Title Group Pension Plan (the Title
Plan). The plans are defined benefit plans pursuant to which pension
payments are based primarily on years of service and employee compensation
near retirement. It is the Corporation's policy to fund the plans' costs as
they accrue. Plan assets are comprised principally of bonds, common stocks
and short-term investments.
The measurement dates used to determine pension measurements are December
31 for the Old Republic plan and the Bituminous Plan and September 30 for
the Title Plan.
The components of estimated net periodic pension cost for the plans
consisted of the following:
Quarters Ended March 31,
--------------------------------
2004 2003
-------------- --------------
<s> <c> <c>
Service cost.......................................................... $ 1.9 $ 1.4
Interest cost......................................................... 2.8 2.7
Expected return on plan assets........................................ (3.5) (3.5)
Recognized loss....................................................... 0.6 0.7
-------------- --------------
Net cost.............................................................. $ 1.9 $ 1.4
============== ==============
The companies expect to contribute $0.4 to their pension plans in calendar
year 2004. The companies contributed $10.1 in 2003. Such contributions
reflect amounts required by funding regulations or laws. There are no
discretionary contributions anticipated nor are any non-cash contributions
expected during 2004. There were no discretionary contributions nor any
non-cash contributions made in 2003.
10
5. 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. 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
results exclude realized investment gains or losses and impairments as
these are aggregated in consolidated totals. The contributions of Old
Republic's insurance industry segments to consolidated totals are shown in
the following table.
Quarters Ended March 31,
------------------------------
2004 2003
------------- -------------
<s> <c> <c>
General Insurance Group:
Net premiums earned........................................................... $ 376.5 $ 313.9
Net investment income and other income (a).................................... 48.8 47.9
------------- -------------
Total revenues before realized gains (losses)........................... $ 425.4 $ 361.8
============= =============
Income before taxes and realized investment gains (losses).................... $ 74.3 $ 59.4
============= =============
Income tax expense............................................................ $ 23.1 $ 17.5
============= =============
Mortgage Guaranty Group:
Net premiums earned........................................................... $ 98.7 $ 100.0
Net investment income and other income (a).................................... 21.4 24.8
------------- -------------
Total revenues before realized gains (losses)........................... $ 120.2 $ 124.8
============= =============
Income before taxes and realized investment gains (losses).................... $ 57.4 $ 75.9
============= =============
Income tax expense............................................................ $ 19.3 $ 25.7
============= =============
Title Insurance Group:
Net premiums earned........................................................... $ 168.3 $ 153.9
Title, escrow and other fees ................................................ 65.8 79.6
------------- -------------
Sub-total............................................................... 234.1 233.6
Net investment income and other income (a).................................... 6.5 5.9
------------- -------------
Total revenues before realized gains (losses)........................... $ 240.7 $ 239.6
============= =============
Income before taxes and realized investment gains (losses).................... $ 13.2 $ 25.7
============= =============
Income tax expense............................................................ $ 4.4 $ 8.8
============= =============
Life Insurance Group:
Net premiums earned........................................................... $ 17.1 $ 16.0
Net investment income and other income (a).................................... 1.7 1.7
------------- -------------
Total revenues before realized gains (losses)........................... $ 18.8 $ 17.7
============= =============
Income before taxes and realized investment gains (losses).................... $ 0.9 $ 1.3
============= =============
Income tax expense............................................................ $ 0.3 $ 0.4
============= =============
Consolidated Revenues:
Total revenues of Company segments............................................ $ 805.2 $ 744.0
Consolidated net realized investment gains (losses)........................... 15.6 (6.7)
Other revenues................................................................ 2.5 2.7
Elimination of intersegment revenues (b)...................................... (0.9) (0.9)
------------- -------------
Consolidated revenues................................................... $ 822.4 $ 739.0
============= =============
Consolidated Income before taxes:
Total income before taxes and realized investment
gains (losses) of Company segments...................................... $ 146.0 $ 162.4
Consolidated net realized investment gains (losses)........................... 15.6 (6.7)
Other sources - net........................................................... (3.4) (1.9)
------------- -------------
Consolidated income before income taxes ................................ $ 158.2 $ 153.8
============= =============
---------
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, three minor subsidiaries,
consolidation eliminating adjustments, and general corporate expenses,
as applicable.
11
March 31, December 31,
Consolidated Assets: 2004 2003
------------ -------------
<s> <c> <c>
General................................................................................ $ 6,774.7 $ 6,603.5
Mortgage............................................................................... 2,148.1 2,080.1
Title ................................................................................. 713.7 720.5
Life ................................................................................. 248.3 244.6
Consolidated ........................................................................ $ 9,959.6 $ 9,712.3
============ =============
6. Commitments and Contingent Liabilities:
(a) Legal proceedings against the Company arise in the normal course of
business and usually pertain to claim matters related to insurance policies
and contracts issued by its insurance subsidiaries. Other legal proceedings
are discussed below.
The City and County of San Francisco and certain escrow customers of an
underwritten title agency subsidiary headquartered in the State of
California 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 were tried and a judgment rendered, affirming in part
and denying in part the subsidiary's defenses. In the aggregate, the
judgment, excluding post-judgment interest, amounts to approximately $33.0.
The subsidiary has appealed the most significant portions of the judgment,
and management believes the judgment will be substantially reduced on
appeal. Through March 31, 2004, the subsidiary has continually evaluated
its exposures since the litigation began and has paid or otherwise provided
cumulatively $53.0, including its best estimate of its remaining liability,
costs associated with all these issues, and accumulating interest on the
aforementioned judgment.
Purported class actions have recently been filed in state courts in Ohio
and Florida against the Company's principal title insurance subsidiary, Old
Republic National Title Insurance Company ("ORNTIC"). Substantially similar
lawsuits have been filed against other title insurance companies in New
York and Florida. Plaintiffs allege that, pursuant to rate schedules filed
by ORNTIC with insurance regulators, ORNTIC was required to, but failed to
give consumers a reissue credit on the premiums charged for title insurance
covering mortgage refinancing transactions. Both actions seek damages and
declaratory and injunctive relief. ORNTIC intends to defend vigorously
against these actions, but at this early stage in the litigation the
Company cannot estimate the costs it may incur as the actions proceed to
their conclusions.
An action was filed recently in the Federal District court for South
Carolina against the Company's wholly-owned mortgage guaranty insurance
subsidiary, Republic Mortgage Insurance Company ("RMIC"). Similar lawsuits
have been filed against the other six private mortgage insurers in
different Federal District Courts. The action against RMIC seeks
certification of a nationwide class of consumers who were allegedly
required to pay for private mortgage insurance at a cost greater than
RMIC's "best available rate". The action alleges that the decision to
insure their loans at a higher rate was based on the consumers' credit
scores and constituted an "adverse action" within the meaning, and in
violation of the Fair Credit Reporting Act, that requires notice, allegedly
not given, to the consumers. The action seeks statutory and punitive
damages, as well as other costs. RMIC intends to defend vigorously against
the action, but at this early stage in the litigation the Company cannot
estimate the costs it may incur as the litigation proceeds to its
conclusion.
(b) In April, 2004 the Internal Revenue Service ("IRS") provided the
Company a so-called "30 Day Letter" resulting from a recently completed
examination of tax returns for years 1998 to 2000. In substance, the letter
alleges that certain claim reserve deductions taken through year end 2000
were overstated and thus served to reduce taxable income for those years.
The Company has made a preliminary review of the IRS calculations, and has
concluded that actual loss settlements and reserve re-estimates in the
three years following December 31, 2000 can disprove the most substantial
portions of the alleged reserve overstatements. Accordingly, the Company
intends to defend vigorously the validity of claim reserve deductions taken
in its tax returns. In the event the Company's position is not fully
sustained, payments of any additional taxes owed would be categorized as
timing differences, and as such would likely have little effect on its GAAP
financial statements.
12
OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Quarters Ended March 31, 2004 and 2003
($ in Millions, Except Share Data)
- --------------------------------------------------------------------------------
OVERVIEW AND EXECUTIVE SUMMARY
This management analysis of financial position and results of operations
pertains to the consolidated accounts of Old Republic International Corporation.
The Company conducts its business through three major segments, namely, its
General (property and liability), Mortgage Guaranty, and Title insurance
segments, as well as a smaller Life insurance segment. The consolidated accounts
are presented on the basis of generally accepted accounting principles ("GAAP").
This analysis should be read in conjunction with the most recent annual and
quarterly consolidated financial statements and the footnotes appended to them.
The insurance business is distinguished from most others in that the prices
(premiums) charged for various coverages are set without certainty of the
ultimate benefit and claim costs that will emerge or be incurred, often many
years after issuance of a policy. This basic fact casts Old Republic's business
as a long-term undertaking which is managed with a primary focus on the
achievement of favorable underwriting results. In addition to operating income
stemming from Old Republic's basic underwriting/service functions, significant
revenues are obtained from investable funds generated by those functions, as
well as retained shareholders' capital. In managing investable funds the Company
aims to assure stability of income from interest and dividends, protection of
capital, and sufficient liquidity to meet insurance underwriting and other
obligations as they become payable in the future. Securities trading and the
realization of capital gains are not objectives. The investment philosophy is
therefore best categorized as emphasizing value, credit quality, and relatively
long-term holding periods. The Company's ability to hold both fixed maturity and
equity securities for long periods of time is enabled by the scheduling of
maturities in accord with an appropriate matching of assets and liabilities.
Given the above factors, the Company's affairs are managed for the long
haul, without regard to the arbitrary strictures of quarterly or even annual
reporting periods that publicly held companies must observe. In Old Republic's
view, short reporting time frames do not comport with the long-term nature of
much of its business, driven as it is by a strong focus on the fundamental
underwriting and related service functions of the Company. Management believes
that Old Republic's operating results and financial condition can best be
evaluated by observing underwriting performance trends over succeeding five to
ten year intervals. Such time periods are likely to encompass one or two
economic cycles, and provide appropriate time frames for such cycles to run
their course, and for reserved claim costs to be quantified with greater
finality and effect.
* * *
Old Republic's consolidated pretax operating earnings dropped moderately in
the first quarter of 2004. The shortfall stemmed largely from the anticipated
weakening of the Company's Mortgage and Title insurance segments. Old Republic's
General Insurance business, however, continued to produce strong underwriting
results that largely offset the lower contributions from the two other segments.
Consolidated pretax earnings in this year's first quarter were also affected
adversely by required stock option compensation charges of $6.4, (or 2 cents per
share after tax), of which $5.6 represented the expense of a non-recurring
vesting acceleration of stock option costs; first quarter 2003 operating results
were not burdened by similar charges.
The major components of pretax income and resulting consolidated GAAP net
income discussed in this report were as follows:
Quarters Ended March 31,
------------------------------------------------
2004 2003 % Change
------------- ------------- ------------
<s> <c> <c> <c>
Pretax operating income (loss):
General ...................................................................... $ 74.3 $ 59.4 25.1%
Mortgage Guaranty ............................................................ 57.4 75.9 -24.3
Title ........................................................................ 13.2 25.7 -48.5
Corporate and other........................................................... (2.5) (0.6)
------------- ------------- ------------
Sub-total.................................................................. 142.5 160.5 -11.2
Realized investment gains (losses)............................................ 15.6 (6.7)
------------- ------------- ------------
Consolidated pretax income ................................................... 158.2 153.8 2.8
Income taxes............................................................... 51.7 49.4 4.7
------------- ------------- ------------
Net income.................................................................... $ 106.4 $ 104.3 1.9%
============= ============= ============
Components of Diluted Earnings Per Share:
Net operating income....................................................... $ 0.52 $ 0.60 -13.3%
Net realized gains (losses)................................................ 0.05 (0.03)
------------- ------------- ------------
Net income................................................................. $ 0.57 $ 0.57 --%
============= ============= ============
13
Old Republic's General Insurance Group, which underwrites principally
commercial property and liability insurance coverages, reported a 25.1 percent
increase in pretax operating income to $74.3 for this year's first quarter. This
compares to $59.4 earned during the same period of 2003. Net premiums earned in
this year's first quarter were $376.5, up 20.0 percent from $313.9 a year ago.
The composite underwriting ratio for the first three months of 2004 reflected a
slight decline to 93.0 percent when compared to 94.8 percent posted in the first
quarter of 2003, and 93.3 percent for all of 2003. The positive underwriting
results are attributable to the steadily improved pricing and risk selection
standards that have been applied since 2001, reduced claim frequency and
severity, and well-controlled expenses for substantially all of the Company's
general insurance coverages.
Old Republic's Mortgage Guaranty Group posted a 24.3 percent drop in pretax
operating earnings to $57.4 in this year's first quarter. Net premium revenues
in the most recent quarter were $98.7, or just 1.3 percent below the year-ago
level of $100.0. Persistency for the traditional primary book of business
improved for the second consecutive quarter, rising to 50.2 percent.
The composite underwriting ratio in the first three months of 2004 was 58.6
percent compared to 40.5 percent posted in the same quarter of 2003, and 56.1
percent in last year's final quarter. Traditional primary business claim
severity, measured in terms of average claim reserves and payments, remained
relatively stable in this year's first quarter, as did claim frequency. The loss
ratio of 29.5 percent, while significantly higher than the 15.2 percent loss
ratio posted in the first three months of 2003, was moderately lower than the
32.0 percent posted in last year's final quarter. More than half of the quarter
over quarter increase in the expense ratio reflected the aforementioned stock
option costs incurred by this segment.
Old Republic's Title Insurance Group reflected mixed results in the key
components of its pretax bottom line which dropped by 48.5 percent in this
year's first quarter. Premiums were up 9.3 percent quarter-over-quarter,
benefiting from the reporting lag associated with November and December 2003
production from independent agency sources. On the other hand, escrow and other
fee revenues from current direct operations dropped 17.4 percent. In total,
premium and fee revenues were basically flat at $234.1 in this year's first
quarter. Claim costs, which are associated principally with premium revenues,
were stable for both quarterly periods, while other costs, inclusive of
commissions paid on agency-derived premium production, rose by 6.2 percent year
over year. In combination, these factors produced a higher composite ratio of
97.0 percent in this year's first quarter, compared to 91.5 percent and 93.7
percent in the first and final quarters of 2003, respectively. While net
investment income grew by 7.3 percent in the first three months of 2004, the
gain was not sufficient to offset the downward bias of the Company's results
from its basic underwriting/service functions.
Old Republic's small Life and the Corporate service operations of the
parent holding company produced combined pretax losses of $2.5 and $0.6 in the
first quarters of 2004 and 2003, respectively. Lower life and health income was
largely caused by greater life insurance claim costs, while corporate operations
were affected negatively by the aforementioned recognition of allocated stock
option costs as well as higher employee benefit expenses.
Realized investment gains (losses) amounted to $15.6 and ($6.7) in the
first quarters of 2004 and 2003, respectively. The realization of investment
gains or losses can be highly discretionary and arbitrary due to such factors as
the timing of individual securities sales, losses from write-downs of impaired
securities, tax-planning considerations, and changes in investment management
judgments relative to the direction of securities markets or the future
prospects of individual investees or industry sectors. Write-downs of securities
deemed other than temporarily impaired are in turn caused by a variety of
factors, including adverse securities' market trends and industry-wide or
issuer-specific developments that can lead to the recognition of a permanent
loss of market value or non-recoverability of asset cost.
Cash and invested assets at March 31, 2004, totaled $7.08 billion, or
$38.92 per share, compared to $6.84 billion or $37.71 per share, at December 31,
2003, and $6.40 billion, or $35.42 per share, at March 31, 2003. The investment
portfolio reflects a current allocation of approximately 86 percent in
fixed-maturity securities and 7 percent in equities. As in the past, it contains
little or no exposure to real estate investments, mortgage-backed securities,
derivatives, junk bonds, private placements or mortgage loans. Consolidated
operating cash flow continued to be positive in the latest quarter, growing by
19.5 percent to $234.6.
Common shareholders' equity was $3.66 billion at March 31, 2004, compared
to $3.55 billion at December 31, 2003, and $3.30 billion at March 31, 2003. Book
value per share was $20.16 at the end of March 2004, versus $19.57 at year-end
2003 and $18.26 at March 31, 2003. The latest quarter's change in book value
reflects principally the retention of earnings in excess of dividend
requirements, and an increase in the value of investment securities carried at
market values.
14
CHANGES 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 will
no longer be amortized against operations but must be tested at least annually
for possible impairment of their carrying values. At March 31, 2004 and December
31, 2003, the Company's consolidated unamortized goodwill asset balance was
$88.8 and $87.5. During the first quarter of 2004, the Company tested the
carrying value of its goodwill and intangible assets and determined that there
was no indication of impairment of such assets.
Effective January 1, 2003, the Company elected to reclassify its fixed
maturity securities categorized as held to maturity to the available for sale
classification. The securities involved are primarily utility and tax-exempt
bonds that accounted for approximately 34 percent of Old Republic's investment
portfolio. The decision was prompted by restrictive accounting rules affecting
held to maturity investment securities. The necessarily mechanical application
of these rules can inhibit the Corporation's ability to optimally manage its
investments from a practical business point of view. This change has no income
statement impact, no effect on Old Republic's ability to hold individual
securities to maturity as it may deem appropriate, and does not affect the
Company's necessary long-term orientation in the management of its business.
Going forward, Old Republic's shareholders' equity account could reflect
somewhat greater period-to-period volatility as the entire bond, note and stock
investment portfolio will now be marked to market on a quarterly basis.
Nevertheless, the Company believes that its ability to hold securities until
they mature or until such other time when they can be sold opportunistically are
much more significant and meaningful factors than the balance sheet or income
statement effect of changes in market values at any point in time.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 148 ("FAS 148") "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS No. 123" for
periods starting after December 15, 2002. As of April 1, 2003, the Company
adopted the requirements of FAS 148 utilizing the prospective method. Under this
method, stock-based compensation expense is recognized for awards granted after
the beginning of the fiscal year of adoption. For all other stock option awards
outstanding, the Company continues to use the intrinsic value method permitted
under existing accounting pronouncements. In estimating the compensation cost of
options, the fair value of options has been calculated using the Black-Scholes
option pricing model. Required stock option compensation charges of $6.4 reduced
earnings per share by 2 cents per share in the first quarter of 2004, of which
$5.6 represented the expense of a non-recurring vesting acceleration of such
costs. First quarter 2003 operating results were not burdened by any charges
related to the expensing of stock option awards.
FINANCIAL POSITION
The Company's financial position at March 31, 2004 reflected increases in
assets, liabilities and common shareholders' equity of 2.5%, 2.2% and 3.2%,
respectively, when compared to the immediately preceding year-end. Cash and
invested assets represented 71.1% and 70.5% of consolidated assets as of March
31, 2004 and December 31, 2003, respectively. Consolidated operating cash flow
was positive at $234.6 in this year's first quarter, compared to $196.4 in the
same period of 2003. As of March 31, 2004, the invested asset base increased
3.4% to $7,082.6 principally as a result of higher operating cash flow and an
increase in the fair value of investments.
During the first three months of 2004, the Corporation committed
substantially all investable funds to short to intermediate-term fixed maturity
securities. At both March 31, 2004 and December 31, 2003, approximately 99% of
the Company's investments consisted of marketable securities, including tax and
loss bonds held by its mortgage guaranty subsidiaries for tax purposes, which
are redeemable by the U.S. Treasury. 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. At March 31, 2004, Old
Republic's commitment to equity securities decreased 7.6% in relation to the
related invested balance at year-end 2003; this resulted mostly from sales of
equity securities and reduced net unrealized gains on the remaining holdings. At
March 31, 2004, the Company had no fixed maturity investments in default as to
principal and/or interest.
Relatively high short-term maturity investment positions continued to be
maintained as of March 31, 2004. Such investment positions reflect a large
variety of seasonal and intermediate-term factors including current operating
needs, expected operating cash flows, and investment strategy considerations.
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.
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. With regard to its
equity portfolio, the Company does not own any options nor does it engage in any
type of option writing. Traditional investment management tools and techniques
are employed to address the yield and valuation exposures of the 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
15
through asset diversification and the purchase of investment grade
securities. Reinvestment rate risk is reduced by concentrating on non-callable
issues, and by taking asset-liability matching considerations 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 practices 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 unrealized gains or losses. As a general rule, rising
interest rates enhance currently available yields but typically lead to a
reduction in the fair value of existing fixed maturity investments. By contrast,
a decline in such rates reduces currently available yields but usually serves to
increase the fair value of the existing fixed maturity investment portfolio. All
such changes in fair value are reflected, net of deferred income taxes, directly
in the shareholders' equity account, and as a component of the separate
statement of comprehensive income. Given the Company's inability to forecast or
control the movement of interest rates, Old Republic sets the maturity spectrum
of its fixed maturity securities portfolio within parameters of estimated
liability payouts, and focuses the overall portfolio on high quality
investments. By so doing, Old Republic believes it is reasonably assured of its
ability to hold securities to maturity as it may deem necessary in changing
environments, and of ultimately recovering their aggregate cost.
Possible future declines in fair values for Old Republic's bond and stock
portfolios would affect negatively the common shareholders' equity account at
any point in time, but would not necessarily result in the recognition of
realized investment losses. The Company reviews the status and market value
changes of each of its investments on at least a quarterly basis during the
year, and estimates of other than temporary impairments in the portfolio's value
are evaluated and established at each quarterly balance sheet date. In reviewing
investments for other than temporary impairment, the Company, in addition to a
security's market price history, considers the totality of such factors as the
issuer's operating results, financial condition and liquidity, its ability to
access capital markets, credit rating trends, most current audit opinion,
industry and securities markets conditions, and analyst expectations to reach
its conclusions. Sudden market value declines caused by such adverse
developments as newly emerged or imminent bankruptcy filings, issuer default on
significant obligations, or reports of financial accounting developments that
bring into question the validity of previously reported earnings or financial
condition, are recognized as realized losses as soon as credible publicly
available information emerges to confirm such developments. Accordingly, the
recognition of losses from other than temporary value impairments is subject to
a great deal of judgment as well as turns of events over which the Company can
exercise little or no control. In the event the Company's estimate of other than
temporary impairments is insufficient at any point in time, future periods' net
income would be adversely affected by the recognition of additional realized or
impairment losses, but its financial position would not necessarily be affected
adversely inasmuch as such losses, or a portion of them, could have been
recognized previously as unrealized losses.
The following tables show certain information relating to the Company's
fixed maturity and equity portfolios as of the dates shown:
- --------------------------------------------------------------------------------------------------------------------------------
Credit Quality Ratings of Fixed Maturity Securities (*)
- --------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2004 2003
----------------- ------------------
<s> <c> <c>
Aaa............................................................................. 30.4% 29.7%
Aa.............................................................................. 19.1 19.1
A............................................................................... 31.1 32.0
Baa............................................................................. 18.6 18.5
----------------- ------------------
Total investment grade................................................. 99.2 99.3
All other (**).................................................................. .8 .7
----------------- ------------------
Total.................................................................. 100.0% 100.0%
================= ==================
(*) Credit quality ratings used are those assigned primarily by Moody's; other
ratings are assigned by Standard & Poor's and converted to equivalent
Moody's ratings classifications.
(**) "All other" includes non-investment or non-rated small issues of tax-exempt
bonds.
The Company had no gross unrealized losses on non-investment grade fixed
maturity securities as of March 31, 2004.
16
- --------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified by Industry Concentration for Investment Grade Fixed Maturity Securities
as of March 31, 2004
- --------------------------------------------------------------------------------------------------------------------------------
Gross
Amortized Unrealized
Cost Losses
------------ ------------
<s> <c> <c>
Fixed Maturity Securities by Industry Concentration:
Municipals...................................................................... $ 77.7 $ .7
Utilities....................................................................... 30.9 .4
Industrials..................................................................... 9.0 .1
Finance......................................................................... 25.0 .1
Other .......................................................................... 113.1 .8
------------ ------------
Total.................................................................. $ 255.8 (a) $ 2.4
============ ============
(a) Represents 4.5 percent of the total fixed maturity securities portfolio.
- --------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified by Industry Concentration for Equity Securities
as of March 31, 2004
- --------------------------------------------------------------------------------------------------------------------------------
Gross
Unrealized
Cost Losses
------------ ------------
<s> <c> <c>
Equity Securities by Industry Concentration:
Healthcare...................................................................... $ 55.9 $ 14.3
Retail.......................................................................... 31.2 7.1
Natural Gas..................................................................... 19.2 5.3
Utilities....................................................................... 22.3 3.8
Other .......................................................................... 42.6 4.9
------------ ------------
Total.................................................................. $ 171.3 (b) $ 35.6 (c)
============ ============
(b) Represents 40.3 percent of the total equity securities portfolio.
(c) Represents 8.4 percent of the cost of the total equity securities
portfolio, while gross unrealized gains represent 20.0 percent of the
portfolio.
- --------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified For All Fixed Maturity Securities
as of March 31, 2004
- --------------------------------------------------------------------------------------------------------------------------------
Amortized Cost
of Fixed Maturity Securities Gross Unrealized Losses
--------------------------------- -------------------------------
Non- Non-
Investment Investment
All Grade Only All Grade Only
------------- ------------- ------------ ------------
<s> <c> <c> <c> <c>
Maturity Ranges:
Due in one year or less............................. $ 2.5 $ - $ - $ -
Due after one year through five years............... 46.4 - .3 -
Due after five years through ten years.............. 176.7 - 1.7 -
Due after ten years................................. 30.1 - .2 -
------------- ------------- ------------ ------------
Total...................................... $ 255.8 (d) $ - $ 2.4 $ -
============= ============= ============ ============
(d) Represents 4.5 percent of the total fixed maturity securities portfolio.
17
- --------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified by Duration and Amount of Unrealized Losses
as of March 31, 2004
- --------------------------------------------------------------------------------------------------------------------------------
Amount of Gross Unrealized Losses
-----------------------------------------------------------------------
Total Gross
Less than 20% to 50% More than Unrealized
20% of Cost of Cost 50% of Cost Loss
------------- ------------- ------------- -------------
<s> <c> <c> <c> <c>
Number of Months in Loss Position:
Fixed Maturity Securities:
One to six months.................... $ 1.5 $ - $ - $ 1.5
Seven to twelve months............... .7 - - .7
More than twelve months.............. .1 - - .1
------------- ------------- ------------- -------------
Total....................... $ 2.4 $ - $ - $ 2.4
============= ============= ============= =============
Equity Securities:
One to six months.................... $ 4.3 $ 4.8 $ - $ 9.1
Seven to twelve months............... .6 - - .6
More than twelve months.............. 3.4 22.3 - 25.8
------------- ------------- ------------- -------------
Total....................... $ 8.4 $ 27.2 $ - $ 35.6
============= ============= ============= =============
Number of Issues in Loss Position:
Fixed Maturity Securities:
One to six months.................... 51 - - 51
Seven to twelve months............... 16 - - 16
More than twelve months.............. 2 - - 2
------------- ------------- ------------- -------------
Total....................... 69 - - 69 (e)
============= ============= ============= =============
Equity Securities:
One to six months.................... 7 2 - 9
Seven to twelve months............... 3 - - 3
More than twelve months.............. 6 7 - 13
------------- ------------- ------------- -------------
Total....................... 16 9 - 25 (e)
============= ============= ============= =============
The aging of issues with unrealized losses employs month-end closing market
price comparisons with an issue's original cost. The percentage reduction from
original cost reflects the decline as of a specific point in time, March 31,
2004 in the above table, and accordingly, is not indicative of a security's
value having been consistently below its cost at the percentages and throughout
the periods shown.
(e) At March 31, 2004, the number of issues in a loss position represent 4.5
percent as to fixed maturities, and 30.9 percent as to equity securities of
the total number of such issues held by the Company.
- --------------------------------------------------------------------------------------------------------------------------------
Age Distribution of Fixed Maturity Securities
- --------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2004 2003
------------------ ------------------
<s> <c> <c>
Maturity Ranges:
Due in one year or less............................................................ 7.6% 11.0%
Due after one year through five years.............................................. 49.0 50.0
Due after five years through ten years............................................. 40.2 37.7
Due after ten years through fifteen years.......................................... 3.2 1.3
Due after fifteen years............................................................ - -
------------------ ------------------
Total..................................................................... 100.0% 100.0%
================== ==================
Average Maturity................................................................... 4.6 Yrs. 4.5 Yrs.
================== ==================
Duration (f)....................................................................... 4.0 4.0
================== ==================
(f) Duration is used as a measure of bond price sensitivity to interest rate
changes. A duration of 4.0 as of March 31, 2004 implies that a 100 basis
point parallel increase in interest rates from current levels would result
in a possible decline in the market value of the long-term fixed maturity
investment portfolio of approximately 4.0 percent.
18
- --------------------------------------------------------------------------------------------------------------------------------
Composition of Unrealized Gains (Losses)
- --------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2004 2003
------------------- -----------------
<s> <c> <c>
On Fixed Maturity Securities:
Amortized cost..................................................................... $ 5,633.7 $ 5,463.9
Estimated fair value............................................................... 5,959.7 5,741.1
------------------- -----------------
Gross unrealized gains............................................................. 328.4 285.0
Gross unrealized losses............................................................ (2.4) (7.8)
------------------- -----------------
Net unrealized gains ..................................................... $ 325.9 $ 277.1
=================== =================
On Equity Securities:
Cost............................................................................... $ 425.2 $ 439.2
Estimated fair value............................................................... 474.5 513.5
------------------- -----------------
Gross unrealized gains............................................................. 85.0 98.2
Gross unrealized losses............................................................ (35.6) (23.9)
------------------- -----------------
Net unrealized gains ..................................................... $ 49.3 $ 74.2
=================== =================
Among other major assets, substantially all of the Company's receivables
are not past due. Reinsurance recoverable balances on paid or estimated unpaid
losses are deemed recoverable from solvent reinsurers or reduced by allowances
for estimated amounts unrecoverable which allowances are reflected in the
Company's net reserve liabilities. Deferred policy acquisition costs are
estimated by taking into account the variable costs of producing specific types
of insurance policies, and evaluating their recoverability on the basis of
recent trends in claims costs. The Company's deferred policy acquisition cost
balances have not fluctuated substantially from period-to-period and do not
represent significant percentages of assets, shareholders' equity, or premium
reserves.
The parent holding company meets 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. The Company can receive up to $321.2
in dividends from its subsidiaries in 2004 without the prior approval of
regulatory authorities. The liquidity achievable through such permitted dividend
payments is more than adequate to cover the parent holding company's currently
expected cash outflows represented mostly by interest on outstanding debt and
quarterly cash dividend payments to shareholders. In addition, Old Republic can
access the commercial paper market for up to $150.0 to meet unanticipated
liquidity needs.
Old Republic's capitalization of $3,805.6 at March 31, 2004 consisted of
debt of $137.4 and common shareholders' equity of $3,668.1. The increase in the
common shareholders' equity account during the first quarter of 2004 reflects
primarily the retention of earnings in excess of dividend requirements and an
increase in the value of investments carried at market values. At its March,
2004 meeting, the Company's Board of Directors authorized the reacquisition of
up to $250.0 of common shares as market conditions warrant during the two year
period from that date; no stock had as yet been acquired through March 31, 2004
pursuant to this authorization.
RESULTS OF OPERATIONS
Revenues:
Pursuant to GAAP applicable to the insurance industry, revenues are
associated with the related benefits, claims, and expenses by means of the
provision for policy benefits, the deferral and subsequent amortization of
applicable acquisition costs, and the recognition of incurred benefits, claims
and operating expenses. Substantially all general insurance premiums are
reflected in income on a pro-rata basis. Earned but unbilled premiums are
generally taken into income on the billing date, while adjustments for
retrospective premiums, commissions and similar charges or credits are accrued
on the basis of periodic evaluations of current underwriting experience and
contractual obligations.
Nearly all of the Company's mortgage guaranty premiums stem from monthly
installment policies. Accordingly, such premiums are fully earned in the month
they are reported and received. With respect to minor numbers of annual or
single premium policies, earned premiums are largely recognized on a pro-rata
basis over the terms of the policies.
Title premium and fee revenues stemming from the Company's direct
operations represent approximately 36% of such consolidated title business
revenues. Such premiums are generally recognized as income at the escrow closing
date which approximates the policy effective date. Fee income related to escrow
and other closing services is recognized when the related services have been
performed and completed. The remaining 64% of consolidated title premium and fee
revenues is produced by independent title agents and other service providers.
Rather than making estimates that could be subject to significant variance from
actual premium and fee production, the Company recognizes revenues from those
sources upon receipt. Such receipts can reflect a three to four month lag
19
relative to the effective date of the underlying title policy, and are offset
concurrently by production expenses and claim reserve provisions.
Ordinary life insurance premiums are recognized as revenues when due,
whereas premiums for other coverages such as credit life, credit disability, and
health insurance are recognized as income on a pro-rata, sum of the years'
digits, or combination of such methods as are deemed most applicable in the
circumstances.
The composition of Old Republic's earned premiums and fees for the periods
reported upon was as follows:
Quarters Ended March 31,
------------------------------------------------
2004 2003 % Change
------------- -------------- -------------
<s> <c> <c> <c>
General Insurance premiums........................................ $ 376.5 $ 313.9 20.0%
Mortgage Guaranty premiums........................................ 98.7 100.0 -1.3
Title Insurance premiums and fees................................. 234.1 233.6 0.2
Life Insurance premiums........................................... 17.1 16.0 6.7
------------- -------------- -------------
Consolidated premiums and fees............................... $ 726.6 $ 663.6 9.5%
============= ============== =============
Earned premiums in the General Insurance Group increased as a result of
positive pricing and risk selection changes the Company has effected during the
past four years, as well as additional business produced in an environment
marked by a more restrictive marketing stance on the part of many competitors.
Mortgage Guaranty premiums were down just 1.3 percent below the year-ago level,
reflecting lower persistency and higher captive cessions. Title premiums were up
9.3 percent quarter over quarter, benefiting from the reporting lag associated
with late 2003 production from independent agency sources, while escrow and
other fee revenues from direct operations dropped 17.4 percent. Overall, title
premium and fee revenues were basically flat. Life and disability premiums
volume has continued to reflect the flattish trends of the past several years as
growth for the Company's limited product offerings has been inhibited by
significant price competition among life and health insurers.
Consolidated net investment income of $70.5 in the first three months of
2004 was up slightly when compared to $69.4 posted in the same period of 2003
due to a continuing low yield environment, which diluted the benefit of the
Company's growing asset base. The average annual yield on investments was 4.4%
and 4.8% for the quarters ended March 31, 2004 and 2003, respectively. Yield
trends reflect at once the relatively short maturity of Old Republic's fixed
maturity securities portfolio and a continuation of a progressively lower yield
environment during recent quarterly periods.
The Company's investment policies have not been designed to maximize or
emphasize the realization of investment gains. Rather, these policies aim to
assure a stable source of income from interest and dividends, protect capital,
and provide sufficient liquidity to meet insurance underwriting and other
obligations as they become payable in the future. Dispositions of fixed maturity
securities arise mostly from scheduled maturities and early calls; for the first
quarters of 2004 and 2003, 88.8% and 87.0%, respectively, of all such
dispositions resulted from these occurrences. Dispositions of equity securities
at a realized gain or loss reflect such factors as ongoing assessments of
issuers' business prospects, rotation among industry sectors, and tax planning
considerations. Additionally, the amount of net realized gains and losses
registered in any one accounting period are affected by the aforementioned
assessments of securities' values for other than temporary impairment. As a
result of the interaction of all these factors and considerations, net realized
investment gains or losses can vary significantly from period-to-period, and, in
the Company's view, are not indicative of any particular trend or result in its
basic insurance underwriting business. The following table reflects the
composition of net realized gains or losses for the periods shown:
Quarters Ended March 31,
------------------------------
2004 2003
------------ ------------
<s> <c> <c>
Realized Gains (Losses) on Disposition of:
Fixed maturity securities.......................................................... $ .7 $ 1.3
Equity securities and miscellaneous investments.................................... 14.8 1.4
------------ ------------
Total................................................................. 15.6 2.8
------------ ------------
Impairment losses on:
Fixed maturity securities.......................................................... - -
Equity securities and miscellaneous investments.................................... - (9.5)
------------ ------------
Total................................................................. - (9.5)
------------ ------------
Net realized gains (losses)............................................................. $ 15.6 $ (6.7)
============ ============
Expenses:
The insurance business is distinguished from most others in that the prices
(premiums) charged for insurance coverages are set without clear knowledge of
the claim costs that will ultimately emerge and be incurred, often many years
after issuance of a policy. In order to achieve a necessary matching of revenues
and expenses, the Company records in each accounting period the benefits, claims
and related settlement costs that have been incurred during the period. Such
costs are affected by the adequacy of reserve estimates established for current
and prior years' claim occurrences. The establishment of claim reserves by the
Company's insurance subsidiaries is a reasonably complex and dynamic process
influenced by a large variety of factors. These factors include past experience
applicable to the anticipated costs of various types of claims, continually
evolving and changing legal theories
20
emanating from the judicial system, recurring accounting, statistical, and
actuarial studies, the professional experience and expertise of the Company's
claim departments' personnel or attorneys and independent claim adjusters,
ongoing changes in claim frequency or severity patterns such as those caused by
natural disasters, illnesses, accidents, work-related injuries, and changes in
general and industry-specific economic conditions. Consequently, the
reserve-setting process relies on management's judgments and the opinions of a
large number of persons, on the application and interpretation of historical
precedent and trends, and on expectations as to future developments. At any
point in time, the Company is exposed to possibly higher than anticipated claim
costs due to all of these factors, and to the evolution, interpretation, and
expansion of tort law, as well as the effects of unexpected jury verdicts.
All reserves are thus based on a large number of assumptions and resulting
estimates which are periodically reviewed and evaluated in the light of emerging
claim experience and changing circumstances. The resulting changes in estimates
are recorded in operations of the periods during which they are made. The
Company believes that its overall reserving practices have been consistently
applied over many years. For at least the past ten years, previously established
reserves have produced reasonable estimates of the ultimate net costs of claims
incurred. However, no representation is made that ultimate net claim and related
costs will not develop in future years to be greater or lower than currently
established reserve estimates.
In addition to the factors cited in the two preceding paragraphs, certain
events could impact adversely the Company's reserve adequacy and its future
operating results and financial condition. With respect to Old Republic's
General insurance business, such events or exposures would include catastrophic
workers' compensation claims caused by a terrorist attack or a natural disaster
such as an earthquake, legislated retroactive incurrence of previously denied or
settled claims, the levying of major guaranty fund assessments by various states
based on the costs of insurance company failures apportioned against remaining
and financially secure insurers, the future failure of one or more significant
assuming reinsurers that would void or reduce the Company's reinsurance
recoverable for losses paid or in reserve, and greater than expected involuntary
market assessments, such as those caused by forced participation in assigned
risk and similar state plans, all of which cannot be reasonably estimated prior
to their emergence.
Mortgage guaranty claim reserves could develop deficiently as a result of
an unexpected rise in unemployment which might hinder borrowers' ability to cure
mortgage payment defaults. Significant declines in home prices could also have
similarly adverse effects since salvage recoveries from the sale of properties
obtained through foreclosures could be reduced. Title segment loss reserve
levels could be impacted adversely by such developments as reduced loan
refinancing activity whose effect could be to lengthen the period during which
title policies remain exposed to loss emergence, or reductions in either
property values or the volume of transactions which, by virtue of the
speculative nature of some real estate developments, could lead to increased
occurrences of fraud, defalcations or mechanics' liens. As to Old Republic's
life and health segment, reserve adequacy may be affected adversely by greater
than anticipated medical care cost inflation as well as greater than expected
frequency and severity of claims.
In management's opinion, geographic concentrations of assureds' employees
in the path of an earthquake or acts of terrorism represent the most significant
catastrophic risks to Old Republic's General insurance segment. These risks
would largely impact the workers' compensation line since primary insurers such
as the Company must, by regulation, issue unlimited liability policies. While
Old Republic obtains a degree of protection through its reinsurance program as
to earthquake exposures, and until 2005, through the Terrorism Risk Insurance
Act of 2002, there is no assurance that recoveries thereunder would be
sufficient to offset the costs of a major calamity nor eliminate its possible
major impact on operating results and financial condition. Old Republic has
availed itself of modeling techniques to evaluate the possible magnitude of
earthquake or terrorist induced claim costs for its most exposed coverage of
workers' compensation. Such models, however, have not been sufficiently
validated by past occurrences, and rely on a large variety and number of
assumptions. As a result, they may not be predictive of possible claims from
future events. With respect to the Company's Mortgage Guaranty business, the
most significant risk lies in the possibility of prolonged economic dislocations
that would result in high unemployment levels and depressed property values
conspiring to magnify loan default rates and resulting claim costs. In Title
insurance, the Company's biggest exposure likely relates to defalcations and
fraud which can result in significant aggregations of claims or non-collection
of insurance premiums. In Life insurance, as in General insurance,
concentrations of insured lives coupled with a catastrophic event would
represent the Company's largest exposure. In all of these regards, current GAAP
accounting does not permit the Company's reserving practices to anticipate and
provide for these exposures before they occur.
Most of Old Republic's consolidated claim and related expense reserves stem
from its General insurance business. At March 31, 2004, such reserves accounted
for 88.6% and 82.0% of consolidated gross and net of reinsurance reserves,
respectively. The following table shows a breakdown of gross and net of
reinsurance claim reserve estimates for major types of insurance coverages as of
that date:
21
Gross Net
---------- -----------
<s> <c> <c>
Claim and Loss Adjustment Expense Reserves:
Commercial automobile (mostly trucking)........................................................... $ 782.8 $ 627.3
Workers' compensation............................................................................. 1,523.3 761.4
General liability................................................................................. 762.8 288.3
Other coverages................................................................................... 517.2 342.9
Unallocated loss adjustment expense reserves...................................................... 84.9 84.8
---------- -----------
Total general insurance segment reserves................................................. 3,671.3 2,105.0
Mortgage guaranty................................................................................. 186.2 184.5
Title............................................................................................. 240.2 240.2
Life.............................................................................................. 21.5 14.5
Unallocated loss adjustment expense reserves - other segments..................................... 23.3 23.3
---------- -----------
Total claim and loss adjustment expense reserves......................................... $ 4,142.6 $ 2,567.6
========== ===========
Asbestosis and environmental claim reserves included in the above
general insurance reserves: Amount......................................................... $ 112.9 $ 80.8
========== ===========
% of total general insurance segment reserves.................. 3.1% 3.8%
========== ===========
Old Republic's General insurance business is composed of a large variety of
lines or classes of commercial insurance; it has negligible exposure to personal
lines such as homeowners or private passenger automobile insurance that exhibit
wide diversification of risks, significant frequency of claim occurrences, and
high degrees of statistical credibility. Most of the General Insurance segment's
claim reserves stem from liability insurance coverages for commercial customers.
Liability claims typically require more extended periods of investigation and at
times protracted litigation before they are finally settled, and thus tend to
exhibit loss development and payment patterns that stretch over relatively long
periods of time.
The Company establishes point estimates for most reserves on an insurance
coverage line-by-line basis for individual subsidiaries, sub-classes, or
individual blocks of business that have similar attributes. Actuarially or
otherwise derived ranges of reserve levels are not utilized in setting such
reserves. The reserves listed in the table above represent such point estimates.
Accordingly, the overall reserve level at any point in time represents the
compilation of a very large number of reported ("case") reserve estimates and
the results of a variety of formula calculations intended to cover claims and
related costs not as yet reported or emerged ("IBNR"). Case reserves are based
on continually evolving assessments of the facts available to the Company during
the claim settlement process. Long-term, disability-type workers' compensation
reserves are discounted to present value based on interest rates ranging from
3.5% to 4.0%. Formula calculations are utilized and are intended to cover IBNR
claim costs as well as additional costs that can arise from such factors as
monetary and social inflation, changes in claims administration processes,
changes in reinsurance ceded levels, and expected trends in claim costs and
related ratios. Typically, such formulas take into account so-called link ratios
that represent prior years' patterns of incurred or paid loss trends between
succeeding years, or past experience relative to progressions of the number of
claims reported over time and ultimate average costs per claim. Reserves
pertaining to large individual commercial insurance accounts that exhibit
sufficient statistical credibility, and that may be subject to retrospective
premium rating plans or the utilization of varying levels or types of
self-insured retentions are established on an account by account basis using
case reserves and applicable formula-driven methods. For certain so-called
long-tail categories of insurance such as excess liability or excess workers'
compensation, officers and directors' liability, and commercial umbrella
liability relative to which claim development patterns are particularly long,
more volatile, and immature in their early stages of development, the Company
judgmentally establishes the most current accident years' loss reserves on the
basis of expected loss ratios. As actual claims data emerges in succeeding
years, the original accident year loss ratio assumptions are validated or
otherwise adjusted sequentially through the application of statistical or
actuarial projection techniques such as the Bornhuetter/Ferguson method which
utilizes data from the more mature experience of prior years.
Except for a small portion that emanates from ongoing primary insurance
operations, a substantial majority of the asbestosis and environmental ("A&E")
claim reserves posted by Old Republic stem mainly from its participations in
assumed reinsurance treaties and insurance pools. Substantially all such
participations were discontinued fifteen or more years ago and have since been
in run-off status. With respect to the primary portion of gross A&E reserves,
Old Republic administers the related claims through its claims personnel as well
as outside attorneys, and posted reserves reflect its best estimates of ultimate
claim costs. Claims administration for the assumed portion of the Company's A&E
exposures is handled by the claims departments of unrelated primary or ceding
reinsurance companies. While the Company performs periodic reviews of a portion
of claim files so managed, the overall A&E reserves it establishes respond to
the paid claim and case reserve activity reported to the Company as well as
available industry statistical data such as so-called survival ratios. Such
ratios represent the number of years' average paid losses for the three or five
most recent calendar years that are encompassed by an insurer's A&E reserve
level at any point in time. According to this simplistic appraisal of an
insurer's A&E loss reserve level, Old Republic's average five year survival
ratios stood at 6.9 years (gross) and 10.5 years (net of reinsurance) as of
March 31, 2004. Incurred net losses for asbestosis and environmental claims have
averaged 1.2% of General Insurance Group incurred losses over the past five
years ended December 31, 2003.
Mortgage guaranty loss reserves are based on calculations that take into
account the number of reported insured mortgage loan defaults as of each balance
sheet date, as well as experience-based estimates of loan defaults that have
occurred but have not as
22
yet been reported. Further, the resulting loss reserve estimates take into
account a large number of variables including trends in claim severity,
potential salvage recoveries, expected cure rates for reported loan defaults at
various stages of default, and judgments relative to future employment levels,
housing market activity, and mortgage loan demand and extensions.
Title insurance and related escrow service loss and loss adjustment expense
reserves are established to cover the estimated settlement costs of known as
well as claims incurred but not reported, concurrently with the recognition of
premium and escrow service revenues. Reserves for known claims are based on an
assessment of the facts available to the Company during the settlement process.
Reserves for claims incurred but not reported are established on the basis of
past experience and evaluations of such variables as changes and trends in the
types of policies issued, changes in real estate markets and interest rate
environments, and changed levels of loan refinancings, all of which can have a
bearing on the emergence, number, and ultimate cost of claims.
Life and health insurance claim reserves also take into account estimates
of the costs of settling known as well as incurred but not reported claims. Such
estimates are based on an assessment of the facts available during the
settlement process and past experience as to the emergence and severity of
unreported claims.
In addition to the above reserve elements, the Company establishes reserves
for loss settlement costs that are not directly related to individual claims.
Such reserves are based on prior years' experience and are intended to cover the
unallocated costs of claim departments' administration of known and IBNR claims.
Substantially all of the Company's reserves for IBNR claims relate to its
general insurance business. As of March 31, 2004, the Company's general
insurance segment carried reserves of $658.2 to cover claims incurred but not as
yet reported as well as possible adverse development of known cases. As noted
above, the aggregate of these provisions, known collectively as IBNR reserves,
results from the application of many formulas and reserve-setting approaches
that are sensitive to the wide variety of already enumerated factors. Should the
reserves for IBNR claims be understated by 10% for a deficiency of $65.8, or
3.1% of the Company's net general insurance reserves as of the most current year
end, the impact on the Company's income statement would be to reduce pretax
income by that amount. While the Company has not incurred such deficiency levels
on reserves posted as of the 10 most recent year ends, there can be no assurance
that this experience will continue in the future.
The percentage of net benefits, claims, and related settlement expenses
measured against premiums and related fee revenues of the Company's operating
segments were as follows:
Quarters Ended March 31,
------------------------------
2004 2003
------------- -------------
<s> <c> <c>
General Insurance Group.......................................................... 67.0% 69.2%
Mortgage Guaranty Group.......................................................... 29.5% 15.2%
Title Insurance Group............................................................ 6.0% 5.5%
Life Insurance Group............................................................. 57.2% 49.2%
Consolidated................................................................ 41.6% 37.6%
============= =============
The general insurance portion of the claims ratio improved in 2004 compared
to 2003. The downtrend in this major cost factor reflects largely the
aforementioned pricing and risk selection improvements that have been applied
since 2001, together with reduced loss severity and frequency. The higher 2004
mortgage guaranty claims ratio results from an increase in claim provisions. The
title insurance loss ratio has been in the low single digits in each of the past
three years due to a continuation of favorable trends in claims frequency and
severity for business underwritten since 1992 in particular. The uptrend in the
2004 and 2003 title insurance loss ratios stem from a rise in the net provision
for ultimate claim costs from the historically low level achieved in 2001. Old
Republic's life and health benefit and claims ratio can vary widely from period
to period due to the relatively small size of this segment's book of business
and the material impact that even a slight change in frequency or severity of
death and health claims can have. The consolidated benefit and claim ratio
reflects the changing effect of period-to-period contributions of each segment
to consolidated results and this ratio's variances within each segment.
The ratio of consolidated underwriting, acquisition, and insurance expenses
to net premiums and fees earned was 47.7% and 48.1% in the first quarters of
2004 and 2003, respectively. Variations in these consolidated ratios reflect a
continually changing mix of coverages sold and attendant costs of producing
business in the Company's four business segments. The following table sets forth
the expense ratios registered by each business segment for the periods shown:
Quarters Ended March 31,
------------------------------
2004 2003
------------- -------------
<s> <c> <c>
General Insurance Group.......................................................... 26.0% 25.6%
Mortgage Guaranty Group.......................................................... 29.1% 25.3%
Title Insurance Group............................................................ 91.0% 86.0%
Life Insurance Group............................................................. 46.3% 53.0%
Consolidated................................................................ 47.7% 48.1%
============= =============
23
Expense ratios for the Company as a whole have remained basically stable
for the periods reported upon. The slight uptrend in the General Insurance
Group's expense ratio reflects the additional costs incurred in the face of a
greater revenue base. The mortgage guaranty segment's expense ratio increased in
2004 with more than half of the quarter over quarter increase reflecting the
aforementioned stock option costs incurred by this segment. The slight increase
in title sales volume in the first quarter of 2004 was not sufficient to cover
the increase in expenses for the quarter. Consolidated interest and other
corporate charges increased in the first quarter 2004 due primarily to the
recognition of allocated stock option costs as well as higher employee benefit
expenses.
The effective consolidated income tax rates were 32.7% and 32.1% in the
first quarters of 2004 and 2003, respectively. The rates for each year 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
investment gains or losses, and underwriting and service income, on the other
hand.
OTHER INFORMATION
Reference is here made to "Information About Segments of Business"
appearing elsewhere herein.
Historical data pertaining to the operating performance, liquidity, and
other financial indicators 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.
Some of the statements made in this report, as well as oral statements or
commentaries made by the Company's management in conference calls following
earnings releases, can constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Any such
forward-looking statements, commentaries, or inferences, of necessity, involve
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, and
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 impacted by similar factors and, most particularly, by changes in national
and regional housing demand and values, the availability and cost of mortgage
loans, employment trends, and default rates on mortgage loans; additionally,
mortgage guaranty results may also be impacted 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
earnings can be affected by the levels of employment and consumer spending,
variation in mortality and health trends, and changes in policy lapsation rates.
At the parent company level, operating earnings or losses are generally
reflective of the amount of debt outstanding and its cost, interest income on
temporary holdings of short-term investments, and period-to-period variation in
the costs of administering the Company's widespread operations.
Any forward-looking statements or commentaries speak only as of their
dates. Old Republic undertakes no obligation to publicly update or revise all
such comments, whether as a result of new information, future events or
otherwise, and accordingly they may not be unduly relied upon.
24
OLD REPUBLIC INTERNATIONAL CORPORATION
- --------------------------------------------------------------------------------
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
The information called for by Item 3 is found in the fourth and fifth unnumbered
paragraphs, as well as in the table entitled "Age Distribution of Fixed Maturity
Securities" under the heading "Financial Position" in the "Management Analysis
of Financial Position and Results of Operations" section of this report.
Item 4 - Controls and Procedures
Based on their review and evaluation, conducted as of the end of the period
covered by this report, the Company's Chief Executive Officer and Chief
Financial Officer are of the opinion that the Company's disclosure controls and
procedures are effective, and that there have been no significant changes in
internal controls or other factors that could significantly affect these
disclosure controls and procedures during the quarter. Disclosure controls and
procedures means such controls and procedures as are designed to ensure that
information required to be disclosed by the Company in its reports filed with
the Securities and Exchange Commission is accumulated and communicated to the
aforementioned executives to allow timely decisions regarding required
disclosure.
25
OLD REPUBLIC INTERNATIONAL CORPORATION
FORM 10 - Q
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
31.1 Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant to
Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by John S. Adams, Chief Financial Officer, pursuant to
Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant to
Section 1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by John S. Adams, Chief Financial Officer, pursuant to
Section 1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. On April 27, 2004, the Company furnished a Current Report on Form 8-K to
incorporate its earnings release dated April 27, 2004 announcing the
results of its operations and its financial condition for the quarter
ended March 31, 2004.
Items other than those listed are omitted because they are not required.
26
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: May 7, 2004
------------------
/s/ John S. Adams
---------------------------------------
John S. Adams
Senior Vice President &
Chief Financial Officer
27
EXHIBIT INDEX
Exhibit
No. Description
- ------------ --------------
31.1 Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant
to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by John S. Adams, Chief Financial Officer, pursuant
to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Aldo C. Zucaro, Chief Executive Officer, pursuant
to Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by John S. Adams, Chief Financial Officer, pursuant
to Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
28