UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended: June 30, 2005 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 001-10607
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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
- -------------------------------------------- ----------------------------------
(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 June 30, 2005
- --------------------------------- ---------------------------------
Common Stock / $1 par value 182,912,978
There are 33 pages in this report
OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / June 30, 2005
INDEX
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PAGE NO.
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PART I FINANCIAL INFORMATION:
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 11
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 12 - 29
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 30
CONTROLS AND PROCEDURES 30
PART II OTHER INFORMATION:
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 31
ITEM 6 - EXHIBITS 31
SIGNATURE 32
EXHIBIT INDEX 33
2
Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
June 30, December 31,
2005 2004
-------------------- -------------------
<s> <c> <c>
Assets
Investments:
Available for sale:
Fixed maturity securities (at fair value)(cost: $6,534.4 and $6,273.2)............ $ 6,676.4 $ 6,455.9
Equity securities (at fair value)(cost: $366.2 and $396.8)........................ 416.5 459.0
Short-term investments (at fair value which approximates cost).................... 449.9 388.6
Miscellaneous investments......................................................... 60.5 54.4
-------------------- -------------------
Total......................................................................... 7,603.5 7,358.1
Other investments................................................................. 13.2 13.4
-------------------- -------------------
Total investments............................................................. 7,616.7 7,371.6
-------------------- -------------------
Other Assets:
Cash.............................................................................. 56.8 60.5
Securities and indebtedness of related parties.................................... 67.4 60.2
Accrued investment income......................................................... 88.6 87.3
Accounts and notes receivable..................................................... 576.0 543.9
Federal income tax recoverable: Current........................................... 44.2 -
Reinsurance balances and funds held............................................... 73.7 92.5
Reinsurance recoverable: Paid losses.............................................. 54.5 53.3
Policy and claim reserves................................ 1,954.3 1,793.2
Deferred policy acquisition costs................................................. 230.2 232.3
Sundry assets..................................................................... 281.5 275.6
-------------------- -------------------
3,427.6 3,199.2
-------------------- -------------------
Total Assets...................................................................... $ 11,044.4 $ 10,570.8
==================== ===================
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, Preferred Stock, and Common Shareholders' Equity
Liabilities:
Losses, claims and settlement expenses............................................ $ 4,706.4 $ 4,403.5
Unearned premiums................................................................. 920.4 903.1
Other policyholders' benefits and funds........................................... 174.0 175.9
-------------------- -------------------
Total policy liabilities and accruals......................................... 5,800.9 5,482.6
Commissions, expenses, fees and taxes............................................. 186.0 235.9
Reinsurance balances and funds.................................................... 167.2 157.8
Federal income tax payable: Current............................................... - 8.4
Deferred.............................................. 563.1 554.5
Debt.............................................................................. 142.7 143.0
Sundry liabilities................................................................ 115.3 122.7
Commitments and contingent liabilities............................................ - -
-------------------- -------------------
Total Liabilities............................................................. 6,975.4 6,705.1
-------------------- -------------------
Preferred Stock:
Convertible preferred stock (1)................................................... - -
-------------------- -------------------
Common Shareholders' Equity:
Common stock (1).................................................................. 185.7 185.4
Additional paid-in capital........................................................ 278.8 270.4
Retained earnings................................................................. 3,471.9 3,240.1
Accumulated other comprehensive income ........................................... 142.3 179.5
Treasury stock (at cost) (1)...................................................... (10.0) (10.0)
-------------------- -------------------
Total Common Shareholders' Equity............................................. 4,068.9 3,865.6
-------------------- -------------------
Total Liabilities, Preferred Stock, and Common Shareholders' Equity........... $ 11,044.4 $ 10,570.8
==================== ===================
(1)At June 30, 2005 and December 31, 2004, 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 185,778,560 at June 30, 2005 and 185,429,127 at
December 31, 2004 were issued and outstanding. At June 30, 2005 and December
31, 2004, 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 2,865,582 as of both June 30, 2005 and December 31,
2004.
See accompanying Notes to Consolidated Financial Statements.
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3
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
$ in Millions, Except Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
<s> <c> <c> <c> <c>
Revenues:
Net premiums earned................................... $ 761.7 $ 691.0 $ 1,478.8 $ 1,351.8
Title, escrow, and other fees......................... 85.9 89.7 157.7 155.5
--------------- --------------- --------------- ---------------
Total premiums and fees........................... 847.6 780.8 1,636.5 1,507.4
Net investment income................................. 75.8 71.2 151.2 141.8
Other income.......................................... 8.5 10.0 16.5 19.7
--------------- --------------- --------------- ---------------
Total operating revenues.......................... 932.1 862.1 1,804.4 1,668.9
Realized investment gains............................. 12.8 4.9 20.8 20.5
--------------- --------------- --------------- ---------------
Total revenues.................................... 944.9 867.1 1,825.2 1,689.5
--------------- --------------- --------------- ---------------
Benefits, Claims and Expenses:
Benefits, claims, and settlement expenses............. 367.2 315.6 713.0 617.5
Dividends to policyholders............................ 2.1 .4 2.8 .6
Underwriting, acquisition, and other expenses......... 385.2 371.5 748.5 731.6
Interest and other charges............................ 2.7 2.2 4.7 4.3
--------------- --------------- --------------- ---------------
Total expenses................................... 757.4 689.8 1,469.1 1,354.1
--------------- --------------- --------------- ---------------
Income before income taxes ........................... 187.5 177.2 356.0 335.3
--------------- --------------- --------------- ---------------
Income Taxes:
Currently payable (recoverable)....................... (1.8) 53.3 42.4 98.9
Deferred.............................................. 17.0 4.8 27.0 10.9
--------------- --------------- --------------- ---------------
Total............................................. 15.2 58.1 69.4 109.9
--------------- --------------- --------------- ---------------
Net Income............................................ $ 172.3 $ 119.0 $ 286.6 $ 225.4
=============== =============== =============== ===============
Net Income Per Share:
Basic............................................. $ .94 $ .65 $ 1.56 $ 1.24
=============== =============== =============== ===============
Diluted........................................... $ .93 $ .65 $ 1.55 $ 1.22
=============== =============== =============== ===============
Average shares outstanding: Basic................. 182,903,826 182,123,337 182,893,037 182,118,799
=============== =============== =============== ===============
Diluted............... 184,952,330 184,218,883 184,913,845 184,387,307
=============== =============== =============== ===============
Dividends Per Common Share:
Cash ............................................ $ .170 $ .130 $ .300 $ .243
=============== =============== =============== ===============
See accompanying Notes to Consolidated Financial Statements.
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4
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- -------------- --------------- --------------
<s> <c> <c> <c> <c>
Net income as reported................................. $ 172.3 $ 119.0 $ 286.6 $ 225.4
--------------- -------------- --------------- --------------
Other comprehensive income (loss):
Foreign currency translation adjustment............. (1.5) (1.4) (2.9) (2.8)
--------------- -------------- --------------- --------------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period... 79.2 (165.6) (31.7) (124.3)
Less: elimination of pretax realized gains
included in income as reported................ 12.8 4.9 20.8 20.5
--------------- -------------- --------------- --------------
Pretax unrealized gains (losses) on securities
carried at market value....................... 66.4 (170.5) (52.5) (144.9)
Deferred income taxes (credits)................... 23.4 (59.7) (18.1) (50.7)
--------------- -------------- --------------- --------------
Net unrealized gains (losses) on securities....... 43.0 (110.8) (34.3) (94.1)
--------------- -------------- --------------- --------------
Net adjustments..................................... 41.4 (112.2) (37.2) (96.9)
--------------- -------------- --------------- --------------
Comprehensive income................................... $ 213.7 $ 6.7 $ 249.3 $ 128.4
=============== ============== =============== ==============
See accompanying Notes to Consolidated Financial Statements.
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5
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
---------------------------------
2005 2004
-------------- --------------
<s> <c> <c>
Cash flows from operating activities:
Net income................................................................................ $ 286.6 $ 225.4
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred policy acquisition costs....................................................... 2.0 (13.2)
Premiums and other receivables.......................................................... (32.2) (32.0)
Unpaid claims and related items......................................................... 154.2 131.1
Other policyholders' benefits and funds................................................. 2.6 57.8
Income taxes............................................................................ (25.8) 42.4
Reinsurance balances and funds.......................................................... 27.0 9.8
Realized investment gains............................................................... (20.8) (20.5)
Accounts payable, accrued expenses and other............................................ (22.5) 11.9
-------------- --------------
Total..................................................................................... 371.2 412.7
-------------- --------------
Cash flows from investing activities:
Fixed maturity securities:
Maturities and early calls............................................................. 399.1 303.1
Sales.................................................................................. 135.1 51.4
Sales of:
Equity securities...................................................................... 69.5 40.0
Other investments...................................................................... 1.1 2.1
Fixed assets for company use........................................................... 4.9 .6
Cash and short-term investments of subsidiary acquired.................................... 1.2 -
Purchases of:
Fixed maturity securities.............................................................. (812.1) (733.6)
Equity securities...................................................................... (28.5) (23.6)
Other investments...................................................................... (2.8) (.8)
Fixed assets for company use........................................................... (22.2) (7.3)
Investment in affiliates............................................................... (9.7) (1.4)
Other-net................................................................................. .4 2.6
-------------- --------------
Total..................................................................................... (263.8) (366.9)
-------------- --------------
Cash flows from financing activities:
Issuance of debentures and notes.......................................................... 1.0 -
Issuance of common shares................................................................. 5.5 9.0
Redemption of debentures and notes........................................................ (1.1) (.4)
Dividends on common shares................................................................ (54.8) (44.2)
Other-net................................................................................. (.3) (2.5)
-------------- --------------
Total..................................................................................... (49.7) (38.2)
-------------- --------------
Increase (decrease) in cash and short-term investments 57.5 7.5
Cash and short-term investments, beginning of period...................................... 449.2 451.2
-------------- --------------
Cash and short-term investments, end of period............................................ $ 506.8 $ 458.7
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for: Interest ............................................. $ 4.7 $ 4.2
============== ==============
Income taxes.......................................... $ 94.1 $ 66.5
============== ==============
See accompanying Notes to Consolidated Financial Statements.
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6
OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)
- --------------------------------------------------------------------------------
1. Accounting Policies and Basis of Presentation:
The accompanying consolidated 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.
2. Common Share Data:
(a) Earnings Per Share - The following table provides a reconciliation of the
income and number of shares used in basic and diluted earnings per share
calculations.
Quarters Ended Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- ---------------
<s> <c> <c> <c> <c>
Numerator:
Net Income ...................................... $ 172.3 $ 119.0 $ 286.6 $ 225.4
-------------- -------------- -------------- ---------------
Numerator for basic earnings per share -
income available to common stockholders........ 172.3 119.0 286.6 225.4
-------------- -------------- -------------- ---------------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions...................... $ 172.3 $ 119.0 $ 286.6 $ 225.4
============== ============== ============== ===============
Denominator:
Denominator for basic earnings per share
weighted-average shares (1) .................. 182,903,826 182,123,337 182,893,037 182,118,799
Effect of dilutive securities - stock options.... 2,048,504 2,095,546 2,020,808 2,268,508
-------------- -------------- -------------- ---------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions (1)........................ 184,952,330 184,218,883 184,913,845 184,387,307
============== ============== ============== ===============
Earnings per share: Basic........................ $ .94 $ .65 $ 1.56 $ 1.24
============== ============== ============== ===============
Diluted...................... $ .93 $ .65 $ 1.55 $ 1.22
============== ============== ============== ===============
(1) Common share data has been retroactively adjusted to reflect all stock
dividends and splits.
7
(b) Stock Options Compensation - The Financial Accounting Standards Board
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, as such awards become vested. 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 for all periods shown. In estimating
the compensation cost of options, the fair value of options has been
calculated using the Black-Scholes option pricing model.
Quarters Ended Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- ---------------
<s> <c> <c> <c> <c>
Comparative data:
Net income:
As reported..................................... $ 172.3 $ 119.0 $ 286.6 $ 225.4
Add: Stock-based compensation expense
included in reported income, net of
related tax effects......................... .8 .4 1.3 4.6
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of related tax effects.. 1.5 .5 5.4 10.0
-------------- -------------- -------------- ---------------
Pro forma basis................................. $ 171.6 $ 118.9 $ 282.4 $ 220.0
============== ============== ============== ===============
Basic earnings per share:
As reported..................................... $ .94 $ .65 $ 1.56 $ 1.24
Pro forma basis................................. .94 .65 1.54 1.21
Diluted earnings per share:
As reported..................................... .93 .65 1.55 1.22
Pro forma basis................................. $ .93 $ .65 $ 1.53 $ 1.19
============== ============== ============== ===============
Expense recognition of stock options granted in 2003, 2004 and 2005 reduced
earnings per share by less than one cent per share in the second quarter 2005
and by one cent per share in the first six months of 2005. Stock option
expense recognition reduced earnings per share by less than one cent per
share in the second quarter of 2004 and two cents per share for the first six
months of 2004.
Options were granted during the second quarter of 2005 and first quarter of
2004 for 1,618,000 and 1,990,500 shares of common stock, respectively.
Options outstanding as of June 30, 2005 and 2004 were 10,502,099 and
9,730,924, respectively. The maximum number of options available for future
issuance as of June 30, 2005 is 472,679.
During December, 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 - Revised ("FAS 123R")
"Share-Based Payment". FAS 123R requires entities to recognize the cost of
employee services received in exchange for awards of equity instruments based
on the grant-date fair value of those awards. The effective date of this
pronouncement is the beginning of the first interim or annual reporting
period that begins after June 15, 2005. In April, 2005, the U.S. Securities
and Exchange Commission approved a new rule that, for public companies,
delays the effective date of FAS 123R to the first annual, rather than
interim, reporting period that begins after June 15, 2005. Except for the
change in effective date, the guidance of FAS 123R is unchanged.
The statement allows for three transition methods of implementation: the
modified prospective application and two versions of the modified
retrospective application. The modified prospective application requires
entities to expense share-based payments for new awards and awards modified,
repurchased, or cancelled after the required effective date. Additionally, it
requires entities to record as an expense, the cost attributable to the
unvested options outstanding as of the required effective date. Modified
retrospective application may be applied either (a) to all prior years for
which Statement 123 was effective (fiscal years beginning after December 15,
1994) or (b) only to prior interim periods in the year of initial adoption if
the required effective date of this statement does not coincide with the
beginning of the entity's fiscal year.
The Company believes that the reduction to fully diluted earnings per share
will be immaterial when calculated using the modified prospective transition
method.
8
3. Unrealized Appreciation of Investments:
Cumulative net unrealized gains on fixed maturity securities available for
sale and equity securities credited to a separate account in common
shareholders' equity amounted to $136.3 at June 30, 2005. Unrealized
appreciation of investments, before applicable deferred income taxes of
$73.7, at June 30, 2005 included gross unrealized gains and (losses) of
$238.5 and ($28.4), respectively.
For the six months ended June 30, 2005 and 2004, net unrealized depreciation
of investments, net of deferred income tax credits, amounted to $34.3 and
$94.1, respectively.
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 Six Months Ended
June 30, June 30,
----------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- ---------------- -------------- --------------
<s> <c> <c> <c>
Service cost.................................. $ 2.1 $ 1.5 $ 4.2 $ 3.4
Interest cost................................. 3.0 2.8 6.1 5.7
Expected return on plan assets................ (3.6) (3.5) (7.3) (7.0)
Recognized loss............................... .5 .6 1.1 1.2
--------------- ---------------- -------------- --------------
Net cost $ 2.0 $ 1.5 $ 4.1 $ 3.4
=============== ================ ============== ==============
The companies are not expecting to make cash or non-cash contributions to
their pension plans in calendar year 2005.
Effective January 1, 2005, both the Old Republic Plan and the Bitco Plan were
closed to new employees hired after December 31, 2004. The Title Plan was
already closed to new employees. There were no changes to the benefits for
employees/beneficiaries already in the Plans.
Also effective January 1, 2005, the Old Republic International Employees
Savings and Stock Ownership Plan ("ESSOP") became a 401K plan. All aspects of
the ESSOP remained unchanged, except that employee contributions are now made
on a pretax rather than post-tax basis.
9
5. Information About Segments of Business:
The Corporation's major business segments are organized as the General
Insurance (property and liability insurance), Mortgage Guaranty and Title
Insurance Groups. Effective with the second quarter of 2004, the Company has
included the results of its small life & health insurance business with those
of its corporate and minor service operations; prior period data has been
reclassified accordingly. 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 net realized investment gains or losses 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 Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ---------- ----------
<s> <c> <c> <c> <c>
General Insurance Group:
Net premiums earned............................................. $ 461.3 $ 396.2 $ 892.4 $ 772.8
Net investment income and other income ......................... 51.8 48.8 103.3 97.7
----------- ----------- ---------- ----------
Total revenues before realized gains......................... $ 513.2 $ 445.1 $ 995.8 $ 870.6
=========== =========== ========== ==========
Income before taxes (credits) and realized
investment gains........................................... $ 86.4 $ 83.3 $ 171.3 $ 157.6
=========== =========== ========== ==========
Income tax expense (credits) on above (1)....................... $ (19.0) $ 26.3 $ 7.7 $ 49.4
=========== =========== ========== ==========
Mortgage Insurance Group:
Net premiums earned............................................. $ 108.5 $ 100.4 $ 213.9 $ 199.1
Net investment income and other income ......................... 21.7 22.3 43.3 43.7
----------- ----------- ---------- ----------
Total revenues before realized gains......................... $ 130.3 $ 122.7 $ 257.3 $ 242.9
=========== =========== ========== ==========
Income before taxes and realized investment gains............... $ 67.9 $ 59.5 $ 132.5 $ 116.9
=========== =========== ========== ==========
Income tax expense on above .................................... $ 22.8 $ 20.0 $ 44.4 $ 39.4
=========== =========== ========== ==========
Title Insurance Group:
Net premiums earned............................................. $ 175.7 $ 178.9 $ 335.7 $ 347.3
Title, escrow and other fees.................................... 85.9 89.7 157.7 155.5
----------- ----------- ---------- ----------
Sub-total.................................................... 261.7 268.7 493.4 502.8
Net investment income and other income ......................... 6.5 6.7 13.1 13.2
----------- ----------- ---------- ----------
Total revenues before realized gains (losses)................ $ 268.2 $ 275.4 $ 506.6 $ 516.1
=========== =========== ========== ==========
Income before taxes and realized investment
gains (losses).............................................. $ 22.8 $ 31.0 $ 35.6 $ 44.3
=========== =========== ========== ==========
Income tax expense on above..................................... $ 7.8 $ 10.8 $ 12.0 $ 15.2
=========== =========== ========== ==========
Consolidated Revenues:
Total revenues of above Company segments........................ $ 911.8 $ 843.3 $ 1,759.8 $ 1,629.6
Other sources (2)............................................... 22.7 19.6 48.9 41.0
Consolidated net realized investment gains...................... 12.8 4.9 20.8 20.5
Elimination of intersegment revenues (3)........................ (2.4) (.8) (4.3) (1.7)
----------- ----------- ---------- ----------
Consolidated revenues........................................ $ 944.9 $ 867.1 $ 1,825.2 $ 1,689.5
=========== =========== ========== ==========
Consolidated Income Before Taxes:
Total income before taxes and realized investment
gains of above Company segments.............................. $ 177.2 $ 173.9 $ 339.6 $ 318.9
Other sources - net (2)......................................... (2.6) (1.6) (4.3) (4.1)
Consolidated net realized investment gains...................... 12.8 4.9 20.8 20.5
----------- ----------- ---------- ----------
Consolidated income before income taxes...................... $ 187.5 $ 177.2 $ 356.0 $ 335.3
=========== =========== ========== ==========
Consolidated Income Tax Expense:
Total income tax expense of above Company segments (1) $ 11.5 $ 57.2 $ 64.2 $ 104.1
Other sources - net (2)......................................... (.8) (.7) (2.0) (1.7)
Income tax expense on consolidated
net realized investment gains......................... 4.5 1.7 7.2 7.5
----------- ----------- ---------- ----------
Consolidated income tax expense.............................. $ 15.2 $ 58.1 $ 69.4 $ 109.9
=========== =========== ========== ==========
10
June 30, December 31,
2005 2004
------------------- ------------------
<s> <c> <c>
Consolidated Assets:
General....................................................................... $ 7,645.4 $ 7,222.8
Mortgage...................................................................... 2,171.9 2,205.9
Title......................................................................... 739.9 753.0
Other - net (2)............................................................... 486.9 388.9
------------------- ------------------
Consolidated ................................................................. $ 11,044.4 $ 10,570.8
=================== ==================
- ----------
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.
(1)General Insurance tax expense was reduced by $45.9 in the second quarter and
six months ended June 30, 2005 as discussed in note 7(b).
(2)Represents amounts for Old Republic's holding company parent, minor internal
service subsidiaries, and a small life and health insurance operation.
(3)Represents consolidation eliminating adjustments.
6. Commitments and Contingent Liabilities:
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.
Purported class actions have 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 unaffiliated 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. The 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. The Ohio case has been stayed, pending an appeal in a similar
action against another title insurer.
An action was filed 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. RMIC filed a motion to compel arbitration of the dispute with the
named plaintiff. The motion was denied and RMIC has filed an appeal, which is
pending.
7. Income Taxes
(a) In April, 2004 the Internal Revenue Service ("IRS") issued a so-called
"30 Day Letter" to the Company as a result of 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.
After reviewing the IRS' calculations, the Company concluded that its claim
reserves were calculated consistently and provided a fair and reasonable
estimate of its unpaid losses. The Company vigorously defended the validity
of the claim reserve deductions taken in its tax returns, and the matter was
assigned to an IRS Appeals Officer for resolution. By letter dated July 5,
2005, the IRS Appeals Office confirmed an agreement reached with the Company
whereby tax years 1988 through 2000 will be closed without adjustment to the
claim reserve deductions as originally filed in the corresponding tax
returns.
(b) The Company obtained a favorable resolution on its claim for a Federal
income tax refund pertaining to the three years ended December 31, 1990. As a
result, a combined recovery of income taxes and related accumulated interest
of $57.9 was recorded in the second quarter of 2005. The net of tax effect of
this recovery resulted in a non-recurring addition to net income of $45.9 in
the second quarter and six months ended June 30, 2005.
11
OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Six Months Ended June 30, 2005 and 2004
($ in Millions, Except Share Data)
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
This management analysis of financial position and results of operations
pertains to the consolidated accounts of Old Republic International Corporation
("Old Republic" or "the Company"). The Company conducts its business through
three major segments, namely, its General (property and liability), Mortgage
Guaranty, and Title insurance segments. A small life and health insurance
business, accounting for 2.2% of consolidated revenues for the six months ended
June 30, 2005 and 2.2% of consolidated assets as of June 30, 2005, is included
within the corporate and other caption. 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 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 over time. In addition to
operating income stemming from Old Republic's basic underwriting and related
services functions, significant revenues are obtained from investable funds
generated by those functions as well as from 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 contemplation of
an appropriate matching of assets and liabilities.
In light of the above factors, the Company's affairs are managed for the long
run, without regard to the arbitrary strictures of quarterly or even annual
reporting periods that American industry must observe. In Old Republic's view,
short reporting time frames do not comport well 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 intervals are likely to encompass one or two
economic and/or underwriting 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.
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
- --------------------------------------------------------------------------------
To aid investment analysis of Company results, both net operating income and
net income figures per share are provided to highlight the impact of certain
accounting rules or securities market-driven considerations that affect the
recording of investment gains or losses and lead to lessened period-to-period
comparability. 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. In particular, write-downs of securities deemed other than
temporarily impaired are affected by some of these factors as well as industry
or issuer-specific developments that can call for the recognition of a loss of
market value or non-recoverability of asset cost.
Old Republic's consolidated net operating earnings before net realized
investment gains, amounted to $163.9, or 89 cents per share, for the second
quarter of 2005, up 41.6 percent from $115.7, or 63 cents per share in the same
period of 2004. For the first six months of 2005, net operating earnings before
net realized investment gains, amounted to $273.0, or $1.48 per share, up 28.5
percent from $212.4 or $1.15 per share in the same period of 2004. Earnings for
both 2005 periods include a non-recurring recovery of income taxes and related
accumulated interest of $57.9, $45.9, net of tax or 25 cents per share. The
recovery stems from a recent favorable resolution of the Company's claim for a
permanent Federal income tax refund applicable to the three years ended December
31, 1990. Additionally, the increases reflect improved performance by the
Company's General and Mortgage Guaranty insurance segments. Year-over-year these
two segments generated greater underwriting income as well as moderate growth of
investment income. Inclusive of net realized investment gains, net income for
this year's second quarter amounted to $172.3, or 93 cents per share, versus
$119.0, or 65 cents per share in the year-ago period. Net income for this year's
first half amounts to $286.6, or $1.55 per share, versus $225.4, or $1.22 per
share in the first half of 2004. Pretax earnings in last year's first six months
were affected adversely by required non-recurring stock option compensation
charges of $5.6 (or 2 cents per share after tax), representing the expense of a
vesting acceleration of stock option compensation costs in the first quarter of
2004.
12
The major components of pretax income and resulting consolidated GAAP net
income discussed in this report were as follows:
Quarters Ended June 30, Six Months Ended June 30,
--------------------------------------- ---------------------------------------
% %
2005 2004 Change 2005 2004 Change
--------- ---------- ------------ ---------- --------- ------------
<s> <c> <c> <c> <c> <c> <c>
Pretax operating income (loss):
General ............................... $ 86.4 $ 86.3 3.8% $ 171.3 $ 157.6 8.7%
Mortgage Guaranty ..................... 67.9 59.5 14.2 132.5 116.9 13.3
Title ................................. 22.8 31.0 (26.4) 35.6 44.3 (19.5)
Corporate and other.................... (2.6) (1.6) (4.3) (4.1)
Realized investment gains................. 12.8 4.9 20.8 20.5
--------- ---------- ---------- ---------
Consolidated pretax income ............... 187.5 177.2 5.8 356.0 335.3 6.2
Income taxes........................... 15.2 58.1 (73.9) 69.4 109.9 (36.8)
--------- ---------- ------------ ---------- --------- ------------
Net income................................ $ 172.3 $ 119.0 44.8% $ 286.6 $ 225.4 27.2%
========= ========== ============ ========== ========= ============
Components of Diluted
Earnings Per Share:
Net operating income before non-
recurring income tax benefit ...... $ .64 $ .63 1.6% $ 1.23 $ 1.15 7.0%
Non-recurring income tax benefit ....... .25 - .25 -
--------- ---------- ---------- ---------
.89 .63 41.3 1.48 1.15 28.7
Net realized gains .................... .04 .02 .07 .07
--------- ---------- ---------- ---------
Net income ............................ $ .93 $ .65 43.1% $ 1.55 $ 1.22 27.0%
========= ========== ============ ========== ========= ============
Consolidated revenues in the second quarter of 2005 totaled $944.9, up 9.0
percent from $867.1 in the same period of 2004. For the first six months of
2005, consolidated revenues totaled $1,825.2, up 8.0 percent from $1,689.5 in
the first half of 2004. Net premiums and fees earned were $847.6 and $1,636.5,
respectively, in this year's second quarter and first six months versus $780.8
and $1,507.4 earned in the same year-ago periods.
Old Republic's General Insurance Group, which underwrites principally
commercial property and liability insurance coverages, reported a 3.8 percent
increase in pretax operating income to $86.4 for this year's second quarter and
a 8.7 percent increase to $171.3 for the first six months of 2005. This compares
to $83.3 and $157.6 earned during the same periods of 2004. Net premiums earned
in this year's second quarter were $461.3, up 16.4 percent from $396.2 a year
ago, while the first six months of 2005 reflects $892.4, up 15.5 percent from
$772.8 in the same 2004 period. The composite underwriting ratio for the second
quarter of 2005 reflected a moderate increase to 91.4 percent when compared to
89.2 percent registered in the second quarter of 2004. The composite
underwriting ratio for the first six months of 2005 was 91.7 percent, up
slightly from the 91.0 percent posted in the same 2004 period. Favorable
underwriting results continue and reflect basically stable overall claim costs
as well as firm expense controls.
Mortgage Guaranty Group operations posted double digit rises of 14.2 percent
in pretax operating income to $67.9 in this year's second quarter and 13.3
percent to $132.5 in this year's first half. Net premium revenues in the most
recent quarter and year-to-date periods were $108.5 and $213.9, respectively, up
8.1 percent and 7.4 percent, respectively, from their year-ago levels of $100.4
and $199.1. Most of the improvement in mortgage guaranty operations stemmed from
the basic underwriting and related services function of the business.
The composite underwriting ratios in the second quarter and first six months
of 2005 were 53.5 percent and 54.4 percent, respectively, compared to 57.4
percent and 58.1 percent posted in the same periods of 2004. The claim ratio of
31.5 percent was slightly lower than the 32.0 percent posted in the second
quarter of 2004, while the 31.9 percent posted for the first half of 2005 was
slightly higher than the 30.8 percent reflected in the first six months of 2004.
Year-over-year claim ratio comparisons reflect basic stability in paid loss
trends, claim frequency and severity patterns, all of which appear to have
leveled off in the three most recent quarters. Profitability was also affected
favorably by the combination of lower contract underwriting costs, some
reductions in variable sales expenses, and continued attention to operating
efficiencies. Year-over-year comparisons also benefited from the absence of
stock option expense acceleration costs of $2.0 that burdened first half 2004
operations to the extent of 100 basis points in the expense ratio. Most of the
decline in the expense ratios reflected this segment's share of the
aforementioned 2004 stock option costs, expense reductions and continued
attention to operating efficiencies.
Old Republic's Title Insurance Group reflected slight variations in the key
components of its pretax operating income, which dropped to $22.8 and $35.6 in
this year's second quarter and first half. Premium and fee revenues were down
slightly at $261.7 and $493.4 for the 2005 periods. All of the shortfall in this
year's title operating income stemmed from the basic underwriting and related
services operations. While claim costs remained relatively stable, operating
expense reductions have been more difficult to achieve in light of slightly
negative premium and fee revenue trends. Indicative of the drop in title premium
and fee revenues, the number of closed transactions for the Company's directly
produced business were 6.6 percent and 9.8 percent lower in this year's first
and second quarter, respectively, and 8.3 percent less in the first half of the
year when compared to the same periods of 2004. These reduced production levels
are generally attributable to a continued drop in refinance transactions, as
well as more subdued new and resale housing activity in 2005 to date. In
combination, these factors produced slightly higher composite ratios of 93.6
percent and 95.3 percent in this year's second quarter and first half,
respectively, compared to 90.7 percent and 93.6 percent for the same periods in
2004.
13
Combined results for Old Republic's corporate and other segment which
includes its small Life & Health insurance business and net corporate expenses
reflected pretax net operating deficits of $2.6 and $4.3 in the second quarter
and first half of 2005, respectively. For the second quarter and first half of
2004, the comparable operating deficits amounted to $1.6 and $4.1, respectively.
These results are reflective of holding company expenses and debt service costs,
investment income on temporary investment holdings, and lower earnings from Old
Republic's overall book of term life and accident and health business.
Consolidated net investment income of $75.8 and $151.2 for the second quarter
and first six months of 2005 was up by 6.5 percent and 6.6 percent,
respectively, when compared to the preceding year periods due primarily to the
benefits of the Company's growing invested asset base. Realized investment gains
amounted to $12.8 and $4.9 in the second quarters of 2005 and 2004,
respectively, and $20.8 and $20.5 for the first six months of 2005 and 2004,
respectively.
Cash and invested assets at June 30, 2005, totaled $7.76 billion, or $42.44
per share, compared to $7.51 billion, or $41.19 per share, at December 31, 2004.
Consolidated operating cash flow remained positive at $371.2 for the first half
of 2005, compared to $412.7 in the same period of 2004. The investment portfolio
reflects a current allocation of approximately 88 percent in fixed income
investments and 5 percent in equities. It contains little or no exposure to real
estate investments, mortgage-backed securities, derivatives, junk bonds, private
placements or mortgage loans.
Common shareholders' equity was $4.06 billion at June 30, 2005, compared to
$3.86 billion at December 31, 2004, and $3.65 billion at June 30, 2004. Book
value per share was $22.25 at the end of June 2005, versus $21.17 at year-end
2004 and $20.07 at June 30, 2004. The year-to-date change in book value reflects
principally additions from earnings in excess of dividend requirements, offset
by a decline in the value of investment securities carried at market values.
- --------------------------------------------------------------------------------
MANAGEMENT ANALYSIS
- --------------------------------------------------------------------------------
CHANGES IN ACCOUNTING POLICIES
During December, 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 - Revised ("FAS 123R")
"Share-Based Payment". FAS 123R requires entities to recognize the cost of
employee services received in exchange for awards of equity instruments based on
the grant-date fair value of those awards. The effective date of this
pronouncement is the beginning of the first interim or annual reporting period
that begins after June 15, 2005. In April, 2005, the U.S. Securities and
Exchange Commission ("SEC") approved a new rule that, for public companies,
delays the effective date of FAS 123R to the first annual, rather than interim,
reporting period that begins after June 15, 2005. Except for the change in the
effective date, the guidance of FAS 123R is unchanged.
The statement allows for three transition methods of implementation: the
modified prospective application and two versions of the modified retrospective
application. The modified prospective application requires entities to expense
share-based payments for new awards and awards modified, repurchased, or
cancelled after the required effective date. Additionally, it requires entities
to record as an expense, the cost attributable to the unvested options
outstanding as of the required effective date. Modified retrospective
application may be applied either (a) to all prior years for which Statement 123
was effective (fiscal years beginning after December 15, 1994) or (b) only to
prior interim periods in the year of initial adoption if the required effective
date of this statement does not coincide with the beginning of the entity's
fiscal year.
The Company believes that the reduction to fully diluted earnings per share
will be immaterial when calculated using the modified prospective transition
method.
FINANCIAL POSITION
The Company's financial position at June 30, 2005 reflected increases in
assets, liabilities and common shareholders' equity of 4.5%, 4.0% and 5.3%,
respectively, when compared to the immediately preceding year-end. Cash and
invested assets represented 70.3% and 71.1% of consolidated assets as of June
30, 2005 and December 31, 2004, respectively. Consolidated operating cash flow
was positive at $371.2 in this year's first six months compared to the same 2004
period level of $412.7. The decline in 2005 cash flow from operations by
comparison to 2004 was due primarily to the timing of payments for income taxes,
claims, and the settlement of the Title Insurance Group California litigation.
As of June 30, 2005, the invested asset base increased 3.2% to $7,762.2
principally as a result of positive operating cash flow offset by a decline in
the fair value of fixed maturity and equity investments.
During the first six months of 2005 and 2004, the Corporation committed
substantially all investable funds to short to intermediate-term fixed maturity
securities. At both June 30, 2005 and December 31, 2004, approximately 99% of
the Company's investments consisted of marketable securities, including $545.7
and $499.3, respectively, of U.S. Treasury tax and loss bonds held by its
mortgage guaranty subsidiaries for deferred tax purposes. 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 June 30,
2005, Old Republic's commitment to equity securities decreased 9.3% in relation
to the related invested balance at year-end 2004, mostly due to the sales of
equity securities and a reduction in net unrealized gains. At June 30, 2005, the
Company had no fixed maturity investments in default as to principal and/or
interest.
14
Relatively high short-term maturity investment positions continued to be
maintained as of June 30, 2005. Such positions reflect a large variety of
seasonal and intermediate-term factors including current operating needs,
expected operating cash flows, quarter-end cash flow seasonality, 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 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 separate component of the 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 affected adversely by the recognition of additional realized or
impairment losses, but its financial condition would not necessarily be affected
adversely inasmuch as such losses, or a portion of them, could have been
recognized previously as unrealized losses.
15
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 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2005 2004
----------------- -----------------
<s> <c> <c>
Aaa............................................................................... 35.3% 32.6%
Aa................................................................................ 18.6 19.5
A................................................................................. 27.1 27.5
Baa............................................................................... 18.4 19.8
----------------- -----------------
Total investment grade................................................... 99.4 99.4
All other (2)..................................................................... .6 .6
----------------- -----------------
Total.................................................................... 100.0% 100.0%
================= =================
(1) 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.
(2) "All other" includes non-investment or non-rated small issues of tax-exempt
bonds.
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified by Industry Concentration for Investment Grade Fixed Maturity Securities
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2005
-------------------------------
Gross
Amortized Unrealized
Cost Losses
------------ -------------
<s> <c> <c>
Fixed Maturity Securities by Industry Concentration:
Finance............................................................................... $ 157.6 $ 2.8
Municipals............................................................................ 402.3 2.3
Consumer Durables..................................................................... 48.8 1.6
Service............................................................................... 111.4 1.5
Other (includes 16 industry groups)................................................... 855.3 8.5
------------ -------------
Total........................................................................ $ 1,575.5 (3) $ 17.0
============ =============
(3) Represents 24.1 percent of the total fixed maturity securities portfolio.
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified by Industry Concentration for Equity Securities
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2005
-------------------------------
Gross
Unrealized
Cost Losses
------------ ------------
<s> <c> <c>
Equity Securities by Industry Concentration:
Insurance............................................................................. $ 28.4 $ 3.7
Service .............................................................................. 7.2 .9
Mutual Fund .......................................................................... 54.3 .2
------------ ------------
Total........................................................................ $ 89.9 (4) $ 4.9 (5)
============ ============
(4) Represents 24.6 percent of the total equity securities portfolio.
(5) Represents 1.3 percent of the cost of the total equity securities
portfolio, while gross unrealized gains represent 15.1 percent of the
portfolio.
16
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified by Maturity Ranges For All Fixed Maturity Securities
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2005
------------------------------------------------------------------------
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........................ $ 144.0 $ - $ .3 $ -
Due after one year through five years.......... 859.2 - 10.5 -
Due after five years through ten years......... 566.4 - 5.9 -
Due after ten years............................ 5.7 - - -
------------- ------------- ------------ -------------
Total...................................... $ 1,575.5 $ - $ 17.0 $ -
============= ============= ============ =============
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified by Duration and Amount of Unrealized Losses
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2005
-----------------------------------------------------------------------
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........................... $ 7.3 $ - $ - $ 7.3
Seven to twelve months...................... 5.0 - - 5.0
More than twelve months..................... 4.6 - - 4.6
------------- ------------- ------------ -------------
Total.............................. $ 17.0 $ - $ - $ 17.0
============= ============= ============ =============
Equity Securities:
One to six months........................... $ 3.9 $ - $ - $ 3.9
Seven to twelve months...................... - - - -
More than twelve months..................... 1.0 - - 1.0
------------- ------------- ------------ -------------
Total.............................. $ 4.9 $ - $ - $ 4.9
============= ============= ============ =============
Number of Issues in Loss Position:
Fixed Maturity Securities:
One to six months........................... 239 - - 239
Seven to twelve months...................... 87 - - 87
More than twelve months..................... 56 - - 56
------------- ------------- ------------ -------------
Total.............................. 382 - - 382 (6)
============= ============= ============ =============
Equity Securities:
One to six months........................... 2 - - 2
Seven to twelve months...................... - - - -
More than twelve months..................... 1 1 - 2
------------- ------------- ------------ -------------
Total.............................. 3 1 - 4 (6)
============= ============= ============ =============
The aging of issues with unrealized losses employs 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 (June 30, 2005
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.
(6) At June 30, 2005 the number of issues in an unrealized loss position
represent 22.4 percent as to fixed maturities, and 13.3 percent as to
equity securities of the total number of such issues held by the Company.
17
- ------------------------------------------------------------------------------------------------------------------------------------
Age Distribution of Fixed Maturity Securities
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2005 2004
------------------ ----------------
<s> <c> <c>
Maturity Ranges:
Due in one year or less....................................................... 5.6% 12.5%
Due after one year through five years......................................... 43.8 42.9
Due after five years through ten years........................................ 47.4 43.5
Due after ten years through fifteen years..................................... 3.2 1.1
Due after fifteen years....................................................... - -
------------------ ----------------
Total..................................................................... 100.0% 100.0%
================== ================
Average Maturity................................................................... 4.7 Years 4.7 Years
================== ================
Duration (7)....................................................................... 4.1 4.1
================== ================
(7) Duration is used as a measure of bond price sensitivity to interest rate
changes. A duration of 4.1 as of June 30, 2005 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 4.1 percent.
- ------------------------------------------------------------------------------------------------------------------------------------
Composition of Unrealized Gains (Losses)
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2005 2004
------------------ ------------------
<s> <c> <c>
Fixed Maturity Securities:
Amortized cost................................................................ $ 6,534.4 $ 6,273.2
Estimated fair value.......................................................... 6,676.4 6,455.9
------------------ ------------------
Gross unrealized gains........................................................ 159.0 194.5
Gross unrealized losses....................................................... (17.0) (11.8)
------------------ ------------------
Net unrealized gains ..................................................... $ 142.0 $ 182.7
================== ==================
Equity Securities:
Cost.......................................................................... $ 366.2 $ 396.8
Estimated fair value.......................................................... 416.5 459.0
------------------ ------------------
Gross unrealized gains........................................................ 55.2 68.6
Gross unrealized losses....................................................... (4.9) (6.4)
------------------ ------------------
Net unrealized gains...................................................... $ 50.2 $ 62.2
================== ==================
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 have otherwise been
reduced by allowances for estimated amounts unrecoverable. 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 or
shareholders' equity.
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 $341.5
in dividends from its subsidiaries in 2005 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 $4,211.6 at June 30, 2005 consisted of
debt of $142.7 and common shareholders' equity of $4,068.9. The increase in the
common shareholders' equity account during the first six months of 2005 reflects
primarily the retention of earnings in excess of dividends requirements offset
by a decrease in the value of investments carried at market values. Old Republic
has paid cash dividends to its shareholders without interruption since 1942, and
has increased the annual rate in each of the past 24 years. The annual dividend
rate is typically reviewed and approved by the Board of Directors in the first
quarter of each year. In establishing each year's cash dividend rate the
Corporation does not follow a strict formulaic approach and favors a gradual
rise in the annual dividend rate that is largely reflective of long-term
consolidated operating earnings trends. Accordingly, each year's dividend rate
is set judgmentally in consideration of such key factors as the dividend paying
capacity of the Corporation's insurance subsidiaries, the trends in average
annual statutory and GAAP earnings for the six most recent calendar years, and
the long-term expectations for the Corporation's consolidated business. At its
March, 2005 meeting the Board of Directors approved a quarterly cash dividend
rate of 17 cents per share, up from 13 cents per share, subject to the usual
quarterly authorizations.
18
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 June 30, 2005 pursuant to this authorization.
RESULTS OF OPERATIONS
Revenues: Premiums & Fees
Pursuant to GAAP applicable to the insurance industry, revenues are
associated with the related benefits, claims, and 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 written and earned in the month coverage is
effective. 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 (which includes branch offices of its title insurers and wholly owned
subsidiaries of the Company) represent approximately 40 percent and 39 percent
of consolidated title business revenues for the second quarter and first six
months of 2005, respectively. 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 60 percent and
61 percent of consolidated title premium and fee revenues for the second quarter
and first six months of 2005, respectively, is produced by independent title
agents and underwritten title companies. 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 relative to the effective date of the
underlying title policy, and are offset concurrently by production expenses and
claim reserve provisions.
The major sources of Old Republic's earned premiums and fees for the
periods shown were as follows:
% Change
from prior
General Mortgage Title Other Total period
---------- ---------- --------- ---------- ---------- ------------
<s> <c> <c> <c> <c> <c> <c>
Years Ended December 31:
2000............................ $ 857.8 $ 331.4 $ 494.0 $ 53.4 $ 1,736.8 -2.5%
2001............................ 1,000.2 353.1 625.3 50.6 2,029.5 16.9
2002............................ 1,184.1 376.2 813.4 50.1 2,423.9 19.4
2003............................ 1,379.5 400.9 1,103.8 51.6 2,936.0 21.1
2004............................ 1,623.0 403.2 1,025.2 64.6 3,116.1 6.1
Six Months Ended June 30:
2004............................ 772.8 199.1 502.8 32.5 1,507.4 9.2
2005............................ 892.4 213.9 493.4 36.6 1,636.5 8.6
Quarters Ended June 30:
2004............................ 396.2 100.4 268.7 15.4 780.8 8.9
2005............................ $ 461.3 $ 108.5 $ 261.7 $ 16.0 $ 847.6 8.6%
========== ========== ========= ========== ========== ============
Consolidated net premiums and fees earned increased by 8.6% in both 2005
periods. Earned premiums in the General Insurance Group grew by 16.4% and 15.5%
in the second quarter and first six months of 2005, respectively, as a result of
positive pricing and risk selection changes the Company effected during the 2001
to 2003 period in particular, as well as additional business produced in a
reasonably stable underwriting environment. Mortgage guaranty premium income
trends reflect improved persistency trends for traditional primary mortgage
insurance. Title Group premium and fee revenues were down slightly in both the
second quarter and first half of 2005 and are reflective of a continued
reduction in mortgage refinancing activity, as well as more subdued new and
resale housing activity in 2005 to date.
19
The percentage allocation of net premiums earned for major insurance
coverage in the General Insurance Group was as follows:
Type of Coverage
---------------------------------------------------------------------------------------------
Comm.
Auto
(mostly Workers' Financial General
trucking) Comp. Indemnity Property Liability Other Total
----------- ---------- ----------- ---------- ---------- --------- --------
<s> <c> <c> <c> <c> <c>
Years Ended December 31:
2000........................ 49.7% 16.6% 7.9% 13.7% 5.1% 7.0% 100.0%
2001........................ 45.7 17.4 7.2 12.8 5.4 11.5 100.0
2002........................ 43.0 19.1 8.7 12.9 4.7 11.6 100.0
2003........................ 39.5 20.0 11.7 12.2 5.3 11.3 100.0
2004........................ 37.9 21.8 11.8 11.3 5.8 11.4 100.0
Six Months Ended June 30:
2004........................ 38.1 21.9 12.1 11.5 5.3 11.1 100.0
2005........................ 38.8 21.3 11.6 10.9 5.5 11.9 100.0
Quarters Ended June 30:
2004........................ 38.0 20.4 11.9 11.4 6.2 12.1 100.0
2005........................ 38.9% 20.3% 12.2% 10.8% 5.1% 12.7% 100.0%
=========== ========== =========== ========== ========== ========= ========
The following tables provide information on risk exposure trends for Old
Republic's Mortgage Guaranty Group.
New Insurance Written
-----------------------------------------------------------
Traditional
Primary Bulk Other Total
------------ ----------- ------------ ------------
<s> <c> <c> <c> <c>
Years Ended December 31:
2000................................ $ 14,929.7 $ 35.3 $ 1,594.8 $ 16,559.8
2001................................ 25,085.4 2,614.4 3,675.3 31,375.1
2002................................ 30,809.6 5,130.0 7,555.5 43,495.1
2003................................ 37,255.8 6,806.6 5,802.8 49,865.2
2004................................ 24,749.4 4,487.8 7,324.7 36,562.0
Six Months Ended June 30:
2004................................ 13,082.7 1,331.1 6,441.1 20,855.0
2005................................ 10,032.4 5,764.8 43.4 15,840.7
Quarters Ended June 30:
2004................................ 7,183.1 1,290.0 5,276.0 13,749.2
2005................................ $ 5,326.8 $ 2,465.2 $ 3.5 $ 7,795.7
============ =========== ============ ============
Net Risk In Force
------------------------------------------------------------
Traditional
Primary Bulk Other Total
------------ ----------- ------------ ------------
<s> <c> <c> <c> <c>
As of December 31:
2000................................ $ 14,840.7 $ 8.7 $ 271.5 $ 15,120.9
2001................................ 15,043.5 167.0 336.9 15,547.4
2002................................ 15,367.6 513.0 450.7 16,331.3
2003................................ 15,329.5 802.2 493.4 16,625.1
2004................................ 15,452.2 834.8 580.9 16,868.0
As of June 30:
2004................................ 15,322.5 792.2 548.5 16,663.3
2005................................ $ 15,126.5 $ 1,203.9 $ 576.2 $ 16,906.7
============= =========== ============ ============
20
Analysis of Traditional Primary Risk in Force:
FICO Unscored/
By Fair Isaac & Company ("FICO") Scores (1): FICO less FICO 620 greater Unavail-
than 620 to 680 than 680 able
------------ ------------ ------------- ------------
<s> <c> <c> <c> <c>
As of December 31:
2000...................................... -% -% -% -%
2001...................................... - - - -
2002...................................... - - - -
2003...................................... 8.5 29.2 48.8 13.5
2004...................................... 8.6 31.1 51.4 8.9
As of June 30:
2004...................................... 8.6 30.3 50.4 10.7
2005...................................... 8.5% 31.6% 52.4% 7.5%
============ ============ ============= ============
- --------------------
(1) Scores were unavailable for a substantial number of policies in force prior
to 2003.
By Loan to Value ("LTV") Ratio:
LTV
LTV less LTV LTV greater
than 85 85 to 90 90 to 95 than 95
------------ ------------ ------------- ------------
<s> <c> <c> <c> <c>
As of December 31:
2000...................................... 5.4% 38.2% 50.3% 6.1%
2001...................................... 5.7 37.6 48.8 7.9
2002...................................... 6.0 37.3 47.0 9.7
2003...................................... 6.4 37.3 43.8 12.5
2004...................................... 5.7 36.8 42.0 15.5
As of Ended June 30:
2004...................................... 6.1 37.1 43.0 13.8
2005...................................... 5.5% 37.0% 40.6% 16.9%
============ ============ ============= ============
By Type of Loan Documentation: Full Reduced
Documentation Documentation
----------------- -----------------
<s> <c> <c>
As of December 31:
2000...................................... 100.0% -%
2001...................................... 99.4 .6
2002...................................... 96.7 3.3
2003...................................... 94.4 5.6
2004...................................... 93.2 6.8
As of June 30:
2004...................................... 93.9 6.1
2005...................................... 92.0% 8.0%
================= =================
Earned Premiums Persistency
---------------------------- -----------------------------
Traditional
Direct Net Primary Bulk (2)
------------ ------------ ------------ ------------
<s> <c> <c> <c> <c>
Years Ended December 31:
2000...................................... $ 359.0 $ 331.4 82.1% -%
2001...................................... 390.9 353.1 65.3 -
2002...................................... 432.4 376.2 59.1 71.7
2003...................................... 467.3 400.9 46.0 31.8
2004...................................... 483.6 403.2 64.5 55.7
Six Months Ended June 30:
2004...................................... 238.3 199.1 54.8 41.9
2005...................................... 252.7 213.9 66.6% 55.0%
============ ============
Quarters Ended June 30:
2004...................................... 119.8 100.4
2005...................................... $ 128.1 $ 108.5
============ ============
- -----------------------
(2) Due to the relative immaturity of the bulk business, the above trend may
prove to be highly volatile.
21
The following table indicates the percentage allocation of Title Group
premium and fee revenues by production sources:
Independent
Direct Title Agents &
Operations Other Total
--------------- --------------- --------------
<s> <c> <c> <c>
Years Ended December 31:
2000...................................... 45.8% 54.2% 100.0%
2001...................................... 47.4 52.6 100.0
2002...................................... 43.7 56.3 100.0
2003...................................... 40.0 60.0 100.0
2004...................................... 38.1 61.9 100.0
Six Months Ended June 30:
2004...................................... 38.9 61.1 100.0
2005...................................... 39.2 60.8 100.0
Quarters Ended June 30:
2004...................................... 41.8 58.2 100.0
2005...................................... 39.9% 60.1% 100.0%
=============== =============== ==============
Revenues: Net Investment Income
Net investment income is affected by trends in interest and dividend yields
for the types of securities in which the Company's funds are invested during
individual reporting periods. The following tables reflect the segmented and
consolidated invested asset bases as of the indicated dates, and the investment
income earned and resulting yields on such assets. In calculating yields,
non-interest bearing U.S. Treasury tax and loss bonds, held by the Company's
mortgage guaranty subsidiaries for deferred tax purposes, are necessarily
excluded from the invested asset base. Since the Company can exercise little
control over market values, yields are evaluated on the basis of investment
income earned in relation to the amortized cost of the underlying invested
assets, though yields based on the market values of such assets are also shown
in the statistics below.
Market Invested
Invested Assets at Cost Value Assets at
------------------------------------------------------------------- Adjust- Market
General Mortgage Title Other Total ment Value
---------- ----------- --------- ---------- ----------- ---------- ------------
<s> <c> <c> <c> <c> <c> <c> <c>
As of December 31:
2000...................... $ 3,112.3 $ 1,333.6 $ 373.7 $ 149.5 $ 4,969.2 $ 98.0 $ 5,067.2
2001...................... 3,198.8 1,542.3 423.9 150.1 5,315.0 219.7 5,534.8
2002...................... 3,446.0 1,700.9 489.6 226.9 5,863.4 305.5 6,169.0
2003...................... 3,798.2 1,827.9 556.9 177.1 6,360.1 360.3 6,720.4
2004...................... 4,217.8 2,001.2 595.2 295.0 7,109.4 262.2 7,371.6
As of June 30:
2004...................... 4,012.6 1,881.9 569.1 268.6 6,732.3 215.0 6,947.4
2005...................... $ 4,409.2 $ 1,986.7 $ 566.1 $ 445.0 $ 7,407.1 $ 209.6 $ 7,616.7
========== =========== ========= ========== =========== ========== ============
22
Net Investment Income Yield at
-------------------------------------------------------------------- ------------------------
General Mortgage Title Other Total Cost Market
---------- ---------- --------- --------- ----------- ---------- ----------
<s> <c> <c> <c> <c> <c> <c> <c>
Years Ended
December 31:
2000.................. $ 179.8 $ 56.8 $ 24.0 $ 13.3 $ 273.9 6.0% 5.9%
2001.................. 175.7 63.3 22.7 12.8 274.7 5.7 5.5
2002.................. 172.5 65.8 22.5 11.7 272.6 5.2 5.0
2003.................. 175.0 65.7 23.5 14.9 279.2 4.9 4.6
2004.................. 183.4 67.7 25.5 14.0 290.8 4.6 4.4
Six Months Ended
June 30:
2004.................. 89.5 33.3 12.5 6.4 141.8 4.7 4.5
2005.................. 95.7 35.0 12.7 7.6 151.2 4.5 4.3
Quarters Ended
June 30:
2004.................. 45.0 16.7 6.2 3.2 71.2 4.7 4.5
2005.................. $ 47.8 $ 17.4 $ 6.4 $ 4.1 $ 75.8 4.5% 4.4%
========== ========== ========= ========= =========== ========== ==========
Consolidated net investment income grew by 6.5% and 6.6% for the second
quarter and first six months of 2005, respectively, when compared to the same
periods of 2004 primarily due to the benefits of a rising invested asset base.
Yield trends reflect at once the relatively short maturity of Old Republic's
fixed maturity securities portfolio as well as continuation of a lower yield
environment during the past several years.
Revenues: Net Realized Gains
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, protection of
capital, and provision of 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 six months of 2005 and 2004, 74.7% and 85.5%, 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:
Realized Gains (Losses)
on Disposition of: Impairment Losses on:
------------------------------------------- ------------------------------------------
Equity Equity
securities securities
Fixed and miscell- Fixed and miscell- Net
maturity aneous maturity aneous realized
securities investments Total securities investments Total gains
------------ -------------- -------- ------------ ------------- --------- ----------
<s> <c> <c> <c> <c> <c> <c> <c>
Years Ended
December 31:
2000................ $ .8 $ 32.9 $ 33.6 $ - $ - $ - $ 33.6
2001................ (2.9) 39.4 36.5 (1.2) (5.5) (6.7) 29.7
2002................ 3.8 29.1 33.0 (5.0) (14.0) (19.0) 13.9
2003................ 4.6 31.1 35.7 - (16.4) (16.4) 19.3
2004................ 4.6 48.5 53.2 - (5.2) (5.2) 47.9
Six Months Ended
June 30:
2004................ 1.9 18.5 20.5 - - - 20.5
2005................ 3.0 23.0 26.0 - (5.2) (5.2) 20.8
Quarters Ended
June 30:
2004................ 1.2 3.6 4.9 - - - 4.9
2005................ $ 2.7 $ 10.2 $ 12.9 $ - $ (.1) $ (.1) $ 12.8
============ ============== ======== ============ ============= ========= ==========
23
Expenses: Benefits and Claims
In order to achieve a necessary matching of revenues and expenses, the
Company records the benefits, claims and related settlement costs that have been
incurred during each accounting 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 principally include past experience applicable to the anticipated
costs of various types of claims, continually evolving and changing legal
theories 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 the opinions of a large number of persons, on
the application and interpretation of historical precedent and trends, on
expectations as to future developments, and on management's judgment in
interpreting all such factors. 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 unexpectedly adverse 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 cumulative 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 but not be
limited to 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 involuntary market plans, all
of which cannot be reasonably estimated prior to their emergence.
Mortgage insurance claim reserves are determined on the basis of the
carried risk on reported loan defaults and on an estimate of defaulted loans
that have yet to be reported. In establishing its reserve position, the Company
makes estimates of average claim frequencies (the number of reported defaults
which will ultimately result in a claim payment) and average claim severities
(the amount of claim ultimately to be paid).
The majority of defaults reported to the Company are cured by the borrower
either by making the necessary number of mortgage payments to bring the loan
current, by refinancing the mortgage loan, or by selling the property in an
amount sufficient to cover the outstanding mortgage debt. Estimates of claim
frequency, which are based on historical trends and on judgments as to current
and future economic conditions, are applied according to the level of the
reported default. Claim severity is estimated based on historical claim payments
including the impact of loss mitigation strategies and potential salvage
recoveries. Once reported, the time required to cure a default or settle a claim
can be significant, often running years from the date of original default. As
such, ultimate cure and claim rates develop over long periods of time, often
through changing economic conditions.
Title segment loss reserve levels could be impacted adversely by such
developments as reduced loan refinancing activity, the effect of which 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 small life and health insurance operations, 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 December 31, 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
24
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 June 30, 2005, such reserves accounted
for 89.2% and 82.8% of consolidated gross and net of reinsurance reserves,
respectively, while similar reserves at December 31, 2004 accounted for 88.6%
and 82.1% of the respective consolidated amounts. The following table shows a
breakdown of gross and net of reinsurance claim reserve estimates for major
types of insurance coverages as of those dates:
June 30, 2005 December 31, 2004
------------------------- --------------------------
Gross Net Gross Net
---------- ---------- ----------- -----------
<s> <c> <c> <c> <c>
Claim and Loss Adjustment Expense Reserves:
Commercial automobile (mostly trucking).............................. $ 842.7 $ 670.6 $ 788.6 $ 635.9
Workers' compensation................................................ 1,668.3 852.9 1,607.0 814.0
General liability.................................................... 922.6 390.1 808.7 350.5
Other coverages...................................................... 619.7 413.6 576.0 382.1
Unallocated loss adjustment expense reserves......................... 145.6 88.5 122.0 87.2
---------- ---------- ----------- -----------
Total general insurance reserves 4,199.1 2,415.9 3,902.4 2,269.7
Other coverages:
Mortgage guaranty.................................................... 201.9 200.9 200.5 199.1
Title................................................................ 255.2 255.2 252.5 252.5
Life and health...................................................... 23.3 18.9 22.6 16.9
Unallocated loss adjustment expense reserves -
other coverages................................................... 26.7 26.7 25.4 25.4
---------- ---------- ----------- -----------
Total claim and loss adjustment expense reserves................. $ 4,706.4 $ 2,917.7 $ 4,403.5 $ 2,763.8
========== ========== =========== ===========
Asbestosis and environmental claim reserves included
in the above general insurance reserves:
Amount........................................................... $ 151.8 $ 110.3 $ 118.9 $ 97.1
========== ========== =========== ===========
% of total general insurance reserves............................ 3.6% 4.6% 3.0% 4.3%
========== ========== =========== ===========
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 Group'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 accounts and blocks of business that have similar attributes.
Actuarially or otherwise derived ranges of reserve levels are not utilized as
such in setting these reserves, and, accordingly, the reserves listed in the
above table represent the Company's point estimates at each reporting date. The
overall reserve level at any point in time therefore 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 that range from 3.5
percent to 4.0 percent. Formula calculations are utilized to provide for 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 and recoverability 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 large 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
25
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 6.6 years (gross) and 9.2 years (net of reinsurance) as of June
30, 2005 and 6.2 years (gross) and 9.6 years (net of reinsurance) as of December
31, 2004. Fluctuations in this ratio between years can be caused by the
inconsistent pay out patterns associated with these types of claims. Incurred
net losses for asbestosis and environmental claims have averaged 2.6 percent of
General Insurance Group net incurred losses for the five years ended December
31, 2004.
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 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.
The Company establishes unallocated loss adjustment expense reserves for
loss settlement costs that are not directly related to individual claims. Such
reserves are based on prior years' cost experience and trends, 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 June 30, 2005 and December 31, 2004, the
Company's general insurance segment carried reserves of $876.4 and $735.2,
respectively, to cover claims incurred but not as yet reported as well as for
the possible adverse development of known case reserves. 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 these
reserves for IBNR claims be understated by 10 percent for a deficiency of $87.6,
or 3.6 percent of the Company's net general insurance reserves as of June 30,
2005 and $73.5, or 3.2 percent as of the prior year end balance sheet date, the
impact on the Company's income statement would be to reduce pretax income by
such amounts. While Old Republic has not incurred such a deficiency level on
total reserves posted as of the 10 most recent year ends, there can be no
assurance that this favorable experience will continue in the future.
The percentage of net claims, benefits and related settlement expenses
measured against premiums and related fee revenues of the Company's three major
operating segments and its consolidated results were as follows:
General Mortgage Title Consolidated
-------------- ------------- ----------- -------------
<s> <c> <c> <c> <c>
Years Ended December 31:
2000............................................. 77.9% 15.0% 3.6% 43.9%
2001............................................. 75.3 16.1 4.0 42.4
2002............................................. 72.6 14.1 5.0 40.2
2003............................................. 67.8 22.7 5.8 37.9
2004............................................. 66.1 35.5 5.8 42.0
Six Months Ended June 30:
2004............................................. 66.2 30.8 5.8 41.0
2005............................................. 67.2 31.9 5.9 43.7
Quarters Ended June 30:
2004............................................. 65.4 32.0 5.7 40.5
2005............................................. 67.0% 31.5% 5.9% 43.6%
============== ============= =========== =============
The general insurance portion of the claims ratio has reflected a
reasonably consistent downtrend since 1999. The reduction in this major cost
factor reflects largely the aforementioned pricing and risk selection
improvements that have been applied since 2001, together with elements of
reduced loss severity and frequency. The mortgage guaranty claims ratio has
trended higher since the second quarter of 2003 reflecting increases in claim
provisions principally due to such factors as higher loss payments and
expectations of higher severity and frequency of claims. The lower 2002 mortgage
guaranty claims ratio resulted from a decline in claim provisions driven
principally by a drop in expected claim severity and a small increase in 2001
was largely the result of a moderately higher loan default rate factor. The most
recent year-over-year claim ratio comparisons reflect basic stability in paid
loss trends, claim frequency and severity patterns, all of which have leveled
off in the three most recent quarters ended June 30, 2005. The title insurance
26
loss ratios have been in the low single digits in each of the past five years
due to a continuation of favorable trends in claims frequency and severity for
business underwritten since 1992 in particular. The moderate uptrend in title
insurance loss ratios since 2002 stems from a rise in the net provision for
ultimate claim costs from the historically low level achieved in 2001 and 2000.
The consolidated benefits and claims ratio reflects the changing effects of
period-to-period contributions of each segment to consolidated results, and this
ratio's variances within each segment.
The percentage of net claims, benefits and related settlement expenses
measured against premiums by major insurance coverage in the General Insurance
Group were as follows:
Type of Coverage
---------------------------------------------------------------------------------
Comm.
Auto
(mostly Workers' Financial General
trucking) Comp. Indemnity Property Liability Other
----------- ---------- ----------- ---------- ---------- ---------
<s> <c> <c> <c> <c> <c> <c>
Years Ended December 31:
2000............................... 91.4% 90.3% 33.6% 54.1% 64.7% 58.4%
2001............................... 82.5 89.0 39.0 59.5 71.0 68.5
2002............................... 78.4 93.2 41.1 51.5 67.6 66.9
2003............................... 70.4 81.2 51.0 59.1 89.5 52.2
2004............................... 66.5 72.4 47.6 56.2 108.6 59.3
Six Months Ended June 30:
2004............................... 68.7 71.9 44.7 55.2 117.2 56.9
2005............................... 69.8 72.6 56.7 53.3 102.4 55.7
Quarters Ended June 30:
2004............................... 67.2 74.6 44.7 59.0 101.1 52.5
2005............................... 69.0% 74.5% 60.8% 53.1% 106.5% 51.0%
=========== ========== =========== ========== ========== =========
Average Mortgage Guaranty paid claims, and certain delinquency ratio data are
shown below:
Average Paid Claim Amount (1)
------------------------------------
Traditional
Primary Bulk (2)
---------------- ---------------
<s> <c> <c>
Years Ended December 31:
2000...................................... $ 21,551 $ -
2001...................................... 19,221 -
2002...................................... 20,693 -
2003...................................... 22,339 29,293
2004...................................... 23,920 19,885
Six Months Ended June 30:
2004...................................... 23,614 17,091
2005...................................... 24,056 22,340
Quarters Ended June 30:
2004...................................... 23,930 16,338
2005...................................... $ 23,711 $ 24,103
================ ===============
Delinquency Ratio
------------------------------------
Traditional
Primary Bulk (2)
---------------- ---------------
<s> <c> <c>
As of December 31:
2000...................................... 2.50% -%
2001...................................... 2.84 .33
2002...................................... 3.43 3.28
2003...................................... 3.95 4.76
2004...................................... 4.11 4.59
As of June 30:
2004...................................... 3.65 5.12
2005...................................... 3.82% 3.25%
================ ===============
- ---------------
(1) Amounts are in whole dollars.
(2) Due to the relative immaturity of the bulk business, the above trends may
prove to be highly volatile.
27
Traditional Primary Delinquency Ratios for Top Ten States (3):
------------------------------------------------------------------------------------------------
FL TX GA IL NC CA OH PA MN AZ
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
As of December 31:
2000...................... 3.4% 2.7% 2.9% 2.6% 2.4% 2.9% 3.2% 2.3% 1.1% 1.8%
2001...................... 3.4 3.2 2.9 2.9 3.0 3.1 3.8 2.5 1.9 2.7
2002...................... 3.6 3.9 3.9 3.3 4.0 2.9 4.9 3.3 2.1 3.3
2003...................... 3.5 4.6 4.9 4.0 4.7 2.8 6.9 3.8 2.5 3.4
2004...................... 3.2 5.0 5.6 3.8 4.9 2.1 7.6 4.4 3.5 2.8
As of June 30:
2004...................... 2.8 4.3 4.8 3.5 4.5 2.2 6.8 3.8 2.8 2.9
2005...................... 2.4% 4.6% 5.4% 3.8% 4.5% 1.6% 7.4% 4.1% 3.5% 2.1%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
- --------------
(3) As determined by risk in force as of June 30, 2005. These 10 states
represent approximately 50% of risk in force as of that date.
Expenses: Underwriting, Acquisition and Other Expenses
The ratio of consolidated underwriting, acquisition, and other expenses to
net premiums and fees earned was 44.0% and 45.9% in the second quarters of 2005
and 2004, respectively, and 44.3% and 46.8% for the first six months of 2005 and
2004, respectively. The 2005 consolidated year-to-date expense ratio benefited
from the absence of a required non-recurring stock option compensation charge of
$5.6 recorded in the first quarter of 2004. This expense, representing a vesting
acceleration of stock option compensation costs, added approximately 40 basis
points to the 2004 consolidated year-to-date expense ratio. Variations in these
consolidated ratios reflect a continually changing mix of coverages sold and
attendant costs of producing business in the Company's three business segments.
The following table sets forth the expense ratios registered by each major
business segment and in consolidation for the periods shown:
General Mortgage Title Consolidated
-------------- ------------- ----------- -------------
<s> <c> <c> <c> <c>
Years Ended December 31:
2000............................................. 28.1% 29.6% 92.4% 47.7%
2001............................................. 26.7 27.5 87.2 46.5
2002............................................. 25.8 32.3 85.6 47.9
2003............................................. 25.5 24.8 84.6 48.5
2004............................................. 24.6 25.6 90.5 47.3
Six Months Ended June 30:
2004............................................. 24.8 27.3 87.8 46.8
2005............................................. 24.5 22.5 89.4 44.3
Quarters Ended June 30:
2004............................................. 23.8 25.4 85.0 45.9
2005............................................. 24.4% 22.0% 87.7% 44.0%
============== ============= =========== =============
Expense ratios for the Company as a whole have remained basically stable
for the periods reported upon. To a significant degree, expense ratios for both
the general and title insurance segments are mostly reflective of variable
costs, such as commissions or similar charges, that rise or decline along with
corresponding changes in premium and fee income, as well as changes in general
operating expenses which can contract or expand in differing proportions due to
varying levels of operating efficiencies and expense management opportunities.
The General Insurance Group's expense ratio reflects the benefits of
well-controlled production and administrative expense management in the face of
a greater revenue base. The Mortgage Guaranty segment's expense ratio decreased
in 2003 and 2001 due to greater efficiencies gained in the distribution and
servicing of its products; the increase in this ratio for 2002 was due to the
posting of special operating charges aggregating $20.5. These charges stemmed
from the cessation of the development and marketing of a loan portfolio
evaluation service aimed at existing and potential mortgage guaranty insurance
customers, and a reassessment of certain class action litigation exposures. The
2003 ratio also benefited from the resolution of the aforementioned class action
litigation at a cost approximately $5.0 less than the related reserves recorded
in 2002. The increase in 2004 resulted from higher stock option compensation
expenses offset by recovery of certain prior years' litigation costs. The
declines in the second quarter and first six months 2005 ratios reflect the
absence of this segments' share of the aforementioned 2004 stock option costs,
as well as a combination of lower contract underwriting costs, reductions in
variable sales expenses, and continued attention to operating efficiencies.
Decreased title sales volume led to higher expense ratios in the second quarter
and first half of 2005 despite relatively flat underwriting costs for both
periods, while increased title sales volume in 2003 and 2002 led to a lower
expense ratio for those years. The increase in the 2004 ratio results from the
final settlement of consumer and regulatory litigation costs affecting Old
Republic's California title insurance subsidiary.
28
Expenses: Total
The composite ratios of the above net claims, benefits and underwriting
expenses that reflect the sum total of all the factors enumerated above have
been as follows:
General Mortgage Title Consolidated
-------------- ------------- ----------- -------------
<s> <c> <c> <c> <c>
Years Ended December 31:
2000............................................. 106.0% 44.6% 96.0% 91.6%
2001............................................. 102.0 43.6 91.2 88.9
2002............................................. 98.4 46.4 90.6 88.1
2003............................................. 93.3 47.5 90.4 86.4
2004............................................. 90.7 61.1 96.3 89.3
Six Months Ended June 30:
2004............................................. 91.0 58.1 93.6 87.8
2005............................................. 91.7 54.4 95.3 88.0
Quarters Ended June 30:
2004............................................. 89.2 57.4 90.7 86.4
2005............................................. 91.4% 53.5% 93.6% 87.6%
============== ============= =========== =============
Expenses: Income Taxes
The effective consolidated income tax rates were 8.1% and 19.5% for the
second quarter and first six months of 2005, respectively, and 32.8% for both
similar periods of 2004. The effective tax rates were reduced and net earnings
were enhanced by tax and related interest recoveries of $45.9, or 25 cents per
share, in the second quarter 2005 from the favorable resolution of tax issues
applicable to the three years ended December 31, 1990. Excluding the effects of
these tax and related interest recoveries, the effective tax rates remained
consistent with those of the corresponding prior periods. The rates for each
year reflect primarily the varying proportions of pretax operating income
derived from partially tax-sheltered investment income (principally state and
municipal 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 health insurance earnings
can be affected by the levels of employment and consumer spending, variations 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 variations 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.
29
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
Evaluation of Disclosure Controls and Procedures
The Company's principal executive officer and its principal financial officer
have evaluated the Company's disclosure controls and procedures as of the end of
the period covered by this quarterly report. Based upon their evaluation, the
principal executive officer and principal financial officer have concluded that
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) are effective for the
above referenced evaluation period.
Changes in Internal Control Over Financial Reporting
During the three month period ended June 30, 2005, there were no changes in
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Management's Report on Internal Control Over Financial Reporting
The Company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company's internal control
over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
30
OLD REPUBLIC INTERNATIONAL CORPORATION
FORM 10-Q
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
(a) The annual meeting of registrant's shareholders was held on May 27, 2005.
(b) Proxies for the meeting were solicited by management pursuant to Regulation
14A under the Security Exchange Act of 1934. There was no solicitation in
opposition to management's nominees for directors as listed in the proxy
statement and all such nominees were elected.
(c) At the meeting, the shareholders voted on the following matter:
1. The election of four Class 3 directors. There were at least 127,765,719
affirmative votes for each director and no more than 38,159,067 votes
withheld for any single director.
Item 6 - Exhibits
- -----------------
(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 Karl W. Mueller, 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 Karl W. Mueller, 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.
31
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: August 8, 2005
----------------
----------------------------------------
Karl W. Mueller
Senior Vice President and
Chief Financial Officer
32
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 Karl W. Mueller, 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 Karl W. Mueller, 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.
33