1
SECURITIES AND EXCHANGE COMMISSION
OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10 - Q
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1994 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 19
Commission File Number 0-4625
OLD REPUBLIC INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware No. 36-2678171
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
307 North Michigan Avenue, Chicago, Illinois 60601
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 312-346-8100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Shares Outstanding
Class September 30, 1994
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Common Stock / $1 par value 51,910,805 *
* Excludes 4,439,267 common shares issued, outstanding and held by an
affiliate, which are classified as treasury stock for financial accounting
purposes only.
There are 11 pages contained in this report.
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OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / September 30, 1994
INDEX
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PAGE NO.
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PART I FINANCIAL INFORMATION:
CONSOLIDATED SUMMARY BALANCE SHEETS 3
CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4
CONSOLIDATED SUMMARY STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 6
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 7 & 8
PART II OTHER INFORMATION 9 - 11
3
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited)
($ in Millions)
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September 30, December 31,
1994 1993
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Assets
Investments: Held to maturity:
Fixed maturity securities (at amortized cost)
(Fair value: $2,555.9 and $2,599.3) $2,653.5 $2,509.8
Other long-term investments 27.2 19.8
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Total 2,680.7 2,529.6
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Available for sale:
Fixed maturity securities (at fair value) (Cost: $594.5 and $616.5) 576.3 642.4
Equity securities (at fair value) (Cost: $247.6 and $180.5) 256.9 191.9
Short-term investments 225.6 254.3
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Total 1,058.9 1,088.7
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Total investments 3,739.7 3,618.4
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Other Assets:Cash 32.1 43.9
Accrued investment income 64.8 60.6
Accounts and notes receivable 306.0 288.3
Federal income tax recoverable - deferred 84.6 83.2
Reinsurance balances and funds held 151.9 165.8
Reinsurance recoverable:
Paid losses 34.6 20.2
Policy and claim reserves 1,553.0 1,524.2
Deferred policy acquisition costs 100.4 95.5
Sundry assets 198.5 197.7
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2,526.4 2,479.8
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Total assets $6,266.1 $6,098.3
============ ============
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Liabilities, Preferred Stock and
Common Shareholders' Equity
Liabilities: Future policy benefits $188.7 $190.1
Losses, claims and settlement expenses 3,538.2 3,405.6
Unearned premiums 401.2 419.2
Other policyholders' benefits and funds 76.2 82.9
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Insurance reserves 4,204.5 4,097.9
Commissions, expenses, fees and taxes 103.9 105.8
Reinsurance balances and funds 183.1 169.5
Federal income tax payable - current 7.4 14.8
Debt and debt equivalents 291.7 282.7
Sundry liabilities 88.1 92.4
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Total liabilities 4,879.0 4,763.3
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Preferred Redeemable convertible preferred stock 17.0 16.6
Stock: Convertible preferred stock 3.9 3.9
Cumulative preferred stock 54.8 57.5
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Total preferred stock 75.7 78.0
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Common Common stock 57.6 57.5
Shareholders'Additional paid-in capital 456.6 455.2
Equity: Net unrealized appreciation of securities (4.4) 25.2
Retained earnings 833.5 750.2
Treasury stock (32.1) (31.3)
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Total common shareholders' equity 1,311.3 1,256.9
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Total liabilities, preferred stock
and common shareholders' equity $6,266.1 $6,098.3
============ ============
See accompanying notes.
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OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited)
($ in Millions, Except Common Share Data)
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Quarters Ended Nine Months Ended
September 30, September 30,
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1994 1993 1994 1993
----------- ----------- ----------- -----------
Revenues: Net premiums earned $310.0 $312.1 $967.8 $898.5
Title, escrow and other fees 31.4 52.6 112.6 141.2
Net investment income 56.8 53.6 167.2 163.5
Realized investment gains 0.8 7.8 6.7 25.8
Other income 4.6 10.0 14.4 21.1
----------- ----------- ----------- -----------
Net revenues 403.9 436.2 1,268.9 1,250.2
----------- ----------- ----------- -----------
Expenses: Benefits, claims and settlement expenses 181.1 196.6 578.0 584.1
Underwriting, acquisition and insurance expenses 160.2 174.2 512.8 480.3
Interest and other expenses 5.7 6.0 17.1 18.3
----------- ----------- ----------- -----------
Total expenses 347.2 376.9 1,108.0 1,082.8
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Income before income taxes and items below 56.7 59.3 160.8 167.4
----------- ----------- ----------- -----------
Income Taxes: Currently payable 12.9 19.9 36.0 48.9
Deferred 5.7 (2.1) 16.6 2.7
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Total income taxes 18.7 17.8 52.6 51.7
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38.0 41.5 108.1 115.7
Other items - net (0.1) --- (0.1) 0.2
----------- ----------- ----------- -----------
Income before cumulative effect
of accounting changes 37.8 41.4 108.0 116.0
Cumulative effect of accounting changes --- --- --- 8.6
----------- ----------- ----------- -----------
Net Income: $37.8 $41.4 $108.0 $124.7
============ =========== =========== ===========
Earnings and Primary Earnings:
Dividends Per Before cumulative effect of accounting changes $0.64 $0.70 $1.82 $1.97
Common Share: Cumulative effect of accounting changes --- --- --- 0.15
----------- ----------- ----------- -----------
Net income $0.64 $0.70 $1.82 $2.12
=========== =========== =========== ===========
Fully Diluted Earnings:
Before cumulative effect of accounting changes $0.61 $0.67 $1.74 $1.87
Cumulative effect of accounting changes --- --- --- 0.14
----------- ----------- ----------- -----------
Net income $0.61 $0.67 $1.74 $2.01
=========== =========== =========== ===========
Cash dividends $0.12 $0.11 $0.35 $0.32
=========== =========== =========== ===========
Average number of common and common
equivalent shares outstanding:
Primary 57,219,840 57,180,690 57,246,201 57,060,286
=========== =========== =========== ==========
Fully Diluted 61,669,829 61,620,439 61,697,447 61,531,612
=========== =========== =========== ===========
See accompanying notes.
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OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in Millions)
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Nine Months Ended
September 30,
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1994 1993
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Cash flows from operating activities:
Net income $108.0 $124.7
Change in non-cash items:
Deferred policy acquisition costs (4.9) (13.0)
Premiums and other receivables (18.0) (7.8)
Unpaid claims and related items 106.9 78.0
Future policy benefits and policyholders' funds (22.3) 44.8
Income taxes 6.5 0.4
Reinsurance balances and funds 13.4 8.4
Accounts payable, accrued expenses and other (2.1) 8.9
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Total 187.4 244.6
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Cash flows from investing activities:
Sales of fixed maturity securities 226.2 468.8
Sales of equity securities 19.6 56.1
Sales of other investments 3.3 2.7
Sales of fixed assets for company use 1.9 1.3
Purchases of fixed maturity securities (358.3) (566.2)
Purchases of equity securities (86.7) (94.2)
Purchases of other investments (0.8) (4.7)
Purchases of other long-term investments (10.0) ---
Purchases of fixed assets for company use (9.1) (7.6)
Other-net 2.0 3.8
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Total (211.8) (140.0)
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Cash flows from financing activities:
Increase in term loans 11.0 6.2
Issuance of preferred and common stocks 1.4 3.8
Issuance of debentures and notes --- ---
Repayments of term loans (0.4) (6.5)
Dividends on common shares (18.2) (15.9)
Dividends on preferred shares (6.2) (6.2)
Purchase of treasury stock (0.8) ---
Purchase of cumulative preferred stock (2.6) ---
Other-net (0.2) 7.7
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Total (16.1) (10.9)
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Increase (decrease) in cash and short-term investments (40.5) 93.6
Cash and short-term investments, beginning of year 298.3 280.7
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Cash and short-term investments, end of period $257.8 $374.4
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $13.6 $13.4
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Income taxes $43.3 $44.6
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See accompanying notes
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OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)
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1. Accounting Policies and Basis of Presentation:
The accompanying consolidated summary financial statements have been
prepared in conformity with generally accepted accounting principles as
described in the Corporation's latest annual report to shareholders or
as disclosed herein. The financial accounting and reporting process
relies on estimates and on the exercise of judgement, but in the opinion
of management all adjustments, consisting of normal recurring accruals,
necessary to a fair presentation of the accompanying statements have
been reflected therein. Realized gains or losses on dispositions of
investment securities have been reflected in the operating results for
each period presented.
2. Common Share Data:
Earnings per share have been calculated on the basis of average common
and common equivalent shares outstanding for the quarters and nine
months ended September 30, 1994 and 1993. Retroactive adjustment has
been made for all stock dividends and splits declared through September
30, 1994. Primary earnings per share calculations give effect to the
deduction of dividend requirements applicable to preferred stock of $1.2
and $3.7 for the quarter and nine months ended September 30, 1994,
respectively and $1.2 and $3.9 for the quarter and nine months ended
September 30, 1993, respectively. Fully diluted earnings per share are
similarly calculated, after taking into account substantially all
convertible securities and options includable for each period.
Common shares outstanding were 51,910,805 at September 30, 1994 after
elimination of 4,439,267 shares issued and outstanding, which are held
by a consolidated affiliate. These shares are classified as treasury
stock for financial accounting purposes only.
3. Unrealized Appreciation of Investments:
Cumulative net unrealized losses on investments (fixed maturity
securities available for sale and equity securities) debited to a
separate account in common shareholders' equity amounted to $4.4 at
September 30, 1994. Unrealized depreciation of investments, before
applicable income tax credits of $2.8, at September 30, 1994 included
gross unrealized gains and (losses) of $17.4 and $(24.6), respectively.
For the nine months ended September 30, 1994 and 1993, net unrealized
appreciation (depreciation) of investments, net of deferred income
taxes, amounted to $(29.7) and $24.6, respectively.
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OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 1994 and 1993
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OVERVIEW
This analysis pertains to the consolidated accounts of Old Republic
International Corporation. The Company conducts its business through four
major segments, namely its General (property and liability coverages), Title,
Mortgage Guaranty, and Life insurance groups.
FINANCIAL POSITION
Old Republic's financial position at September 30, 1994 reflected increases
in assets of 2.8%, liabilities of 2.4%, and common shareholders' equity of
4.3% when compared to the immediately preceding year-end. Cash and invested
assets represented 61.2% and 61.0% of consolidated assets as of September 30,
1994 and December 31, 1993, respectively. Relatively high short-term maturity
investment positions continued to be maintained as of September 30, 1994 to
provide necessary liquidity for specific operating needs and to enhance
flexibility in investment strategy. Changes in short-term investments reflect
a large variety of seasonal and intermediate-term factors including seasonal
operating cash needs, investment strategy, and expectations as to trends in
interest yields. Accordingly, the future level of short-term investments will
vary and respond to the dynamics of these factors and may, as a result,
increase or decrease from current levels. During the first nine months of
1994, the Corporation committed substantially all investable funds in short
to intermediate-term fixed maturity securities. Old Republic continues to
adhere to its long-term policy of investing primarily in investment grade,
marketable securities; the Corporation has not directed its investable funds
to so-called "junk bonds." During the first nine months of 1994, Old Republic
increased its commitment to common stock investments which reflected growth
of 33.8% vis-a-vis the related invested balance at year-end 1993. As of
September 30, 1994, the carrying value of fixed maturity securities in
default as to principal or interest was immaterial in relation to
consolidated assets or shareholders' equity. During the first nine months of
1994, the market value of Old Republic's consolidated fixed maturity
securities portfolio declined by approximately $231.1 million. In
management's opinion, this decline has no practical effect on the
Corporation's business since positive operating cash flow and cash provided
by scheduled maturities are more than sufficient to meet foreseeable cash
flow needs.
Consolidated operations produced positive cash flows in the first nine months
of 1994. The parent holding company has met its liquidity and capital needs
principally through dividends paid by its subsidiaries. The insurance
subsidiaries' ability to pay cash dividends to the parent company is
generally restricted by law or subject to approval of the insurance
regulatory authorities of the states in which they are domiciled.
Additionally, the terms of guarantees by the Company of bank loans to the
trustee of the Company's Employees Savings and Stock Ownership Plan require
the Company to maintain a minimum consolidated tangible net worth and
restrict the amount of debt the Company may incur, both of which covenants
are being met.
Old Republic's capitalization of $1.6 billion at September 30, 1994 consisted
of debt and debt equivalents of $291.7 million, redeemable convertible
preferred stock of $17.0 million (excluding $13.8 million of such stock
classified as a debt equivalent), convertible preferred stock of $3.9
million, cumulative preferred stock of $54.8 million, and common
shareholders' equity of $1.31 billion. The rise in the common shareholders'
equity account during the nine months ended September 30, 1994 reflects
primarily the retention of earnings in excess of dividends declared on
outstanding preferred and common shares and the net unrealized depreciation
of securities. During the second quarter of 1994, the Corporation acquired
$.8 million of common stock and $13 thousand of cumulative preferred stock.
During the third quarter of 1994, the Corporation acquired an additional $2.6
million of cumulative preferred stock.
RESULTS OF OPERATIONS
Revenues:
Net premiums and fees earned in the first nine months of 1994 amounted to
$1.08 billion and were 3.9% above the amount reported for the first nine
months of 1993. For the third quarter of 1994, net premiums and fees earned
amounted to $341.5 million and were 6.4% below the amount reported for the
third quarter of 1993. For the third quarter of 1994, the Company's General
Insurance Group posted a decrease in premium revenues due to the elimination
since 1993 of crop insurance coverages and reduced volume from the Company's
participation in workers' compensation insurance pools. Title Group premium
and fee revenues declined in the third quarter of 1994 when compared to the
immediately preceding quarter and third quarter of 1993; a rise in mortgage
rates, depressed conditions in the large California housing market in
particular, and the much lower level of refinancing activity, contributed to
a decline in mortgage originations. Growth in the Mortgage Guaranty Group's
premium production was affected adversely by the factors cited for title
insurance, but offset positively by continued geographic expansion and higher
renewal premiums.
The General Insurance Group's net premiums earned increased 2.9% to $647.3
million in the first nine months of 1994. The Title
8
Insurance Group reported premiums and fees in the first nine months of $304.7
million, down from $319.5 million in the year-ago period. The Mortgage
Guaranty Group continued to experience double-digit growth, reporting net
premiums earned of $98.3 million, an increase of 43.7%. For the year's third
quarter, premium and fees grew (declined) by (4.4%) for general insurance,
(22.7%) for title insurance and 37.3% for mortgage guaranty. Life and health
premiums also rose during these 1994 periods but remained below 3.0% of
consolidated premiums and fees.
Consolidated net investment income was $167.2 million in the first nine
months of 1994 and $56.8 million in the third quarter of 1994, reflecting
slightly higher levels when compared to corresponding 1993 periods. While
invested assets have grown as a result of positive operating cash flow, the
benefits of the greater investment base have been offset in part by a greater
commitment to tax-exempt fixed maturity securities and common stock
investments that typically produce lower current yields. Equities made up
about 6.8% of the investment portfolio at the end of the first nine months of
1994 compared to 4.5% one year ago. The average annual yield on investments
was 6.1% and 6.5% for the nine months ended September 30, 1994 and 1993,
respectively.
While the Company's investment policies have not been designed to maximize
capital gains, in the first nine months of 1994 such gains were lower than
those for the comparable period in 1993. Dispositions of securities have, as
in recent periods, been caused principally by: (1) calls prior to maturity by
issuers, (2) a desire to extend moderately the average life of the portfolio,
and (3) the Company's ongoing process of monitoring its investments with a
view toward maximizing the quality of its portfolio. For the first nine
months of 1994, approximately 71% of total dispositions represented
maturities and early calls of existing holdings; for the year 1993 these
transactions amounted to approximately 58%.
Expenses:
Consolidated benefit, claim and settlement costs, as a percentage of net
premiums and fees earned, were approximately 54% and 56% in the first nine
months of 1994 and 1993, respectively. For the third quarter of each year
these ratios were 53% in 1994 and 54% in 1993. Claims for property and
liability coverages were slightly lower in 1994 due to a decline in claim
frequency and reduced losses from involuntary pool assessments. Mortgage
Guaranty claim costs decreased due to a decline in loan defaults in most
parts of the U.S., while the Title and Life segments benefited from generally
lower claim provisions.
The ratio of consolidated underwriting, acquisition and insurance expenses to
net premiums and fees earned was 47% and 46% in the first nine months of 1994
and 1993, respectively. These ratios were 47% in the third quarters of 1994
and 1993. The consolidated expense ratio was affected in part by higher
Mortgage Guaranty and Life insurance segments production costs, stable costs
in the General insurance segment. In the Title insurance segment expenses
trended down but the reduction has been insufficient to offset a larger drop
in operating revenues. Variations in these consolidated percentages between
comparative periods also typically reflect changing patterns in the mix of
business and the varying production costs pertaining thereto.
Income from Operations:
Income before taxes, other items, and the cumulative effect of accounting
changes decreased by 3.9% in the first nine months of 1994 when compared to
the same period one year ago; for the third quarter of 1994, pre-tax income
decreased by 4.3% when compared to the same period in 1993. In the 1994
third quarter, the Corporation's General, Mortgage Guaranty and Life segments
reflected higher pre-tax operating earnings and the Title segment posted a
pre-tax loss for the aforementioned reasons. For the first nine months of the
year the same patterns prevailed, although the Title segment operated
profitably but at a much lower rate.
The effective consolidated income tax rate was approximately 32% and 31% in
the first nine months of 1994 and 1993, respectively and 33% and 30% in the
third quarter of both 1994 and 1993, respectively. The rates for each period
reflect primarily the varying proportions of pre-tax operating income derived
from tax-sheltered investment income (principally tax-exempt interest) on the
one hand, and fully taxable investment and underwriting/service income on the
other hand. In August 1993, the corporate federal income tax rate was
increased from 34% to 35% retroactive to January 1, 1993. The 1993 income
tax rate increase was recorded by the Company in its third quarter 1993
financial statements on a cumulative basis as required in the circumstances;
net income benefitted by approximately $1.5 million or $0.02 per share as a
result. Accordingly, the effective income tax expenses for the first half of
1993 and 1994 are not comparable. The effective income tax rate for all of
1993 was approximately 32%.
OTHER INFORMATION
Historical data pertaining to the operating results, liquidity, and other
financial matters applicable to an insurance enterprise such as the Company
are not necessarily indicative of expectations for future periods. The
long-term nature of the insurance business, seasonal and annual patterns in
premium production and incidence of claims, the random nature of the latter
costs, changes in market yields obtained on invested assets, and changes in
government policies affecting inflation rates and general economic conditions
are some of the factors which bear upon comparisons of quarter-to-quarter and
year-to-year operating results.
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OLD REPUBLIC INTERNATIONAL CORPORATION
FORM 10 - Q
PART II - OTHER INFORMATION
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Item 6 - Exhibits and reports on Form 8-K
(a) Exhibits
1. Earnings per share.
(b) Reports on Form 8-K
1. The registrant has not filed any reports on Form 8-K during the
quarter for which this report was filed.
Items other than those listed are omitted because they are not required.
10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Old Republic International Corporation
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(Registrant)
Date November 11, 1994
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/s/ Paul D. Adams
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P. D. Adams
Senior Vice President &
Chief Financial Officer