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 quarter ended September 30, 1995 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-4625
OLD REPUBLIC INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware No. 36-2678171
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
307 North Michigan Avenue, Chicago, Illinois 60601
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 312-346-8100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 daus. 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, 1995
--------------------------- -------------------------
Common Stock / $1 par value 52,158,931 *
* Excludes 4,439,267 common shares issued, outstanding and held by an affiliate,
which are classified as treasury stock for financial accounting purposes only.
There are 11 pages contained in this report.
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OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / September 30, 1995
INDEX
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PAGE NO.
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PART I FINANCIAL INFORMATION:
CONSOLIDATED SUMMARY BALANCE SHEETS 3
CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4
CONSOLIDATED SUMMARY STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 6
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 7 & 8
PART II OTHER INFORMATION 9 - 11
3
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited)
($ in Millions)
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September 30, December 31,
1995 1994
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Assets
Investments: Held to maturity:
Fixed maturity securities (at amortized cost)
(Fair value: $2,965.1 and $2,582.6) $2,930.3 $2,727.2
Other long-term investments (at cost) 27.5 27.3
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Total 2,957.8 2,754.6
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Available for sale:
Fixed maturity securities (at fair value) (Cost: $758.3 and $646.8) 775.7 620.3
Equity securities (at fair value) (Cost: $143.4 and $254.7) 186.4 263.8
Short-term investments 239.9 172.1
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Total 1,202.1 1,056.2
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Total investments 4,160.0 3,810.8
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Other Assets:Cash 21.4 31.1
Accrued investment income 71.1 64.3
Accounts and notes receivable 310.8 285.1
Federal income tax recoverable - Current --- 4.8
- Deferred 19.6 72.4
Reinsurance balances and funds held 130.4 142.4
Reinsurance recoverable - Paid losses 25.2 25.6
- Policy and claim reserves 1,515.6 1,526.3
Deferred policy acquisition costs 104.8 101.3
Sundry assets 190.2 198.1
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Total other assets 2,389.5 2,452.0
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Total Assets $6,549.5 $6,262.9
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Liabilities, Preferred Stock and
Common Shareholders' Equity
Liabilities: Future policy benefits $184.2 $184.9
Losses, claims and settlement expenses 3,610.8 3,514.7
Unearned premiums 410.0 405.5
Other policyholders' benefits and funds 73.2 79.1
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Total policy liabilities and accruals 4,278.4 4,184.3
Commissions, expenses, fees and taxes 102.5 106.3
Reinsurance balances and funds 169.4 162.2
Federal income tax payable - Current 13.4 ---
Debt and debt equivalents 308.6 314.7
Sundry liabilities 96.6 90.4
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Total liabilities 4,969.1 4,858.1
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Preferred Redeemable convertible preferred stock 17.3 16.8
Stock: Convertible preferred stock 0.6 3.8
Cumulative preferred stock 54.8 54.8
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Total preferred stock 72.8 75.4
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Common Common stock 58.2 57.6
Shareholders'Additional paid-in capital 462.2 456.9
Equity: Net unrealized appreciation (depreciation) of securities 40.8 (10.4)
Retained earnings 984.7 865.0
Treasury stock (at cost) (38.4) (39.8)
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Total common shareholders' equity 1,507.5 1,329.3
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Total Liabilities, Preferred Stock
and Common Shareholders' Equity $6,549.5 $6,262.9
============ ============
See accompanying notes.
4
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited)
($ in Millions, Except Common Share Data)
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Quarters Ended Nine Months Ended
September 30, September 30,
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1995 1994 1995 1994
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Revenues: Net premiums earned $311.1 $310.0 $920.9 $967.8
Title, escrow and other fees 34.6 31.4 87.9 112.6
Net investment income 62.4 56.8 186.0 167.2
Realized investment gains 20.2 0.8 25.9 6.7
Other income 5.0 4.6 15.4 14.4
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Net revenues 433.5 403.9 1,236.3 1,268.9
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Expenses: Benefits, claims and settlement expenses 186.9 181.1 558.5 578.0
Underwriting, acquisition and insurance expenses 148.6 160.2 446.8 512.8
Interest and other expenses 6.6 5.7 20.1 17.1
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Total expenses 342.2 347.2 1,025.6 1,108.0
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Income before income taxes and items below 91.3 56.7 210.7 160.8
----------- ----------- ----------- -----------
Income Taxes: Currently payable 21.3 12.9 43.2 36.0
Deferred 8.9 5.7 25.7 16.6
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Total income taxes 30.3 18.7 68.9 52.6
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61.0 38.0 141.8 108.1
Other items - net --- (0.1) 0.2 (0.1)
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Net Income: $60.9 $37.8 $142.0 $108.0
=========== =========== =========== ============
Earnings and
Dividends Per
Common Share: Primary Earnings $1.05 $0.64 $2.43 $1.82
=========== =========== =========== ===========
Fully Diluted Earnings $0.99 $0.61 $2.30 $1.74
=========== =========== =========== ===========
Cash dividends $0.13 $0.12 $0.38 $0.35
=========== =========== =========== ===========
Average number of common and common
equivalent shares outstanding:
Primary 57,122,458 57,219,840 57,028,452 57,246,201
=========== =========== =========== ===========
Fully Diluted 61,676,312 61,669,829 61,662,755 61,697,447
=========== =========== =========== ===========
See accompanying notes.
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OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in Millions)
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Nine Months Ended
September 30,
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1995 1994
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Cash flows from operating activities:
Net income $142.0 $108.0
Change in non-cash items:
Deferred policy acquisition costs (3.6) (4.9)
Premiums and other receivables (24.1) (18.0)
Unpaid claims and related items 102.3 106.9
Future policy benefits and policyholders' funds 8.4 (22.3)
Income taxes 44.3 6.5
Reinsurance balances and funds 18.8 13.4
Accounts payable, accrued expenses and other 7.3 (2.1)
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Total 295.6 187.4
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Cash flows from investing activities:
Sales of fixed maturity securities:
Held to maturity:
Maturities and early calls 93.4 129.1
Other --- 11.1
Available for sale:
Maturities and early calls 39.8 30.6
Other 40.2 55.4
Sales of equity securities 150.1 19.6
Sales of other investments 3.0 3.3
Sales of fixed assets for company use 2.3 1.9
Purchases of fixed maturity securities:
Held to maturity (332.1) (291.3)
Available for sale (161.9) (67.0)
Purchases of equity securities (37.7) (86.7)
Purchases of other investments (3.0) (10.8)
Purchases of fixed assets for company use (4.7) (9.1)
Other-net (0.4) 2.0
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Total (210.9) (211.8)
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Cash flows from financing activities:
Increase in term loans --- 11.0
Issuance of preferred and common stocks 2.0 1.4
Repayments of term loans (3.9) (0.4)
Dividends on common shares (19.9) (18.2)
Dividends on preferred shares (5.9) (6.2)
Purchase of cumulative preferred stock --- (2.6)
Purchase of treasury stock (0.9) (0.8)
Issuance of treasury stock 2.3 ---
Other-net (0.2) (0.2)
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Total (26.6) (16.1)
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Increase (decrease) in cash and short-term investments 58.0 (40.5)
Cash and short-term investments, beginning of year 203.3 298.3
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Cash and short-term investments, end of period $261.3 $257.8
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $16.1 $13.6
============ ============
Income taxes $24.9 $43.3
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See accompanying notes.
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OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)
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1.Accounting Policies and Basis of Presentation:
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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, 1995 and 1994. Retroactive adjustment has been made for all
stock dividends and splits declared through September 30, 1995. 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, 1995, respectively and $1.3 and $3.9 for
the quarter and nine months ended September 30, 1994, 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 52,158,931 at September 30, 1995 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 gains on fixed maturity securities available for
sale and equity securities credited to a separate account in common
shareholders' equity amounted to $40.8 at September 30, 1995. Unrealized
appreciation of investments, before applicable income taxes of $21.0, at
September 30, 1995 included gross unrealized gains and (losses) of $67.5
and $(5.6), respectively.
For the nine months ended September 30, 1995 and 1994, net unrealized
appreciation (depreciation) of investments, net of deferred income taxes,
amounted to $51.2 and $(29.7), respectively.
7
OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 1995 and 1994
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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, 1995 reflected increases in
assets of 4.6%, liabilities of 2.3%, and common shareholders' equity of 13.4%
when compared to the immediately preceding year-end. Cash and invested assets
represented 64.9% and 62.4% of consolidated assets as of September 30, 1995 and
December 31, 1994, respectively. Relatively high short-term maturity investment
positions continued to be maintained as of September 30, 1995 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
to the dynamics of these factors and may, as a result, increase or decrease from
current levels. During the first nine months of 1995, 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" or derivative
types of securities. During the first nine months of 1995, Old Republic's
commitment to equity securities decreased by 29.3% vis-a-vis the related
invested balance at year-end 1994. As of September 30, 1995, the carrying value
of fixed maturity securities in default as to principal or interest was
immaterial in relation to conoslidated assets or shareholders' equity.
Consolidated operations produced positive cash flows in the first nine months of
1995. 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 $1.88 billion at September 30, 1995 consisted
of debt and debt equivalents of $308.6 million, redeemable convertible preferred
stock of $17.3 million (excluding $11.7 million of such stock classified as a
debt equivalent), convertible preferred stock of $.6 million, cumulative
preferred stock of $54.8 million, and common shareholders' equity of $1.50
billion. The increase in the common shareholders' equity account during the nine
months ended September 30, 1995 reflects primarily the retention of earnings in
excess of dividends declared on outstanding preferred and common shares and an
increase during the first nine months of 1995 in the value of bonds and stocks
carried at market value. During 1994, the Corporation acquired $8.5 million of
its common stock and $2.6 million of its cumulative preferred stock in open
market transactions. In the first nine months of 1995, the Corporation acquired
an additional $.9 million of its common stock. As of September 30, 1995, a
standing authorization by the Company's Board of Directors permits it to
reacquire additional amounts of such shares for a total of up to $38.0 million
through May 1996.
RESULTS OF OPERATIONS
Revenues:
Net premiums and fees earned in the first nine months of 1995 amounted to $1.00
billion and were 6.6% below the amount reported for the first nine months of
1994. For the third quarter of 1995, net premiums and fees earned amounted to
$345.7 million and were 1.2% above the amount reported for the third quarter of
1994. For the third quarter of 1995, the Company's General Insurance Group
posted an increase in premium revenues due to varying levels of growth in
certain parts of the Company's business, but principally among liability
coverages. Title Group premium and fee revenues decreased in the third quarter
of 1995 when compared to the third quarter of 1994; depressed conditions in the
large California housing market in particular, and the near absence of
refinancing activity contributed to a decline in mortgage originations. Growth
in the Mortgage Guaranty Group was enhanced by continued expansion of this
gorup's marketing territory and from higher volume driven by lower mortgage
rates.
8
The General Insurance Group's net premiums earned decreased 1.5% to $637.8
million in the first nine months of 1995. The Title Insurance Group reported
premiums and fees in the first nine months of $219.2 million, down from $304.7
million in the year-ago period. The Mortgage Guaranty Group continued to
experience double-digit growth in production and reported net premiums earned
of $121.6 million, an increase of 23.7%. For the year's third quarter, premium
and fees grew (declined) by 2.2% for general insurance, (7.7%) for title
insurance and 22.9% for mortgage guaranty. Life and health premiums remained
flat in the first nine months of 1995, but decreased 13.3% for the third quarter
1995 when compared to the same year-ago period.
Consolidated net investment income was $186.0 million in the first nine months
of 1995 and $62.4 million in the third quarter of 1995 compared to $167.2
million and $56.8 million, respectively, in the same quarter and nine month
period of 1994. The higher revenue from this source is attributable to positive
cash flow in addition to improved market yields for fixed-maturity securities.
Equities made up about 4.5% of the investment portfolio at the end of the first
nine months of 1995 compared to 6.8% one year ago. The average annualized yield
on investments was 6.2% and 6.1% at the end of September 30, 1995 and 1994,
respectively.
The Company's investment policies have not been designed to maximize realized
investment gains. Realized gains of $20.2 million and $25.9 million reported in
the third quarter and for the first nine months of 1995, respectively, are due
to the sale of equity securities. Dispositions of fixed maturity 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 continually monitoring its
investments with a view toward maximizing the quality ratings and
diversification of its portfolio. For the first nine months of 1995,
approximately 77% of total dispositions represented maturities and early calls
of existing holdings; for the year 1994 these transactions amounted to
approximately 64%.
Expenses:
Consolidated benefit, claim and settlement costs, as a percentage of net
premiums and fees earned, were approximately 55% and 54% in the first nine
months of 1995 and 1994, respectively. For the third quarter of each year
these ratios were 54% in 1995 and 53% in 1994. Claims experience for property
and liability coverages improved in both periods due in part to reduced losses
from involuntary pool assessments. The Mortgage Guaranty claim costs increased
for the first nine months of 1995 compared to the same period in 1994 due in
part to a rise in mortgage delinquencies, while the Title and Life insurance
segments benefited from generally lower claim provisions.
The ratio of consolidated underwriting, acquisition and insurance expenses to
net premiums and fees earned were 44% and 47% in the first nine months of 1995
and 1994, respectively. These ratios were 43% and 47% for the third quarters of
1995 and 1994, respectively. Variations in these percentages between
comparative periods typically reflect changing patterns in the mix of business
and the varyingproduction costs pertaining thereto.
Income from Operations:
Income from operations before realized investment gains, taxes and other items
increased by 19.9% in the first nine months of 1995 when compared to the same
period one year ago; for the third quarter of 1995, income from operations
increased by 27.3% when compared to the same quarter in 1994. The Corporation's
General, Mortgage Guaranty and Life insurance segments reflected higher pre-tax
operating earnings. The Title insurance segment posted a pre-tax operating loss
for the first nine months of 1995 while reporting pre-tax operating earnings in
the third quarter of 1995 for the aforementioned reasons.
The effective consolidated income tax rate was 32% in the first nine months of
1995 and 1994, respectively and 32% and 33% in the third quarters of 1995 and
1994, 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.
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 results to be achieved in succeeding years. 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 are some
of the factors which have a bearing on quarter-to-quarter and year-to-year
comparisons and future 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
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(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 10, 1995
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\s\ Paul D. Adams
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P.D. Adams
Senior Vice President &
Chief Financial Officer