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 March 31, 1996 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-4625
OLD REPUBLIC INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware No. 36-2678171
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
307 North Michigan Avenue, Chicago, Illinois 60601
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 312-346-8100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Shares Outstanding
Class March 31, 1996
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Common Stock / $1 par value 86,479,048 *
* Excludes 6,658,901 common shares issued, outstanding and held by an
affiliate, which are classified as treasury stock for financial accounting
purposes only.
There are 11 pages contained in this report.
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OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / March 31, 1996
INDEX
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PAGE NO.
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PART I FINANCIAL INFORMATION:
CONSOLIDATED SUMMARY BALANCE SHEETS 3
CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4
CONSOLIDATED SUMMARY STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 6
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 7 & 8
PART II OTHER INFORMATION 9 - 11
3
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited)
($ in Millions)
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March 31, December 31,
1996 1995
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Assets
Investments: Held to maturity:
Fixed maturity securities (at amortized cost)
(fair value: $1,750.5 and $1,759.0) $1,740.9 $1,714.1
Other long-term investments (at cost) 25.7 26.9
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Total 1,766.6 1,741.1
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Available for sale:
Fixed maturity securities (at fair value)
(cost: $2,048.9 and $2,068.9) 2,074.7 2,146.0
Equity securities (at fair value) (cost: $98.9 and $95.7) 133.3 126.1
Short-term investments (at fair value which approximates cost) 275.2 312.7
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Total 2,483.3 2,584.9
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Total investments 4,249.9 4,326.0
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Other Assets:Cash 26.0 19.4
Accrued investment income 71.8 69.7
Accounts and notes receivable 300.8 313.6
Reinsurance balances and funds held 126.8 125.1
Reinsurance recoverable: Paid losses 23.8 24.7
Policy and claim reserves 1,446.6 1,416.1
Deferred policy acquisition costs 107.0 107.8
Sundry assets 188.5 190.6
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2,291.7 2,267.4
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Total Assets $6,541.7 $6,593.5
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Liabilities, Preferred Stock and
Common Shareholders' Equity
Liabilities: Future policy benefits $180.8 $186.0
Losses, claims and settlement expenses 3,560.6 3,519.8
Unearned premiums 392.9 406.7
Other policyholders' benefits and funds 70.6 75.4
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Total policy liabilities and accruals 4,205.1 4,188.0
Commissions, expenses, fees and taxes 101.4 110.3
Reinsurance balances and funds 169.3 169.3
Federal income tax payable: Current 10.5 11.5
Deferred 2.1 10.1
Debt and debt equivalents 157.3 320.5
Sundry liabilities 80.2 98.4
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Total liabilities 4,726.2 4,908.4
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Preferred Redeemable convertible preferred stock 16.9 17.0
Stock: Convertible preferred stock 1.0 0.6
Cumulative preferred stock 54.8 54.8
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Total preferred stock 72.7 72.5
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Common Common stock 95.5 58.8
Shareholders'Additional paid-in capital 570.3 463.4
Equity: Net unrealized appreciation of securities 38.6 70.3
Retained earnings 1,076.6 1,058.3
Treasury stock (at cost) (38.4) (38.4)
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Total Common Shareholders' Equity 1,742.7 1,612.5
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Total Liabilities, Preferred Stock
and Common Shareholders' Equity $6,541.7 $6,593.5
============ ============
See accompanying notes.
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OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited)
($ in Millions, Except Common Share Data)
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Quarters Ended
March 31,
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1996 1995
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Revenues: Net premiums earned $320.1 $292.6
Title, escrow and other fees 33.6 23.8
Net investment income 65.5 61.1
Realized investment gains 5.8 3.7
Other income 5.7 4.5
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Net revenues 430.9 385.8
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Expenses: Benefits, claims and settlement expenses 182.5 170.4
Underwriting, acquisition and insurance expenses 165.0 151.8
Interest and other expenses 6.1 6.7
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Total expenses 353.7 329.0
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Income before income taxes and items below 77.1 56.7
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Income Taxes: Currently payable 14.4 11.0
Deferred 9.7 7.2
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Total income taxes 24.1 18.3
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52.9 38.4
Other items - net 0.4 0.6
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Income before extraordinary item 53.4 39.0
Extraordinary item (net of tax credits of $1.8) (3.3) --
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Net Income: $50.0 $39.0
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Earnings and
Dividends Per
Common Share: Primary Earnings:
Before extraordinary item $0.58 $0.44
Extraordinary item (0.04) ---
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Net income $0.54 $0.44
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Fully Diluted Earnings:
Before extraordinary item $0.56 $0.42
Extraordinary item (0.04) ---
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Net income $0.52 $0.42
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Cash dividends $0.087 $0.080
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Stock dividends 50% --%
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Average number of common and common
equivalent shares outstanding:
Primary 90,969,694 85,408,443
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Fully Diluted 94,479,448 92,096,081
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See accompanying notes.
5
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in Millions)
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Quarters Ended
March 31,
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1996 1995
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Cash flows from operating activities:
Net income $50.0 $39.0
Change in non-cash items:
Deferred policy acquisition costs 1.1 1.7
Premiums and other receivables 13.6 (0.5)
Unpaid claims and related items 3.7 56.7
Future policy benefits and policyholders' funds (13.8) 6.7
Income taxes 7.6 18.6
Reinsurance balances and funds (0.1) 18.9
Accounts payable, accrued expenses and other (27.4) (24.5)
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Total 34.9 116.8
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Cash flows from investing activities:
Sales of fixed maturity securities:
Held to maturity:
Maturities and early calls 23.6 23.3
Other --- ---
Available for sale:
Maturities and early calls 48.9 22.6
Other 15.4 9.7
Sales of equity securities 5.4 24.7
Sales of other investments 1.6 0.7
Sales of fixed assets for company use 0.3 0.8
Purchases of fixed maturity securities:
Held to maturity (46.4) (119.2)
Available for sale (50.4) (42.8)
Purchases of equity securities (8.3) (4.3)
Purchases of other investments (0.4) (1.5)
Purchases of fixed assets for company use (2.6) (1.2)
Other-net (1.3) 4.4
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Total (14.2) (82.5)
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Cash flows from financing activities:
Increase in term loans 22.0 ---
Issuance of preferred and common stocks 11.8 0.9
Repayments of term loans (1.0) (1.0)
Redemption of debentures and notes (75.0) ---
Dividends on common shares (7.3) (6.3)
Dividends on preferred shares (1.9) (2.0)
Purchase of treasury stock --- (0.9)
Issuance of treasury stock --- 2.3
Other-net --- 0.4
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Total (51.4) (6.4)
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Increase (decrease) in cash and short-term investments (30.8) 27.8
Cash and short-term investments, beginning of period 332.1 203.3
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Cash and short-term investments, end of period $301.3 $231.1
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $7.0 $4.6
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Income taxes $15.4 $1.2
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See accompanying notes.
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OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited)
($ 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:
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Earnings per share have been calculated on the basis of average common and
common equivalent shares outstanding for the quarters ended March 31, 1996
and 1995. Retroactive adjustment has been made for all stock dividends and
splits declared through March 31, 1996. Primary earnings per share
calculations give effect to the deduction of dividend requirements applicable
to preferred stock of $1.2 for the quarters ended March 31, 1996 and 1995.
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 86,479,048 at March 31, 1996 after elimination
of 6,658,901 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:
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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 $38.6 at March 31, 1996. Unrealized
appreciation of investments, before applicable income taxes of $21.2,
at March 31, 1996 included gross unrealized gains and (losses) of $75.1 and
$(15.2), respectively.
For the quarters ended March 31, 1996 and 1995, net unrealized appreciation
(depreciation) of investments, net of deferred income taxes, amounted to
$(31.7) and $22.9, respectively.
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OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Quarters Ended March 31, 1996 and 1995
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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),
Mortgage Guaranty, Title, and Life insurance groups.
FINANCIAL POSITION
Old Republic's financial position at March 31, 1996 reflected decreases in
assets of 0.8%, liabilities of 3.7%, and an increase in common shareholders'
equity of 8.1% when compared to the immediately preceding year-end. Cash
and invested assets represented 66.5% and 67.0% of consolidated assets as of
March 31, 1996 and December 31, 1995, respectively. Relatively high short-term
maturity investment positions continued to be maintained as of March 31, 1996
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 quarter of 1996,
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 quarter of
1996, Old Republic's commitment to equity securities increased by 5.6%
vis-a-vis the related invested balance at year-end 1995. As of March 31, 1996,
the carrying value of fixed maturity securities in default as to principal or
interest was immaterial in relation to consolidated assets or shareholders'
equity.
Consolidated operations produced positive cash flows in this year's first
quarter. 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 $1.97 billion at March 31, 1996 consisted of
debt and debt equivalents of $157.3 million, redeemable convertible preferred
stock of $16.9 million (excluding $11.7 million of such stock classified as a
debt equivalent), convertible preferred stock of $1.0 million, cumulative
preferred stock of $54.8 million, and common shareholders' equity of $1.74
billion. The increase in the common shareholders' equity account during the
quarter ended March 31, 1996 reflects primarily the retention of earnings in
excess of dividends declared on outstanding preferred and common shares, and
the issuance of additional shares to effect the debt conversion noted below;
this was offset to some degree by a decline in the value of bonds and stocks
carried at market value. As of March 31, 1996, a standing authorization by the
Company's Board of Directors permits the reacquisition of up to $38.0 million
of common and preferred shares.
In February 1996, the Company called for redemption its 10% debentures of 2018
($74.0 million principal amount) and its 5.75% convertible subordinated
debentures of 2002 ($110.0 million principal amount); redemption of the former
was effected with available funds, while the latter was converted into
approximately 6.4 million Old Republic common shares. As a result of these
redemptions and conversions, the Company's debt declined by $184.0 million
while its common shareholders' equity account rose by $108.7 million.
In April 1996, the Company called for redemption its 11.5% debentures of 2015
($30.0 million principal amount) to be retired with available funds. Later
in 1996, the Company may, at its sole option, redeem all or part of
approximately $54.8 million of its Series "H" cumulative preferred stock.
RESULTS OF OPERATIONS
Revenues:
Net premiums and fees earned in the first quarter of 1996 amounted to $320.1
million and were 9.4% above the amount reported for the first quarter of 1995.
For the first three months of 1996, the Company's General Insurance Group
posted a 2.5% increase in earned premiums to $205.1 million due to moderate
growth in most parts of the Company's business. Premium growth in the
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Mortgage Guaranty Group was enhanced by continued expansion of the marketing
territory and from higher volume driven by lower mortgage rates throughout
most of this year's first quarter; the year over year increase in earned
premiums was 33.1% to $51.3 million. Title Group premium and fee revenues
increased by 24.6% to $83.7 million in the first quarter of 1996 when compared
to the same quarter of 1995; lower mortgage rates in the second half of 1995
and early in 1996 contributed to greater housing and mortgage finance and
refinance activity.
Consolidated net investment income was $65.5 million in the first quarter of
1996 compared to $61.1 million in the same quarter of 1995. The higher revenue
from this source is attributable to positive cash flow in addition to slightly
greater market yields for fixed-maturity securities which represent the vast
majority of Old Republic's investment portfolio. Equities made up about 3.1%
of total investments at the end of the first quarter of 1996 compared to 6.5%
one year ago. The average annualized yield on investments was approximately
6.1% and 6.3% at the end of March 31, 1996 and 1995, respectively. In the
past eighteen months the Company has committed a larger percentage of
investable funds to tax-exempt fixed maturity securities.
The Company's investment policies have not been designed to maximize realized
investment gains. Realized gains of $5.8 million in the first quarter of 1996
were mostly 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 quarter
of 1996, approximately 83% of total dispositions represented maturities and
early calls of existing holdings; for the year 1995 these transactions
amounted to approximately 59%.
Expenses:
Consolidated benefit, claim and settlement costs, as a percentage of net
premiums and fees earned, were approximately 57% and 54% in the first quarters
of 1996 and 1995, respectively. Claims experience for property and liability
coverages improved slightly in both periods due mostly to reduced losses from
involuntary pool assessments. Mortgage Guaranty claim costs increased during
the first quarter of 1996 compared to the same period in 1995 due to higher
mortgage delinquencies. Title insurance claim provisions were much lower in
the first three months of 1996 as a result of a continuing drop in claim
frequencies and severity on business underwritten since 1992. Life Group
claim costs were basically stable in both quarterly periods.
The ratio of consolidated underwriting, acquisition and insurance expenses to
net premiums and fees earned was 52% and 48% in the first quarters of 1996 and
1995, respectively. Variations in these percentages between comparative periods
typically reflect changing patterns in the mix of business and the varying
production costs pertaining thereto.
Income from Operations and Net Income:
Income from operations before realized investment gains, taxes and other items
increased by 34.5% in the first quarter of 1996 when compared to the same
period one year ago. The Corporation's General, Mortgage Guaranty and Life
insurance segments reflected higher pre-tax operating earnings. The Title
insurance segment posted pre-tax operating earnings for the first quarter of
1996 while posting a pre-tax operating loss in the first quarter of 1995 for
the aforementioned reasons.
The effective consolidated income tax rate was 31% and 32% in the first quarters
of 1996 and 1995, 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.
The aforementioned early retirement of the Company's 10% debentures of 2018
produced a net of tax charge of $3.3 million (4 cents per share) that has been
reflected as an extraordinary item in this year's first quarter.
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: May 10, 1996
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/s/ P. D. Adams
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P. D. Adams
Senior Vice President &
Chief Financial Officer