UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: December 31, 1996
-----------------
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934(NO FEE REQUIRED)
For the transition period from _____________________ to ___________________
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
Securities registered pursuant to Section 12(b) of the Act:
Share/Par Value Outstanding Name of each exchange
Title of each class February 28, 1997 on which registered
- ------------------------- --------------------------- -----------------------
Common Stock/$1 par value 87,062,850 * New York Stock Exchange
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(*) Excludes 6,658,901 common shares issued, outstanding and held by an
affiliate, which are classified as treasury stock for financial accounting
purposes only.
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part Ill of this Form 10-K or any amendment to this
Form 10-K. _X_
The aggregate market value of the Company's voting Common Stock held by
non-affiliates of the registrant computed by reference to the closing price at
which the stock was quoted as of February 28, 1997 was $2,362,015,121.
Documents incorporated by reference:
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The following documents are incorporated by reference into that part of this
Form 10-K designated to the right of the document title.
Title Part
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Proxy statement for the 1997
Annual Meeting of Shareholders III, Items 10, 11, 12 and 13
Exhibits as specified in exhibit index (page 54) IV, Item 14
There are 56 pages in this report
PART I
Item 1-Business
(a) General Development of Business. Old Republic International Corporation is a
Chicago-based insurance holding company with subsidiaries engaged in the general
(property & liability), mortgage guaranty, title, and life (life & disability)
insurance businesses. In this report, "Old Republic", "the Corporation", or "the
Company" refers to Old Republic International Corporation and its subsidiaries
as the context requires. The aforementioned insurance segments are organized as
the Old Republic General, Mortgage Guaranty, Title, and Life Groups, and
references herein to such groups apply to the Company's subsidiaries engaged in
the respective segments of business.
Financial Information Relating to Segments of Business (a)
The contributions to net revenues, and income (loss) before taxes and
extraordinary item of each Old Republic segment are set forth below for the
years shown, together with their respective assets at the end of each year. The
information below should be read in conjunction with the consolidated financial
statements, the notes thereto, and the "Management Analysis of Financial
Position and Results of Operations" appearing elsewhere herein.
($ in Millions)
-----------------------------------------------------------------------------
Years Ended December 31,
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Net Revenues(b) Income (Loss) Before Taxes
--------------------------------------- ------------------------------------
1996 1995 1994 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
General ............................... $ 1,074.9 $ 1,056.1 $ 1,051.4 $ 188.8 $ 171.1 $ 154.2
Mortgage Guaranty...................... 262.6 203.9 158.3 120.2 102.8 78.3
Title.................................. 387.9 326.2 404.7 24.6 4.6 (.2)
Life................................... 60.5 58.0 55.7 7.0 7.9 6.4
Other Operations - Net................. 2.6 1.8 .9 (13.5) (20.2) (20.6)
----------- ----------- ----------- ---------- ---------- ----------
Subtotal............................. 1,788.7 1,646.1 1,671.2 327.2 266.2 218.1
Realized Investment Gains.............. 15.1 49.7 7.7 15.1 49.7 7.7
----------- ----------- ----------- ----------- ----------- ----------
Total................................ $ 1,803.9 $ 1,695.9 $ 1,679.0 $ 342.4 $ 316.0 $ 225.8
=========== =========== =========== =========== =========== ==========
Assets at December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
General............................................................................. $ 5,350.5 $ 5,356.8 $ 5,199.9
Mortgage Guaranty................................................................... 760.5 634.0 487.8
Title............................................................................... 408.2 415.8 402.4
Life................................................................................ 310.3 328.2 322.7
Total............................................................................. $ 6,656.2 $ 6,593.5 $ 6,262.9
=========== =========== ==========
------------
(a) Reference is made to the table in Note 7 of the Notes to Consolidated
Financial Statements, incorporated herein by reference, which shows the
contribution of each subcategory to consolidated net revenues and
income or loss before income taxes of Old Republic's insurance industry
segments.
(b) Revenues consist of net premiums, fees, net investment and other income
earned; realized investment gains are shown in total for all groups
combined.
General Insurance Group
Through its General Insurance Group subsidiaries, the Corporation assumes
risks and performs related risk management and marketing services pertaining to
a large variety of property and liability commercial insurance coverages. Old
Republic does not have a meaningful participation in personal lines of
insurance.
Liability Coverages: Workers' compensation, general liability (including
the general liability portion of commercial package policies), and commercial
automobile full coverage protection are the major classes of insurance
underwritten for businesses and public entities such as municipalities. Within
these classes of insurance, Old Republic specializes in a number of industries,
most prominently the transportation, coal and energy services, construction and
forest product industries. Such business is primarily produced through agency
and brokerage channels.
2
The rates charged for all workers' compensation insurance are generally
regulated by the various states. It is therefore possible that the rate
increases necessary to cover any expansion of benefits under state laws or
increases in claim frequency or severity may not always be granted soon enough
to enable insurers to fully recover the amount of the benefits they must pay.
During the past ten years, the Corporation has steadily diversified its
General Insurance Group business. This diversification has been achieved
through a combination of internal growth, the establishment of new subsidiaries,
and through selective mergers with other companies. For 1996, production of
direct workers' compensation premiums accounted for 22.4% of consolidated direct
premiums written by the General Insurance Group. For the same year, general
liability and commercial automobile (principally trucking) direct insurance
premiums amounted to 11.6% and 43.2%, respectively, of consolidated direct
premiums written.
During the past decade, specialty programs have also been expanded or
initiated to insure corporations' exposures to directors' and officers' and
errors and omissions liability, to cover owners and operators of private
aircraft for hull and liability exposures, and to insure grain elevators and
liquid petroleum gas operations.
The Corporation assumes (on both treaty and facultative bases) a moderate
amount of reinsurance business produced by other insurance or reinsurance
companies. Most of this business encompasses workers' compensation, general and
automobile liability lines, as well as a moderate amount of property exposures.
Property and Other Coverages: Old Republic's property insurance business
primarily includes commercial physical damage insurance on trucking risks. A
small volume of business is represented by fire and other physical perils for
houses and commercial properties. All such insurance is produced through agents
or financial intermediaries, such as finance companies, and on a reinsurance
assumed basis.
Fidelity and surety coverages are underwritten through agents by the Old
Republic Surety Group, Inc. Old Republic Insured Credit Services, Inc., a
wholly-owned subsidiary, has marketed loan and retail installment sales
credit guaranty insurance since 1955 through commercial banks and thrift
institutions. This coverage provides lenders with a guaranty against defaults on
home equity and home improvement loans and installment sales contracts.
Auto Warranty and Home Warranty, while still relatively small businesses,
are marketed directly by Old Republic through its own employees and selected
independent agents.
Mortgage Guaranty Group
Real estate mortgage loan insurance protects lending institutions against
certain losses, generally to the extent of 10% to 35% of the sum of the
outstanding amount of each insured mortgage loan, and allowable costs incurred
in the event of default by the borrower. The Corporation insures only first
mortgage loans, primarily on residential properties having one-to-four family
dwelling units.
Mortgage Guaranty Insurance premiums originate from savings and loan
associations, mortgage bankers and other lending institutions. The Corporation's
residential real estate loan insurance business is originated, approximately 19%
by savings and loan associations, 68% by mortgage bankers and 13% by other
lenders. The Corporation's mortgage guaranty insurance in force at December 31,
1996, was originally produced by approximately 3,800 different lending
institutions and about 2,300 such institutions originated business in 1996. The
profitability of the Corporation's insurance products is not tied in any
significant degree to the financial well-being of these institutions. While it
is possible that the failure of a large number of such institutions could
increase the competition for sales of certain insurance products to the
surviving institutions, it is also likely that other institutions or providers
of financial services would emerge to take their place.
Annual, monthly and single premium plans for residential real estate loan
insurance are offered. Annual plans provide coverage on a year to year basis
with first year premiums being dependent on the loan-to-value ratio and the
coverage offered. Annual renewal premiums are charged on the basis of the
outstanding loan balance on the anniversary date, or, if selected, on the
original loan balance. Monthly plans provide coverage on a month-to-month basis
with premiums being dependent on the loan-to-value ratio and the coverage
offered. In the case of monthly premium plans, the first month and all renewal
months are charged on the basis of the outstanding loan amount on the
anniversary date or, if selected, on the original loan balance. Single premium
plans provide coverage for a period of three to fifteen years, or the number of
years required to amortize a standard mortgage to an 80% loan-to-value ratio, if
selected. The premium charged similarly depends on the loan-to-value ratio, the
coverage offered, the type of loan instrument (whether fixed rate/fixed payment
or an adjustable mortgage loan) and whether the property is to be owner
occupied. Approximately 45% and 53%, respectively of the residential real estate
loan insurance in force at December 31, 1996, has been written under annual and
monthly premium plans. Monthly premium plans, a product that was introduced in
1993, accounted for approximately 96% of the new business written in 1996.
3
The Corporation limits its residential real estate insurance to lenders
approved by it and supervised or regulated by federal or state authorities in
order to obtain reasonable assurance as to the effectiveness of such
institutions' lending practices. A master policy is issued to each approved
lender, but the master policy does not obligate the Corporation to issue
insurance on any particular loan. To obtain insurance on a specific mortgage
loan, an approved lender submits an application, supported by a copy of the
borrower's loan application, an appraisal report on the property by either the
lender or an independent appraiser, a written credit report on the borrower, an
affidavit of the borrower's equity and certain other information. The
underwriting department reviews this material and approves or rejects the
application, usually on the day it is received. The Corporation generally
adheres to the underwriting guidelines published by the Federal Home Loan
Mortgage Corporation. Upon approval of an application for insurance of a loan,
the Corporation issues a commitment to insure the loan; this is followed by a
certificate of insurance when the loan is consummated.
Title Insurance Group
The title insurance business consists primarily of the issuance of policies
to real estate purchasers and investors based upon searches of the public
records which contain information concerning interests in real property. The
policy insures against losses arising out of defects, liens and encumbrances
affecting the insured title and not excluded or excepted from the coverage of
the policy.
There are two basic types of title insurance policies: lenders' policies
and owners' policies. Both are issued for a onetime premium. Most mortgages made
in the United States are extended by savings and loan associations, mortgage
bankers, savings and commercial banks, state and federal agencies, and life
insurance companies. The financial institutions secure title insurance policies
to protect their mortgagees' interest in the real property. This protection
remains in effect for as long as the mortgagee has an interest in the property.
A separate title insurance policy is issued to the owner of the real estate. An
owner's policy of title insurance protects an owner's interest in the title to
the property.
The premiums charged for the issuance of title insurance policies vary with
the policy amount and the type of policy issued. The premium is collected in
full when the real estate transaction is closed, there being no recurring fee
thereafter. In many areas, premiums charged on subsequent policies on the same
land may be reduced, depending generally upon the time elapsed between issuance
of the previous policies and the nature of the transactions for which the
policies are issued. Most of the charge to the consumer relates to title
services rendered in conjunction with the issuance of a policy rather than to
the possibility of loss due to risks insured against. Accordingly, the service
performed by a title insurer relates for the most part to the prevention of loss
rather than to the assumption of the risk of loss.
In connection with its title insurance operations, Old Republic also
provides escrow facilities, services for the disbursement of construction funds,
and other services pertaining to real estate transfers.
Life Insurance Group
Credit & Other Life and Disability: Old Republic markets and writes
consumer credit life and disability insurance primarily through automobile
dealers, consumer finance companies, banks, and savings and loan associations.
Borrowers insured under consumer credit life insurance are also generally
covered by consumer credit disability protection. Credit life insurance provides
for the repayment of a loan, installment purchase, or other debt obligation in
the event of the death of the borrower, while credit disability insurance
provides for the payment of installments due on such debt while the borrower is
disabled. Old Republic has also written various conventional life,
disability/accident and health insurance coverages for many years, principally
on a direct marketing basis through banks and other financial services
institutions.
Ordinary term life insurance is sold through independent agents and brokers
for relatively large face amounts, in both the United States and Canada.
Marketing of term life insurance products is aimed principally toward
self-employed individuals, professionals, owners of small businesses, and high
net worth persons.
Annuities: In the past, Old Republic marketed annuity policies, some of
which remain outstanding, through securities dealers in New York State. These
policies provide for annuity benefits based on premiums paid and accumulating
with interest over time. Since 1985, the volume of annuity business has been
inconsequential as the Company has been unwilling to compete in this part of the
insurance business.
4
Consolidated Underwriting Statistics
The following table reflects underwriting statistics covering: 1) premiums
together with loss, expense, and policyholders' dividend ratios for the major
coverages underwritten solely in the General, Mortgage Guaranty and Title
insurance groups, and disability/accident & health coverages underwritten
directly or through reinsurance in both the Life and General Insurance groups;
2) a summary of net retained life insurance in force at the end of the years
shown:
($ in Millions)
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Years Ended December 31,
-----------------------------------------------------
1996 1995 1994
-------------- ------------- -------------
General Insurance Group:
Overall Experience:
Net Premiums Written............................................... $ 866.3 $ 876.1 $ 851.6
Net Premiums Earned (a)............................................ $ 868.2 $ 847.7 $ 860.6
Loss Ratio .................................................... 73% 75% 76%
Policyholders' Dividend Ratio...................................... -% 1% 1%
Expense Ratio(a)................................................... 27% 26% 26%
-------------- ------------- -------------
Composite Ratio.................................................... 100% 102% 103%
============== ============= =============
Experience by Major Coverages:
Workers' Compensation:
Net Premiums Earned (a)............................................ $ 151.6 $ 187.2 $ 239.4
Loss Ratio .................................................... 71% 88% 81%
Policyholders' Dividend Ratio...................................... 1% 3% 4%
============== ============= =============
Commercial Automobile (Principally trucking):
Net Premiums Earned (a)............................................ $ 397.4 $ 361.3 $ 321.2
Loss Ratio .................................................... 79% 79% 82%
============== ============= =============
General Liability:
Net Premiums Earned (a)............................................ $ 46.9 $ 53.7 $ 54.2
Loss Ratio .................................................... 76% 55% 84%
============== ============= =============
Property and Other Coverages:
Net Premiums Earned (a)............................................ $ 272.3 $ 245.5 $ 245.7
Loss Ratio .................................................... 63% 66% 62%
============== ============= =============
Mortgage Guaranty Group:
Net Premiums Earned (b) ........................................... $ 226.6 $ 175.2 $ 134.5
Loss Ratio (b) .................................................... 36% 33% 29%
============== ============= =============
Title Insurance Group:(b)
Net Premiums Earned................................................ $ 220.2 $ 183.3 $ 244.4
Combined Net Premiums & Fees Earned................................ $ 367.4 $ 305.5 $ 384.7
Loss Ratio : To Net Premiums Earned.............................. 8% 14% 18%
: To Net Premiums & Fees Earned....................... 5% 8% 12%
============== ============= =============
Disability/Accident & Health (c):
Net Premiums Earned................................................ $ 33.9 $ 31.2 $ 28.5
Loss Ratio ........................................................ 42% 44% 46%
============== ============= =============
Net Retained Life Insurance In Force:
Ordinary Life...................................................... $ 3,833.9 $ 4,063.4 $ 4,230.0
Credit and Other Life.............................................. 135.7 173.6 193.3
-------------- ------------- -------------
Total........................................................... $ 3,969.6 $ 4,237.0 $ 4,423.4
============== ============= =============
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(a) Statutory net premiums earned and expense ratios may vary from amounts
calculated pursuant to generally accepted accounting principles due to
differences in the calculation of unearned premium reserves and
acquisition cost under each accounting method.
(b) Amounts and ratios reported are determined pursuant to generally
accepted accounting principles.
(c) Disability/accident & health data reflect the composite experience of the
Life and General Insurance segments of business. Accordingly, the General
Insurance Group composite experience includes premiums and related costs
for disability/accident & health coverages underwritten directly or
through reinsurance in such group.
5
Variations in the loss (including related claim settlement expense) ratios
are caused by changes in the frequency and severity of claims incurred, changes
in premium rates and the level of premium refunds, and periodic changes in claim
and claim expense reserve estimates resulting from ongoing reevaluations of
reported and unreported claims and claim expenses. Loss, expense, policyholders'
dividends, and composite ratios have been rounded to the nearest percentage
point. The loss ratios include loss adjustment expenses where appropriate.
Policyholders' dividends are a reflection of changes in loss experience for
individual or groups of policies, rather than overall results, and should be
viewed in conjunction with loss ratio trends; policyholders' dividends apply
principally to workers' compensation insurance.
General Insurance Group loss ratios for workers' compensation and liability
insurance coverages in particular may reflect greater volatility due to a
variety of factors. The inherent volatility of claims experience due to chance
events in any one year, greater or lower loss costs emanating from involuntary
business (i.e. from industry-wide insurance pools and associations in which
participation is basically mandatory), and added provisions for loss costs not
recoverable from assuming reinsurers which have experienced financial
difficulties are some of the major factors which may influence comparisons of
loss ratios between years. The Company generally underwrites concurrently
workers' compensation, commercial automobile (liability and physical damage),
and general liability insurance coverages for a large number of customers.
Accordingly, an evaluation of trends in premiums, loss and dividend ratios for
these individual coverages should be considered in light of such a concurrent
underwriting approach. Improved loss experience for workers compensation
insurance in 1996 reflects lower claim costs from involuntary market
participations as well as generally improving industry-wide loss trends.
The increase in the mortgage guaranty loss ratio is due to a rise in claim
frequency, mostly in the California market which has been affected by an
economic slowdown for the past several years. The Title Insurance Group loss
ratios for the years presented reflect improving loss severity and frequency
trends for business underwritten since 1992.
The decrease in net ordinary life insurance in force is attributed to
competitive market pressures which served to reduce first year premium
production.
General Insurance Claim Reserves
The Corporation's property and liability insurance subsidiaries establish
claim reserves which consist of estimates to settle: a) reported claims; b)
claims which have been incurred as of each balance sheet date but have not as
yet been reported ("IBNR") to the insurance subsidiaries; and c) the direct
costs, (such as attorneys' fees which are allocable to individual claims) and
indirect costs (such as salaries and rent applicable to the overall
administration of the claim department) to administer known and IBNR claims.
Such claim reserves, except as to classification in the Consolidated Balance
Sheets in terms of gross and reinsured portions, are reported for financial and
regulatory reporting purposes at amounts that are substantially the same.
The establishment of claim reserves by property and liability insurers,
such as the Corporation's General Insurance Group, is a reasonably complex and
dynamic process influenced by a large variety of factors. These include past
experience applicable to the anticipated costs of various types of claims,
continually evolving and changing legal theories emanating from the judicial
system, actuarial studies, the professional experience and expertise of the
Company's claim departments' personnel or attorneys and independent adjusters
retained to handle individual claims, the effect of inflationary trends on
future claim settlement costs, and periodic changes in claim frequency patterns
such as those caused by natural disasters, illnesses, accidents, or work-related
injuries. Consequently, the reserve-setting process relies on the judgments and
opinions of a large number of persons, on historical precedent and trends, and
on expectations as to future developments. At any point in time, the Company and
the industry are exposed to possibly higher than anticipated claim costs due to
the aforementioned factors, and to the evolution, interpretation, and expansion
of tort law, as well as to the effects of unexpected jury verdicts.
In establishing claim reserves, the possible increase in future loss
settlement costs caused by inflation is considered implicitly, along with the
many other factors cited above. Reserves are generally set to provide for the
ultimate cost of all claims. With regard to workers' compensation reserves,
however, the ultimate cost of long-term disability or pension-type claims is
discounted to present value based on interest rates ranging from 3.5% to 4.0%.
The Company, where applicable, uses only such discounted reserves in evaluating
the results of its operations, in pricing its products and settling
retrospective and reinsured accounts, in evaluating policy terms and experience,
and for other general business purposes. Solely to comply with reporting rules
mandated by the Securities and Exchange Commission, however, Old Republic has
made statistical studies of applicable workers' compensation reserves to obtain
estimates of the amounts by which claim and claim adjustment expense reserves,
net of reinsurance, have been discounted. These studies have resulted in
estimates of such amounts at approximately $163.2, $162.8 and $169.1 million, as
of December 31, 1996, 1995, and 1994, respectively. It should be noted, however,
that these differences between
6
discounted and non-discounted (terminal) reserves are, fundamentally, of an
informational nature, and are not indicative of an effect on operating results
for any one or series of years for the above-noted reasons.
The Company believes that its overall reserving practices have been
consistently applied over many years, and that its aggregate net reserves have
resulted in reasonable approximations of the ultimate net costs of claims
incurred. However, no representation is made that ultimate net claim and related
costs will not be greater or lower than previously established reserves.
The following table shows the indicated deficiencies or redundancies for
the years 1986 to 1996. In reviewing this tabular data, it should be noted that
prior periods' loss payment and development trends may not be repeated in the
future due to the large variety of factors influencing the reserving process
outlined herein above. With respect to the 1986 data in particular, the
indicated deficiency pertains largely to adverse claim development for
reinsurance assumed business which the Company has de-emphasized since 1986 due
to unacceptably high loss ratios. Further, the reserve redundancies or
deficiencies shown for all years are not necessarily indicative of the effect on
reported results of any one or series of years since retrospective premium and
commission adjustments employed in various parts of the Company's business tend
to partially or fully offset or negate such effects. (See "Consolidated
Underwriting Statistics" above, and "Reserves, Reinsurance, and Retrospective
Adjustments" elsewhere herein).
The subject of property and liability insurance claim reserves has been
written about and analyzed extensively by a large number of professionals and
regulators. Accordingly, the above discussion summary should, of necessity, be
regarded as a basic outline of the subject and not as a definitive presentation.
($ in Millions/Percentages to Nearest Whole Point)
- -----------------------------------------------------------------------------------------------------------------------------------
(a) As of December 31: 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(b) Liability (1) for unpaid claims
and claim adjustment
expenses(2): $974 $1,130 $1,271 $1,335 $1,435 $1,540 $1,573 $1,700 $1,768 $1,821 $1,829
=====================================================================================================
(c) Paid (cumulative) as of (3):
One year later 16% 17% 20% 20% 21% 24% 20% 20% 20% 20% -%
Two years later 32 32 33 33 36 35 32 33 33 - -
Three years later 43 41 42 43 44 44 41 41 - - -
Four years later 50 49 50 49 50 50 47 - - - -
Five years later 56 55 54 54 55 55 - - - - -
Six years later 61 58 58 58 59 - - - - - -
Seven years later 63 62 62 61 - - - - - - -
Eight years later 67 65 65 - - - - - - - -
Nine years later 69 68 - - - - - - - - -
Ten years later 72% - % - % - % - % - % - % -% -% -% -%
========================================================================================================
(d) Liability reestimated (i.e.,
cumulative payments plus
reestimated ending liability)
as of (4):
----------
One year later 103% 104% 101% 98% 100% 99% 97% 95% 95% 96% -%
Two years later 111 104 97 99 100 97 94 91 93 - -
Three years later 110 100 98 98 99 96 93 93 - - -
Four years later 106 101 98 98 99 97 96 - - - -
Five years later 108 101 99 99 100 100 - - - - -
Six years later 108 102 99 100 103 - - - - - -
Seven years later 109 103 101 104 - - - - - - -
Eight years later 111 105 104 - - - - - - - -
Nine years later 112 109 - - - - - - - - -
Ten years later 116% - % - % - % - % - % -% - % -% -% -%
=====================================================================================================
(e) Redundancy (deficiency)(5):
For each year-end at (a): -16% -9% -4% -4% -3% -% 4% 7% 7% 4% -%
======================================================================================================
Average for all year-ends
at (a): -0.2%
=====
(1) Amounts are reported net of reinsurance recoverable. (2) Excluding
unallocated loss adjustment expense reserves. (3) Percent of most recent
reestimated liability (line d). Decreases in paid loss percentages may at times
reflect the reassumption by the Company of certain previously ceded loss
reserves. (4) Percent of beginning liability (line b) for unpaid claims and
claim adjustment expenses. (5) Most current liability reestimated (line d) as a
percent of beginning liability (line b).
7
The following table shows an analysis of changes in aggregate reserves for
the Company's property and liability insurance claims and claim adjustment
expenses (1) for each of the years shown.
($ in Millions)
----------------------------------------
Years Ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Amount of reserves for unpaid claims and claim adjustment expenses
at the beginning of each year, net of reinsurance losses recoverable............ $ 1,820.9 $ 1,768.3 $ 1,700.8
------------ ------------ ------------
Incurred claims and claim adjustment expenses:
Provisions for insured events of the current year............................... 668.0 684.7 705.8
Change in provision for insured events of prior years........................... (74.4) (92.6) (89.1)
------------ ---------- ------------
Total incurred claims and claim adjustment expenses...................... 593.6 592.1 616.7
------------ ------------ ------------
Payments:
Claims and claim adjustment expenses attributable to insured
events of the current year................................................. 243.0 207.1 236.6
Claims and claim adjustment expenses attributable to insured
events of prior years...................................................... 342.0 332.4 312.4
------------ ------------ ------------
Total payments........................................................... 585.0 539.5 549.0
------------ ------------ ------------
Amount of reserves for unpaid claims and claim adjustment expenses
at the end of each year (2), net of reinsurance losses recoverable.............. 1,829.5 1,820.9 1,768.3
Reinsurance losses recoverable.................................................... 1,296.5 1,311.8 1,407.4
------------ ------------ ------------
Amount of reserves for unpaid claims and claim adjustment expenses................ $ 3,126.0 $ 3,132.7 $ 3,175.7
============ ============ ============
------------
(1) Excluding unallocated loss adjustment expense reserves.
(2) Reserves for incurred but not reported losses amounted to approximately
32.6%, 31.1% and 30.4% of the totals shown as of December 31, 1996,
1995 and 1994, respectively.
The data in the two tables above, incorporates Old Republic's estimates for
various asbestosis and environmental impairment ("A&E") claims or related costs
that have been filed in the normal course of business against a number of its
insurance subsidiaries. Such claims relate primarily to policies issued prior to
1985, many during a short period between 1981 and 1982 pursuant to an agency
agreement canceled in 1982. During all years and through the current date, the
Corporation's insurance subsidiaries have typically issued general liability
insurance policies with face amounts ranging between $1 million and $2 million
and rarely exceeding $10 million. Such policies have, in turn, been subject to
reinsurance cessions which have typically reduced the Corporation's retentions
to $500,000 or less as to each claim.
The Corporation's reserving methods, particularly as they apply to
formula-based reserves, have been established to provide for normal claim
occurrences as well as unusual exposures such as those pertaining to A&E claims
and related costs. At times, however, the Corporation's insurance subsidiaries
also establish specific formula and other reserves as part of their overall
claim and claim expense reserves to cover certain claims such as those emanating
from A&E exposures. These are intended to cover additional litigation and other
costs that are likely to be incurred to protect the Company's interests in
litigated cases in particular. At December 31, 1996, the Corporation's aggregate
indemnity and loss adjustment expense reserves specifically identified with A&E
exposures amounted to approximately $92.3 million gross, and $64.2 million net
of reinsurance. Based on average annual claims payments during the five most
recent calendar years, such reserves represented 9.7 years (gross) and 11.9
years (net) of average annual claims payments.
Old Republic disagrees with the allegations of liability on virtually all
A&E related claims of which it has knowledge on the grounds that exclusions in
the policies preclude coverage for nearly all such claims, and that the
Corporation never intended to assume such risks. Old Republic's exposure on such
claims cannot therefore be calculated by conventional insurance reserving
methods for this and a variety of reasons, including: a) the absence of
statistically valid data inasmuch as such claims typically involve long
reporting delays and very often uncertainty as to the number and identity of
insureds against whom such claims have arisen or will arise; and b) the
litigation history of such or similar claims for other insurance industry
members that has produced court decisions that have been inconsistent with
regard to such issues as when the alleged loss occurred, which policies provide
coverage, how a loss is to be allocated among potentially responsible insureds
and/or their insurance carriers, how policy coverage exclusions are to be
interpreted, what types of environmental impairment or toxic tort claims are
covered, when the insurer's duty to defend is triggered, how policy limits are
to be calculated, and whether clean-up costs constitute property damage.
8
Individual insurance companies and others who have evaluated the potential
costs of litigating and settling A&E claims have noted with serious concern the
possibility that resolution of such claims, by applying liability retroactively
in the context of the existing insurance system, could likely undermine
materially the financial condition of major participants in the property and
liability insurance industry. In light of this substantial public policy issue,
the Corporation is of the view that the courts will not resolve in the near
future the litigation gridlock stemming from the non-resolution to date of many
environmental claims in particular. In recent times, the Executive Branch and/or
the United States Congress have proposed changes in the legislation and rules
affecting environmental claims. As of December 31, 1996, however, there is no
solid evidence to suggest that forthcoming changes might mitigate or reduce some
or all of these claim exposures.
Because of the above issues and uncertainties, estimation of reserves for
losses and allocated loss adjustment expenses for the above noted types of
claims is extremely difficult or impossible. Accordingly, no representation can
be made that the Corporation's reserves for such claims and related costs will
not prove to be overstated or understated in the future.
(b) Investments. In common with other insurance organizations, Old Republic
invests most funds provided by operations in income-producing investment
securities and bank deposits.
All investments must comply with applicable insurance laws and regulations
which prescribe the nature, form, quality, and relative amounts of investments
which may be made by insurance companies. Generally, these laws and regulations
permit insurance companies to invest within varying limitations in state,
municipal and federal government obligations, corporate obligations, preferred
and common stocks, certain types of real estate, and first mortgage loans. Old
Republic's investment policies are also influenced by the terms of the insurance
coverages written, by its expectations as to the timing of claim and benefit
payments, and by income tax considerations. The following tables show invested
assets at the end of the last three years, together with investment income for
such years.
Consolidated Investments
($ in Millions)
December 31,
-----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
------------ ----------- -----------
Held to Maturity
Fixed Maturity Securities:
Corporate.............................................................. $ - $ - $ 1,356.2
Utilities.............................................................. 984.3 995.5 919.3
Tax-Exempt............................................................. 1,038.3 717.8 450.7
Redeemable Preferred Stocks............................................ .2 .7 .8
------------ ------------ ------------
2,022.9 1,714.1 2,727.2
------------ ------------ ------------
Other Invested Assets:
Mortgage Loans......................................................... 8.7 11.8 14.0
Policy Loans........................................................... 2.0 2.1 2.1
Collateral Loans....................................................... .2 .3 .4
Sundry................................................................. 14.2 12.6 10.7
------------ ------------ ------------
25.1 26.9 27.3
------------ ------------ ------------
Total held to maturity................................................ 2,048.1 1,741.1 2,754.6
------------ ------------ ------------
Available for Sale
Fixed Maturity Securities:
U.S. & Canadian Governments............................................ 758.0 812.4 620.3
Corporate.............................................................. 1,226.1 1,333.6 -
------------ ------------ ------------
1,984.2 2,146.0 620.3
------------ ------------ ------------
Equity Securities:
Perpetual Preferred Stocks............................................ 5.0 4.4 4.5
Common Stocks......................................................... 111.1 121.7 259.2
------------ ------------ ------------
116.1 126.1 263.8
------------ ------------ ------------
Short-term Investments.................................................... 265.7 312.7 172.1
------------ ------------ ------------
Total available for sale.............................................. 2,366.0 2,584.9 1,056.2
------------ ------------ ------------
Total Investments......................................................... $ 4,414.2 $ 4,326.0 $ 3,810.8
============ ============ ============
9
-----------------------------------------------------------------------------------------------------------------------------
Sources of Consolidated Investment Income
($ in Millions)
Years Ended December 31,
-----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
Fixed Maturity Securities:
Taxable................................................................ $ 199.1 $ 203.2 $ 189.6
Tax-Exempt............................................................. 41.4 27.1 18.6
Redeemable Preferred Stocks............................................ - - -
------------- -------------- --------------
240.6 230.4 208.2
------------- -------------- --------------
Equity Securities:
Perpetual Preferred Stocks............................................. .3 .4 .5
Common Stocks.......................................................... 2.2 5.8 7.0
------------- -------------- --------------
2.6 6.3 7.5
------------- -------------- --------------
Other Investment Income:
Interest on Short-term Investments..................................... 16.0 13.6 9.7
Sundry................................................................. 8.4 8.4 7.9
------------- -------------- --------------
24.5 22.0 17.7
------------- -------------- --------------
Gross Investment Income................................................... 267.7 258.7 233.6
Less: Investment Expenses (a).......................................... 7.2 6.8 6.0
------------- -------------- --------------
Net Investment Income..................................................... $ 260.5 $ 251.9 $ 227.5
============= ============== ==============
------------
(a) Investment expenses consist primarily of personnel costs and
investment custody service fees.
For at least the past 25 years, Old Republic's investment policy has been
to acquire and retain primarily investment grade, publicly traded, fixed
maturity securities. Accordingly, the Corporation's exposure to so-called "junk
bonds", private placements, real estate, mortgage loans, and derivatives is
immaterial or non-existent. Management considers investment-grade securities to
be those rated by Standard & Poor's Corporation ("Standard & Poor's") or Moody's
Investors Service, Inc. ("Moody's") that fall within the top four rating
categories or securities which are not rated but have characteristics similar to
securities so rated. At December 31, 1996 and December 31, 1995, total
investments in default as to principal and/or interest amounted to less than 1%
of consolidated assets.
The Company's investment policies are not designed to encourage trading of
its securities or to maximize the realization of investment gains. While the
amount of portfolio turnover varies from year to year, recent years'
dispositions of portfolio investments held to maturity are caused principally by
issuers' calls prior to maturity.
Effective January 1, 1993, the Company reevaluated the classification of
its invested assets as to those it (1) has the positive intent and ability to
hold until maturity (generally carried at amortized costs for fixed-maturity
securities), (2) has available for sale (carried at fair value with adjustments
to equity) or (3) has the intention of trading (carried at fair value with
adjustments to income). In November 1995, the Company again reevaluated the
classification of invested assets, as permitted by a Special Report issued by
the Financial Accounting Standards Board (FASB) during that month. As a result,
additional fixed maturity securities previously categorized as "held to
maturity" were reclassified to the "available for sale" category; the amortized
cost of the securities so reclassified was $1,365.7, and their fair market value
was $1,394.2; the related net of deferred tax unrealized gain of $18.5 was
credited directly to a separate account in the common shareholders' equity
section of the balance sheet in the final quarter of 1995. Prior years' balance
sheets and investment classifications have not been restated nor reclassified to
reflect these changes. The Company's invested assets as of December 31, 1996
have been classified solely as "held to maturity" or "available for sale".
The independent credit quality ratings and maturity distribution for Old
Republic's consolidated fixed maturity investments, excluding short-term
investments, at December 31, 1996 and December 31, 1995, are shown in the
following tables. These investments, $4.0 billion and $3.8 billion at December
31, 1996 and 1995, respectively, represented approximately 60% and 59%,
respectively, of consolidated assets, and 85% and 79%, respectively, of
consolidated liabilities as of such dates.
10
-------------------------------------------------------------------------------------------------------------------------
Independent Ratings (a)
-------------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------
1996 1995
-------- --------
(% of total portfolio)
Aaa.................................................................................... 31.5% 30.9%
Aa..................................................................................... 29.8 28.2
A...................................................................................... 33.2 34.1
Baa.................................................................................... 4.8 6.0
-------- -------
Total investment grade.............................................................. 99.3 99.2
All others (b)......................................................................... .7 .8
-------- -------
Total............................................................................... 100.0% 100.0%
======== =======
------------
(a) Ratings are assigned primarily by Moody's with remaining ratings
assigned by Standard & Poor's and converted to the equivalent Moody's
rating.
(b) "All others" include securities which when purchased were investment
grade, non-investment grade or non-rated convertible securities, and
other non-rated securities such as small issues of tax exempt bonds.
------------------------------------------------------------------------------------------------------------------------
Maturity Distribution
------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------
1996 1995
-------- --------
(% of total portfolio)
Due in one year or less................................................................ 10.3% 7.7%
Due after one year through five years.................................................. 40.9 43.1
Due after five years through ten years................................................. 45.8 47.5
Due after ten years through fifteen years.............................................. 2.0 .7
Due after fifteen years................................................................ 1.0 1.0
-------- --------
100.0% 100.0%
======== ========
Average life (years)................................................................... 4.6 4.7
======== ========
------------------------------------------------------------------------------------------------------------------------
(c) Marketing. Workers' compensation, general liability and commercial
automobile insurance underwritten for larger commercial enterprises and public
entities is marketed primarily through independent insurance agents and brokers
with the assistance of Old Republic's trained sales, underwriting, actuarial,
and loss control personnel. The remaining property and liability commercial
insurance written by Old Republic is obtained through insurance agents or
brokers who are independent contractors and generally represent other insurance
companies, by direct sales, and through controlled marketing and underwriting
joint ventures. No single source accounted for over 10% of Old Republic's
premium volume in 1996.
Mortgage guaranty insurance is marketed primarily through a direct sales
force which calls on savings and loan associations, other lending institutions,
and mortgage bankers. No sales commissions or other forms of remuneration are
paid to the lending institutions and others for the procurement or development
of business.
11
A substantial portion of the Company's title insurance business is referred
to it by title insurance agents, builders, lending institutions, real estate
developers, realtors, and lawyers. Title insurance is sold through 243 Company
offices located in 31 states and through agencies and underwritten title
companies in the District of Columbia and all states except Iowa and Oregon. The
issuing agents are authorized to issue binders and title insurance policies
based on their own search and examination, or on the basis of abstracts and
opinions of approved attorneys. Policies are also issued through independent
abstract companies (not themselves title insurers) pursuant to underwriting
agreements. These agreements generally provide that the underwritten company may
cause title policies of the Company to be issued, and the latter is responsible
under such policies for any payments to the insured. Typically, the agency or
underwritten title company deducts the major portion of the title insurance
charge to the consumer as its commission and for services. During 1996,
approximately 50% of title insurance premiums and fees were accounted for by
policies issued by agents and underwritten title companies.
Existing differences in various parts of the country with respect to the
acceptance and use of title insurance in real estate sales and loan transactions
have a material effect on title insurance growth and operations in the areas
concerned. In the Western states and certain urban areas of the East and
Midwest, title insurance is widely accepted, with the result that the potential
volume of title insurance premium income is large in relation to the volume of
real estate activity in those areas. In some other parts of the country, title
insurance is not as generally used, particularly in transactions involving
residential real estate. Consequently, in those areas, the growth of title
insurance depends not only upon market share of the title insurance business
within the industry, but also upon the increased use of title insurance in real
estate transactions. The volume of real estate activity is also affected by the
availability and cost of financing, population growth, family movements and
other factors. Also, the title insurance business is seasonal. During the winter
months, new building activity is reduced and, accordingly, the Company does less
title insurance business relative to new construction during such months than
during the rest of the year. The most important factor, insofar as Old
Republic's title business is concerned, however, is the rate of activity in the
resale market for residential properties.
The personal contacts, relationships, and reputations of Old Republic's key
executives are a vital element in obtaining and retaining much of its business.
Many of the Company's customers produce large amounts of premiums and therefore
warrant substantial levels of top executive attention and involvement. In this
respect, Old Republic's mode of operation is similar to that of professional
reinsurers and commercial insurance brokers, and relies on the marketing,
underwriting, and management skills of relatively few key people for large parts
of its business.
Several types of insurance coverages underwritten by Old Republic, such as
credit life and disability, loan credit guaranty, title, and mortgage guaranty
insurance, are affected in varying degrees by changes in national economic
conditions. During periods of economic recession or rising interest rates,
operating and/or claim costs pertaining to such coverages tend to rise
disproportionately to revenues and generally result in reduced levels of
profitability.
At least one insurance subsidiary of Old Republic is licensed to do business
in each of the 50 states, the District of Columbia, Puerto Rico, Virgin Islands,
Guam, and each of the Canadian provinces; mortgage insurance subsidiaries are
licensed in 50 states and the District of Columbia, while title insurance
operations, however, are licensed to do business in 48 states, the District of
Columbia and Puerto Rico. Consolidated direct premium volume distributed among
the various geographical regions shown was as follows for the past three years:
- ---------------------------------------------------------------------------------------------------------------------------
Geographical Distribution of Direct Premiums Written
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
-------- -------- --------
United States:
Northeast................................................................. 5.1% 5.0% 5.3%
Mid-Atlantic.............................................................. 8.1 8.9 10.0
Southeast................................................................. 16.3 16.6 16.2
Southwest................................................................. 14.0 13.1 14.3
East North Central........................................................ 17.2 17.7 16.2
West North Central........................................................ 16.1 16.3 15.2
Mountain.................................................................. 8.3 8.5 8.4
Western................................................................... 11.9 11.0 12.5
Foreign (Principally Canada)................................................. 2.9 2.9 1.9
-------- -------- --------
Total................................................................. 100.0% 100.0% 100.0%
======== ======== ========
12
(d) Reserves, Reinsurance, and Retrospective Adjustments. Old Republic's
insurance subsidiaries establish reserves for future policy benefits, unearned
premiums, reported claims, claims incurred but not reported, and claim
adjustment expenses, as required in the circumstances. Such reserves are based
on regulatory accounting requirements and generally accepted accounting
principles. In accordance with insurance industry practices, claim reserves are
based on estimates of the amounts that will be paid over a period of time and
changes in such estimates are reflected in the financial statements when they
occur. See "General Insurance Claim Reserves" herein.
To maintain premium production within its capacity and limit maximum losses
and risks for which it might become liable under its policies, Old Republic, as
is the practice in the insurance industry, may cede a portion or all of its
premiums and liabilities on certain classes of insurance, individual policies,
or blocks of business to other insurers and reinsurers. Although the ceding of
insurance does not generally discharge an insurer from its direct liability to a
policyholder, it is industry practice to establish the reinsured part of risks
as the liability of the reinsurer. Old Republic also employs retrospective
premium adjustments, contingent commissions, agency profit and risk-sharing
arrangements, and joint underwriting ventures for parts of its business in order
to minimize losses for which it might become liable under its insurance
policies, and to afford its clients or producers a degree of participation in
the risks and rewards associated with such business. Under retrospective
arrangements, Old Republic collects additional premiums if losses are greater
than originally anticipated and refunds a portion of original premiums if loss
costs are lower. Pursuant to contingent commissions, agency profit and other
risk-sharing arrangements, the Company adjusts commissions or premiums
retroactively to likewise reflect deviations from originally expected loss
costs. The amount of premium, commission, or other retroactive adjustments which
may be made is either limited or unlimited depending on the Company's evaluation
of risks and related contractual arrangements. To the extent that any
reinsurance companies, retrospectively rated risks, or producers might be unable
to meet their obligations under existing reinsurance or retrospective insurance
and commission agreements, Old Republic would be liable for the defaulted
amounts. In these regards, however, the Company generally protects itself by
withholding funds, by securing indemnity agreements, or by otherwise
collateralizing reinsurance obligations through irrevocable letters of credit,
cash, or securities.
Old Republic's reinsurance practices with respect to portions of its
business also result from its desire to bring its sponsoring organizations and
clients into some degree of joint venture relationship. The Corporation may, in
exchange for a ceding commission, reinsure up to 100% of the underwriting risk,
and the premium applicable to such risk, to insurers owned by or affiliated with
lending institutions, sponsors whose customers are insured by Old Republic, or
individual clients who have formed "captive" insurance companies. The ceding
commissions received compensate Old Republic for performing the direct insurer's
functions of underwriting, actuarial, claim settlement, loss control, legal,
reinsurance, and administrative services to comply with local and federal
regulations, and for providing appropriate risk management services.
Remaining portions of Old Republic's business are reinsured with
independent insurance or reinsurance companies under various quota share and
excess of loss agreements.
Reinsurance protection on property and liability operations generally
limits the net loss on any one risk to a maximum of (in whole dollars): fire and
other physical perils-$300,000; accident and health-$100,000; workers'
compensation-$1,000,000; other liability coverages-$500,000; and loan credit
guaranty-$200,000. Substantially all the mortgage guaranty insurance business is
retained, with the exposure on any one risk currently averaging less than
$24,000. Title insurance risk assumptions, based on the title insurance
subsidiaries' financial resources, are limited to a maximum of $25,000,000 as to
any one policy. The maximum amount of ordinary life insurance retained on any
one life by the Life Insurance Group is $250,000.
(e) Competition. The insurance business is highly competitive and Old Republic
competes with many stock and mutual insurance companies. Many of these
competitors offer more insurance coverages and have substantially greater
financial resources than the Corporation. The rates charged for many of the
insurance coverages in which the Corporation specializes, such as credit life
and disability insurance, workers' compensation insurance, other property and
liability insurance, and title insurance, are primarily regulated by the states
and are also subject to extensive competition among major insurance
organizations. The basic methods of competition available to Old Republic, aside
from rates, are service to customers, expertise in tailoring insurance programs
to the specific needs of its clients, efficiency and flexibility of operations,
personal involvement by its key executives, and, as to title insurance, accuracy
and timely delivery of evidences of title issued. For certain types of
coverages, including loan credit guaranty and mortgage guaranty insurance, the
Company also competes in varying degrees with the Federal Housing Administration
("FHA") and the Veterans Administration ("VA"). In these regards, the
Corporation's insurance subsidiaries compete with the FHA and VA by offering
different coverages and by establishing different requirements relative to such
factors as interest rates, closing costs, and loan processing charges. The
Corporation believes its experience and expertise have enabled it to develop a
variety of specialized insurance programs for its customers and to secure state
insurance departments' approval of these programs.
13
(f) Government Regulation. In common with all insurance companies, the
Corporation's insurance subsidiaries are subject to the regulation and
supervision of the jurisdictions in which they do business. The method of such
regulation varies, but, generally, regulation has been delegated to state
insurance commissioners who are granted broad administrative powers relating to:
the licensing of insurers and their agents; the nature of and limitations on
investments; approval of policy forms; reserve requirements; and trade
practices. In addition to these types of regulation, many classes of insurance,
including most of the Corporation's insurance coverages, are subject to rate
regulations which require that rates be reasonable, adequate, and not unfairly
discriminatory.
The Federal National Mortgage Association ("FNMA") and the Federal Home
Loan Mortgage Corporation ("FHLMC") have various qualifying requirements for
private mortgage guaranty insurers which write mortgage insurance on loans
acquired by the FNMA and FHLMC from mortgage lenders. These requirements include
a basic standard calling for the maintenance of a ratio of aggregate insured
risk to policyholders' surplus (defined as total statutory capital and surplus
plus statutory contingency reserves) of not more than 25 to 1. Other qualifying
requirements are designed to insure the financial stability of a private
mortgage insurance company by limiting the geographic concentration of insurance
risks, by limiting risks on nonresidential real estate insurance to 10% of
policyholders' surplus, by maintaining 85% of total admitted assets in
marketable securities and other highly liquid investments, and by maintaining a
minimum policyholders' surplus of $5 million.
Most of the Company's savings and loan association customers for mortgage
guaranty insurance are governed by the regulations of the Federal Home Loan Bank
Board. A regulation of that Board prohibits savings and loan associations from
insuring any loan with a mortgage insurance company if certain relationships
exist between such mortgage insurance company and the savings and loan
association. Generally, a savings and loan association may not obtain insurance
from any mortgage insurance company if (1) any commission, fee or other
compensation is paid to the savings and loan association or any of its officers,
directors, employees or affiliates, (2) a savings account is maintained by the
mortgage insurance company with such savings and loan association, (3) any
officer or employee of the mortgage insurance company or its parent company is a
director, officer or controlling person of the savings and loan association, or
(4) either (a) the association or any director, officer, controlling person or
affiliate holds equity securities of the mortgage insurance company or any
parent company thereof having a cost in excess of $50,000 or representing more
than one percent of any class of equity securities of the company, if its assets
are less than $50 million, or one-half percent, if the assets equal or exceed
$50 million, or (b) the association and all of its directors, officers,
controlling persons or affiliates in the aggregate own equity securities of the
mortgage insurance company having a cost in excess of $100,000, or two percent
of a company the assets of which are less than $50 million, or one percent, if
the assets equal or exceed $50 million.
There have been various proposals from time to time with respect to
additional regulation of credit life and disability insurance which could have
an adverse effect on the consumer credit insurance business. The financial
institutions whose customers are insured by Old Republic are also regulated by
federal and state authorities whose regulations have a direct effect on certain
forms of credit life and disability insurance.
The majority of states have also enacted insurance holding company laws
which require registration and periodic reporting by insurance companies
controlled by other corporations licensed to transact business within their
respective jurisdictions. Old Republic's insurance subsidiaries are subject to
such legislation and are registered as controlled insurers in those
jurisdictions in which such registration is required. Such legislation varies
from state to state but typically requires periodic disclosure concerning the
corporation which controls the registered insurers, or ultimate holding company,
and all subsidiaries of the ultimate holding company, and prior approval of
certain intercorporate transfers of assets (including payments of dividends in
excess of specified amounts by the insurance subsidiary) within the holding
company system. Each state has established minimum capital and surplus
requirements to conduct an insurance business. All of the Company's subsidiaries
meet or exceed these requirements, which vary from state to state.
(g) Employees. As of December 31, 1996, Old Republic employed approximately
5,650 persons on a full time basis. Eligible full time employees participate in
various pension plans which provide annuity benefits payable upon retirement.
Eligible employees are also covered by hospitalization and major medical
insurance, group life insurance, and various profit sharing and deferred
compensation plans. The Company considers its employee relations to be good.
14
Item 2-Properties
The principal executive offices of the Company are located in the Old
Republic Building in Chicago, Illinois. This Company owned building contains
151,000 square feet of floor space of which approximately 50% is occupied by Old
Republic, and the remainder is leased to others. In addition to the
Company-owned principal executive offices, a subsidiary of the Title Insurance
Group partially occupies its headquarters building. This building contains
110,000 square feet of floor space of which approximately 65% is occupied by the
Old Republic National Title Insurance Company. The remainder of the building is
leased to others. Eleven smaller buildings are owned by Old Republic and its
subsidiaries in various parts of the country and are primarily used for its
business. The carrying value of all buildings and related land at December 31,
1996 was approximately $13.1 million.
Certain other operations of the Company and its subsidiaries are directed
from leased premises. See Note 5(b) of the Notes to Consolidated Financial
Statements for a summary of all material lease obligations.
Item 3-Legal Proceedings
There are no material legal proceedings against the Company other than
those arising in the normal course of business and which generally pertain to
claim matters arising from insurance policies and contracts issued by the
Corporation's insurance subsidiaries.
Item 4-Submission of Matters to a Vote of Security Holders
None
Item 4(a)-Executive Officers of the Registrant
Name Age Position
- ---------------------- --- ---------------------------------------
Paul D. Adams 51 Senior Vice President, Chief Financial Officer
since 1990 and Treasurer since 1993.
Anthony F. Colao 69 Senior Vice President, and Director since 1987.
Spencer LeRoy, III 50 Senior Vice President, General Counsel, and
Secretary since 1992.
William F. Schumann 57 Senior Vice President since 1989. President
since 1974 of Old Republic Insured Credit
Services, Inc., a wholly-owned subsidiary.
William A. Simpson 55 Senior Vice President/Mortgage Guaranty, and
Director since 1980. President since 1972 of
Republic Mortgage Insurance Company, a wholly-
owned subsidiary.
A. C. Zucaro 57 Chief Executive Officer, President, Director
and Chairman of the Board since 1990, 1981,
1976 and 1993, respectively.
The term of office of each officer of the Company expires on the date of
the annual meeting of the board of directors, which is generally held in May of
each year. There is no family relationship between any of the executive officers
named above. Each of these named officers, except Mr. LeRoy, has been employed
in executive capacities with the Company and/or its subsidiaries for the past
five years.
15
PART II
Item 5-Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock is traded on the New York Stock Exchange under
the symbol "ORI". The high and low closing prices as reported on the New York
Stock Exchange, and cash dividends declared for each quarterly period during the
past two years were as follows:
Closing Price
------------------------ Cash
High Low Dividends
-------- -------- ---------
1st quarter 1995................. $ 16.75 $ 14.09 $ .080
2nd quarter 1995................. 17.59 16.17 .087
3rd quarter 1995................. 19.67 17.00 .087
4th quarter 1995................. $ 23.67 $ 18.09 $ .087
======== ======== =========
1st quarter 1996................. $ 24.25 $ 21.08 $ .087
2nd quarter 1996................. 23.00 20.33 .110
3rd quarter 1996................. 24.75 20.63 .110
4th quarter 1996................. $ 27.63 $ 24.63 $ .110
======== ======== =========
As of January 31, 1997, there were 3,827 registered holders of the Company's
Common Stock. See Notes 4(b) and 4(c) of the Notes to Consolidated Financial
Statements for a description of certain regulatory restrictions on the payment
of dividends by Old Republic's insurance subsidiaries and certain restrictions
under the terms of Old Republic's loan agreements. Closing prices have been
restated, as necessary, to reflect all stock dividends and splits declared
through December 31, 1996.
16
Item 6-Selected Financial Data
(All amounts, except common share data, are expressed in millions)
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- --------------
FINANCIAL POSITION:
Cash and Invested Assets (a)........... $ 4,521.8 $ 4,415.2 $ 3,906.4 $ 3,723.0 $ 3,332.5
Other Assets (b) ...................... 2,134.3 2,178.2 2,356.5 2,375.3 809.1
Total Assets.................... 6,656.2 6,593.5 6,262.9 6,098.3 4,141.6
Liabilities, Other than Debt (b)....... 4,581.5 4,587.9 4,543.4 4,480.5 2,698.0
Debt and Debt Equivalents.............. 154.0 320.5 314.7 282.7 277.8
Total Liabilities............... 4,735.6 4,908.4 4,858.1 4,763.3 2,975.8
Preferred Stock........................ 20.6 72.5 75.4 78.0 80.8
Common Shareholders' Equity............ 1,900.0 1,612.5 1,329.3 1,256.9 1,084.9
Total Capitalization (c)........ $ 2,074.6 $ 2,005.6 $ 1,719.5 $ 1,617.7 $ 1,443.6
============= ============= ============= ============= ==============
- ----------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Net Premiums and Fees Earned........... $ 1,507.7 $ 1,374.0 $ 1,423.2 $ 1,445.7 $ 1,291.9
Net Investment and Other Income 281.0 272.1 248.0 250.2 262.3
Realized Investment Gains.............. 15.1 49.7 7.7 40.2 62.8
Net Revenues.................... 1,803.9 1,695.9 1,679.0 1,736.3 1,617.0
Benefits, Claims, Settlement
Expenses and Dividends............... 752.0 747.9 761.2 811.3 752.1
Underwriting and Other Expenses........ 709.4 631.9 691.9 681.6 614.2
Income Taxes (d)................ 108.5 103.6 73.4 78.0 75.0
Income Before Items Below.............. 234.8 212.7 151.0 166.4 174.7
Accounting Changes (e)................. - - - 8.6 -
Extraordinary Item (i)................. (4.4) - - - -
------------- ------------- -------------- ------------- --------------
Net Income...................... $ 230.3 $ 212.7 $ 151.0 $ 175.1 $ 174.7
============= ============= ============== ============= ==============
- ----------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA (f):
Net Income:
Primary Earnings (g):
Income Before Items Below............ $ 2.46 $ 2.42 $ 1.70 $ 1.89 $ 2.06
Accounting Changes(e)................ - - - .10 -
Extraordinary Item(i)................ (.05) - - - -
------------- ------------- -------------- ------------- -------------
Net Income...................... $ 2.41 $ 2.42 $ 1.70 $ 1.99 $ 2.06
============= ============= ============== ============= =============
Fully Diluted Earnings (h):
Income Before Items Below............ $ 2.44 $ 2.28 $ 1.63 $ 1.80 $ 1.97
Accounting Changes(e)................ - - - .09 -
Extraordinary Item (i)............... (.05) - - - -
------------- ------------- -------------- ------------- -------------
Net Income...................... $ 2.39 $ 2.28 $ 1.63 $ 1.89 $ 1.97
============= ============= ============== ============= =============
Average Common and Equivalent
Shares Outstanding: Primary.......... 93,625,375 85,910,781 85,811,553 85,616,313 81,774,877
============= ============= ============== ============= ==============
Fully Diluted.... 94,822,531 93,102,807 92,486,235 92,279,148 87,478,359
============= ============= ============== ============= ==============
Dividends: Cash..................... $ .417 $ .340 $ .313 $ .287 $ .260
============= ============= ============== ============= ==============
Stock.................... 50% -% -% -% 100%
============= ============= ============== ============= ==============
Book Value............................. $ 21.85 $ 20.37 $ 17.19 $ 16.17 $ 14.27
============= ============= ============== ============= ==============
Common Shares Outstanding.............. 86,938,763 79,144,153 77,304,618 77,766,001 76,038,843
============= ============= ============== ============= ==============
- ----------------------------------------------------------------------------------------------------------------------------
See Notes on Following Page
17
Notes to Item 6-Selected Financial Data
- -------------------------------------------------------------------------------
(a) Consists of cash, investments and investment income due and accrued;
(b) The Company adopted certain reporting changes mandated by accounting
regulatory authorities which served to increase assets and liabilities by
equal amounts of approximately $1.3 billion at December 1996, $1.4 billion
at December 31, 1995, and $1.5 billion at December 31, 1994 and 1993. As
permitted, prior years' reports have not been changed retroactively for
these changes which became effective in 1993;
(c) Total capitalization consists of debt and debt equivalents, preferred
stock, and common shareholders' equity;
(d) Income taxes were decreased, and net income correspondingly increased by
$1.9 ($.02 per share) in 1992, as a result of amortized fresh start
deferred income tax credits all of which resulted from changes in tax
regulations effective January 1, 1987;
(e) Effective January 1, 1993, the Company adopted Financial Accounting
Statement (FAS) No. 109 "Accounting for Income Taxes" that required a
change to the asset and liability method of calculating deferred income
taxes. The cumulative effect of this change resulted in net income of
$13.3, or $.15 per share ($.14 fully diluted) in 1993. In addition,
effective January 1, 1993 the Company adopted FAS No. 106 "Employers'
Accounting for Post-retirement Benefits Other than Pensions" for health
care and life insurance benefit plans. A few Old Republic subsidiaries
made available post-retirement health benefits for employees that retired
prior to November 30, 1992. The Company recognized the accumulated post-
retirement benefit liability of $7.0 as of January 1, 1993; this resulted
in an after tax charge to net income of $4.6 or $.05 per share ($.05 fully
diluted). As permitted, prior year reports have not been changed
retroactively for these changes which became effective in 1993;
(f) Common share data has been retroactively adjusted for all stock dividends
and splits declared through December 31, 1996. Excludes 6,658,901 issued
and outstanding common shares, held by a consolidated affiliate, which are
eliminated in consolidation and in the calculation of outstanding shares
for financial accounting purposes only;
(g) Calculated after deduction of preferred stock dividend requirements of $4.7
in 1996, $4.9 in 1995, $5.1 in 1994, $5.2 in 1993 and $6.0 in 1992;
(h) Calculated after deduction of preferred stock dividend requirements and, as
applicable, after adjustment for post-tax convertible debentures interest
of $4.0 in 1996, $.6 in 1995, $.9 in 1994, $1.0 in 1993 and $2.6 in 1992.
(i) See note 3(c) of the Notes to Consolidated Financial Statements for an
explanation of the extraordinary item.
18
Item 7-Management Analysis of Financial Position and Results of Operations
($ in Millions, Except Share Data)
- -------------------------------------------------------------------------------
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.
CHANGES IN ACCOUNTING POLICIES
In November 1995, the Company reevaluated the classification of invested
assets, as permitted by a Special Report issued by the Financial Accounting
Standards Board (FASB) during that month. As a result, the Company reclassified
from the "held to maturity" to the "available for sale" categories certain fixed
maturity securities with an amortized cost of $1,365.7, fair value of $1,394.2
and an unrealized gain of $28.4. The unrealized gain, net of deferred income
taxes of $9.9, was credited directly to a separate account in the common
shareholders' equity section of the balance sheet in the final quarter of 1995.
In the fourth quarter of 1995, the Company's Mortgage Guaranty Group
adopted the accrual method for recording past-due premium revenues and the
related premium receivable arising from new monthly premium policies. This new
payment mode emerged as a significant factor for the mortgage guaranty industry
beginning in mid-1994. Before adoption of this accrual method, such past-due
premiums were recognized on receipt of cash. With the adoption of this accrual
method, a cumulative increase in net premiums written of $9.8, net premiums
earned of $6.3, and post-tax income of $3.9 or 4 cents per fully diluted share
was reflected in the Company's final quarter and the year of 1995.
FINANCIAL POSITION
Old Republic's financial position at December 31, 1996 reflected an
increase in assets of 1.0%, a decrease in liabilities of 3.5%, and an increase
in common shareholders' equity of 17.8%, when compared to the immediately
preceding year-end. As indicated below, the largest changes in the liabilities
and equity accounts were due to debt redemptions and conversions, respectively.
Cash and invested assets represented 67.9% and 67.0% of consolidated assets as
of December 31, 1996 and 1995, respectively. Relatively high short-term maturity
investment positions continued to be maintained as of most recent year-ends 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 1996 and 1995, the Corporation committed
substantially all investable funds in short to intermediate-term fixed maturity
securities, with an emphasis on tax-exempt bonds. 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 1996, Old
Republic's commitment to equity securities decreased by 8.0% vis-a-vis the
related invested balance at year-end 1995. As of December 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 for the latest three
years. The decline in cash flow from operations in 1996 was due mainly to lower
operating cash flow in Old Republic's general and life insurance segments. The
parent holding company has met its liquidity and capital needs for the past
three years 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.
19
Old Republic's capitalization of $2,074.6 at December 31, 1996 consisted of
debt and debt equivalents of $154.0, redeemable convertible preferred stock of
$19.3 (excluding $8.8 of such stock classified as a debt equivalent),
convertible preferred stock of $1.2, and common shareholders' equity of
$1,900.0. The increase in the common shareholders' equity account during the
past three years reflects primarily the retention of earnings in excess of
dividends declared on outstanding preferred and common shares, the issuance of
additional shares to effect the debt conversions noted below, and the conversion
of preferred stock to common stock; this was offset to some degree in 1996 by a
decline, compared to an increase in 1995, in the value of fixed maturity
securities carried at market value.
The Corporation acquired $.9 of common stock in 1995 in open market
transactions. At its May 16, 1996 meeting, the Company's Board of Directors
authorized the reacquisition of up to $150.0 of common and preferred shares as
market conditions warrant during the twenty-four month period from that date.
In February 1996, the Company called for redemption its 10% debentures
maturing in 2018 ($75.0 principal amount) and its 5.75% convertible subordinated
debentures maturing in 2002 ($110.0 principal amount); in April 1996, the
Company called for redemption its 11.5% debentures maturing in 2015 ($30.0
principal amount); redemption of the debentures was effected with internally
available funds, while the subordinated debentures were converted by their terms
into approximately 6.4 million Old Republic common shares. As a result of these
redemptions and conversions, the Company's debt declined by $215.0 while its
common shareholders' equity account rose by $108.6. The early retirement of the
debentures produced a net of tax charge of $4.4 (5 cents per share) that has
been reflected as an extraordinary item in 1996. In December 1996, the Company
redeemed all ($54.8) of its Series "H" cumulative preferred stock with available
funds.
RESULTS OF OPERATIONS
Revenues:
Net premiums and fees earned increased by 9.7% in 1996 and decreased by
3.5% and 1.6% in 1995 and 1994, respectively. In 1996, the increase in property
and liability earned premiums was 1.9% as premium growth continued at a slow
pace due to a soft pricing environment. In 1995 and 1994, lower property and
liability premium growth was also due to the soft premium rate environment for
most insurance coverages, and lower participation in involuntary market
(assigned risk) pools. For the past three years, mortgage guaranty premiums have
increased due to a rise in the amount of renewal and new business, and market
expansion. Title Group premiums and fee revenues increased 20.3% in 1996;
greater housing and mortgage finance activity were the main reasons for this
rise in revenues. Depressed conditions in the large California housing market
and much lower refinancing activity nationwide resulted in reduced title
insurance revenues in 1995 and 1994. Life and disability premium volume
increased moderately during the last three years as a result of greater term
life and accident insurance production.
Net investment income grew by 3.4%, 10.7% and 3.1% in 1996, 1995 and 1994,
respectively. For each of the past three years, this revenue source was affected
by positive consolidated operating cash flows and by a concentration of
investable assets in interest-bearing, fixed maturity securities. In 1996, the
Company, as previously mentioned, used internal funds to refund most of the
above noted $105.0 of debt and $54.8 of preferred stock, thus reducing its
invested asset base. The average annual yield on investments was 6.0%, 6.2% and
6.1% for the years ended December 31, 1996, 1995 and 1994, respectively. This
yield pattern reflects at once the relatively short maturity of Old Republic's
fixed maturity securities portfolio, changes in interest rates at various times
during the past three years, and, during 1995 and 1996, the commitment of a
larger percentage of investable funds to tax-exempt fixed maturity securities
that typically bear lower yields.
While the Company's investment policies have not been designed to maximize
realized investment gains, such gains were higher in 1995 than those realized in
1996 and 1994. Dispositions of securities have been caused principally by calls
prior to maturity by issuers of bonds and notes and by sales of equity
securities. In 1996, approximately 72.5% of total fixed maturity securities
dispositions represented contractual maturities and early calls of existing
holdings; for the year 1995 and 1994 these amounted to approximately 58.5% and
63.5%, respectively.
20
Expenses:
Consolidated benefit, claim, and related settlement costs, as a percentage
of net premiums and fees earned, were approximately 49.9% in 1996, 54.4% in 1995
and 53.5% in 1994. This consolidated ratio was affected principally by an
improving claim ratio for liability insurance coverages due mostly to reduced
losses from involuntary workers compensation pool assessments, as well as
reduced claim frequencies and severity generally. Policyholders' dividends
incurred mainly for the Corporation's workers compensation insurance coverages
for each year reflect changes in the loss ratio for individual experience-rated
policies. The loss ratio rose in each of the past three years in the mortgage
guaranty insurance line due to a rise in frequency of claim occurrences, mostly
in the California market which has been affected by an economic slowdown for the
past several years. The title insurance loss ratio in each of the past three
years was affected by favorable trends in claims frequency and severity for
business underwritten since 1992.
The ratio of consolidated underwriting, acquisition, and insurance expenses
to net premiums and fees earned was approximately 46.0% in 1996, 44.0% in 1995
and 47.0% in 1994. Variations in these ratios reflect a continually changing mix
of coverages sold and attendant costs of producing business. During the past
three years the property and liability expense ratio has remained relatively
flat and that of the mortgage guaranty segment has been trending down. The title
insurance expense ratio was lower in 1996 due in part to an increase in premium
and fees volume, while it was higher in 1994 and 1995 as premiums and fees
volume in this segment declined at a faster rate than operating costs could be
reduced.
In 1996, interest and other charges declined principally as a result of the
above noted reduction in outstanding debt.
Pre-Tax and Net Income:
Income before taxes increased by 8.3% and 39.9% in 1996 and 1995,
respectively, and decreased by 7.2% in 1994. General insurance results have
trended up during the past five years and have continued as the largest
contributor to consolidated earnings, principally as a result of greater
investment income and improved underwriting results. The mortgage guaranty
segment reflected significantly improved earnings in each of the last three
years due to increased revenues. Title insurance earnings were much reduced in
1995 and 1994 due to the previously noted decline in revenues, while the
increase in 1996 resulted from growth in premiums and fees and a reduction in
loss and expense ratios. Life and disability operations have posted relatively
flat earnings in the past three years. Consolidated pre-tax income for 1995 was
also affected positively by greater than normal realization of investment gains.
The effective consolidated income tax rates were 31.6% in 1996, 32.7% in
1995 and 32.5% in 1994. The rates for each year reflect primarily the varying
proportions of pre-tax operating income derived from tax-exempt investment
income, on the one hand, and the combination of fully taxable investment income,
realized investment gains, and underwriting and service income, on the other
hand.
See last paragraph under "Financial Position" above for extraordinary
charge recorded in 1996.
OTHER INFORMATION
Reference is here made to "Financial Information Relating to Segments of
Business" appearing elsewhere herein.
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.
21
Item 8-Financial Statements
Listed below are the financial statements included herein:
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
Page No.
--------
Consolidated Balance Sheets......................................... 23-24
Consolidated Statements of Income................................... 25
Consolidated Statements of Preferred Stock and
Common Shareholders' Equity...................................... 26
Consolidated Statements of Cash Flows............................... 27
Notes to Consolidated Financial Statements.......................... 28-49
Report of Independent Accountants................................... 50
22
Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets ($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------
1996 1995
------------ ------------
Assets
Investments:
Held to maturity:
Fixed maturity securities (at amortized cost) (fair value: $2,045.6
and $1,759.0)........................................................................... $ 2,022.9 $ 1,714.1
Other long-term investments (at cost)..................................................... 25.1 26.9
------------ ------------
2,048.1 1,741.1
------------ ------------
Available for sale:
Fixed maturity securities (at fair value) (cost: $1,957.7 and $2,068.9).................. 1,984.2 2,146.0
Equity securities (at fair value) (cost: $74.6 and $95.7)................................. 116.1 126.1
Short-term investments (at fair value which approximates cost)............................ 265.7 312.7
------------ ------------
2,366.0 2,584.9
------------ ------------
4,414.2 4,326.0
------------ ------------
Other Assets:
Cash...................................................................................... 35.3 19.4
Securities and indebtedness of related parties............................................ 43.5 40.0
Accrued investment income................................................................. 72.2 69.7
Accounts and notes receivable............................................................. 255.2 273.6
Reinsurance balances and funds held....................................................... 112.8 125.1
Reinsurance recoverable: Paid losses................................................. 26.5 24.7
Policy and claim reserves................................... 1,396.2 1,416.1
Deferred policy acquisition costs......................................................... 114.6 107.8
Sundry assets............................................................................. 185.3 190.6
------------ ------------
2,241.9 2,267.4
------------ ------------
Total Assets............................................................................ $ 6,656.2 $ 6,593.5
============ ============
See accompanying Notes to Consolidated Financial Statements.
- ------------------------------------------------------------------------------
23
Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets ($ in Millions) (Continued)
- -------------------------------------------------------------------------------
December 31,
------------------------------
1996 1995
------------ ------------
Liabilities, Preferred Stock, and Common Shareholders' Equity
Liabilities:
Future policy benefits.................................................................... $ 183.6 $ 186.0
Losses, claims and settlement expenses.................................................... 3,541.8 3,519.8
Unearned premiums......................................................................... 386.8 406.7
Other policyholders' benefits and funds................................................... 65.3 75.4
------------ ------------
Total policy liabilities and accruals................................................... 4,177.5 4,188.0
Commissions, expenses, fees and taxes..................................................... 112.6 110.3
Reinsurance balances and funds............................................................ 173.7 169.3
Federal income tax payable: Current................................................. 1.9 11.5
Deferred................................................ 39.1 10.1
Debt and debt equivalents................................................................. 154.0 320.5
Sundry liabilities........................................................................ 76.5 98.4
Commitments and contingent liabilities.................................................... - -
------------ ------------
Total Liabilities...................................................................... 4,735.6 4,908.4
------------ ------------
Preferred Stock:
Redeemable convertible preferred stock (*)................................................ 19.3 17.0
Convertible preferred stock (*)........................................................... 1.2 .6
Cumulative preferred stock (*)............................................................ - 54.8
------------ ------------
Total Preferred Stock.................................................................. 20.6 72.5
------------ ------------
Common Shareholders' Equity:
Common stock(*)........................................................................... 96.0 58.8
Additional paid-in capital................................................................ 575.6 463.4
Net unrealized appreciation (depreciation) of securities.................................. 43.4 70.3
Retained earnings......................................................................... 1,223.3 1,058.3
Treasury stock (at cost).................................................................. (38.4) (38.4)
------------ ------------
Total Common Shareholders' Equity...................................................... 1,900.0 1,612.5
------------ ------------
Total Liabilities, Preferred Stock and Common Shareholders' Equity..................... $ 6,656.2 $ 6,593.5
============ ============
- ------------
(*) At December 31, 1996 and 1995, there were 75,000,000 shares of $0.01 par
value preferred stock authorized, of which 33,727,438 in 1996 and
36,633,018 in 1995 were redeemable and/or convertible and cumulative
preferred shares issued and outstanding. As of the same dates, there were
250,000,000 shares of common stock, $1.00 par value, authorized, of which
96,011,609 in 1996 and 88,216,992 in 1995 were issued and outstanding.
At December 31, 1996 and 1995 there were 50,000,000 shares of Class B
Common Stock, $1.00 par value, authorized, of which no shares were issued.
Common shares classified as treasury stock were 9,072,846 and 9,072,839 as
of December 31, 1996 and 1995, respectively.
See accompanying Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------
24
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Income ($ in Millions, Except Share Data)
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
Revenues:
Net premiums earned.................................................... $ 1,360.4 $ 1,251.7 $ 1,282.9
Title, escrow, and other fees.......................................... 147.2 122.2 140.3
Net investment income.................................................. 260.5 251.9 227.5
Realized investment gains.............................................. 15.1 49.7 7.7
Other income........................................................... 20.4 20.2 20.4
-------------- -------------- --------------
1,803.9 1,695.9 1,679.0
-------------- -------------- --------------
Benefits, Losses and Expenses:
Benefits, claims, and settlement expenses.............................. 752.1 740.3 753.5
Dividends to policyholders............................................. - 7.5 7.6
Underwriting, acquisition, and insurance expenses...................... 693.3 605.0 668.5
Interest and other charges............................................. 16.0 26.9 23.3
-------------- -------------- --------------
1,461.5 1,379.9 1,453.1
-------------- -------------- --------------
Income before income taxes and items below............................. 342.4 316.0 225.8
-------------- -------------- --------------
Income Taxes: Currently payable.................................... 65.7 63.8 41.8
Deferred............................................. 42.8 39.7 31.5
-------------- -------------- --------------
Total................................................ 108.5 103.6 73.4
-------------- -------------- --------------
Income before items below.............................................. 233.8 212.4 152.4
Equity in earnings of unconsolidated subsidiaries
and minority interests............................................... .9 .2 (1.4)
-------------- -------------- --------------
Income before extraordinary item....................................... 234.8 212.7 151.0
Extraordinary item, net of income tax credits of $2.4.................. (4.4) - -
-------------- -------------- --------------
Net Income............................................................. $ 230.3 $ 212.7 $ 151.0
============== ============== ==============
Net Income Per Share:
Primary:
Before extraordinary item........................................... $ 2.46 $ 2.42 $ 1.70
Extraordinary item.................................................. (.05) - -
-------------- -------------- --------------
Net income.......................................................... $ 2.41 $ 2.42 $ 1.70
============== ============== ==============
Fully Diluted:
Before extraordinary item........................................... $ 2.44 $ 2.28 $ 1.63
Extraordinary item.................................................. (.05) - -
-------------- -------------- --------------
Net income.......................................................... $ 2.39 $ 2.28 $ 1.63
============== ============== ==============
Average number of common and common
equivalent shares outstanding: Primary.......................... 93,625,375 85,910,781 85,811,553
============== ============== ==============
Fully Diluted.................... 94,822,531 93,102,807 92,486,235
============== ============== ==============
Dividends Per Common Share:
Cash................................................................. $ .417 $ .340 $ .313
============== ============== ==============
Stock................................................................ 50% -% -%
============== ============== ==============
See accompanying Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------
25
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Preferred Stock
and Common Shareholders' Equity ($ in Millions)
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
Redeemable Convertible Preferred Stock:
Balance, beginning of year........................................... $ 17.0 $ 16.8 $ 16.6
Amortization to redemption value capitalized....................... (.1) (1.1) (1.1)
Converted into common stock........................................ (.4) (.6) -
Reclassification from debt equivalent.............................. 2.8 2.1 1.3
-------------- -------------- --------------
Balance, end of year................................................. $ 19.3 $ 17.0 $ 16.8
============== ============== ==============
Convertible Preferred Stock:
Balance, beginning of year........................................... $ .6 $ 3.8 $ 3.9
Exercise of stock options.......................................... .5 .1 .2
Converted into common stock........................................ - (3.2) (.3)
-------------- -------------- -------------
Balance, end of year................................................. $ 1.2 $ .6 $ 3.8
============== ============== ==============
Cumulative Preferred Stock:
Balance, beginning of year........................................... $ 54.8 $ 54.8 $ 57.5
Stock acquired during the year..................................... - - (2.6)
Redemption of cumulative preferred stock........................... (54.8) - -
-------------- -------------- --------------
Balance, end of year................................................. $ - $ 54.8 $ 54.8
============== ============== ==============
Common Stock:
Balance, beginning of year........................................... $ 58.8 $ 57.6 $ 57.5
Stock dividend..................................................... 31.8 - -
Dividend reinvestment plan......................................... - - -
Exercise of stock options.......................................... .3 .1 -
Acquisition of subsidiary.......................................... .4 .5 -
Conversion of convertible debentures............................... 4.2 - -
Conversion of convertible preferred stock.......................... .1 .4 -
-------------- -------------- --------------
Balance, end of year................................................. $ 96.0 $ 58.8 $ 57.6
============== ============== ==============
Additional Paid-in Capital:
Balance, beginning of year........................................... $ 463.4 $ 456.9 $ 455.2
Dividend reinvestment plan......................................... .5 .4 .4
Exercise of stock options.......................................... 6.8 2.4 .8
Acquisition of subsidiary.......................................... - .1 -
Conversion of convertible debentures............................... 104.4 - -
Conversion of convertible preferred stock.......................... .2 3.5 .3
-------------- -------------- --------------
Balance, end of year................................................. $ 575.6 $ 463.4 $ 456.9
============== ============== ==============
Net Unrealized Appreciation (Depreciation) of Securities:
Balance, beginning of year........................................... $ 70.3 $ (10.4) $ 25.2
Change for the year, net of deferred tax if any.................... (26.9) 80.7 (35.7)
-------------- -------------- --------------
Balance, end of year................................................. $ 43.4 $ 70.3 $ (10.4)
============== ============== ==============
Retained Earnings:
Balance, beginning of year........................................... $ 1,058.3 $ 865.0 $ 750.2
Net income......................................................... 230.3 212.7 151.0
Dividends on common: Cash.......................................... (35.9) (26.7) (24.5)
: Stock......................................... (31.8) - -
Dividends on preferred stock....................................... (7.5) (6.7) (7.0)
Acquisition of subsidiary.......................................... 8.5 10.6 -
Currency translation adjustments................................... 1.5 3.3 (4.6)
--------------- -------------- --------------
Balance, end of year................................................. $ 1,223.3 $ 1,058.3 $ 865.0
=============== ============== ==============
Treasury Stock:
Balance, beginning of year........................................... $ (38.4) $ (39.8) $ (31.3)
Acquired during the year........................................... - (.9) (8.5)
Acquisition of subsidiary.......................................... - 2.3 -
-------------- -------------- -------------
Balance, end of year................................................. $ (38.4) $ (38.4) $ (39.8)
============== ============== =============
See accompanying Notes to Consolidated Financial Statements.
- ------------------------------------------------------------------------------
26
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows ($ in Millions)
- ------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
Cash flows from operating activities:
Net income........................................................... $ 230.3 $ 212.7 $ 151.0
Change in non-cash items:
Deferred policy acquisition costs.................................. (6.7) (6.8) (5.7)
Premiums and other receivables..................................... 18.6 (29.8) (7.8)
Unpaid claims and related items.................................... 37.4 104.2 107.5
Future policy benefits and policyholders' funds.................... (19.8) 15.3 (18.6)
Income taxes....................................................... 32.1 56.3 9.2
Reinsurance balances and funds..................................... 15.6 24.8 11.1
Accounts payable, accrued expenses and other....................... 3.9 18.9 13.7
-------------- -------------- --------------
Total................................................................ 311.6 395.6 260.4
-------------- -------------- --------------
Cash flows from investing activities:
Sales of fixed maturity securities:
Held to maturity:
Maturities and early calls....................................... 91.9 123.8 159.3
Other............................................................ - - 23.4
Available for sale:
Maturities and early calls....................................... 200.6 72.5 31.9
Other............................................................ 111.1 139.0 86.3
Sales of equity securities........................................... 45.9 201.9 30.2
Sales of other investments........................................... 4.4 4.1 4.7
Sales of fixed assets for company use................................ 3.4 6.8 3.7
Purchases of fixed maturity securities:
Held to maturity................................................... (400.1) (236.9) (411.2)
Available for sale................................................. (206.1) (515.8) (152.3)
Purchases of equity securities....................................... (24.4) (42.6) (100.8)
Purchases of other investments....................................... (2.7) (3.8) (12.2)
Purchases of fixed assets for company use............................ (12.4) (7.1) (11.4)
Other-net............................................................ (7.7) 3.6 1.2
-------------- -------------- --------------
Total................................................................ (196.0) (254.3) (347.0)
-------------- -------------- --------------
Cash flows from financing activities:
Increase in term loans............................................... 88.0 12.7 34.0
Issuance of preferred and common stock............................... 17.4 14.5 1.6
Issuance of treasury stock........................................... - 2.3 -
Repayments of term loans............................................. (47.9) (4.9) (.5)
Redemption of debentures and notes................................... (105.0) - -
Dividends on common shares........................................... (35.9) (26.7) (24.5)
Dividends on preferred shares........................................ (7.6) (7.9) (8.2)
Purchases of treasury stock ......................................... - (.9) (8.5)
Purchases of cumulative preferred stock.............................. - - (2.6)
Redemption of cumulative preferred stock............................. (54.8) - -
Other-net............................................................ (.6) (1.4) .4
-------------- --------------- -------------
Total................................................................ (146.6) (12.3) (8.4)
-------------- -------------- -------------
Increase (decrease) in cash and short-term
investments........................................................... (31.1) 128.8 (95.0)
Cash and short-term investments, beginning of year................... 332.1 203.3 298.3
-------------- -------------- -------------
Cash and short-term investments, end of year......................... $ 301.0 $ 332.1 $ 203.3
============== =============== =============
See accompanying Notes to Consolidated Financial Statements.
- ------------------------------------------------------------------------------
27
Old Republic International Corporation and Subsidiaries
Notes to Consolidated Financial Statements
($ in Millions, Except as Otherwise Indicated)
- -------------------------------------------------------------------------------
Old Republic International Corporation is a Chicago-based insurance holding
company with subsidiaries engaged in the general (property & liability),
mortgage guaranty, title, and life (life & disability) insurance businesses. In
this report, "Old Republic", "the Corporation", or "the Company" refers to Old
Republic International Corporation and its subsidiaries as the context
requires. The aforementioned insurance segments are organized as the Old
Republic General, Mortgage Guaranty, Title, and Life Groups, and references
herein to such groups apply to the Company's subsidiaries engaged in the
respective segments of business. See Note 7 for a discussion of the Company's
business segments.
Note 1-Summary of Significant Accounting Policies- The significant accounting
policies employed by Old Republic International Corporation and its subsidiaries
are set forth in the following summary.
(a) Consolidation Practices-The consolidated financial statements include the
accounts of the Corporation and those of its major insurance underwriting and
service subsidiaries. Non-consolidated insurance marketing and service
subsidiaries are insignificant and are reflected on the equity basis of
accounting. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Accounting Principles-The Corporation's insurance underwriting subsidiaries
maintain their records in conformity with accounting practices prescribed or
permitted by state insurance regulatory authorities. In consolidating such
subsidiaries, adjustments have been made to conform their accounts with
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(c) Investments-The Company may classify its invested assets in terms of those
assets relative to which it either (1) has the positive intent and ability to
hold until maturity (generally carried at amortized costs for fixed maturity
securities), (2) has available for sale (carried at fair value with adjustments
to equity, net of deferred income taxes) or (3) has the intention of trading
(carried at fair value with adjustments to income); as of December 31, 1996, the
Company's invested assets were classified solely as "held to maturity" or
"available for sale."
In November 1995, the Company reevaluated the classification of invested
assets, as permitted by a Special Report issued by the Financial Accounting
Standards Board (FASB) during that month. As a result, the Company reclassified
from "held to maturity" to "available for sale", certain fixed maturity
securities with an amortized cost of $1,365.7, fair value of $1,394.2 and an
unrealized gain of $28.4. The unrealized gain, net of deferred income taxes of
$9.9, was credited directly to a separate account in the common shareholders'
equity section of the balance sheet in the final quarter of 1995.
Fixed maturity securities and redeemable preferred stocks classified as
"held to maturity" are generally carried at amortized costs while fixed maturity
securities classified as "available for sale" in addition to other preferred and
common stocks (equity securities) are included at fair value. Fair values for
fixed maturity securities are based on quoted market prices or estimated using
values obtained from independent pricing services as applicable. Mortgage and
policy loans (other long-term investments) are carried on the basis of the lower
of unpaid principal balances or estimated realizable value. The aggregate fair
value of fixed maturity securities - "held to maturity" at December 31, 1996 was
above their carrying values.
28
The amortized cost and estimated fair values of fixed maturity securities
are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
Fixed Maturity Securities:
December 31, 1996:
Held to maturity:
Utilities....................................... $ 984.3 $ 13.6 $ 7.9 $ 990.1
Tax-exempt...................................... 1,038.3 19.1 2.1 1,055.2
Redeemable preferred stocks..................... .2 - - .3
----------- ----------- ---------- -----------
$ 2,022.9 $ 32.8 $ 10.1 $ 2,045.6
=========== ========== ========== ===========
Available for sale:
U.S. & Canadian Governments..................... $ 743.1 $ 17.4 $ 2.5 $ 758.0
Corporate....................................... 1,214.6 18.8 $ 7.2 $ 1,226.1
----------- ---------- ---------- -----------
$ 1,957.7 $ 36.3 $ 9.8 $ 1,984.2
=========== ========== ========== ===========
Fixed Maturity Securities:
December 31, 1995:
Held to maturity:
Utilities....................................... $ 995.4 $ 30.7 $ 2.5 $ 1,023.7
Tax-exempt...................................... 717.8 18.1 1.6 734.4
Redeemable preferred stocks..................... .7 - - .7
----------- ----------- ---------- -----------
$ 1,714.1 $ 48.9 $ 4.1 $ 1,759.0
=========== ========== ========== ===========
Available for sale:
U.S. & Canadian Governments..................... $ 776.7 $ 36.0 $ .4 $ 812.4
Corporate....................................... 1,292.1 44.7 $ 3.3 $ 1,333.6
----------- ---------- ---------- -----------
$ 2,068.9 $ 80.8 $ 3.7 $ 2,146.0
=========== ========== ========== ===========
29
The amortized cost and estimated fair value at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
----------- -----------
Fixed Maturity Securities:
Held to Maturity:
Due in one year or less.......................................................... $ 158.2 $ 159.0
Due after one year through five years............................................ 777.2 782.5
Due after five years through ten years........................................... 1,015.7 1,031.3
Due after ten years.............................................................. 71.7 72.6
----------- -----------
$ 2,022.9 $ 2,045.6
=========== ===========
Available for Sale:
Due in one year or less.......................................................... $ 252.1 $ 254.3
Due after one year through five years............................................ 851.2 861.0
Due after five years through ten years........................................... 806.9 817.6
Due after ten years.............................................................. 47.3 51.1
----------- -----------
$ 1,957.7 $ 1,984.2
=========== ===========
A summary of the Company's equity securities follows:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Equity Securities:
December 31, 1996:
Common stocks................................... $ 69.8 $ 42.7 $ 1.5 $ 111.1
Non redeemable preferred stocks................. 4.7 .2 - 5.0
----------- ---------- ---------- ----------
$ 74.6 $ 43.0 $ 1.5 $ 116.1
=========== ========== ========== ==========
December 31, 1995:
Common stocks................................... $ 91.3 $ 33.6 $ 3.2 $ 121.7
Non redeemable preferred stocks................. 4.4 - - 4.4
----------- ---------- ---------- ----------
$ 95.7 $ 33.6 $ 3.2 $ 126.1
=========== ========== ========== ==========
Investment income is reported net of allocated expenses and includes
appropriate adjustments for amortization of premium and accretion of discount on
fixed maturity securities acquired at other than par value. Dividends on equity
securities are credited to income on the ex-dividend date. Realized investment
gains and losses are reflected as revenues in the income statement and are
determined on the basis of amortized value at date of sale for fixed maturity
securities, and cost in regard to equity securities; such bases apply to the
specific securities sold. Unrealized investment gains and losses, net of any
deferred income taxes, are recorded directly in a separate account of
shareholders' equity.
At December 31, 1996, the Corporation and its subsidiaries had no non-income
producing investments.
30
The following table reflects the composition of net investment income and net
realized and unrealized investment gains or losses for each of the years shown:
Years Ended December 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
Investment income from:
Fixed maturity securities........................................ $ 240.6 $ 230.4 $ 208.2
Equity securities................................................ 2.6 6.3 7.5
Short-term investments........................................... 16.0 13.6 9.7
Other sources.................................................... 8.4 8.4 7.9
---------- ---------- -----------
Gross investment income....................................... 267.7 258.7 233.6
Investment expenses (1).......................................... 7.2 6.8 6.0
---------- ---------- -----------
Net investment income......................................... $ 260.5 $ 251.9 $ 227.5
========== ========== ===========
Realized gains (losses) on:
Fixed maturity securities:
Held to maturity.............................................. $ .3 $ .1 $ 1.1
---------- ---------- -----------
Available for sale:
Gains......................................................... 2.6 4.9 2.0
Losses........................................................ (.1) (1.7) (.3)
---------- ---------- -----------
Net......................................................... 2.5 3.2 1.7
---------- ---------- -----------
Total....................................................... 2.9 3.3 2.8
---------- ---------- -----------
Equity securities............................................. 12.9 47.2 5.3
Other assets.................................................. (.7) (.8) (.5)
---------- ---------- -----------
Total....................................................... 15.1 49.7 7.7
Income taxes..................................................... 5.3 17.5 2.7
---------- ---------- -----------
Net realized gains............................................ $ 9.8 $ 32.2 $ 5.0
========== ========== ===========
Unrealized investment gains (losses) on:
Fixed maturity securities:
Held to maturity (2).......................................... $ (22.1) $ 189.0 $ (234.0)
========== ========== ===========
Available for sale............................................ $ (50.3) $ 101.9 $ (50.8)
Less: Deferred income taxes (credits)........................ (17.1) 35.3 (17.4)
---------- ---------- -----------
Net unrealized gains (losses)............................... $ (33.2) $ 66.5 $ (33.3)
========== ========== ===========
Equity securities-available for sale............................. $ 10.1 $ 21.6 $ (3.2)
Less: Deferred income taxes (credits)............................ 3.8 7.4 ( .8)
---------- ---------- -----------
Net unrealized gains (losses)................................. $ 6.2 $ 14.2 $ (2.3)
========== ========== ===========
-----------
(1) Investment expenses consist of personnel costs and investment custody
service fees.
(2) Deferred income taxes do not apply since these securities are carried
at amortized cost.
(d) Revenue Recognition-Pursuant to generally accepted accounting principles
applicable to the insurance industry, benefits, claims, and expenses are
associated with the related revenues by means of the provision for policy
benefits, the deferral and subsequent amortization of acquisition costs, and the
recognition of incurred benefits, claims and operating expenses.
General insurance (property and liability) and level-term credit life
insurance premiums are reflected in income on a pro-rata basis. Earned but
unbilled premiums are generally taken into income on the billing date, and
adjustments for retrospective premiums, commissions and similar charges are
accrued on the basis of periodic evaluations of current underwriting experience
and contractual obligations. Title insurance premiums are recognized as income
upon the substantial completion of the policy issuance process. Title abstract,
escrow, service, and other fees are taken into income at the time of closing of
the related escrow. First year and renewal mortgage guaranty premiums are
recognized as income on a straight-line basis except that a portion of first
year premiums received for certain high risk policies is deferred and reported
as earned over the estimated policy life, including renewal periods. Single
premiums for mortgage guaranty policies covering more
31
than one year are earned on an accelerated basis over the policy term. Ordinary
life and annuity premiums are recognized as revenue when due. Decreasing term
credit life and credit disability/accident & health insurance premiums are
generally earned on a sum-of-the-years-digits or similar method.
(e) Deferred Policy Acquisition Costs-The Corporation's insurance subsidiaries,
other than title companies, defer certain costs which vary with and are
primarily related to the production of business. Deferred costs consist
principally of commissions, premium taxes, marketing, and policy issuance
expenses. With respect to most coverages, deferred acquisition costs are
amortized on the same basis as the related premiums are earned or,
alternatively, over the periods during which premiums will be paid or
underwriting and claim services performed. The following table summarizes
deferred policy acquisition costs and related data for the years shown:
Years Ended December 31,
---------------------------------------
1996 1995 1994
---------- ---------- ----------
Deferred, beginning of year........................................ $ 107.8 $ 101.3 $ 95.5
---------- ---------- ----------
Acquisition costs deferred:
Commissions - net of reinsurance................................. 116.6 96.8 110.5
Premium taxes.................................................... 30.6 33.8 33.8
Salaries and other marketing expenses............................ 65.8 52.4 52.2
---------- ---------- ----------
Sub-total..................................................... 213.1 183.1 196.8
Amortization charged to income..................................... (206.4) (176.6) (191.0)
---------- ---------- ----------
Change for the year........................................... 6.7 6.5 5.6
---------- ---------- ----------
Deferred, end of year.............................................. $ 114.6 $ 107.8 $ 101.3
========== ========== ==========
(f) Future Policy Benefits/Unearned Premiums-General insurance and level term
credit life insurance policy liabilities represent unearned premium reserves
developed by application of monthly pro-rata factors to premiums in force.
Disability/accident & health and decreasing term credit life insurance policy
liabilities are calculated primarily on a sum-of-the-years-digits method.
Mortgage guaranty unearned premium reserves are calculated primarily on a
pro-rata basis. Ordinary life policy liabilities are determined on a level
premium method and take into account mortality and withdrawal rates based
principally on anticipated company experience; assumed interest rates range from
3.0% to 6.0%. With respect to annuity policies, the liabilities represent the
surrender value of such policies during deferral periods, without adjustment for
surrender charges; such values are deemed appropriate to provide for ultimate
benefit reserves in the event policyholders exercise an annuity benefit option
at a later date.
At December 31, 1996 and 1995, the Life Insurance Group had $3,969.6 and
$4,237.0, respectively, of net life insurance in force. Future policy benefits
and unearned premiums, consisted of the following:
December 31,
---------------------------------
1996 1995
----------- -----------
Future Policy Benefits:
Life Insurance Group:
Life insurance............................... $ 64.4 $ 62.1
Annuities.................................... 76.9 83.1
Disability/accident & health................. 42.1 40.7
----------- -----------
Total..................................... 183.6 $ 186.0
=========== ===========
Unearned Premium:
General Insurance Group.......................$ 327.9 $ 333.0
Mortgage Guaranty Group....................... 58.8 73.6
----------- -----------
Total......................................$ 386.8 $ 406.7
============ ===========
32
The Company has previously issued directly or assumed as a reinsurer certain
insurance policies generally categorized as financial guarantees. The major
types of guarantees pertain to (a) state, municipal and other general or special
revenue bonds, (b) variable interest rate guarantees, and (c) insurance of the
future residual value of fixed assets. The types of risks involved include
failure by the bond issuer to make timely payment of principal and interest,
changes in interest rates, and changes in the future value of fixed assets. The
degree of risk pertaining to these insurance products is largely dependent on
the effects of general economic cycles and changes in the credit worthiness of
issuers whose obligations have been guaranteed. During the past three years, new
commitments have been limited to reinsuring the risks identified at (a)
immediately above.
Premiums received for financial guarantee policies are generally earned over
the terms of the contract (which may range between 5 and 30 years) or on the
basis of current exposure relative to maximum exposure in force; with respect to
residual value insurance, that portion of the premium in excess of certain
initial underwriting costs is deferred and taken into income when all events
leading to the determination of exposure, if any, have occurred. Since losses on
financial guarantee insurance products cannot be predicted reliably, the
Company's unearned premium reserves serve as the primary income recognition and
loss reserving mechanism. When losses become known and determinable, they are
paid or placed in reserve and the remaining directly-related unearned premiums
are taken into income.
No assurance can be given that unearned premiums will be greater or less
than ultimate incurred losses on these policies.
The following table reflects certain data pertaining to net insurance in
force for the Company's financial guarantee business at the dates shown:
Years Ended December 31,
----------------------------------
1996 1995
----------- -----------
Net Insurance in Force:
Bonds................................ $ 2,323.2 $ 2,352.2
Other................................ 1.4 1.6
Net Unearned Premiums:
Bonds................................ 13.9 14.5
Other................................ $ .6 $ .8
=========== ===========
With respect to mortgage guaranty insurance (net insurance in force of
$45,651.6 and $38,862.7, at December 31, 1996 and 1995, respectively) the
Company's reserving policies are set forth below in Note 1(g).
(g) Losses, Claims and Settlement Expenses-Reserves are estimates that provide
for the ultimate expected cost of settling unpaid losses and claims reported at
each balance sheet date. Losses and claims incurred but not reported, as well as
expenses required to settle losses and claims are established on the basis of
various criteria, including historical cost experience and anticipated costs of
servicing reinsured and other risks. Long-term disability-type workers'
compensation reserves, however, are discounted to present value based on
interest rates ranging from 3.5% to 4%.
The establishment of claim reserves is a reasonably complex and dynamic
process influenced by a large variety of factors. These include past experience
applicable to the anticipated costs of various types of claims, continually
evolving and changing legal theories emanating from the judicial system,
actuarial studies, the professional experience and expertise of the Company's
claim departments' personnel or attorneys and independent adjusters retained to
handle individual claims, the effect of inflationary trends on future claim
settlement costs, and periodic changes in claim frequency patterns such as those
caused by natural disasters, illnesses, accidents, or work-related injuries.
Consequently, the reserve-setting process relies on the judgments and opinions
of a large number of persons, on historical precedent and trends, and on
expectations as to future developments. At any point in time, the Company and
the industry are exposed to possibly higher than anticipated claim costs due to
the aforementioned factors, and to the evolution, interpretation, and expansion
of tort law, as well as to the effects of unexpected jury verdicts.
33
The Company believes that its overall reserving practices have been
consistently applied over many years, and that its aggregate net reserves have
resulted in reasonable approximations of the ultimate net costs of claims
incurred. However, no representation is made that ultimate net claim and related
costs will not be greater or lower than previously established reserves.
The following table shows an analysis of changes in aggregate reserves for
the Company's losses, claims and settlement expenses for each of the years
shown.
Years Ended December 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Amount of reserves for unpaid claims and claim adjustment
expenses at the beginning of each year, net of reinsurance
losses recoverable................................................... $ 2,200.2 $ 2,096.5 $ 1,989.8
---------- ---------- ----------
Incurred claims and claim adjustment expenses:
Provisions for insured events of the current year.................... 865.9 864.6 857.3
Change in provision for insured events of prior years................ (110.3) (118.9) (100.4)
---------- ---------- ----------
Total incurred claims and claim adjustment expenses............. 755.6 745.6 756.8
---------- ---------- ----------
Payments:
Claims and claim adjustment expenses attributable to insured
events of the current year......................................... 297.4 251.7 279.9
Claims and claim adjustment expenses attributable to insured
events of prior years.............................................. 419.6 390.5 370.1
---------- ---------- ----------
Total payments.................................................. 717.0 642.3 650.1
---------- ---------- ----------
Amount of reserves for unpaid claims and claim adjustment
expenses at the end of each year, net of reinsurance
losses recoverable................................................... 2,238.7 2,200.2 2,096.5
Reinsurance losses recoverable......................................... 1,303.0 1,319.6 1,418.1
---------- ---------- ----------
Amount of reserves for unpaid claims and claim adjustment
expenses............................................................. $ 3,541.8 $ 3,519.8 $ 3,514.7
========== ========== ==========
All reserves are necessarily based on 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. Return and additional premiums and
policyholders dividends, all of which tend to be affected by development of
claims in future years, may offset in whole or in part developed claim
redundancies or deficiencies for certain coverages such as workers compensation.
The data in the table above, incorporates Old Republic's estimates for
various asbestosis and environmental impairment ("A&E") claims or related costs
that have been filed in the normal course of business against a number of its
insurance subsidiaries. Many such claims relate to policies issued prior to
1985, and during a short period between 1981 and 1982 pursuant to an agency
agreement canceled in 1982. During all years and through the current date, the
Corporation's insurance subsidiaries have typically issued general liability
insurance policies with face amounts ranging between $1 million and $2 million
and rarely exceeding $10 million. Such policies have, in turn, been subject to
reinsurance cessions which have typically reduced the Corporation's retentions
to $500,000 or less as to each claim.
The Corporation's reserving methods, particularly as they apply to
formula-based reserves, have been established to provide for normal claim
occurrences as well as unusual exposures such as those pertaining to A&E claims
and related costs. At times, however, the Corporation's insurance subsidiaries
also establish specific formula and other reserves as part of their overall
claim and claim expense reserves to cover claims such as those emanating from
A&E exposures. These are intended to cover additional litigation and other costs
that are likely to be incurred to protect the Company's interests in litigated
cases in particular. At December 31, 1996, the Corporation's aggregate indemnity
and loss adjustment expense reserves specifically identified with A&E exposures
amounted to approximately $92.3 million gross, and $64.2 million net of
reinsurance. Based on average annual claims payments during the five most recent
calendar years, such reserves represented 9.7 years (gross) and 11.9 years (net)
of average annual claims payments.
34
Old Republic disagrees with the allegations of liability on virtually all
A&E related claims of which it has knowledge on the grounds that exclusions in
the policies preclude coverage for nearly all such claims, and that the
Corporation never intended to assume such risks. Old Republic's exposure on such
claims cannot therefore be calculated by conventional insurance reserving
methods for this and a variety of reasons, including: a) the absence of
statistically valid data inasmuch as such claims typically involve long
reporting delays and very often uncertainty as to the number and identity of
insureds against whom such claims have arisen or will arise; and b) the
litigation history of such or similar claims for other insurance industry
members that has produced court decisions that have been inconsistent with
regard to such issues as when the alleged loss occurred, which policies provide
coverage, how a loss is to be allocated among potentially responsible insureds
and/or their insurance carriers, how policy coverage exclusions are to be
interpreted, what types of environmental impairment or toxic tort claims are
covered, when the insurer's duty to defend is triggered, how policy limits are
to be calculated, and whether clean-up costs constitute property damage.
Individual insurance companies and others who have evaluated the potential
costs of litigating and settling A&E claims have noted with increasing concern
the possibility that resolution of such claims, by applying liability
retroactively in the context of the existing insurance system, could likely
bankrupt or undermine seriously the financial condition of the property and
liability insurance industry. In the light of this substantial public policy
issue, the Corporation is of the view that the courts will not resolve in the
near future the litigation gridlock stemming from the non-resolution to date of
many environmental claims in particular. In recent times, the Executive Branch
and/or the United States Congress have proposed changes in the legislation and
rules affecting environmental claims. As of December 31, 1996, however, there is
no solid evidence to suggest that forthcoming changes might mitigate or reduce
some or all of these claim exposures.
Because of the above issues and uncertainties, estimation of reserves for
losses and allocated loss adjustment expenses for the above noted types of
claims is extremely difficult or impossible. Accordingly, no representation can
be made that the Corporation's reserves for such claims and related costs will
not prove to be overstated or understated in the future.
(h) Income Taxes-The Corporation and most of its subsidiaries file a
consolidated tax return and provide for income taxes payable currently. Deferred
income taxes included in the accompanying consolidated financial statements
pursuant to generally accepted accounting principles will not necessarily become
payable/recoverable in the future. The Company uses the asset and liability
method of calculating deferred income taxes. This method calls for the
establishment of a deferred tax, calculated at currently effective tax rates,
for the cumulative temporary differences between financial statement and tax
bases of assets and liabilities.
The provision for combined current and deferred income taxes reflected in
the consolidated statements of income does not bear the usual relationship to
operating income before taxes as the result of permanent and other differences
between pre-tax income and taxable income determined under existing tax
regulations. The more significant differences, their effect on the statutory
income tax rate, and the resulting effective income tax rates are summarized
below:
Years Ended December 31,
-----------------------------------------
1996 1995 1994
---------- ---------- ---------
Statutory tax rate.............................. 35.0% 35.0% 35.0%
Tax rate increases (decreases):
Tax-exempt interest......................... (3.5) (2.5) (2.4)
Dividends received exclusion................ (.1) (.4) (.9)
Other items - net.......................... .3 .6 .8
---------- --------- ----------
Effective tax rate.............................. 31.6% 32.7% 32.5%
========== ========= ==========
35
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred tax recoverable (payable) are as follows
at the dates shown:
December 31,
--------------------------------------------
1996 1995 1994
---------- ---------- ----------
Deferred Tax Assets:
Future policy benefits........................................ $ 2.3 $ 2.2 $ 3.1
Losses, claims, and settlement expenses....................... 182.8 179.8 179.8
Unearned premium reserves..................................... (8.9) (3.0) 1.0
Other......................................................... 10.0 8.8 8.7
---------- ----------- ----------
Total gross deferred tax assets............................. 186.3 187.9 192.7
Less-valuation allowance.................................... .7 2.5 1.4
---------- ----------- ----------
Net deferred tax assets..................................... 185.5 185.4 191.3
---------- ----------- ----------
Deferred Tax Liabilities:
Deferred policy acquisition costs............................. 38.7 36.7 35.5
Mortgage guaranty insurers' contingency reserves.............. 135.3 97.2 67.2
Fixed maturity securities adjusted to cost.................... 5.9 4.4 3.6
Unrealized investment gains (losses).......................... 22.8 37.1 (5.5)
Title plants and records...................................... 4.1 3.5 3.4
Other......................................................... 17.6 16.5 14.5
---------- ---------- ----------
Total deferred tax liabilities.............................. $ 224.6 $ 195.6 $ 118.8
---------- ---------- ----------
Net deferred tax asset (liability).......................... $ (39.1) $ (10.1) $ 72.4
========== ========== ==========
Pursuant to special provisions of the Internal Revenue Code pertaining to
mortgage guaranty insurers, a contingency reserve (established in accordance
with insurance regulations designed to protect policyholders against
extraordinary volumes of claims) is deductible from gross income. The tax
benefits obtained from such deductions must, however, be invested in a special
type of non-interest bearing U.S. Government Tax and Loss Bond. For Federal
income tax purposes, the amounts deducted for the contingency reserve are taken
into gross statutory taxable income (a) when the contingency reserve is
permitted to be charged for losses under state law or regulation, (b) in the
event operating losses are incurred, or (c) in any event upon the expiration of
ten years.
Life Insurance companies domiciled in the United States and qualifying as
life insurers for tax purposes are taxed under special provisions of the
Internal Revenue Code. As a result of legislation, 1983 and prior years' tax
deferred earnings (cumulatively $20.4 at December 31, 1996) credited to the
former memorandum "policyholders' surplus account" will generally not be taxed
unless they are subsequently distributed to shareholders. The Company does not
presently anticipate any distribution or payment of taxes on such earnings in
the future.
As a result of regular examinations of the tax returns for the Corporation
and its subsidiaries, the Internal Revenue Service ("IRS") has proposed certain
adjustments for additional taxes applicable to the years 1982 to 1993. The
proposed adjustments pertain to the timing of certain deductions, the IRS's
contention that contractually obligated premium refunds should be treated as
dividends, deductions for certain loss and related reserves, a reinsurance
transaction, and several other issues not involving material amounts. The
Company and its tax counsel believe that substantially all of the proposed
material adjustments are without merit, that the Company will be successful in
vigorously defending its positions, and that the ultimate adjustments, if any,
will not significantly affect its financial condition or results of operations.
During 1995, certain of the proposed adjustments were finally settled for
immaterial amounts.
(I) Property and Equipment-Property and equipment is generally depreciated or
amortized over the estimated useful lives of the assets, (2 to 45 years),
substantially by the straight-line method. Expenditures for maintenance and
repairs are charged to income as incurred, and expenditures for major renewals
and additions are capitalized.
36
(j) Title Plants and Records-Title plants and records are carried at original
cost or appraised value at date of pur chase. Such values represent the cost of
producing or acquiring interests in title records and indexes and the appraised
value of purchased subsidiaries' title records and indexes at dates of
acquisition. The cost of maintaining, updating, and operating title records is
charged to income as incurred. Title records and indexes are ordinarily not
amortized unless events or circumstances indicate that the carrying amount of
the capitalized costs may not be recoverable.
(k) Goodwill-The costs of certain purchased subsidiaries in excess of related
book values (goodwill) at date of acquisition are being amortized against
operations principally over 40 years using the straight-line method.
Amortization of goodwill amounted to $4.6 in 1996, $3.2 in 1995 and $3.1 in
1994.
(l) Employee Benefit Plans- The Corporation has several pension plans covering a
portion of its work force. 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 components of annual net periodic pension cost (credit) for the plans
consisted of the following:
Years Ended December 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
Service cost....................................................... $ 4.2 $ 3.2 $ 3.4
Interest cost...................................................... 7.8 7.6 7.1
Return on assets................................................... (8.1) (15.5) (5.2)
Net amortization and deferral...................................... (3.0) 5.6 (4.9)
---------- ---------- ----------
Net cost........................................................... $ .9 $ 1.0 $ .3
========== ========== ==========
A reconciliation of the funded status of the plans is as follows:
December 31,
---------------------------
1996 1995
----------- -----------
Actuarial present value of benefit obligations:
Vested benefit obligations....................................................... $ 96.6 $ 87.7
Nonvested benefit obligations.................................................... 2.2 2.4
----------- -----------
Accumulated benefit obligations.................................................. 98.8 90.2
Excess of projected benefit obligations over
accumulated benefit obligations............................................... 18.4 15.5
----------- -----------
Projected benefit obligations...................................................... 117.3 105.7
Plans' assets at fair market value................................................. 124.4 112.6
----------- -----------
Plan assets in excess of projected benefit obligations............................. 7.1 6.9
Unrecognized net loss.............................................................. 3.0 3.3
Prior service cost not yet recognized in net periodic pension cost................. .4 .5
Remaining unrecognized transition net assets from
December 31, 1985................................................................ (2.6) (4.2)
----------- -----------
Unfunded accrued pension asset recognized in the consolidated
balance sheet.................................................................... $ 8.0 $ 6.5
=========== ===========
The projected benefit obligations for the plans were determined using the
following assumptions at the dates shown:
December 31,
---------------------------
1996 1995
---------- ----------
Settlement discount rates.......................................................... 7.0 - 7.5% 7.4 - 8.0%
Rates of compensation increase..................................................... 4.0 - 6.0% 4.0 - 6.0%
Long-term rates of return on assets................................................ 8.0 - 8.5% 8.0 - 8.5%
37
The Corporation has a number of profit sharing and other incentive
compensation programs for the benefit of a substantial number of its employees.
The costs related to such programs are summarized below:
Years Ended December 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
Employees Savings and Stock Ownership Plan............................ $ 4.0 $ 1.2 $ 5.2
Other profit sharing.................................................. 4.0 3.4 3.2
Deferred and incentive compensation................................... $ 10.0 $ 5.2 $ 8.2
=========== =========== ==========
The Company sponsors a leveraged Employee Savings and Stock Ownership Plan
(ESSOP) in which a majority of its employees participate. The ESSOP acquired all
of its stock of the Company in 1987 and prior years. Accordingly, it is not
required to adopt the American Institute of Certified Public Accountants' SOP
No. 93-6, "Employers' Accounting for Employee Stock Ownership Plans." Shares of
Company stock owned by the ESSOP are released to participants based on a formula
prescribed by the Employee Retirement Income Security Act of 1974, and dividends
on released shares are allocated to participants as earnings. The Company's
contributions are based on a formula considering growth in net income per share
over consecutive five year periods. As of December 31, 1996, there were
32,575,883 Series "D" Redeemable Convertible Preferred Shares and 34,575 Common
Shares owned by the ESSOP of which 5,731,675 Series "D" Redeemable Convertible
Preferred Shares and 26,801 Common Shares were unreleased and unallocated. There
are no repurchase obligations in existence. (See Note 3).
(m) Escrow Funds-Segregated cash deposit accounts and the offsetting liabilities
for escrow deposits in connection with Title Insurance Group real estate
transactions in the same amounts ($390.2 and $299.5 at December 31, 1996 and
1995, respectively) are not included as assets or liabilities in the
accompanying consolidated balance sheets as the escrow funds are not available
for regular operations.
(n) Earnings Per Share-Consolidated primary earnings per share are based upon
the weighted average number of shares outstanding during each year,
retroactively adjusted for all stock dividends and splits declared through
December 31, 1996. Dividend requirements of $4.7 in 1996, $4.9 in 1995 and $5.1
in 1994 on preferred stock have been considered in per share calculations. The
average number of common shares used in 1996, 1995 and 1994 earnings per share
calculations reflect the pro forma inclusion of 7,605,047, 7,748,065 and
7,984,755 incremental common shares, respectively, which would be issued upon
conversion and/or exercise of dilutive convertible preferred and stock option
shares. Fully diluted earnings per share are similarly calculated with the
inclusion of substantially all convertible securities and stock options
includable for each year; no such data is shown when the calculations are
anti-dilutive.
(o) Cash Flows-For purposes of the Consolidated Statements of Cash Flows, the
Company considers short-term investments, consisting of money market funds,
certificates of deposit, and commercial paper with maturities of less than 90
days to be cash equivalents. These securities are carried at cost which
approximates fair value.
Supplemental cash flow information: Years Ended December 31,
-----------------------------------------
1996 1995 1994
---------- ---------- ----------
Cash paid during the year for:
Interest...................................................... $ 14.0 $ 23.1 $ 19.9
Income taxes.................................................. 75.2 47.4 61.5
---------- ---------- ----------
$ 89.2 $ 70.5 $ 81.4
========== ========== ==========
(p) Concentration of Credit Risk-Excluding U.S. government fixed maturity
securities, the Company is not exposed to any significant credit concentration
risk.
(q) Statement Presentation-Amounts shown in the consolidated financial
statements and applicable notes are stated (except as otherwise indicated and as
to share data) in millions, which amounts may not add to totals shown due to
rounding. Necessary reclassifications are made in prior periods' financial
statements whenever appropriate to conform to the most current presentation.
38
Note 2-Investments - Bonds and other investments carried at $167.9 as of
December 31, 1996 were on deposit with governmental authorities by the
Corporation's insurance subsidiaries to comply with insurance laws.
Note 3-Debt and Debt Equivalents-Consolidated debt of Old Republic and its
subsidiaries is summarized below:
December 31
--------------------------------------------------
1996 1995
--------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ----------
Commercial paper due within 180 days with an
average yield of 5.59% and 5.81%............................. $ 133.7 $ 133.7 $ 92.1 $ 92.1
Convertible subordinated debentures maturing in
2002 at 5.75% (b)(c)......................................... - - 110.0 148.5
Debentures maturing in 2015 at 11.5%(c)......................... - - 29.6 31.8
Debentures maturing in 2018 at 10.0%(c)......................... - - 74.0 79.5
Other miscellaneous debt........................................ 11.3 11.3 2.9 2.9
--------- --------- --------- ----------
Total debt...................................................... 145.1 145.1 308.8 354.8
Redeemable convertible preferred stock classified
as a debt equivalent (See (a) below)......................... 8.8 8.8 11.7 11.7
--------- --------- --------- ----------
Total debt and debt equivalents................................. $ 154.0 $ 154.0 $ 320.5 $ 366.5
========= ========= ========= ==========
The carrying amount of the Company's commercial paper borrowings
approximates its fair value. The fair value of publicly traded debt is based on
its quoted market price.
Scheduled maturities of the above debt (including redeemable convertible
preferred stock classified as a debt equivalent see (a)below) at December 31,
1996 are as follows: 1997: $137.9; 1998: $2.4; 1999: $3.9; 2000: $3.3; 2001:
$.1; 2002 and after $6.1. During 1996, 1995 and 1994, $10.8, $23.0 and $19.8,
respectively, of interest expense on debt was charged to consolidated
operations.
- ------------
(a) The Company has guaranteed bank loans (balance at December 31, 1996 was
$8.8) to a Trust established by the Old Republic Employees Savings and
Stock Ownership Plan ("ESSOP"). The loans have been used to fund the
purchase of Series "D" Redeemable Convertible Preferred Stock from the
Company by the Trust for the original amount of the loans. The Trust's loan
principal repayments (currently scheduled at $2.7 in 1997, $1.0 in 1998,
$2.6 in 1999 and $2.5 in 2000) are expected to be met by annual profit
sharing contributions by the Corporation and its participating
subsidiaries, while interest payments are to be covered by Trust income,
including dividends on the Corporation's stock held by the ESSOP. The
interest rate on the Trust's loans of $8.8 is payable quarterly and at
rates ranging from 75% to 80% of the prime rate. See Notes 4a and 4b.
(b) Each one thousand dollar convertible debenture maturing in 2002, could have
been converted at any time into 58.536 common shares. See note (c) below.
(c) In February 1996, the Company called for the redemption of its 10%
debentures maturing in 2018 ($75.0 principal amount), and its 5.75%
convertible subordinated debentures maturing in 2002 ($110.0 principal
amount). In April 1996, the Company called for redemption its 11.5%
debentures maturing in 2015 ($30.0 principal amount). Redemption of the
debentures was effected with internally available funds, while the
subordinated debentures were converted by their terms into approximately
6.4 million Old Republic common shares. The early retirement of the
Company's debentures produced a net of tax charge of $4.4 (5 cents per
share) that has been reflected as an extraordinary item in 1996.
39
Note 4-Shareholders' Equity - All common and preferred share data herein has
been retroactively adjusted as applicable for stock dividends or splits declared
through December 31, 1996.
(a) Preferred Stock-The following table shows certain information pertaining to
each of the Corporation's series of preferred shares issued and outstanding:
Redeemable
convertible Convertible Cumulative
-------------- -------------- --------------
Preferred Stock Series: "D"(3) "G"(1) "H"
-------------- -------------- --------------
Annual cumulative dividend rate
per share................................ $ .087 $ (1) 8 3/4%
Conversion ratio of preferred into
common shares (2)........................ 5 for 1 1 for .95 -
Conversion right begins.................... Anytime Anytime -
Redemption and liquidation
value per share.......................... $ .87 (1) $ 25.00
Redemption beginning in year............... 1987 (1) (4)
Total redemption value (millions).......... $ 29.14 (1) $ 54.80
Vote per share............................. one one -
Shares outstanding:
December 31, 1995........................ 34,311,603 129,315 2,192,100
December 31, 1996........................ 33,502,462 224,976 -
============== ============== ==============
- -----------
(1) The Corporation has authorized up to 1,000,000 shares of Series G
Convertible Preferred Stock ("Series G") for issuance pursuant to the
Corporation's Stock Option Plan. Series G has been issued under two
different designations; the most recent designation being Series G-2
(except as otherwise stated, Series "G" and Series "G-2" are collectively
referred to as Series "G"). Each share of Series G pays a floating rate
dividend based on the prime rate of interest. At December 31, 1996, the
annual dividend rate for Series G and Series G-2 was $.44 per share and
$1.23 per share, respectively. Each share of Series G is convertible at
any time, after being held six months, into 0.95 shares of Common Stock
(See 4(d)). Unless previously converted, Series G shares may be redeemed
at the Corporation's sole option five years after their issuance.
(2) In the event of a merger in which the Corporation is not the survivor,
each series of Preferred Stock must be redeemed at the above stated
redemption value per share. In the event of certain defined Business
Combinations or the acquisition of 20% or more of a class of the
Corporation's voting securities in certain circumstances, the Series D
preferred stock is convertible into common shares at a ratio ranging from
5 for 1 to 2.5 for 1 unless previously converted.
(3) Series "D" redeemable convertible preferred stock, substantially all of
which is held by the Corporation's employee benefit plans, is adjustable
proportionately as to redemption value, dividend rate, and number of
shares to reflect any stock dividends or splits declared on the
Corporation's common stock, and has a preference as to dividend payments
and upon liquidation of the Corporation.
(4) Redeemed on December 13, 1996 at a redemption price of $25.00 per share.
(b) Cash Dividend Restrictions-The payment of cash dividends by the Corporation
is principally dependent upon the amount of its insurance subsidiaries'
statutory policyholders' surplus available for dividend distribution. The
insurance subsidiaries' ability to pay cash dividends to the Corporation is in
turn generally restricted by law or subject to approval of the insurance
regulatory authorities of the states in which they are domiciled. These
authorities recognize only statutory accounting practices for determining
financial position, results of operations, and the ability of an insurer to pay
dividends to its shareholders. Based on 1996 data, the maximum amount of
dividends payable to the Corporation by its insurance and a small number of
non-insurance company subsidiaries during 1997 without the prior approval of
appropriate regulatory authorities is approximately $233.2. However, management
does not expect to distribute all such dividends since reinvested earnings are
the Corporation's major source of capital to promote its growth, and support its
obligations to policyholders.
(c) Debt Restrictions-Under the most restrictive covenants, the terms of Old
Republic's guaranties relative to loan agreements described in Note 3(a) provide
that while loans under such agreements are outstanding, Old Republic will
maintain a minimum consolidated tangible net worth (excluding goodwill and net
unrealized investment gains or losses, but including title plants and records)
of at least $400.0. Such agreements also,
40
among other things, restrict Old Republic from permitting "Debt" to exceed 25%
of its consolidated tangible net worth (as adjusted for goodwill and net
unrealized investment gains or losses on equity securities) without approval of
the lenders.
(d) Stock Option Plans-At December 31, 1996, the Corporation had two stock-based
compensation plans, which are described below. The Corporation continues to
apply Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APBO 25") and related Interpretations in accounting for these
plans; accordingly, no compensation cost is charged to operations for these
plans. The Corporation has not elected to adopt the fair value method of
accounting encouraged by Financial Accounting Standard No.123 "Accounting for
Stock Based Compensation" ("FAS 123"), issued in October, 1995. FAS 123 is
applicable to the 5,000 and 936,000 options granted in 1996 and 1995,
respectively. If all of these options vest, the gross potential compensation
cost to the Corporation would be insignificant for the 1996 award and $4.6, for
the 1995 grant. Had compensation cost for the plans been determined pursuant to
FAS 123 (i.e. compensation cost recognized for options as vested) for 1996 and
1995, the effect on net income and earnings per share would be immaterial and
have no significant effect.
The Corporation's two existing plans (the 1985 and 1992 plans) are fixed
option plans for its key employees and those of its eligible subsidiaries. All
options granted under its 1979 plan were exercised, cancelled or forfeited as of
December 31, 1994. All plans provide for the issuance of options for up to 5% of
the Old Republic common stock issued and outstanding at any one time. The
exercise price of each option equals the market price of the Corporation's stock
on the date of grant. The term of each option is generally ten years from the
date of grant. Under ordinary circumstances, options may be exercised to the
extent of 10% of the number of shares covered thereby on and after the date of
grant and cumulatively to the extent of an additional 10% on and after each of
the first through ninth anniversaries of the date of grant. The Corporation may
extend 15 year loans at a prevailing market rate of interest for a portion of
the exercise price. Amendments to the plans also enable optionees to,
alternatively, exercise their options into Series "G" or Series "G-2"
Convertible Preferred Stock. The exercise of options into such Series "G" or
Series "G-2" Convertible Preferred Stock reduces by 5% the number of equivalent
common shares which would otherwise be obtained from the exercise of options
into common shares.
Under the 1985 and 1992 plans, in the event the market price of Old Republic
common stock reaches a pre-established value ("the vesting acceleration price"),
optionees may exercise their options to the extent of 10% of the number of
shares covered by the option for each year that the optionee has been employed
by the Corporation or its subsidiaries. During 1996, the vesting acceleration
price was reached on the majority of options granted in 1993 and 1995.
Approximately 488,000 and 589,000 options were accelerated for the 1993 and 1995
grants, respectively.
A summary of the status of the Corporation's two fixed stock option plans as
of December 31, 1996, 1995 and 1994, and changes during the years ended on those
dates is presented below:
As of and for the Years Ended December 31,
------------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year ... 2,706,908 $13.48 2,018,453 $11.72 2,137,037 $11.48
Granted............................. 5,000 22.13 936,000 16.27 - -
Exercised........................... 526,497 9.96 216,030 8.66 100,079 6.41
Cancelled and forfeited............. 27,275 16.13 31,515 16.57 18,505 12.76
--------- --------- ---------
Outstanding at end of year.......... 2,158,136 14.33 2,706,908 13.48 2,018,453 11.72
========= ========= =========
Exercisable at end of year.......... 1,718,958 14.12 1,119,525 10.36 1,112,309 9.03
========= ========= =========
Weighted average fair value of
options granted during the year $7.51 $ 5.05 N/A
===== ====== ======
41
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted - Average
---------------------
Remaining Weighted-
Number Con- Number Average
Out- tractual Exercise Exercis- Exercise
Ranges of Exercise Prices Standing Life Price able Price
--------------------------- --------- --------- --------- --------- ---------
1985 Plan - $6.971 to $ 8.41............... 529,822 3.30 $ 7.80 468,189 $ 7.82
1992 Plan - $16.25 to $17.75............... 1,623,314 8.03 16.43 1,250,269 16.47
1992 Plan - $22.13......................... 5,000 9.00 $ 22.13 500 $ 22.13
(e) Common Stock-There were 250,000,000 shares of common stock authorized at
December 31, 1996. At the same date, there were 50,000,000 shares of Class "B"
common stock authorized but none were issued or outstanding. Class "B" common
shares have the same rights as common shares except for being entitled to 1/10th
of a vote per share.
The Corporation issued a total of 741,600 common shares valued at $8.9 and
991,563 common shares valued at $13.7 in 1996 and 1995, respectively to effect
acquisitions which were not material to Old Republic's financial position or
operating results.
(f) Undistributed Earnings-The equity of the Corporation in the undistributed
earnings, determined in accordance with generally accepted accounting
principles, and in the net unrealized investment gains (losses) of its
respective subsidiaries at December 31, 1996 amounted to $1,253.2 and $44.6,
respectively. Cash dividends declared during 1996, 1995 and 1994, to the
Corporation by its subsidiaries amounted to $152.8, $106.8 and $55.4,
respectively.
(g) Treasury Stock-A total of 8,310,540 common shares issued and outstanding are
held by consolidated affiliates. See "Related Party Transactions" herein.
(h) Statutory Data-The shareholders' equity and net income, determined in
accordance with statutory accounting practices, of the Corporation's insurance
subsidiaries was as follows at the dates and for the periods shown:
Shareholders' Equity Net Income
------------------------- ---------------------------------------
December 31, Years Ended December 31,
------------------------- ---------------------------------------
1996 1995 1996 1995 1994
----------- ----------- ----------- ----------- -----------
General Insurance Group...................... $ 1,225.1 $ 1,129.1 $ 182.6 $ 149.6 $ 116.2
Mortgage Guaranty Group...................... 131.0 133.8 111.6 95.9 74.7
Title Insurance Group........................ 119.9 125.6 14.1 15.2 6.0
Life Insurance Group......................... $ 75.3 $ 81.2 $ 5.6 $ 6.9 $ 6.9
=========== =========== =========== =========== ===========
Note 5-Commitments and Contingent Liabilities:
(a) Reinsurance-In order to maintain premium production within their capacity
and to limit maximum losses for which they might become liable under policies
underwritten, Old Republic's insurance subsidiaries, as is the common practice
in the insurance industry, cede all or a portion of their premiums and
liabilities on certain classes of business to other insurers and reinsurers.
Although the ceding of insurance does not ordinarily discharge an insurer from
liability to a policyholder, it is industry practice to establish the reinsured
part of risks as the liability of the reinsurer. Old Republic also employs
retrospective premium, contingent commission, and profit sharing arrangements
for parts of its business in order to minimize losses for which it might become
liable under insurance policies underwritten by it. To the extent that any
reinsurance companies or retrospectively rated risks or producers might be
unable to meet their obligations under existing reinsurance or retrospective
insurance and agency agreements, Old Republic would be liable for the defaulted
amounts. As deemed necessary, reinsurance ceded to other companies is secured by
letters of credit, cash, and/or securities.
42
Reinsurance protection for General Insurance operations generally limits the
net loss on any one risk to the following maximums (in thousands): fire and
other physical perils-$300; accident and health-$100; workers'
compensation-$1,000; other liability-$500; and loan credit guaranty-$200. A
substantial portion of the mortgage guaranty insurance business is retained,
with the exposure on any one risk currently averaging less than $24. Title
insurance risk assumptions, based on the title insurance subsidiary's financial
resources, are currently limited to $25,000 as to any one policy. The maximum
amount of ordinary life insurance retained on any one life by the Life Insurance
Group is $250.
Most of the reinsurance ceded by the Corporation's insurance subsidiaries in
the ordinary course of business is placed on a quota share or excess of loss
basis. Under quota share reinsurance, the companies remit an agreed upon
percentage of their premiums written to assuming companies and are reimbursed
for a pro-rata share of claims and commissions incurred and for a ceding
commission to cover expenses and costs for underwriting and claim services
performed. Under excess of loss reinsurance agreements, the companies are
generally reimbursed for losses exceeding contractually agreed-upon levels.
43
The following information relates to reinsurance and related data for the
General Insurance, Mortgage Guaranty and Life Insurance Groups for the three
years ended December 31, 1996. For the years 1994 to 1996, reinsurance
transactions of the Title Insurance Group have not been material.
Years Ended December 31,
------------------------------------------------
1996 1995 1994
-------------- ------------- --------------
General Insurance Group
Written premiums: direct.................................. $ 1,095.6 $ 1,118.0 $ 1,170.2
assumed................................. 48.4 65.2 68.6
ceded................................... $ 278.9 $ 307.0 $ 387.3
============== ============= ==============
Earned premiums: direct.................................. $ 1,096.8 $ 1,099.7 $ 1,174.6
assumed................................. 52.1 74.3 78.1
ceded................................... $ 281.3 $ 322.8 $ 388.6
============== ============= ==============
Claims ceded................................................... $ 215.1 $ 210.0 $ 277.2
============== ============= ==============
Mortgage Guaranty Group
Written premiums: direct.................................. $ 213.0 $ 170.3 $ 138.4
assumed................................. - - -
ceded................................... $ 1.1 $ 2.2 $ 3.2
============== ============= ==============
Earned premiums: direct.................................. $ 227.9 $ 178.2 $ 138.3
assumed................................. - - -
ceded................................... $ 1.2 $ 3.0 $ 3.8
============== ============= ==============
Claims ceded................................................... $ .8 $ 1.8 $ 2.3
============== ============= ==============
Mortgage guaranty insurance in force as of
December 31: direct....................................... $ 45,922.3 $ 39,201.2 $ 31,415.8
assumed...................................... - - .1
ceded........................................ $ 270.7 $ 338.5 $ 1,010.5
============== ============= ==============
Life Insurance Group
Written premiums: direct.................................. $ 80.8 $ 88.0 $ 80.4
assumed................................. .2 .3 .3
ceded................................... $ 32.8 $ 42.4 $ 43.3
============== ============= ==============
Earned premiums: direct.................................. $ 78.8 $ 82.5 $ 80.6
assumed................................. .2 .3 .3
ceded................................... $ 33.1 $ 40.9 $ 41.0
============== ============= ==============
Life insurance in force as of December 31: direct....... $ 6,775.8 $ 7,747.3 $ 8,742.4
assumed...... - - -
ceded........ $ 2,806.2 $ 3,510.2 $ 4,318.9
============== ============= ==============
Disability/accident and health insurance premiums ceded on a quota share basis:
To affiliated companies.................................... $ 3.1 $ 3.4 $ 3.0
To unaffiliated companies.................................. 18.9 24.7 24.5
-------------- ------------- -------------
Total..................................................... $ 22.0 $ 28.1 $ 27.6
============== ============= =============
Percentage of direct and assumed premiums.................. 37.7% 43.8% 49.9%
============== ============= ==============
(b) Leases-Some of the Corporation's subsidiaries maintain their offices in
leased premises. Certain of these leases provide for the payment of real estate
taxes, insurance, and other operating expenses. At December 31, 1996, aggregate
minimum rental commitments (net of expected sub-lease receipts) under
noncancellable operating leases of $106.3 are summarized as follows: 1997:
$27.6; 1998: $20.8; 1999: $14.1; 2000: $8.8; 2001: $6.6; 2002 and after: $28.2.
44
(c) General-In the normal course of business, the Corporation and its
subsidiaries are subject to various contingent liabilities, including possible
income tax assessments resulting from tax law interpretations or issues raised
by taxing authorities in their regular examinations. Management does not
anticipate any significant losses or costs to result from any known or existing
contingencies.
(d) Legal Proceedings-There are no material legal proceedings other than those
arising in the normal course of business and which generally pertain to claim
matters related to insurance policies and contracts issued by the Corporation's
insurance subsidiaries.
Note 6-Consolidated Quarterly Results-Unaudited - Old Republic's consolidated
quarterly operating data for the two years ended December 31, 1996 is presented
below. In February 1996, the Company called for the redemption of its 10%
debentures maturing in 2018 ($75.0 principal amount); in April 1996, the Company
called for redemption of its 11.5% debentures maturing in 2015 ($30.0 principal
amount); redemption of these debentures was effected with internally available
funds. The early retirement of the Company's 10% debentures of 2018 produced a
net of tax charge of $3.3 (4 cents per share) that has been reflected as an
extraordinary item in the first quarter of 1996, while the retirement of the
Company's 11.5% debentures of 2015 produced an additional net of tax charge of
$1.1 (1 cent per share) that was reflected as an extraordinary item in the
second quarter of 1996. Accordingly, the total extraordinary item reflected in
the results for 1996 was $4.4 (5 cents per share).
In the fourth quarter of 1995, the Company's Mortgage Guaranty Group adopted the
accrual method for recording past-due premium revenues and the related premium
receivable arising from new monthly premium policies. This new payment mode has
emerged as a significant factor for the mortgage guaranty industry beginning in
mid-1994. Before adoption of this accrual method, such past-due premiums were
recognized on receipt of cash. With the adoption of this accrual method, a
cumulative increase in net premiums written of $9.8, net premiums earned of
$6.3, and post-tax income of $3.9 or 4 cents per fully diluted share was
reflected in the Company's final quarter and the year of 1995.
In the opinion of management, all adjustments consisting of normal recurring
adjustments necessary to a fair presentation of quarterly results have been
reflected in the data which follows. It is also management's opinion, however,
that quarterly operating data for insurance enterprises is not indicative of
results to be achieved in succeeding quarters or years. The long-term nature of
the insurance business, seasonal patterns in premium production and incidence of
claims, and changes in yields on invested assets are some of the factors
necessitating a review of operating results, changes in shareholders' equity,
and cash flows for periods of several years to obtain a proper indicator of
performance. The data below should be read in conjunction with the "Management
Analysis of Financial Position and Results of Operations":
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Year Ended December 31, 1996: ------------ ------------ ------------- -------------
Operating Summary:
Net premiums, fees, and other income................. $ 359.4 $ 387.9 $ 384.3 $ 396.1
Net investment income and realized gains............. 71.3 65.2 71.5 67.4
Total revenues....................................... 430.9 453.3 456.0 463.6
Benefits, claims, and expenses....................... 353.7 369.6 365.5 372.5
Income before extraordinary item..................... 53.4 57.0 61.7 62.5
Extraordinary item, net of tax....................... (3.3) (1.1) - -
Net income........................................... $ 50.0 $ 55.9 $ 61.7 $ 62.5
============ ============ ============= =============
Net income per share:
Primary:
Before extraordinary item.......................... $ .58 $ .59 $ .64 $ .65
Extraordinary item................................. (.04) (.01) - -
Net Income......................................... $ .54 $ .58 $ .64 $ .65
============ ============ ============= =============
Fully Diluted:
Before extraordinary item.......................... $ .56 $ .59 $ .64 $ .65
Extraordinary item................................. (.04) (.01) - -
Net Income......................................... $ .52 $ .58 $ .64 $ .65
============ ============ ============= =============
Average common and equivalent shares outstanding:
Primary............................................ 90,969,694 94,113,365 94,241,978 94,566,910
============ ============ ============= =============
Fully Diluted...................................... 94,479,448 94,420,963 94,664,729 94,850,603
============ ============ ============= =============
45
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Year Ended December 31, 1995: ------------- ------------- -------------- -------------
Operating Summary:
Net premiums, fees, and other income................. $ 320.9 $ 352.3 $ 350.7 $ 369.9
Net investment income and realized gains............. 64.8 64.3 82.6 89.6
Total revenues....................................... 385.8 416.9 433.5 459.6
Benefits, claims, and expenses....................... 329.0 354.2 342.2 354.3
Net income........................................... $ 39.0 $ 42.0 $ 60.9 $ 70.6
============= ============= ============== =============
Net income per share: Primary..................... $ .44 $ .48 $ .70 $ .80
Fully Diluted............... $ .42 $ .45 $ .66 $ .75
============= ============= ============== =============
Average common and equivalent shares outstanding:
Primary............................................ 85,408,443 85,531,874 85,683,687 86,806,302
============= ============= ============== =============
Fully Diluted...................................... 92,096,081 92,286,309 92,514,468 93,729,360
============= ============= ============== =============
46
Note 7-Information About Segments of Business - The contributions of Old
Republic's insurance industry segments to consolidated revenues and operating
results, and certain balance sheet data pertaining thereto are shown in the
following tables on the basis of generally accepted accounting principles
("GAAP"). 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, although disability/accident &
health coverages may be written directly or indirectly through reinsurance in
either the General or Life Insurance segments.
In computing the profit or loss before taxes for each segment, the following
items have not been added or deducted: general corporate revenues and expenses,
parent company interest expense, income taxes, and equity in operating results
of, or dividends from, unconsolidated subsidiaries and affiliates. To reconcile
the total assets shown for the General, Mortgage Guaranty, Title and Life Groups
with total consolidated assets at December 31, 1996 and 1995, adjustments must
be made for the parent company assets of $2,079.6 and $2,056.3, and
consolidating eliminations of $2,477.6 and $2,417.5, respectively.
Revenues and assets connected with foreign operations are not significant in
relation to consolidated totals.
Net Revenues
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------
1996 1995 1994
-------------- ------------- --------------
General Insurance Group:
Net premiums earned:
Liability coverages......................................... $ 463.6 $ 477.9 $ 509.8
Property and other coverages................................ 404.0 373.2 354.2
Net investment (a) and other income........................... 207.3 204.9 187.4
-------------- ------------- --------------
Total...................................................... 1,074.9 1,056.1 1,051.4
-------------- ------------- --------------
Mortgage Guaranty Group:
Net premiums earned........................................... 226.5 175.2 134.5
Net investment (a) and other income........................... 36.0 28.6 23.8
-------------- ------------- --------------
Total...................................................... 262.6 203.9 158.3
-------------- ------------- --------------
Title Insurance Group:
Net premiums earned........................................... 220.2 183.3 244.4
Title, escrow and other fees.................................. 147.2 122.2 140.2
-------------- ------------- --------------
Sub-total................................................... 367.4 305.5 384.7
Net investment (a) and other income........................... 20.4 20.6 20.0
-------------- ------------- --------------
Total...................................................... 387.9 326.2 404.7
-------------- ------------- --------------
Life Insurance Group:
Annuities:
Net premiums earned......................................... - - -
Net investment income....................................... 5.2 6.1 6.4
-------------- ------------- --------------
Sub-total................................................... 5.2 6.1 6.4
-------------- ------------- --------------
Credit and other life and disability:
Net premiums earned......................................... 46.0 41.9 40.0
Net investment (a) and other income......................... 9.2 9.9 9.2
-------------- ------------- --------------
Sub-total................................................... 55.2 51.8 49.3
-------------- ------------- --------------
Total...................................................... 60.5 58.0 55.7
-------------- ------------- --------------
Other Operations - Net (b):..................................... 2.6 1.8 .9
-------------- ------------- --------------
Consolidated sub-total...................................... 1,788.7 1,646.1 1,671.2
Net Realized Gains.............................................. 15.1 49.7 7.7
-------------- ------------- --------------
Consolidated................................................ $ 1,803.9 $ 1,695.9 $ 1,679.0
============== ============= ==============
47
Income (Loss) Before Taxes
- -----------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------
1996 1995 1994
------------ ----------- -----------
General Insurance Group:
Underwriting/service income (loss):
Liability coverages........................................ $ (26.0) $ (58.6) $ (65.0)
Property and other coverages............................... 20.5 38.6 45.4
Net investment income (a).................................... 194.3 191.1 173.8
------------ ----------- ------------
Total...................................................... 188.8 171.1 154.2
------------ ----------- ------------
Mortgage Guaranty Group:
Underwriting/service income.................................. 89.8 77.6 57.7
Net investment income (a).................................... 30.4 25.2 20.6
------------ ----------- ------------
Total...................................................... 120.2 102.8 78.3
------------ ----------- ------------
Title Insurance Group:
Underwriting/service income (loss) .......................... 5.9 (13.4) (16.9)
Net investment income (a).................................... 18.6 18.0 16.7
------------ ----------- ------------
Total...................................................... 24.6 4.6 (.2)
------------ ----------- ------------
Life Insurance Group:
Annuities.................................................... .6 2.7 2.4
Other coverages and net investment income (a)................ 6.4 5.2 3.9
------------ ----------- ------------
Total...................................................... 7.0 7.9 6.4
------------ ----------- ------------
Other Sources - Net (b):....................................... (13.5) (20.2) (20.6)
------------ ----------- ------------
Consolidated sub-total..................................... 327.2 266.2 218.1
Net Realized Gains............................................. 15.1 49.7 7.7
------------ ----------- ------------
Consolidated............................................... $ 342.4 $ 316.0 $ 225.8
============ =========== ============
- ------------
In the above tables, net premiums earned on a GAAP basis differ from statutory
amounts as a result of differences in the calculations of unearned premium
reserves under each accounting method. (a) Including unallocated investment
income derived from invested capital and surplus funds./(b) Represents results
of holding company parent, consolidation eliminating adjustments, and general
corporate expenses, as applicable.
Assets At Year End
- --------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------------
1996 1995
------------ ------------
General Insurance Group...................... $ 5,350.5 $ 5,356.8
Mortgage Guaranty Group...................... 760.5 634.0
Title Insurance Group........................ 408.2 415.8
Life Insurance Group......................... 310.3 328.2
Consolidated................................. $ 6,656.2 $ 6,593.5
============ ============
Note 8-Related Party Transactions - At December 31, 1996 and 1995, the
Corporation owned 98.85% of the non-voting common shares, and 40% of the voting
common and preferred shares of the American Business & Mercantile Insurance
Group, Inc., ("AB&M Group" or "Group"), an affiliated insurance holding company
engaged in the property and liability reinsurance business. As of the same
dates, the American Business & Personal Insurance Mutual, Inc. ("Mutual"), a
property & liability mutual insurer owned by its policyholders, held directly or
through a subsidiary .04% of the non-voting common shares and 60% of the Group's
voting common and preferred shares. At both dates, 1.11% of the Group's
non-voting common shares were held by public shareholders.
48
Pursuant to underwriting and investment management agreements, Old Republic
receives management fees for administering the affairs of the Group's
reinsurance subsidiary and those of the Mutual. Pursuant to reinsurance
treaties, the Group and the Mutual are quota share participants in various types
of primary or assumed reinsurance contracts produced through Old Republic
underwriting facilities. Fees received in the past three years by Old Republic
were immaterial. The following table shows reinsurance cessions, retrocessions,
and assumptions to or from the Group's reinsurance subsidiary and the Mutual for
the last three years.
Ceded to Group Assumed from Mutual Ceded to Mutual
------------------------ ------------------------ ------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
------ ------ ------ ------ ------ ------ ------ ------ ------
Premiums written............ $ 9.3 $ 12.6 $ 12.5 $ - $ - $ - $ 1.6 $ 3.6 $ 3.6
Commissions and fees........ .8 .8 .7 - - - - - -
Losses and loss expenses.... 9.8 14.7 14.8 .1 .1 (.1) 1.7 4.1 4.3
Loss and loss expense ......
reserves................... 55.5 54.1 51.1 17.1 18.7 20.2 8.4 7.9 6.9
Unearned premiums........... $ 1.1 $ 1.1 $ .9 $ - $ - $ - $ .3 $ .3 $ .3
====== ====== ====== ====== ======= ====== ====== ====== =======
Certain subsidiaries of the Company have sold various accounts receivable
to a finance company subsidiary of the Mutual. Total receivables sold as of
December 31, 1996 and 1995 amounted to approximately $6.1 and $6.0,
respectively.
At December 31, 1996 and 1995, the Group held approximately 7.2% and 7.8%,
respectively, of Old Republic's issued and outstanding common shares. For
financial accounting purposes only, 6,658,901 of such shares have been treated
as treasury shares at each respective date in consolidating the Group's accounts
with those of the Corporation.
In the normal course of business, the Company cedes, on the same terms as
apply to unrelated reinsurers, certain parts of its outgoing reinsurance to a
foreign reinsurer in which it has an equity interest. Total premiums ceded to
this reinsurer amounted to approximately $4.3 in 1996, $6.0 in 1995 and $6.1 in
1994. As of December 31, 1996 and 1995, total premium and loss reserve credits
taken on account of cumulative cessions aggregated $64.1 and $65.6,
respectively, all of which credits were collateralized by cash, investments and
funds held amounting to $70.1 and $73.2, respectively.
At December 31, 1996, the Corporation owned 93% of the voting common stock
of Employers General Insurance Group, Inc. ("EGI") an affiliated insurance
holding company engaged in the property and liability insurance and reinsurance
business, primarily in Texas. At such date, 7% of EGI's voting common stock was
held by public shareholders.
Pursuant to a branch management agreement, EGI supervises the solicitation
and underwriting of all lines of insurance that two insurance subsidiaries of
Old Republic are authorized to write. EGI's Texas domiciled insurance subsidiary
has entered into a quota share reinsurance treaty with an insurance subsidiary
of Old Republic. Under the reinsurance treaty, EGI's insurance subsidiary
reinsures the net retained amount of business produced by EGI and its
subsidiaries.
Ceded to EGI
--------------------------------------
1996 1995 1994
-------- -------- --------
Premiums written........................... $ 38.1 $ 33.8 $ 29.7
Losses and loss expenses................... 32.4 26.4 22.6
Loss and loss expense reserves............. 54.0 42.4 33.3
Unearned premiums.......................... $ 12.0 $ 12.6 $ 12.3
======== ======== ========
EGI has also entered into an investment counsel agreement pursuant to which
an Old Republic subsidiary provides investment advice, accounting services and
assistance to EGI in executing purchases and sales of investments. Fees received
by Old Republic were immaterial.
49
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Old Republic International Corporation
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of Old
Republic International Corporation and subsidiaries (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements of income,
preferred stock and common shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Old Republic
International Corporation and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Chicago, Illinois
March 11, 1997
50
Item 9-Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10-Directors and Executive Officers of the Registrant
Omitted pursuant to General Instruction G(3). The Company will file with the
Commission prior to April 1, 1997 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 23, 1997. See also Item 4(a) in Part I of this report. A list of
Directors appears on the "Signature" page of this report.
Item 11-Executive Compensation
Omitted pursuant to General Instruction G(3). The Company will file with the
Commission prior to April 1, 1997 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 23, 1997.
Item 12-Security Ownership of Certain Beneficial Owners and Management
Omitted pursuant to General Instruction G(3). The Company will file with the
Commission prior to April 1, 1997 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 23, 1997.
Item 13-Certain Relationships and Related Transactions
Omitted pursuant to General Instruction G(3). The Company will file with the
Commission prior to April 1, 1997 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 23, 1997.
PART IV
Item 14-Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of this report:
1. Financial statements: See Item 8, Index to Financial Statements.
2. Financial statement schedules will be filed on or before April 30, 1997
under cover of Form 10-K/A.
3. See exhibit index on page 54 of this report.
(b) Reports on Form 8-K:
1. No reports on Form 8-K were filed during the fourth quarter of 1996.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 (Name, Title or Principal
Capacity, and Date).
(Registrant): Old Republic International Corporation
By : __________/s/ A.C.Zucaro______________________ ___3/26/97___
A. C. Zucaro, Chairman of the Board, Date
Chief Executive Officer, President and Director
By : __________/s/ Paul D. Adams___________________ ___3/26/97___
Paul D. Adams, Senior Vice President, Date
Chief Financial Officer and Treasurer
52
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated (Name, Title or
Principal Capacity, and Date).
_____/s/ Anthony F. Colao_______ ______/s/ John W. Popp___________
Anthony F. Colao, Director* John W. Popp, Director*
Senior Vice President
______ /s/ John C. Collopy______ ______ /s/ William A. Simpson____
John C. Collopy, Director* William A. Simpson, Director*
President of Republic Mortgage
Insurance Company
______ /s/ Jimmy A. Dew_________ ______ /s/ Arnold L. Steiner_____
Jimmy A. Dew, Director* Arnold L. Steiner, Director*
Executive Vice President of Republic
Mortgage Insurance Company
______/s/ Kurt W. Kreyling______ ______ /s/ David Sursa___________
Kurt W. Kreyling, Director* David Sursa, Director*
______ /s/ Peter Lardner________ ______ /s/ William G. White, Jr._
Peter Lardner, Director* William G. White, Jr., Director*
President of Bituminous Casualty
Corporation
______ /s/ Wilbur S. Legg_______
Wilbur S. Legg, Director*
* By/S/A. C. Zucaro
Attorney-in-fact
Date: March 13, 1997
53
EXHIBIT INDEX
An index of exhibits required by item 601 of Regulation S-K follows:
(3) Articles of incorporation and by-laws.
(A) * Restated Certificate of Incorporation, as amended. (Exhibit 3(A)
to Registrant's Annual Report on Form 10K for 1995).
(B) * By-laws, as amended.
(4) Instruments defining the rights of security holders, including indentures.
(A) * Certificates of Designations, as amended, with respect to Series
D Cumulative Convertible Preferred Stock, Series G Convertible
Preferred Stock and Series G-2 Convertible Preferred Stock.
(Exhibit 4(A) to Registrant's Annual Report on Form 10K for 1995).
(B) * Agreement to furnish certain long term debt instruments to the
Securities & Exchange Commission upon request (Exhibit 4(D) on Form
8 dated August 28, 1987).
(C) * Rights Agreement dated as of June 26, 1987 between Old Republic
International Corporation and Morgan Shareholder Services Trust
Company (Exhibit 4 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987).
(D) * Form of Indenture dated as of August 15, 1992 between Old
Republic International Corporation and Wilmington Trust Company, as
Trustee. (Exhibit 4(G) to Registrant's Annual Report on Form 10-K
for 1993).
(10) Material contracts.
(A) * Copy of the restated Old Republic International Corporation Employees
Savings and Stock Ownership Plan.
(B) Form 11 - K Annual Report of the Old Republic International
Employees Savings and Stock Ownership Plan for the year ended
December 31, 1996 (To be filed by amendment on Form 10-K).
** (C) * Copy of Old Republic International Corporation Key Employees
Performance Recognition Plan, as restated.
** (D) * Copy of Old Republic International Corporation Non-qualified Stock
Option Plan (Exhibit to Form S-8 Registration Statement No.2-66302).
** (E) * Amendments to Old Republic International Corporation
Non-qualified Stock Option Plan (Exhibit 10(E) to Registrant's
Annual Report on Form 10-K for 1991).
** (F) * 1985 Old Republic International Corporation Non-qualified Stock
Option Plan A (Exhibit 10.1 to Form S-3 Registration Statement
No. 2-98166).
** (G) * Amendments to 1985 Old Republic International Corporation
Non-qualified Stock Option Plan A (Exhibit 10(G) to Registrant's
Annual Report on Form 10-K for 1991).
** (H) * 1985 Old Republic International Corporation Non-qualified Stock
Option Plan B (Exhibit 10.2 to Form S-3 Registration Statement
No. 2-98166).
** (I) * 1990 Old Republic International Corporation Non-qualified Stock
Option Plan (Exhibit 10 to Form S-8 Registration Statement No.
33-37692).
** (J) * 1992 Old Republic International Corporation Non-qualified Stock
Option Plan (Exhibit 10 to Form S-8 Registration Statement No.
33-49646).
(K) * Old Republic International Corporation Employees Retirement Plan
(Exhibit 10(J) to Registrant's Annual Report on Form 10-K for
1991).
54
(Exhibit Index, Continued)
(10) Material contracts (Continued)
** (L) * Old Republic International Corporation Executives Excess Benefits
Pension Plan (Exhibit 10.16 to Registration Statement No. 2-95243).
** (M) * Form of Indemnity Agreement between Old Republic
International Corporation and each of its directors and certain
officers (Exhibit 10 to Form S-3 Registration Statement No.
33-16836).
** (N) * Copy of directors and officers liability and company
reimbursement policy dated October 6, 1970 (Exhibit 12(A) to Form
S-1 Registration Statement No. 2-41089).
(O) * Copy of Bitco Savings Plan (Exhibit 4.3 to Form S-8 Registration
Statement No. 33-32439).
(P) Form 11-K Annual Report of the Bitco Savings Plan for the year ended
December 31, 1996 (To be filed by amendment on Form 10-K).
(Q) * Copy of RMIC Corporation Profit-Sharing Plan (Exhibit 10(M) to
Registrant's Annual Report on Form 10-K for 1980).
** (R) * Copy of a written description of the RMIC Key Employees
Performance Recognition Plan (Exhibit 10(Q) to Registrant's Annual
Report on Form 10-K for 1991).
(S) * Copy of Great West Casualty Company Profit Sharing Plan (Exhibit 10
to Form S-8 Registration Statement No. 33-52069).
(T) Form 11-K Annual Report of the Great West Casualty Company Profit
Sharing Plan for the year ended December 31, 1996 (To be filed by
amendment on Form 10-K).
** (U) * Copy of deferred compensation agreement dated November 4,
1976, as amended, between RMIC Corporation and William A. Simpson
(Exhibit 10(J) to Registrant's Annual Report on Form 10-K for
1980).
** (V) * Copy of deferred compensation agreement dated November 4,
1976, as amended, between RMIC Corporation and Jimmy A. Dew
(Exhibit 10(K) to Registrant's Annual Report on Form 10-K for
1980).
** (W) * Copy of Incentive Compensation Plan of The Founders Title Group, Inc.
(Exhibit 10(N) to Registrant's Annual Report on Form 10-K for 1980).
** (X) * Copy of part time employment agreement between Old Republic Title
Company and John C. Collopy. (Exhibit 10(W) to Registrant's Annual
Report on Form 10-K for 1993).
(Y) * Placement Agency Agreement dated November 16, 1987 among Old Republic
International Corporation, Old Republic Capital Corporation and
Merrill Lynch Money Markets Inc. (Exhibit 10.1 to Form S-3
Registration Statement No. 33-16836).
(Z) * Issuing and Paying Agency Agreement dated November 16, 1987 among
Old Republic International Corporation, Old Republic Capital
Corporation and Morgan Guaranty Trust Company of New York (Exhibit
10.2 to Form S-3 Registration Statement No. 33-16836).
55
(Exhibit Index, Continued)
(11) Schedule showing computations of average number of common shares
outstanding, as used in the calculations of per share earnings for
each of the three years ended December 31, 1996, 1995 and 1994.
(21) Subsidiaries of the registrant.
(23) Consent of Coopers & Lybrand L.L.P.
(24) Powers of attorney
(28) Consolidated Schedule P (To be filed by amendment.)
- ---------------
* Exhibit incorporated herein by reference.
** Denotes a management or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 601 of Regulation S-K.
56