Disclosure Items Omitted:
-------------------------
Item 8, Report of Independent
Registered Public Accounting Firm
Item 9A, Controls and Procedures
Exhibits 23, 31.1 - 32.2
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, 2004 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: 001-10607
---------
OLD REPUBLIC INTERNATIONAL CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 36-2678171
- -------------------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
307 North Michigan Avenue, Chicago, Illinois 60601
- -------------------------------------------- -----------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 312-346-8100
------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of each class on Which Registered
------------------- -----------------------
7% Subordinated Debentures Due June 15, 2007 New York Stock Exchange
- -------------------------------------------- -----------------------
Common Stock/$1 par value New York Stock Exchange
------------------------- -----------------------
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 III of this Form 10-K or any amendment to this
Form 10-K. Yes: _X_/ No:___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes: _X_/ No: ___
The aggregate market value of the registrant's voting Common Stock held by
non-affiliates of the registrant (assuming, for purposes of this calculation
only, that the registrant's directors and executive officers, the registrant's
various employee benefit plans and American Business & Personal Insurance
Mutual, Inc. and its subsidiaries are all affiliates of the registrant), based
on the closing sale price of the registrant's common stock on June 30, 2004, the
last day of the registrant's most recently completed second fiscal quarter, was
$3,971,217,178.
The registrant had 182,614,298 shares of Common Stock outstanding as of February
16, 2005.
Documents incorporated by reference:
- -----------------------------------
The following documents are incorporated by reference into that part of this
Form 10-K designated to the right of the document title.
Title Part
Proxy statement for the 2005 Annual
Meeting of Shareholders III, Items 10, 11, 12, 13 and 14
Exhibits as specified in
exhibit index (page 65) IV, Item 15
----------------
There are 66 pages in this report
PART I
Item 1-Business
(a) General Description of Business. Old Republic International Corporation is a
Chicago-based insurance holding company with subsidiaries that conduct business
through three major segments, namely, its general (property and liability),
mortgage guaranty, and title insurance businesses. A small life and health
insurance business is included under the corporate and other caption. In this
report, "Old Republic", "the Corporation", or "the Company" refers to Old
Republic International Corporation and its subsidiaries as the context requires.
The aforementioned insurance segments are organized as the Old Republic General
Insurance, Mortgage Guaranty, and Title Insurance Groups and references herein
to such groups apply to the Company's subsidiaries engaged in the respective
segments of business.
Financial Information Relating to Segments of Business (1)
The contributions to net revenues and income (loss) before taxes of each Old
Republic segment are set forth below for the years shown, together with their
respective assets at the end of each year. The information below should be read
in conjunction with the consolidated financial statements, the notes thereto,
and the "Management Analysis of Financial Position and Results of Operations"
appearing elsewhere herein.
($ in Millions)
----------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------------------------------------
Net Revenues (2) Income (Loss) Before Taxes
------------------------------------------ -------------------------------------------
2004 2003 2002 2004 2003 2002
----------- ----------- ------------ ------------ ----------- -----------
General........................ $ 1,822.5 $ 1,572.7 $ 1,376.7 $ 333.0 $ 258.9 $ 182.1
Mortgage Guaranty.............. 489.9 498.6 467.1 224.5 276.4 267.7
Title.......................... 1,051.8 1,128.0 836.5 62.5 129.6 97.6
Corporate & Other - Net (3).... 79.3 66.9 62.0 (17.2) (4.5) (.7)
Consolidated Realized
Investment Gains.............. 47.9 19.3 13.9 47.9 19.3 13.9
----------- ----------- ------------ ------------ ----------- -----------
Consolidated................. $ 3,491.6 $ 3,285.8 $ 2,756.4 $ 650.9 $ 679.7 $ 560.7
=========== =========== ============ ============ =========== ===========
Assets at December 31,
------------------------------------------
2004 2003 2002
----------- ----------- -----------
General..................................................................... $ 7,222.8 $ 6,603.5 $ 5,876.5
Mortgage Guaranty........................................................... 2,205.9 2,080.1 1,921.2
Title....................................................................... 753.0 720.5 619.9
Corporate & Other - Net (3)................................................. 388.9 308.0 297.6
----------- ----------- -----------
Consolidated.............................................................. $10,570.8 $ 9,712.3 $ 8,715.4
=========== =========== ===========
- -----------------------
(1) Reference is made to the table in Note 6 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.
(2) Revenues consist of net premiums, fees, net investment and other income
earned; realized investment gains are shown in total for all groups
combined.
(3) Represents amounts for Old Republic's holding company parent, minor
internal service subsidiaries, and a small life and health insurance
operation.
General Insurance Group
Through its General Insurance Group subsidiaries, the Corporation assumes
risks and provides 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 exposure to personal lines of insurance such
as homeowners and private automobile coverages. Similarly, the Corporation does
not provide meaningful amounts of property insurance coverages for commercial
building and related contents.
Liability Coverages: Commercial automobile (mostly trucks) full coverage
protection, workers' compensation and general liability (including the general
liability portion of commercial package policies) 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 (trucking and general
aviation), construction, forest products, and energy industries. Most such
business is produced through independent agency and brokerage channels.
The basic rates charged for 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, or inflation-driven cost increases for
such exposures as medical costs related to bodily injuries may not always be
granted soon enough to enable insurers to fully recover the amount of the
benefits they must pay.
2
Over the years, Old Republic has 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 2004, production of commercial automobile
direct insurance premiums accounted for approximately 33.0% of consolidated
direct premiums written by the General Insurance Group, while workers'
compensation and general liability direct insurance premiums amounted to 23.2%
and 15.2%, respectively, of such consolidated totals.
Among other liability coverages, Old Republic indemnifies corporations'
financial exposures to directors' and officers' ("D&O") liability as well as
those stemming from errors and omissions ("E&O") liability. In the past twenty
years, the Corporation has developed a presence in the general aviation
insurance industry, providing coverage for hull and liability exposures as well
as such additional areas as airport facilities and flying schools. All of these
coverages are produced through independent insurance agency and brokerage
channels.
Property and Other Coverages: Old Republic's property insurance business
incorporates mostly commercial physical damage insurance on trucking risks. A
small volume of business is represented by fire and other physical perils for
commercial properties. Such insurance is produced principally through
independent agencies or brokers.
In addition to the aforementioned D&O and E&O financial indemnity
exposures, the Corporation also provides coverage for fidelity, surety and
credit exposures for a wide range of business enterprises. Fidelity and surety
coverages are underwritten through some 9,000 independent agents by the Old
Republic Surety Group. Surety bonds, such as those aimed at public officials,
license and permit authorizations and contract bonds covering both public and
private works, are typically written for exposures of less than $500,000.
Fidelity bonds are also extended to small to medium-sized risks.
Old Republic Insured Credit Services, Inc. has marketed loan and retail
installment sales credit indemnity insurance since 1955 through commercial
banks, thrifts and other lending institutions. This coverage provides a limited
indemnity to lenders on a variety of consumer loans and installment sales
contracts.
Extended warranty coverages for new and used automobiles, as well as home
warranty policies covering appliances and other mechanical systems in used homes
are marketed by Old Republic through its own employees and selected independent
agents.
Travel insurance is produced through independent travel agents in the
United States and Canada. The coverages provided under these policies, some of
which are also underwritten by one of the Company's life insurance subsidiaries,
include trip delay and trip cancellation protection for insureds.
In recent years, the Corporation has terminated its involvement with
certain smaller parts of its business, including a reinsurance assumed line and
coverages for propane and petroleum distribution, natural gas utilities, and
grain elevators. The run off of these terminated portions of Old Republic's
business is not expected to affect meaningfully its future operating results or
financial condition. The Company believes it has made adequate provisions for
the ultimate claim costs pertaining to those terminated coverages.
Mortgage Guaranty Group
Private mortgage insurance protects mortgage lenders and investors from
default related losses on residential mortgage loans made primarily to
homebuyers who make down payments of less than 20% of the home's purchase price.
The Mortgage Guaranty Group insures only first mortgage loans, primarily on
residential properties having one-to-four family dwelling units.
There are two principal types of private mortgage insurance coverage:
"primary" and "pool". Primary mortgage insurance provides mortgage default
protection on individual loans and covers a stated percentage of the unpaid loan
principal, delinquent interest, and certain expenses associated with the default
and subsequent foreclosure. In lieu of paying the stated coverage percentage,
the Corporation may pay the entire claim amount and take title to the mortgaged
property. Pool insurance is generally used as an additional credit enhancement
for certain secondary market mortgage transactions and provides coverage ranging
up to 100% of the net loss on each individual loan included in the pool, subject
to provisions regarding deductibles, caps on individual exposures, and aggregate
stop loss provisions which limit aggregate losses to a specified percentage of
the total original balances of all loans in the pool.
Traditional primary insurance is issued on an individual loan basis to
mortgage bankers, brokers, commercial banks and savings institutions through a
network of underwriting sites located throughout the country. Traditional
primary loans are individually reviewed (except for loans insured under
delegated approval programs) and priced according to filed premium rates. In
underwriting traditional primary business, the Corporation generally adheres to
the underwriting guidelines published by the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA"),
purchasers of many of the loans the Corporation insures. Delegated underwriting
programs allow approved lenders to commit the Corporation to insure loans
provided they adhere to predetermined underwriting guidelines. In 2004,
delegated underwriting approvals accounted for 53.8% of the Corporation's new
traditional primary insurance written.
3
Bulk and other insurance is issued on groups of loans to mortgage banking
customers through a centralized risk assessment and underwriting process. These
groups of loans are priced in the aggregate, on a bid or negotiated basis.
Coverage for insurance issued in this manner can be issued under primary
insurance policies (loan level coverage) or pool insurance policies (aggregate
coverage). The Corporation considers transactions designated as bulk insurance
to be higher risk (as determined by characteristics such as loan amount, credit
quality, and loan documentation) than those designated as other insurance.
Before insuring any loans, the Corporation issues to each approved customer
a master policy outlining the terms and conditions under which coverage will be
provided. Primary business is then executed via the issuance of a
commitment/certificate for each loan submitted and approved for insurance. In
the case of business issued as pool coverage, a separate pool insurance policy
is issued covering the loans applicable to the transaction.
The amount of premium charge depends on loan-to-value ratios, the level of
coverage being provided, the type of loan instrument (whether fixed rate/fixed
payment or an adjustable rate/adjustable payment), documentation type, and
whether or not the insured property is to be an investment property or owner
occupied. Coverage is non-cancelable by the Company (except in the case of
non-payment of premium or certain master policy violations) and premiums are
paid under single, annual, or monthly payment plans. Single premiums are paid at
loan closing and provide coverage for the entire coverage term. Annual and
monthly premiums are renewable on their anniversary dates with the premium
charge determined on the basis of original or outstanding loan amount.
Substantially all of the Corporation's insurance in force as of December 31,
2004 has been written under monthly premium plans.
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. For the year ended December 31, 2004, approximately 38% of the
Company's consolidated title premium and related fee income stemmed from direct
operations (which include branch offices of its title insurers and wholly owned
subsidiaries of the Company), while the remaining 62% emanated from independent
title agents and underwritten title companies.
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 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
may be 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
property 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 customer 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 cost of
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. Claim losses that do
occur result primarily from title search and examination mistakes, fraud,
forgery, incapacity, missing heirs and escrow processing errors.
In connection with its title insurance operations, Old Republic also
provides escrow closing and construction disbursement services, as well as real
estate information products and services pertaining to real estate transfers and
loan transactions.
Corporate and Other Operations
Corporate and other operations include the accounts of a small life and
health insurance business as well as those of the parent holding company and
several internal service subsidiaries that perform investment management,
payroll, administrative and minor marketing services.
The Corporation's small life and health business registered 2004 and 2003
net premium revenues of $64.6 million and $51.6 million, respectively. This
business is conducted in both the United States and Canada and consists mostly
of limited product offerings sold through financial intermediaries such as
finance companies, automobile dealers, and travel agents, marketing channels
that are also utilized in some of Old Republic's general insurance operations.
Production of term life insurance, as to which new and renewal business
accounted for net premiums earned of approximately $18.9 million in 2004, has
been terminated and placed in run off mode as of year end 2004. As a result of
the changed circumstances, it was concluded that previously deferred acquisition
costs could no longer be amortized for their full amount of the product's
expected run-off years. Accordingly, 2004 operations were charged in the sum of
$10.5 million to reflect revised estimates of deferrable costs.
4
Consolidated Underwriting Statistics
The following table reflects underwriting statistics covering: 1) premiums
and related loss, expense, and policyholders' dividend ratios for the major
coverages underwritten in the General, Mortgage Guaranty and Title insurance
groups:
($ in Millions)
-------------------------------------------------
Years Ended December 31,
-------------------------------------------------
2004 2003 2002
------------- ------------- -------------
General Insurance Group (Statutory Basis):
Overall Experience: Net Premiums Written............... $ 1,701.1 $ 1,460.3 $ 1,268.7
Net Premiums Earned ............... $ 1,626.0 $ 1,382.7 $ 1,182.3
Claim Ratio........................ 65.9% 66.7% 72.7%
Policyholders' Dividend Benefit.... .2 1.1 (.1)
Expense Ratio ..................... 24.6 25.5 25.8
------------- ------------- -------------
Composite Ratio.................... 90.7% 93.3% 98.4%
============= ============= =============
Experience By Major Coverages:
Commercial Automobile: Net Premiums Earned ............... $ 616.3 $ 545.6 $ 508.0
(Principally Trucking) Claim Ratio........................ 66.5% 70.4% 78.4%
============= ============= =============
Workers' Compensation: Net Premiums Earned ............... $ 353.9 $ 277.2 $ 226.2
Claim Ratio........................ 71.9% 75.9% 93.7%
Policyholders' Dividend Benefit.... .5% 5.3% (.5%)
============= ============= =============
Financial Indemnity: (1) Net Premiums Earned ............... $ 191.4 $ 161.8 $ 104.1
Claim Ratio........................ 47.5% 50.9% 40.9%
============= ============= =============
Property: (2) Net Premiums Earned ............... $ 184.5 $ 169.0 $ 151.9
Claim Ratio........................ 56.0% 58.9% 51.4%
============= ============= =============
General Liability: Net Premiums Earned ............... $ 94.4 $ 72.6 $ 55.3
Claim Ratio........................ 108.6% 89.3% 67.5%
============= ============= =============
Other Coverages: (3) Net Premiums Earned ............... $ 185.2 $ 156.4 $ 136.6
Claim Ratio........................ 59.3% 52.2% 66.9%
============= ============= =============
Mortgage Guaranty Group: Net Premiums Earned................ $ 403.2 $ 400.9 $ 376.2
Claim Ratio........................ 35.5% 22.7% 14.1%
Expense Ratio...................... 25.6 24.8 32.3
------------- ------------- -------------
Composite Ratio.................... 61.1% 47.5% 46.4%
============= ============= =============
Title Insurance Group: (4) Net Premiums Earned................ $ 714.0 $ 749.9 $ 524.8
Combined Net Premiums
& Fees Earned.................... $ 1,025.2 $ 1,103.8 $ 813.4
Claim Ratio........................ 5.8% 5.8% 5.0%
Expense Ratio...................... 90.5 84.6 85.6
------------- ------------- -------------
Composite Ratio.................... 96.3% 90.4% 90.6%
============= ============= =============
Consolidated: Net Premiums & Fees Earned......... $ 3,116.1 $ 2,936.0 $ 2,423.9
Claim and Benefit Ratio............ 42.0% 37.9% 40.2%
Expense Ratio...................... 47.3 48.5 47.9
------------- ------------- -------------
Composite Ratio.................... 89.3% 86.4% 88.1%
============= ============= =============
- ---------------
Certain minor reclassifications of prior year data have been reflected in the
above table to conform to current presentation.
(1) Consists principally of fidelity, surety, consumer credit indemnity, and
executive indemnity (directors & officers and errors & omissions)
coverages.
(2) Consists principally of commercial fire, allied lines, multi-peril and
inland marine coverages.
(3) Consists principally of home and auto warranty, aviation and travel
accident coverages.
(4) Title claim, expense, and composite ratios are calculated on the basis of
combined net premiums and fees earned.
Variations in the claim (including related claim settlement expense) ratios
are typically 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
5
ongoing reevaluations of reported and incurred but not reported claims and claim
expenses. The Company can therefore experience period-to-period volatility in
the underwriting results for individual coverages as demonstrated in the above
table. As a result of the Company's fundamental underwriting focus in the
management of its business, it has attempted to dampen this volatility and thus
ensure a higher degree of overall underwriting stability by diversifying the
coverages it offers and industries it serves.
The claim ratios include loss adjustment expenses where appropriate.
Policyholders' dividends, which apply principally to workers' compensation
insurance, 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.
The general insurance claims ratio has reflected favorable trends since
reaching a peak in 1999. The downtrend in this major cost factor reflects
largely the pricing and risk selection improvements effected in the past
forty-eight months. General Insurance Group loss ratios for workers'
compensation and liability insurance coverages in particular may reflect greater
variability due to chance events in any one year, changes in loss costs
emanating from participation in involuntary markets (i.e. insurance assigned
risk pools and associations in which participation is basically mandatory), and
added provisions for loss costs not recoverable from assuming reinsurers which
may experience financial difficulties from time to time. 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, claims
and dividend ratios for these individual coverages should be considered in the
light of such a concurrent underwriting approach. With respect to commercial
automobile coverages, the declining claims ratio stems primarily from the
pricing and risk selection improvements made in recent years, while better
results in workers' compensation are due to improved pricing in general as well
as stronger growth of business subject to captive reinsurance, retrospective
premium, or self-insured deductible programs that are expected to produce lower
net loss ratios. The 2003 workers' compensation dividend benefit rose primarily
due to the conversion of a large account to self-insured status which led to an
increase in policyholder dividend costs and a contra-reduction in incurred
losses. The claims ratio for general liability coverages has tended to be highly
volatile, usually rising due to the impact of higher claims emergence and
greater than anticipated severity on a relatively small book of business.
Mortgage guaranty claim ratios rose in both 2004 and 2003 from historically
low levels posted in 2002 and several prior years. The recent higher loss ratios
have resulted from greater loss provisions caused by higher paid losses and
expectations of moderately higher estimates of claim severity.
The title insurance claim ratio has been in the low single digits in each
of the past several years due to a continuation of favorable trends in claims
frequency and severity for business underwritten since 1992 in particular. A
moderate uptrend in the three years ended December 31, 2004 stems from a rise in
the net provision for ultimate claim costs from the historically low levels
achieved in 2001 and 2000.
The consolidated claims, expense, and composite ratios reflect the changing
period-to-period contributions of each segment to consolidated results, and the
variances within each segment.
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, (fees and costs which are allocable to individual claims) and indirect
costs (such as salaries and rent applicable to the overall management of claim
departments) 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 the Corporation's insurance
subsidiaries is a reasonably complex and dynamic process influenced by a large
variety of factors. These factors include past experience applicable to the
anticipated costs of various types of claims, continually evolving and changing
legal theories emanating from the judicial system, recurring accounting,
statistical, and actuarial studies, the professional experience and expertise of
the Company's claim departments' personnel or attorneys and independent claims
adjusters, ongoing changes in claim frequency or severity patterns such as those
caused by natural disasters, illnesses, accidents, work-related injuries, and
changes in general and industry-specific economic conditions. Consequently, the
reserve-setting process relies on management's judgments and the opinions of a
large number of persons, on the application and interpretation of historical
precedent and trends, and on expectations as to future developments. At any
point in time, the Company is 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 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
6
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 $139.3 million, $142.9 million and
$145.7 million, as of December 31, 2004, 2003 and 2002, respectively. It should
be noted, however, that these differences between 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.
Early in 2001, the Federal Department of Labor revised the Federal Black
Lung Program regulations. The revisions basically require a reevaluation of
previously settled, denied, or new occupational disease claims in the context of
newly devised, more lenient standards when such claims are resubmitted.
Following a number of challenges and appeals by the insurance and coal mining
industries, the revised regulations were, for the most part, upheld in June,
2002 and are to be applied prospectively. Since the final quarter of 2001, black
lung claims filed or refiled pursuant to these anticipated and now final
regulations have increased, though the volume of new claim reports has abated in
2003 and 2004. The vast majority of claims filed to date against Old Republic
pertain to business underwritten through loss sensitive programs that permit the
charge of additional or refund of return premiums to wholly or partially offset
changes in estimated claim costs, or to business underwritten as a service
carrier on behalf of various industry-wide involuntary market (i.e. assigned
risk) pools. A much smaller portion pertains to business produced on a
traditional risk transfer basis. The Company has established applicable reserves
for claims as they have been reported and for claims not as yet reported on the
basis of its historical experience as well as assumptions relative to the effect
of the revised regulations. Inasmuch as a variety of challenges are likely as
the revised regulations are implemented through the actual claim settlement
process, the potential impact on reserves, gross and net of reinsurance or
retrospective premium adjustments, resulting from such regulations cannot as yet
be estimated with reasonable certainty.
Old Republic's reserve estimates also include provisions for indemnity and
settlement costs for various asbestosis and environmental impairment ("A&E")
claims 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, including many issued during a short period between 1981 and 1982 pursuant
to an agency agreement canceled in 1982. Over the years, the Corporation's
property and liability insurance subsidiaries have typically issued general
liability insurance policies with face amounts ranging between $1.0 million and
$2.0 million and rarely exceeding $10.0 million. Such policies have, in turn,
been subject to reinsurance cessions which have typically reduced the
Corporation's retentions to $.5 million or less as to each claim. Old Republic's
exposure to A&E claims cannot, however, be calculated by conventional insurance
reserving methods for 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 insurance industry members that
has produced court decisions that have been inconsistent with regard to such
questions as to when an 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. In recent
times, the Executive Branch and/or the Congress of the United States have
proposed or considered changes in the legislation and rules affecting the
determination of liability for environmental and asbestosis claims. As of
December 31, 2004, however, there is no solid evidence to suggest that possible
future 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 A&E claims in particular is much more
difficult or impossible to quantify with a high degree of precision.
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. At December 31, 2004, Old Republic's aggregate indemnity and loss
adjustment expense reserves specifically identified with A&E exposures amounted
to approximately $118.9 million gross, and $97.1 million net of reinsurance.
Based on average annual claims payments during the five most recent calendar
years, such reserves represented 6.2 years (gross) and 9.6 years (net) of
average annual claims payments. Fluctuations in this ratio between years can be
caused by the inconsistent pay out patterns associated with these types of
claims. For the five years ended December 31, 2004, incurred A&E claim and
related loss settlement costs have averaged 2.6% of average annual General
Insurance Group claims and related settlement costs.
Over the years, 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. The Company believes that its overall reserving
practices have been consistently applied over many years, and that its aggregate
reserves have generally 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 develop in future years to be greater or
lower than currently established reserve estimates.
The following table shows the evolving redundancies or deficiencies for
reserves established as of December 31, of each of the years 1994 through 2004.
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 and settlement processes
outlined herein above. The reserve redundancies or deficiencies shown for all
years are not necessarily indicative of the effect on reported results of any
7
one or series of years since cumulative retrospective premium and commission
adjustments employed in various parts of the Company's business may partially
offset such effects. (See "Consolidated Underwriting Statistics" above, and
"Reserves, Reinsurance, and Retrospective Adjustments" elsewhere herein).
($ in Millions/Percentages to Nearest Whole Point)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) As of December 31: 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(b) Liability(1) for unpaid claims
and claim adjustment
expenses(2): $2,182 $1,964 $1,802 $1,678 $1,661 $1,699 $1,742 $1,846 $1,829 $1,821 $1,768
=================================================================================================
(c) Paid (cumulative) as of (3):
----------------------------
One year later -% 24% 24% 25% 25% 24% 24% 22% 19% 21% 20%
Two years later - - 40 39 39 39 38 37 33 32 33
Three years later - - - 50 49 49 48 45 42 41 40
Four years later - - - - 56 55 54 52 48 47 46
Five years later - - - - - 60 59 57 53 50 50
Six years later - - - - - - 63 61 57 54 53
Seven years later - - - - - - - 65 60 58 56
Eight years later - - - - - - - - 64 62 60
Nine years later - - - - - - - - - 65 63
Ten years later -% -% -% -% -% -% -% -% -% -% 67%
=================================================================================================
(d) Liability reestimated (i.e.,
cumulative payments plus
reestimated ending liability)
As of (4):
-----------------------------
One year later -% 97% 99% 100% 97% 96% 96% 93% 94% 96% 95%
Two years later - - 98 101 98 95 93 89 88 92 93
Three years later - - - 103 100 97 93 87 84 87 90
Four years later - - - - 102 98 95 87 82 83 87
Five years later - - - - - 101 97 89 83 82 84
Six years later - - - - - - 99 91 85 82 84
Seven years later - - - - - - - 94 86 85 85
Eight years later - - - - - - - - 89 86 88
Nine years later - - - - - - - - - 90 89
Ten years later -% -% -% -% -% -% -% -% -% -% 93%
==================================================================================================
(e) Redundancy (deficiency)(5)
for each year-end at (a): -% 3% 2% -3% -2% -1% 1% 6% 11% 10% 7%
==================================================================================================
Average for all year-ends
at (a): 3.6%
========
- ---------------
(1) Amounts are reported net of reinsurance. (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 from
assuming reinsurers through commutations of then existing reserves. (4) Percent
of beginning liability (line b) for unpaid claims and claim adjustment expenses.
(5) Beginning liability less the most current liability reestimated (line d) as
a percent of beginning liability (line b).
The following table shows an analysis of changes in aggregate reserves for
the Company's property and liability insurance claims and allocated claim
adjustment expenses for each of the years shown:
($ in Millions)
-----------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
------- ------- ------- ------- -------- ------- ------- ------- ------- ------- --------
(a) Beginning net reserves.......... $1,964 $1,802 $1,678 $1,661 $1,699 $1,742 $1,846 $1,829 $1,821 $1,768 $1,700
-----------------------------------------------------------------------------------------
Incurred claims and claim expenses:
-----------------------------------
(b) Current year provision.......... 1,070 893 814 749 690 734 728 713 668 684 705
(c) Change in prior years' provision (55) (25) (7) (44) (66) (66) (123) (105) (74) (92) (89)
-----------------------------------------------------------------------------------------
(d) Total incurred.................. 1,014 868 807 704 623 668 604 608 593 592 616
-----------------------------------------------------------------------------------------
Claim payments on:
------------------
(e) Current year events............. 332 277 260 269 258 298 322 275 243 207 236
(f) Prior years' events............. 463 428 423 418 402 412 385 316 342 332 312
-----------------------------------------------------------------------------------------
(g) Total payments.................. 796 706 683 687 661 710 708 591 585 539 549
-----------------------------------------------------------------------------------------
(h) Ending net reserves (a+d-g)..... 2,182 1,964 1,802 1,678 1,661 1,699 1,742 1,846 1,829 1,821 1,768
(i) Unallocated loss adjustment
expense reserves............. 87 83 78 76 73 71 73 73 71 69 55
(j) Reinsurance recoverable on
claim reserves............... 1,632 1,515 1,363 1,261 1,235 1,238 1,190 1,232 1,296 1,311 1,407
-----------------------------------------------------------------------------------------
(k) Gross claim reserves (h+i+j).... $3,902 $3,562 $3,244 $3,016 $2,969 $3,009 $3,005 $3,151 $3,197 $3,202 $3,231
=========================================================================================
8
(b) Investments. In common with other insurance organizations, Old Republic
invests most funds provided by operations in income-producing investment
securities. All investments must comply with applicable insurance laws and
regulations which prescribe the nature, form, quality, and relative amounts of
investments which may be made by insurance companies. Generally, these laws and
regulations permit insurance companies to invest within varying limitations in
state, municipal and federal government obligations, corporate obligations,
preferred and common stocks, certain types of real estate, and first mortgage
loans. Old Republic's investment policies are also influenced by the terms of
the insurance coverages written, by its expectations as to the timing of claim
and benefit payments, and by income tax considerations. The following tables
show invested assets at the end of the last three years, together with
investment income for such years:
Consolidated Investments
($ in Millions)
December 31,
-----------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
----------- ------------ ------------
Available for Sale
Fixed Maturity Securities:
U.S. & Canadian Governments............................................ $ 1,135.3 $ 993.4 $ 976.2
Tax-Exempt............................................................. 1,574.0 1,277.2 -
Utilities.............................................................. 876.4 828.5 -
Corporate.............................................................. 2,870.0 2,641.8 2,196.2
----------- ------------ ------------
6,455.9 5,741.1 3,172.4
Equity Securities......................................................... 459.0 513.5 513.5
Short-term Investments.................................................... 388.6 403.9 253.8
Miscellaneous Investments................................................. 54.4 53.2 -
----------- ------------ ------------
Total available for sale............................................... 7,358.1 6,711.8 3,939.9
----------- ------------ ------------
Held to Maturity
Fixed Maturity Securities:
Utilities.............................................................. - - 754.4
Tax-Exempt............................................................. - - 1,299.7
----------- ------------ ------------
- - 2,054.1
----------- ------------ ------------
Other Investments......................................................... 13.4 8.5 57.4
----------- ------------ ------------
Total held to maturity................................................. 13.4 8.5 2,111.6
----------- ------------ ------------
Total Investments......................................................... $ 7,371.6 $ 6,720.4 $ 6,051.5
=========== ============ ============
Sources of Consolidated Investment Income
($ in Millions)
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Fixed Maturity Securities:
Taxable................................................................ $ 214.0 $ 202.7 $ 193.5
Tax-Exempt............................................................. 53.1 53.7 59.5
------------ ------------ ------------
267.2 256.4 253.1
------------ ------------ ------------
Equity Securities......................................................... 14.3 14.6 12.4
------------ ------------ ------------
Other Investment Income:
Interest on Short-term Investments..................................... 5.7 4.5 6.0
Sundry................................................................. 6.8 6.8 5.2
------------ ------------ ------------
12.5 11.4 11.3
------------ ------------ ------------
Gross Investment Income................................................... 294.1 282.5 276.9
Less: Investment Expenses (1).......................................... 3.2 3.2 4.2
------------ ------------ ------------
Net Investment Income..................................................... $ 290.8 $ 279.2 $ 272.6
============ ============ ============
- ---------------
(1) Investment expenses consist primarily of personnel costs, investment
management and custody service fees and includes interest incurred on funds
held of $.3, $.1 and $.3 for the years ended December 31, 2004, 2003 and
2002, respectively.
9
For many 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. The Company had no bond or note investments in default as to principal
and/or interest at December 31, 2004 and 2003.
The Company's investment policies have not been designed to maximize or
emphasize the realization of investment gains. Old Republic reviews the status
and market value changes of each of its investments on at least a quarterly
basis during the year, and estimates of other than temporary impairments in the
portfolio's value are evaluated and established at each quarterly balance sheet
date. In management's opinion, the Company's high quality and diversified
portfolio, which consists largely of publicly traded securities, has been a
basic reason for the absence of major impairment provisions in the periods
reported upon. The combination of gains and losses on sales of securities and
such provisions or write-downs of securities are reflected as realized gains and
losses in the income statement. Dispositions of securities result principally
from scheduled maturities of bonds and notes and sales of fixed income and
equity securities available for sale. The Company's invested assets as of
December 31, 2004 have been classified largely as "available for sale" pursuant
to the existing investment policy. (See Item 7 - "Management Analysis of
Financial Position and Results of Operations" for a more detailed discussion on
the transfer of fixed maturity securities from "held to maturity" to "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, 2004 and 2003, are shown in the following tables.
These investments, $6.4 billion and $5.7 billion at December 31, 2004 and 2003,
respectively, represented approximately 61% and 59%, respectively, of
consolidated assets, and 96% and 93%, respectively, of consolidated liabilities
as of such dates.
- -------------------------------------------------------------------------------------------------------------------------------
Credit Quality Ratings of Fixed Maturity Securities (1)
- -------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------
2004 2003
---------- ----------
(% of total portfolio)
Aaa.............................................................................. 32.6% 29.7%
Aa............................................................................... 19.5 19.1
A................................................................................ 27.5 32.0
Baa.............................................................................. 19.8 18.5
---------- ----------
Total investment grade....................................................... 99.4 99.3
All others (2)................................................................... .6 .7
---------- ----------
Total........................................................................ 100.0% 100.0%
========== ==========
- ---------------
(1) Credit quality ratings used are those assigned primarily by Moody's; other
ratings are assigned by Standard & Poor's and converted to equivalent
Moody's ratings classifications.
(2) "All others" includes non-investment grade or non-rated small issues of
tax-exempt bonds.
- -------------------------------------------------------------------------------------------------------------------------------
Age Distribution of Fixed Maturity Securities
- -------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------
2004 2003
---------- ----------
(% of total portfolio)
Maturity Ranges:
Due in one year or less.......................................................... 12.5% 11.0%
Due after one year through five years............................................ 42.9 50.0
Due after five years through ten years........................................... 43.5 37.7
Due after ten years through fifteen years........................................ 1.1 1.3
Due after fifteen years.......................................................... - -
---------- ----------
100.0% 100.0%
========== ==========
Average Maturity................................................................. 4.7 Years 4.5 Years
========== ==========
- -------------------------------------------------------------------------------------------------------------------------------
(c) Marketing. Commercial automobile (trucking), workers' compensation and
general liability insurance underwritten for business 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, and by direct sales. No single source accounted for over 10% of Old
Republic's premium volume in 2004.
10
Traditional primary mortgage insurance is marketed primarily through a
direct sales force which calls on mortgage bankers, brokers, commercial banks,
savings institutions and other mortgage originators. No sales commissions or
other forms of remuneration are paid to the lending institutions or others for
the procurement or development of business.
The Mortgage Guaranty segment's ten largest customers were responsible for
approximately 41.8%, 37.3% and 38.3% of traditional primary new insurance
written in 2004, 2003 and 2002, respectively. The largest single customer
accounted for 11.7% of traditional primary new insurance written in 2004
compared to 7.2% and 10.6% in 2003 and 2002, respectively.
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 260 Company
offices located in 33 states and through agencies and underwritten title
companies in Puerto Rico, the District of Columbia and all states except Iowa.
The issuing agents are authorized to issue commitments 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 customer as its commission for services. During 2004,
approximately 62% of title insurance premiums and fees were accounted for by
policies issued by agents and underwritten title companies.
Title insurance premium and fee revenue is closely related to the level of
activity in the real estate market. The volume of real estate activity is
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 produces less title insurance business relative to new construction
during such months than during the rest of the year. The most important factors,
insofar as Old Republic's title business is concerned, however, are the rates of
activity in the resale and refinance markets 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
consumer credit indemnity, 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 Old Republic insurance subsidiary is licensed to do business
in each of the 50 states, the District of Columbia, Puerto Rico, Virgin Islands,
Guam, Saipan, and each of the Canadian provinces; mortgage insurance
subsidiaries are licensed in 50 states and the District of Columbia; title
insurance operations are licensed to do business in 49 states, the District of
Columbia, Puerto Rico and Guam. 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
- -------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
----------- ----------- -----------
United States:
Northeast................................................................ 8.9% 9.3% 8.4%
Mid-Atlantic............................................................. 9.6 9.7 8.3
Southeast................................................................ 18.6 17.6 17.7
Southwest................................................................ 11.8 12.1 12.8
East North Central....................................................... 14.6 14.9 14.8
West North Central....................................................... 12.7 12.2 13.0
Mountain................................................................. 7.5 7.5 7.9
Western.................................................................. 14.0 14.6 14.9
Foreign (Principally Canada)............................................... 2.3 2.1 2.2
----------- ----------- -----------
Total............................................................. 100.0% 100.0% 100.0%
=========== =========== ===========
(d) Reserves, Reinsurance, and Retrospective Adjustments. Old Republic's
insurance subsidiaries establish reserves for 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 of the periods when they occur. See
"General Insurance Claim Reserves" herein.
11
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 and risk-sharing arrangements for parts of its business in
order to minimize losses for which it might become liable under its insurance
policies, and to afford its customers 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 risk-sharing arrangements, the Company adjusts
production costs or premiums retroactively to likewise reflect deviations from
originally expected loss costs. The amount of premium, production and other
retrospective 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, retrospective insurance and production 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, by obtaining surety bonds, or by otherwise collateralizing
such obligations through irrevocable letters of credit, cash, or securities.
Reinsurance recoverable asset balances represent amounts due from or
credited by assuming reinsurers for paid and unpaid claims and policy reserves.
Such reinsurance balances as are recoverable from non-admitted foreign and
certain other reinsurers such as captive insurance companies owned by assureds
or business producers, as well as similar balances or credits arising from
policies that are retrospectively rated or subject to assureds' high deductible
retentions are substantially collateralized by letters of credit, securities,
and other financial instruments. Old Republic evaluates on a regular basis the
financial condition of its assuming reinsurers and assureds who purchase its
retrospectively rated or high deductible policies. Estimates of unrecoverable
amounts are included in the Company's net claim and claim expense reserves since
reinsurance, retrospectively rated and self-insured deductible policies and
contracts do not relieve Old Republic from its direct obligations to assureds or
their beneficiaries.
Old Republic's reinsurance practices with respect to portions of its
business also result from its desire to bring its sponsoring organizations and
customers into some degree of joint venture or risk sharing 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, financial and other intermediaries
whose customers are insured by Old Republic, or individual customers 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 in most
instances with independent insurance or reinsurance companies pursuant to excess
of loss agreements. Except as noted in the following paragraph, reinsurance
protection on property and liability operations generally limits the net loss on
most individual claims to a maximum of (in whole dollars): $1,000,000 for
workers' compensation; $1,000,000 for commercial auto liability; $1,000,000 for
general liability; $3,800,000 for executive protection (directors & officers and
errors & omissions); $1,000,000 for aviation; and $500,000 for property
coverages. Substantially all the mortgage guaranty insurance risk is retained,
with the exposure on any one risk currently averaging approximately $21,700,
though portions of the business are also ceded to captive reinsurers on an
excess of loss basis in most instances. Title insurance risk assumptions are
currently limited to a maximum of $100.0 million as to any one policy. The vast
majority of title policies issued, however, carry exposures of $500,000 or less.
Due to worldwide reinsurance capacity and related cost constraints,
effective January 1, 2002, the Corporation began retaining exposures for all,
but most predominantly workers' compensation liability insurance coverages in
excess of $40.0 million that were previously assumed by unaffiliated reinsurers
for up to $100.0 million. Effective January 1, 2003, reinsurance ceded limits
were raised to the $100.0 million level, and as of January 1, 2005 they have
been further increased to $200.0 million. Pursuant to regulatory requirements,
however, all workers' compensation primary insurers such as the Company remain
liable for unlimited amounts in excess of reinsured limits. Other than the
substantial concentration of workers' compensation losses caused by the
September 11, 2001 terrorist attack on America, to the best of the Company's
knowledge there had not been a similar accumulation of claims in a single
location from a single occurrence prior to that event. Nevertheless, the
possibility continues to exist that non-reinsured losses could, depending on a
wide range of severity and frequency assumptions, aggregate several hundred
million dollars to an insurer such as the Company in the event a catastrophe,
such as caused by an earthquake, lead to the death or injury of a large number
of employees concentrated in a single facility such as a high rise building.
As a result of the September 11, 2001 terrorist attack on America, the
reinsurance industry eliminated coverage from substantially all contracts for
claims arising from acts of terrorism. Primary insurers such as the Company
thereby became fully exposed to such claims. Late in 2002, the Terrorism Risk
Insurance Act of 2002 (the "TRIA") was signed into law, immediately establishing
a temporary federal reinsurance program administered by the Secretary of
Treasury. The TRIA defines what constitutes an "act of terrorism" and
establishes a formula based on primary insurers' premium volume to reimburse
such insurers for 93% of any terrorism losses suffered between November 26, 2002
12
and December 31, 2003, 90% of any losses suffered in 2004, and 85% of any losses
suffered in 2005. Further, pursuant to the TRIA, losses are capped for each year
at $100.0 billion. The TRIA will sunset on December 31, 2005 if not extended or
replaced by similar legislation. The TRIA automatically voided all policy
exclusions which were in effect for terrorism related losses. Under the TRIA,
insurers must offer terrorism coverage with most commercial property and
casualty insurance lines and are permitted to establish an additional premium
charge for their share of such risks, but insureds may elect to reject the
coverage. Insurers are permitted to reinsure that portion of the risk which they
retain under the TRIA, but the reinsurance market has not yet responded with a
widespread willingness to reinsure such risks. As of this date, coverage for
acts of terrorism are excluded from substantially all the Corporation's
reinsurance treaties, and are effectively retained by it subject to any recovery
that would be collected under the TRIA.
(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 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. Mortgage insurance companies also compete by
providing contract underwriting services to lenders, enabling the latter to
improve the efficiency of their operations by outsourcing all or part of their
mortgage loan underwriting processes. For certain types of coverages, including
loan credit indemnity 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 and related services for its customers, and to secure state
insurance departments' approval of these programs.
(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 and the Federal Home Loan
Mortgage Corporation 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 call for compliance with the
applicable laws and regulations of the insurer's domiciliary state and those
states in which it conducts business, maintenance of minimum total
policyholders' surplus of $5.0 million, and maintenance of contingency reserves
in accordance with applicable state laws. The requirements also contain
guidelines pertaining to captive reinsurance transactions.
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, 2004, Old Republic employed approximately
6,500 persons on a full time basis. A majority of 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 savings, profit sharing,
and deferred compensation plans. The Company considers its employee relations to
be good.
(h) Website access. The Company files various reports with the U.S. Securities
and Exchange Commission ("SEC"), including its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements,
and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act. The Company's filings are available for viewing
and/or copying at the SEC's Public Reference Room located at 450 Fifth Street,
NW., Washington, DC 20549. Information regarding the operation of the Public
Reference Room can be obtained by calling 1-800-SEC-0330. The Company's reports
are also available by visiting the SEC's Internet website (http://www.sec.gov)
and accessing its EDGAR database to view or print copies of the electronic
versions of the Company's reports. Additionally, the Company's reports can be
obtained, free of charge, by visiting its Internet website
13
(http://www.oldrepublic.com), selecting Financial Data and the EDGAR Filings
hyperlink to access the SEC's EDGAR database to view or print copies of the
electronic versions of the Company's reports. The contents of the Company's
Internet website are not intended to be, nor shall they be considered
incorporated by reference into any of the reports the Company files with the
SEC.
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 79% is occupied by the
Old Republic National Title Insurance Company. The remainder of the building is
leased to others. Ten 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 owned buildings and related land at December
31, 2004 was approximately $21.8 million.
Certain other operations of the Company and its subsidiaries are directed
from leased premises. See Note 4(b) of the Notes to Consolidated Financial
Statements for a summary of all material lease obligations.
Item 3-Legal Proceedings
(a) Legal proceedings against the Company arise in the normal course of
business and usually pertain to claim matters related to insurance policies and
contracts issued by its insurance subsidiaries. Other legal proceedings are
discussed below.
In 1998 the City and County of San Francisco and certain escrow customers
of an underwritten title agency subsidiary headquartered in the State of
California filed lawsuits alleging that the subsidiary had: 1) failed to escheat
unclaimed escrow funds; 2) charged for services not necessarily provided; and 3)
collected illegal interest payments or fees from banks on the basis of funds
held for escrow customers. The subsidiary in turn conducted an internal review
of its records and concluded that it had certain liabilities for part of the
issues denoted at (1) and (2). The subsidiary defended against the alleged
practice denoted at (3) on the grounds that such practices are common within the
industry, are not in conflict with any laws or regulations, and other
meritorious defenses. The consolidated lawsuits were tried and a judgment
rendered, affirming in part and denying in part the subsidiary's defenses. In
the aggregate, the judgment, excluding post-judgment interest, amounted to
approximately $33.0 million, of which about $6.5 million was paid in partial
settlements. The subsidiary appealed the most significant portions of the
judgment. On January 20, 2005 the Court of Appeals affirmed the judgment against
the subsidiary. The subsidiary has elected not to pursue a further appeal and
instead paid the balance of the judgment on February 28, 2005.
Purported class actions have been filed in state courts in Ohio and Florida
against the Company's principal title insurance subsidiary, Old Republic
National Title Insurance Company ("ORNTIC"). Substantially similar lawsuits have
been filed against other title insurance companies in New York and Florida.
Plaintiffs allege that, pursuant to rate schedules filed by ORNTIC with
insurance regulators, ORNTIC was required to, but failed to give consumers a
reissue credit on the premiums charged for title insurance covering mortgage
refinancing transactions. Both actions seek damages and declaratory and
injunctive relief. ORNTIC intends to defend vigorously against these actions,
but at this early stage in the litigation the Company cannot estimate the costs
it may incur as the actions proceed to their conclusions. The Ohio case has been
stayed, pending an appeal in a similar action against another title insurer, and
ORNTIC has filed a motion to stay one of the two Florida cases.
An action was filed in the Federal District court for South Carolina
against the Company's wholly-owned mortgage guaranty insurance subsidiary,
Republic Mortgage Insurance Company ("RMIC"). Similar lawsuits have been filed
against the other six private mortgage insurers in different Federal District
Courts. The action against RMIC seeks certification of a nationwide class of
consumers who were allegedly required to pay for private mortgage insurance at a
cost greater than RMIC's "best available rate". The action alleges that the
decision to insure their loans at a higher rate was based on the consumers'
credit scores and constituted an "adverse action" within the meaning, and in
violation of the Fair Credit Reporting Act, that requires notice, allegedly not
given, to the consumers. The action seeks statutory and punitive damages, as
well as other costs. RMIC intends to defend vigorously against the action, but
at this early stage in the litigation the Company cannot estimate the costs it
may incur as the litigation proceeds to its conclusion. RMIC filed a motion to
compel arbitration of the dispute with the named plaintiff. The motion was
denied and RMIC has filed an appeal.
(b) Examinations of the Company are performed periodically by the Internal
Revenues Service ("IRS") and other taxing authorities. Discussed below is the
result of the latest of these examinations.
In April, 2004 the IRS provided the Company a so-called "30 Day Letter"
resulting from a recently completed examination of tax returns for years 1998 to
2000. In substance, the letter alleges that certain claim reserve deductions
taken through year end 2000 were overstated and thus served to reduce taxable
income for those years. The Company has made a review of the IRS calculations
15
and has concluded its loss reserves were calculated consistently and provide a
fair and reasonable estimate of its unpaid losses. Accordingly, the Company
intends to defend vigorously the validity of claim reserve deductions taken in
its tax returns. In the event the Company's position is not fully sustained,
payments of any additional taxes owed would be categorized as temporary
differences, and as such would likely have little effect on its GAAP financial
statements. The matter has been assigned to an IRS appeals officer.
Item 4-Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The following table sets forth certain information as of December 31, 2004,
regarding the senior executive officers of the Company:
Name Age Position
- --------------------------- --- ------------------------------------------------------------------------------
Charles S. Boone 51 Senior Vice President - Investments and Treasurer since August, 2001.
James A. Kellogg 53 Senior Vice President/General Insurance and President of Old Republic
Insurance Company since October, 2002.
Spencer LeRoy, III 58 Senior Vice President, General Counsel and Secretary since 1992.
Karl W. Mueller 45 Senior Vice President and Chief Financial Officer since October, 2004. Prior
to joining Old Republic, Mr. Mueller was a partner with the public accounting
firm of KPMG LLP.
William A. Simpson 63 Senior Vice President/Mortgage Guaranty, and Director since 1980. President
since 1972 of Republic Mortgage Insurance Company, a wholly-owned subsidiary.
Rande K. Yeager 56 Senior Vice President/Title Insurance since March, 2003. President since
March, 2002 of Old Republic National Title Insurance Company.
A. C. Zucaro 65 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 for Karl W. Mueller, 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 Equity, Related Security Holder
Matters and Issuer Purchases of Equity Securities
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 2003................................................... $ 20.18 $ 16.53 $ .107
2nd quarter 2003................................................... 23.43 18.31 .113
3rd quarter 2003................................................... 23.76 21.78 .113
4th quarter 2003................................................... 25.79 22.83 .113
Special Dec. 2003................................................... $ - $ - $ .667 (1)
=========== ========== ==========
1st quarter 2004................................................... $ 27.19 $ 23.47 $ .113
2nd quarter 2004................................................... 25.37 21.37 .130
3rd quarter 2004................................................... 25.03 22.60 .130
4th quarter 2004................................................... $ 25.79 $ 23.15 $ .130
=========== ========== ==========
- ---------------
(1) In December, 2003 a special cash dividend of $.667 per share (adjusted for
a 50% stock dividend of the Company's common stock) was declared and paid.
As of January 31, 2005, there were 2,976 registered holders of the
Company's Common Stock. See Note 3(b) of the Notes to Consolidated Financial
Statements for a description of certain regulatory restrictions on the payment
of dividends by Old Republic's insurance subsidiaries. Closing prices have been
restated, as necessary, to reflect all stock dividends and splits declared
through December 31, 2004.
The Company made no common stock repurchases during the fourth quarter 2004
under its common stock repurchase plan.
16
Item 6-Selected Financial Data
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
FINANCIAL POSITION ($ millions):
Cash and Invested Assets (1)........... $ 7,519.5 $ 6,849.2 $ 6,168.2 $ 5,586.7 $ 5,144.3
Other Assets........................... 3,051.3 2,863.0 2,547.1 2,333.4 2,137.1
Total Assets.................... 10,570.8 9,712.3 8,715.4 7,920.2 7,281.4
Liabilities, Other than Debt........... 6,562.1 6,020.9 5,417.9 4,977.1 4,604.0
Debt................................... 143.0 137.7 141.5 159.0 238.0
Total Liabilities............... 6,705.1 6,158.6 5,559.5 5,136.1 4,842.0
Preferred Stock........................ - - - .3 .7
Common Shareholders' Equity............ 3,865.6 3,553.6 3,155.8 2,783.7 2,438.7
Total Capitalization (2)........ $ 4,008.6 $ 3,691.3 $ 3,297.4 $ 2,943.1 $ 2,677.4
============ ============ ============ ============ ============
- ----------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS ($ millions):
Net Premiums and Fees Earned........... $ 3,116.1 $ 2,936.0 $ 2,423.9 $ 2,029.5 $ 1,736.8
Net Investment and Other Income........ 327.5 330.5 318.5 314.1 300.1
Realized Investment Gains.............. 47.9 19.3 13.9 29.7 33.6
Net Revenues................... 3,491.6 3,285.8 2,756.4 2,373.4 2,070.6
Benefits, Claims, and
Settlement Expenses.................. 1,307.9 1,112.8 974.8 860.5 761.2
Underwriting and Other Expenses........ 1,532.7 1,493.2 1,220.8 1,006.2 880.7
Pretax Income..................... 650.9 679.7 560.7 506.6 428.6
Income Taxes.......................... 215.9 219.9 167.7 159.7 131.0
Net Income........................ $ 435.0 $ 459.8 $ 392.9 $ 346.9 $ 297.5
============ ============ ============ ============ ============
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA: (4)
Net Income:
Basic (3)............................. $ 2.38 $ 2.53 $ 2.17 $ 1.94 $ 1.66
============ ============ ============ ============ ============
Diluted ............................. $ 2.36 $ 2.51 $ 2.16 $ 1.92 $ 1.65
============ ============ ============ ============ ============
Dividends: Cash - Regular............... $ .503 $ .446 $ .420 $ .393 $ .367
- Special (5)........... - .667 - - -
------------ ------------ ------------ ------------ ------------
- Total................. $ .503 $ 1.113 $ .420 $ .393 $ .367
============ ============ ============ ============ ============
Stock........................ -% 50% -% -% -%
============ ============ ============ ============ ============
Book Value.............................. $ 21.17 $ 19.57 $ 17.45 $ 15.60 $ 13.75
============ ============ ============ ============ ============
Common Shares (thousands):
Outstanding........................... 182,563 181,606 180,898 178,465 177,380
============ ============ ============ ============ ============
Average: Basic........................ 182,541 181,549 180,863 178,436 178,977
============ ============ ============ ============ ============
Diluted...................... 184,607 183,302 182,323 180,491 180,295
============ ============ ============ ============ ============
- ---------------
(1) Consists of cash, investments and investment income due and accrued.
(2) Total capitalization consists of debt, preferred stock, and common
shareholders' equity.
(3) Calculated after deduction of minor amounts of preferred stock cash
dividends.
(4) All per share statistics herein have been restated to reflect all stock
dividends or splits declared through December 31, 2004.
(5) In December, 2003 a special cash dividend of $.667 per share (adjusted for
a 50% stock dividend of the Company's common stock) was declared and paid.
17
Item 7-Management Analysis of Financial Position and Results of Operations
($ in Millions, Except Share Data)
- --------------------------------------------------------------------------------
OVERVIEW AND EXECUTIVE SUMMARY
This management analysis of financial position and results of operations
pertains to the consolidated accounts of Old Republic International Corporation.
The Company conducts its business through three major segments, namely, its
General (property and liability), Mortgage Guaranty and Title insurance
segments. A small life and health insurance business, accounting for 2.1% of
consolidated revenues and 2.3% of consolidated assets, is included within the
corporate and other caption. The consolidated accounts are presented on the
basis of generally accepted accounting principles ("GAAP"). This analysis should
be read in conjunction with the most recent annual and quarterly consolidated
financial statements and the footnotes appended to them.
The insurance business is distinguished from most others in that the prices
(premiums) charged for various coverages are set without certainty of the
ultimate benefit and claim costs that will emerge or be incurred, often many
years after issuance of a policy. This basic fact casts Old Republic's business
as a long-term undertaking which is managed with a primary focus on the
achievement of favorable underwriting results over time. In addition to
operating income stemming from Old Republic's basic underwriting and related
services functions, significant revenues are obtained from investable funds
generated by those functions as well as from retained shareholders' capital. In
managing investable funds the Company aims to assure stability of income from
interest and dividends, protection of capital, and sufficient liquidity to meet
insurance underwriting and other obligations as they become payable in the
future. Securities trading and the realization of capital gains are not
objectives. The investment philosophy is therefore best categorized as
emphasizing value, credit quality, and relatively long-term holding periods. The
Company's ability to hold both fixed maturity and equity securities for long
periods of time is enabled by the scheduling of maturities in contemplation of
an appropriate matching of assets and liabilities.
In light of the above factors, the Company's affairs are managed for the
long run, without regard to the arbitrary strictures of quarterly or even annual
reporting periods that American industry must observe. In Old Republic's view,
short reporting time frames do not comport well with the long-term nature of
much of its business, driven as it is by a strong focus on the fundamental
underwriting and related service functions of the Company. Management believes
that Old Republic's operating results and financial condition can best be
evaluated by observing underwriting performance trends over succeeding five to
ten year intervals. Such time intervals are likely to encompass one or two
economic and/or underwriting cycles, and provide appropriate time frames for
such cycles to run their course and for reserved claim costs to be quantified
with greater finality and effect.
* * *
To aid investment analysis of Company results, both net operating income
and net income figures per share are provided to highlight the impact of certain
accounting rules or securities market-driven considerations that affect the
recording of investment gains or losses and lead to lessened period-to-period
comparability. The realization of investment gains or losses can be highly
discretionary and arbitrary due to such factors as the timing of individual
securities sales, losses from write-downs of impaired securities, tax-planning
considerations, and changes in investment management judgments relative to the
direction of securities markets or the future prospects of individual investees
or industry sectors. In particular, write-downs of securities deemed other than
temporarily impaired are affected by some of these factors as well as industry
or issuer-specific developments that can call for the recognition of a loss of
market value or non-recoverability of asset cost.
2004 consolidated earnings were affected adversely by special post-tax
charges of approximately $25.5 (14 cents per share). Nearly 75% of the charge
represents an increase in previously posted litigation reserves necessitated by
a ruling on January 20, 2005 by the California Court of Appeals affirming a
prior trial court verdict against Old Republic Title Company. The remainder
covers a write down of previously deferred acquisition costs applicable to a
life insurance product discontinued during the fourth quarter of 2004. Pretax
earnings for 2004 were also affected negatively by the expensing of stock option
benefits totaling $8.6 (3 cents per share after-tax) of which $5.6 represented a
charge for a non-recurring vesting acceleration of stock option costs in the
year's first quarter. Stock option expense charges reduced earnings per share by
less than 1 cent per share in 2003. The aggregate effect of all 2004 special
charges was to decrease pretax earnings by $38.3, and post-tax earnings by $29.0
(16 cents per share).
The major components of pretax income and resulting consolidated GAAP net
income discussed in this report were as follows:
18
Years Ended December 31,
-------------------------------------------------
2004 2003 2002
------------- ------------- -------------
Pretax operating income (loss):
General ............................................................ $ 333.0 $ 258.9 $ 182.1
Mortgage Guaranty .................................................. 224.5 276.4 267.7
Title .............................................................. 62.5 129.6 97.6
Corporate and other................................................. (17.2) (4.5) (.7)
Realized investment gains ............................................. 47.9 19.3 13.9
------------- ------------- -------------
Consolidated pretax income ............................................ 650.9 679.7 560.7
Income taxes........................................................ 215.9 219.9 167.7
------------- ------------- -------------
Net income............................................................. $ 435.0 $ 459.8 $ 392.9
============= ============= =============
Components of Diluted Earnings Per Share:
Net operating income ............................................... $ 2.19 $ 2.44 $ 2.11
Net realized gains ................................................. .17 .07 .05
------------- ------------- -------------
Net income ..............................