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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended: March 31, 2005 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number: 001-10607
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OLD REPUBLIC INTERNATIONAL CORPORATION
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(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
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes: _X_/ No:___
Shares Outstanding
Class March 31, 2005
- --------------------------------- ----------------------------------
Common Stock / $1 par value 182,700,939
There are 32 pages in this report
OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / March 31, 2005
INDEX
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PAGE NO.
----------
PART I FINANCIAL INFORMATION:
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 11
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 12 - 28
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 29
CONTROLS AND PROCEDURES 29
PART II OTHER INFORMATION:
ITEM 5 - OTHER INFORMATION 30
ITEM 6 - EXHIBITS 30
SIGNATURE 31
EXHIBIT INDEX 32
2
Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2005 2004
-------------------- -------------------
Assets
Investments:
Available for sale:
Fixed maturity securities (at fair value)(cost: $6,346.4 and $6,273.2).............. $ 6,420.1 $ 6,455.9
Equity securities (at fair value)(cost: $361.3 and $396.8).......................... 413.6 459.0
Short-term investments (at fair value which approximates cost)...................... 509.0 388.6
Miscellaneous investments........................................................... 54.6 54.4
-------------------- -------------------
Total........................................................................... 7,397.5 7,358.1
Other investments................................................................... 13.2 13.4
-------------------- -------------------
Total investments............................................................... 7,410.7 7,371.6
-------------------- -------------------
Other Assets:
Cash................................................................................ 64.9 60.5
Securities and indebtedness of related parties...................................... 66.8 60.2
Accrued investment income........................................................... 86.8 87.3
Accounts and notes receivable....................................................... 544.1 543.9
Reinsurance balances and funds held................................................. 79.4 92.5
Reinsurance recoverable: Paid losses................................................ 55.5 53.3
Policy and claim reserves.................................. 1,868.7 1,793.2
Deferred policy acquisition costs................................................... 229.7 232.3
Sundry assets....................................................................... 272.4 275.6
-------------------- -------------------
3,268.8 3,199.2
-------------------- -------------------
Total Assets.................................................................... $ 10,679.5 $ 10,570.8
==================== ===================
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, Preferred Stock, and Common Shareholders' Equity
Liabilities:
Losses, claims and settlement expenses.............................................. $ 4,544.4 $ 4,403.5
Unearned premiums................................................................... 913.8 903.1
Other policyholders' benefits and funds............................................. 174.2 175.9
-------------------- -------------------
Total policy liabilities and accruals........................................... 5,632.5 5,482.6
Commissions, expenses, fees and taxes............................................... 187.4 235.9
Reinsurance balances and funds...................................................... 149.7 157.8
Federal income tax payable: Current................................................. 42.1 8.4
Deferred................................................ 522.9 554.5
Debt................................................................................ 143.2 143.0
Sundry liabilities.................................................................. 120.5 122.7
Commitments and contingent liabilities.............................................. - -
-------------------- -------------------
Total Liabilities............................................................... 6,798.6 6,705.1
-------------------- -------------------
Preferred Stock:
Convertible preferred stock (1)..................................................... - -
-------------------- -------------------
Common Shareholders' Equity:
Common stock (1).................................................................... 185.5 185.4
Additional paid-in capital.......................................................... 273.7 270.4
Retained earnings................................................................... 3,330.7 3,240.1
Accumulated other comprehensive income ............................................. 100.8 179.5
Treasury stock (at cost) (1)........................................................ (10.0) (10.0)
-------------------- -------------------
Total Common Shareholders' Equity............................................... 3,880.9 3,865.6
-------------------- -------------------
Total Liabilities, Preferred Stock and Common Shareholders' Equity.............. $ 10,679.5 $ 10,570.8
==================== ===================
(1) At March 31, 2005 and December 31, 2004, there were 75,000,000 shares of
$0.01 par value preferred stock authorized, of which no shares were
outstanding. As of the same dates, there were 500,000,000 shares of common
stock, $1.00 par value, authorized, of which 185,566,521 at March 31, 2005
and 185,429,127 at December 31, 2004 were issued and outstanding. At March
31, 2005 and December 31, 2004, there were 100,000,000 shares of Class B
Common Stock, $1.00 par value, authorized, of which no shares were issued.
Common shares classified as treasury stock were 2,865,582 as of both March
31, 2005 and December 31, 2004.
See accompanying Notes to Consolidated Summary Financial Statements.
- --------------------------------------------------------------------------------
3
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
($ in Millions, Except Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended
March 31,
---------------------------------
2005 2004
-------------- --------------
Revenues:
Net premiums earned........................................................................ $ 717.1 $ 660.7
Title, escrow, and other fees.............................................................. 71.7 65.8
-------------- --------------
Total premiums and fees................................................................ 788.8 726.6
Net investment income...................................................................... 75.7 70.5
Other income............................................................................... 8.0 9.6
-------------- --------------
Total operating revenues............................................................... 872.6 806.8
Realized investment gains.................................................................. 7.9 15.6
-------------- --------------
Total revenues......................................................................... 880.6 822.4
-------------- --------------
Benefits, Claims and Expenses:
Benefits, claims, and settlement expenses.................................................. 345.7 301.9
Dividends to policyholders................................................................. .6 .2
Underwriting, acquisition, and other expenses.............................................. 363.6 360.0
Interest and other charges................................................................. 2.0 2.1
-------------- --------------
Total expenses......................................................................... 712.0 664.2
-------------- --------------
Income before income taxes ................................................................ 168.5 158.1
-------------- --------------
Income Taxes: Currently payable............................................................ 44.3 45.6
Deferred..................................................................... 9.9 6.1
-------------- --------------
Total........................................................................ 54.2 51.7
-------------- --------------
Net Income................................................................................. $ 114.3 $ 106.4
============== ==============
Net Income Per Share:
Basic.................................................................................. $ .63 $ .58
============== ==============
Diluted................................................................................ $ .62 $ .57
============== ==============
Average shares outstanding: Basic...................................................... 182,681,195 181,962,757
============== ==============
Diluted.................................................... 184,688,964 184,504,465
============== ==============
Dividends Per Common Share:
Cash .................................................................................. $ .130 $ .113
============== ==============
See accompanying Notes to Consolidated Summary Financial Statements.
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4
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended
March 31,
---------------------------------
2005 2004
-------------- --------------
Net income as reported..................................................................... $ 114.3 $ 106.4
-------------- --------------
Other comprehensive income (loss):
Foreign currency translation adjustment................................................. (1.4) (1.3)
-------------- --------------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period....................................... (111.0) 41.2
Less: elimination of pretax realized gains
included in income as reported.................................................... 7.9 15.6
-------------- --------------
Pretax unrealized gains (losses) on securities
carried at market value........................................................... (118.9) 25.6
Deferred income taxes (credits)....................................................... (41.6) 8.9
-------------- --------------
Net unrealized gains (losses) on securities........................................... (77.3) 16.7
-------------- --------------
Net adjustments......................................................................... (78.7) 15.3
-------------- --------------
Comprehensive income....................................................................... $ 35.5 $ 121.7
============== ==============
See accompanying Notes to Consolidated Summary Financial Statements.
- --------------------------------------------------------------------------------
5
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended
March 31,
---------------------------------
2005 2004
-------------- --------------
Cash flows from operating activities:
Net income................................................................................ $ 114.3 $ 106.4
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred policy acquisition costs....................................................... 2.5 (2.7)
Premiums and other receivables.......................................................... (.1) 11.1
Unpaid claims and related items......................................................... 78.7 67.8
Other policyholders' benefits and funds................................................. (4.6) 1.7
Income taxes............................................................................ 43.7 50.7
Reinsurance balances and funds.......................................................... 2.6 5.5
Realized investment gains............................................................... (7.9) (15.6)
Accounts payable, accrued expenses and other............................................ (33.7) (6.0)
-------------- --------------
Total..................................................................................... 195.6 219.0
-------------- --------------
Cash flows from investing activities:
Fixed maturity securities:
Maturities and early calls............................................................. 185.7 187.4
Sales.................................................................................. 47.0 23.8
Sales of:
Equity securities...................................................................... 45.5 28.8
Other investments...................................................................... .7 .6
Fixed assets for company use........................................................... 4.4 .1
Cash and short-term investments of subsidiary acquired.................................... 1.2 -
Purchases of:
Fixed maturity securities.............................................................. (315.5) (388.9)
Equity securities...................................................................... (5.2) -
Other investments...................................................................... (.7) (.7)
Fixed assets for company use........................................................... (5.4) (3.2)
Investment in affiliates............................................................... (9.7) (1.4)
Other-net................................................................................. .4 1.3
-------------- --------------
Total..................................................................................... (51.7) (152.0)
-------------- --------------
Cash flows from financing activities:
Issuance of debentures and notes.......................................................... 1.0 -
Issuance of common shares................................................................. 2.0 6.3
Redemption of debentures and notes........................................................ (.6) (.3)
Dividends on common shares................................................................ (23.7) (20.6)
Other-net................................................................................. 2.1 (4.7)
-------------- --------------
Total..................................................................................... (19.1) (19.3)
-------------- --------------
Increase (decrease) in cash and short-term investments 124.7 47.6
Cash and short-term investments, beginning of period...................................... 449.2 451.2
-------------- --------------
Cash and short-term investments, end of period............................................ $ 574.0 $ 498.8
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for: Interest ................................................ $ .3 $ .1
============== ==============
Income Taxes............................................. $ 10.2 $ .3
============== ==============
See accompanying Notes to Consolidated Summary Financial Statements.
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6
OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)
- --------------------------------------------------------------------------------
1. Accounting Policies and Basis of Presentation:
The accompanying consolidated summary financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP") as
described in the Corporation's latest annual report to shareholders or
otherwise disclosed herein. The financial accounting and reporting process
relies on estimates and on the exercise of judgment, but in the opinion of
management all adjustments, consisting only of normal recurring accruals,
necessary for a fair statement of the results were recorded for the interim
periods.
During the first quarter of 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("FAS 142") "Goodwill and Other Intangible
Assets". Under FAS 142, which took effect for fiscal years beginning after
December 15, 2001, all goodwill resulting from business combinations will no
longer be amortized against operations but must be tested at least annually
for possible impairment of its continued value. Such a test was performed in
the first quarters of 2005 and 2004 and did not result in impairment charges.
At March 31, 2005 and December 31, 2004, the Company's consolidated
unamortized goodwill asset balance was $92.8 and $92.2, respectively.
During the second quarter of 2003, the Company adopted Statement of Financial
Accounting Standards No. 148 ("FAS 148") "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS No. 123".
During December, 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 - Revised ("FAS 123R")
"Share-Based Payment". FAS 123R requires entities to recognize the cost of
employee services received in exchange for awards of equity instruments based
on the grant-date fair value of those awards. The effective date of this
pronouncement is the beginning of the first interim or annual reporting
periods that begins after June 15, 2005. In April, 2005, the U.S. Securities
and Exchange Commission approved a new rule that, for public companies,
delays the effective date of FAS 123R to the first annual, rather than
interim, reporting period that begins after June 15, 2005. Except for the
change in effective date, the guidance of FAS 123R is unchanged. See footnote
2(b) herein for further discussion.
2. Common Share Data:
(a) Earnings Per Share - Common share data has been retroactively adjusted to
reflect all stock dividends and splits. The following table provides a
reconciliation of the income and number of shares used in basic and diluted
earnings per share calculations.
Quarters Ended
March 31,
--------------------------------
2005 2004
-------------- --------------
Numerator:
Net Income .......................................................................... $ 114.3 $ 106.4
-------------- --------------
Numerator for basic earnings per share -
income available to common stockholders............................................ 114.3 106.4
-------------- --------------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions.......................................................... $ 114.3 $ 106.4
============== ==============
Denominator:
Denominator for basic earnings per share
weighted-average shares............................................................ 182,681,195 181,962,757
Effect of dilutive securities:
Stock options...................................................................... 2,007,769 2,541,708
-------------- --------------
Dilutive potential common shares................................................... 2,007,769 2,541,708
-------------- --------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions................................................................ 184,688,964 184,504,465
============== ==============
Earnings per share: Basic............................................................... $ 0.63 $ 0.58
============== ==============
Diluted............................................................. $ 0.62 $ 0.57
============== ==============
7
(b) Stock Options Compensation - The Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 148 ("FAS 148")
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FAS No. 123" for periods starting after December 15, 2002. As of
April 1, 2003, the Company adopted the requirements of FAS 148 utilizing the
prospective method. Under this method, stock-based compensation expense is
recognized for awards granted after the beginning of the fiscal year of
adoption, as such awards become vested. For all other stock option awards
outstanding, the Company continues to use the intrinsic value method
permitted under existing accounting pronouncements. The following table shows
a comparison of net income and related per share information as reported, and
on a pro forma basis on the assumption that the estimated value of stock
options was treated as compensation cost for all periods shown. In estimating
the compensation cost of options, the fair value of options has been
calculated using the Black-Scholes option pricing model.
Quarters Ended
March 31,
--------------------------------
2005 2004
-------------- --------------
Comparative data:
Net income:
As reported........................................................................... $ 114.3 $ 106.4
Add: Stock-based compensation expense
included in reported income, net of
related tax effects............................................................... .4 4.1
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of related tax effects........................................ 3.9 9.5
-------------- --------------
Pro forma basis....................................................................... $ 110.8 $ 101.0
============== ==============
Basic earnings per share:
As reported........................................................................... $ 0.63 $ 0.58
Pro forma basis....................................................................... 0.61 0.56
Diluted earnings per share:
As reported........................................................................... 0.62 0.57
Pro forma basis....................................................................... $ 0.60 $ 0.55
============== ==============
Expense recognition of stock options granted in 2003 and 2004 (no options
were granted in the first quarter of 2005) reduced earnings per share by less
than one cent per share in the first quarter 2005 and by two cents per share
in the first quarter 2004.
Options were granted during the first quarter of 2004 for 1,990,500 shares of
common stock. Options outstanding as of March 31, 2005 and 2004 were
9,164,519 and 9,895,529, respectively. The maximum number of options
available for future issuance as of March 31, 2005 is 1,797,537.
During December, 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 - Revised ("FAS 123R")
"Share-Based Payment". FAS 123R requires entities to recognize the cost of
employee services received in exchange for awards of equity instruments based
on the grant-date fair value of those awards. The effective date of this
pronouncement is the beginning of the first interim or annual reporting
periods that begins after June 15, 2005. In April, 2005, the U.S. Securities
and Exchange Commission approved a new rule that, for public companies,
delays the effective date of FAS 123R to the first annual, rather than
interim, reporting period that begins after June 15, 2005. Except for the
change in effective date, the guidance of FAS 123R is unchanged.
The statement allows for three transition methods of implementation: the
modified prospective application and two versions of the modified
retrospective application. The modified prospective application requires
entities to expense share-based payments for new awards and awards modified,
repurchased, or cancelled after the required effective date. Additionally, it
requires entities to record as an expense, the cost attributable to the
unvested options outstanding as of the required effective date. Modified
retrospective application may be applied either (a) to all prior years for
which Statement 123 was effective (fiscal years beginning after December 15,
1994) or (b) only to prior interim periods in the year of initial adoption if
the required effective date of this statement does not coincide with the
beginning of the entity's fiscal year.
The Company believes that the approximate reduction to fully diluted earnings
per share will be less than one cent per share cumulatively for all years
from 2006 through 2009 calculated by using the modified prospective
transition method.
8
3. Unrealized Appreciation of Investments:
Cumulative net unrealized gains on fixed maturity securities available for
sale and equity securities credited to a separate account in common
shareholders' equity amounted to $93.3 at March 31, 2005. Unrealized
appreciation of investments, before applicable deferred income taxes of
$50.2, at March 31, 2005 included gross unrealized gains and (losses) of
$204.8 and ($61.1), respectively.
For the quarters ended March 31, 2005 and 2004, net unrealized appreciation
(depreciation) of investments, net of deferred income taxes (credits),
amounted to ($77.3) and $16.7, respectively.
4. Pension Plans:
The Corporation has three defined benefit pension plans covering a portion of
its work force. The three plans are the Old Republic International Salaried
Employees Restated Retirement Plan (the Old Republic Plan), the Bituminous
Casualty Corporation Retirement Income Plan (the Bituminous Plan) and the Old
Republic National Title Group Pension Plan (the Title Plan). The plans are
defined benefit plans pursuant to which pension payments are based primarily
on years of service and employee compensation near retirement. It is the
Corporation's policy to fund the plans' costs as they accrue. Plan assets are
comprised principally of bonds, common stocks and short-term investments.
The measurement dates used to determine pension measurements are December 31
for the Old Republic Plan and the Bituminous Plan and September 30 for the
Title Plan.
The components of estimated net periodic pension cost for the plans consisted
of the following:
Quarters Ended
March 31,
---------------------------------
2005 2004
-------------- --------------
Service cost..................................................................... $ 2.1 $ 1.9
Interest cost.................................................................... 3.0 2.8
Expected return on plan assets................................................... (3.6) (3.5)
Recognized loss.................................................................. 0.5 0.6
-------------- --------------
Net cost $ 2.0 $ 1.9
============== ==============
The companies are not expecting to make cash or non-cash contributions to
their pension plans in calendar year 2005.
Effective January 1, 2005, both the Old Republic Plan and the Bitco Plan were
closed to new employees hired after December 31, 2004. The Title Plan was
already closed to new employees. There were no changes to the benefits for
employees/beneficiaries already in the Plans.
Also effective January 1, 2005, the Old Republic International Employees
Savings and Stock Ownership Plan ("ESSOP") became a 401K. All aspects of the
ESSOP remained unchanged, except that employee contributions are now made on
a pretax rather than post-tax basis.
9
5. Information About Segments of Business:
The Corporation's major business segments are organized as the General
Insurance (property and liability insurance), Mortgage Guaranty and Title
Insurance Groups. Effective with the second quarter of 2004, the Company has
included the results of its small life & health insurance business with those
of its corporate and minor service operations; prior period data has been
reclassified accordingly. Each of the Corporation's segments underwrites and
services only those insurance coverages which may be written by it pursuant
to state insurance regulations and corporate charter provisions. Segment
results exclude net realized investment gains or losses as these are
aggregated in consolidated totals. The contributions of Old Republic's
insurance industry segments to consolidated totals are shown in the following
table.
Quarters Ended
March 31,
-------------------------
2005 2004
---------- ----------
General Insurance Group:
Net premiums earned............................................................................ $ 431.1 $ 376.5
Net investment income and other income ........................................................ 51.4 48.8
---------- ----------
Total revenues before realized gains........................................................ $ 482.5 $ 425.4
========== ==========
Income before taxes and realized investment gains.............................................. $ 84.8 $ 74.3
========== ==========
Income tax expense on above.................................................................... $ 26.8 $ 23.1
========== ==========
Mortgage Insurance Group:
Net premiums earned............................................................................ $ 105.4 $ 98.7
Net investment income and other income ........................................................ 21.5 21.4
---------- ----------
Total revenues before realized gains........................................................ $ 127.0 $ 120.2
========== ==========
Income before taxes and realized investment gains.............................................. $ 64.6 $ 57.4
========== ==========
Income tax expense on above ................................................................... $ 21.6 $ 19.3
========== ==========
Title Insurance Group:
Net premiums earned............................................................................ $ 159.9 $ 168.3
Title, escrow and other fees................................................................... 71.7 65.8
---------- ----------
Sub-total................................................................................... 231.7 234.1
Net investment income and other income ........................................................ 6.6 6.5
---------- ----------
Total revenues before realized gains........................................................ $ 238.4 $ 240.7
========== ==========
Income before taxes and realized investment gains.............................................. $ 12.8 $ 13.2
========== ==========
Income tax expense on above.................................................................... $ 4.2 $ 4.4
========== ==========
Consolidated Revenues:
Total revenues of above Company segments....................................................... $ 848.0 $ 786.3
Other sources (1).............................................................................. 26.1 21.3
Consolidated net realized investment gains..................................................... 7.9 15.6
Elimination of intersegment revenues (2)....................................................... (1.5) (.9)
---------- ----------
Consolidated revenues....................................................................... $ 880.6 $ 822.4
========== ==========
Consolidated Income Before Taxes:
Total income before taxes and realized investment
gains of above Company segments............................................................. $ 162.3 $ 145.0
Other sources - net (1)........................................................................ (1.7) (2.5)
Consolidated net realized investment gains..................................................... 7.9 15.6
---------- ----------
Consolidated income before income taxes..................................................... $ 168.5 $ 158.1
========== ==========
Consolidated Income Tax Expense:
Total income tax expense of above Company segments............................................. $ 52.6 $ 46.8
Other sources - net (1)........................................................................ (1.2) (1.0)
Income tax expense on consolidated net realized investment gains............................... 2.7 5.8
---------- ----------
Consolidated income tax expense............................................................. $ 54.2 $ 51.7
========== ==========
10
March 31, December 31,
2005 2004
------------------- ------------------
Consolidated Assets:
General................................................................. $ 7,369.5 $ 7,222.8
Mortgage................................................................ 2,229.8 2,205.9
Title................................................................... 717.2 753.0
Other - net (1)......................................................... 362.9 388.9
------------------- ------------------
Consolidated ........................................................... $ 10,679.5 $ 10,570.8
=================== ==================
- ----------
In the above tables, net premiums earned on a GAAP basis differ slightly from
statutory amounts due to certain differences in calculations of unearned premium
reserves under each accounting method.
(1) Represents amounts for Old Republic's holding company parent, minor internal
service subsidiaries, and a small life and health insurance operation.
(2) Represents consolidation eliminating adjustments.
6. Commitments and Contingent Liabilities:
(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.
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.
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) In April, 2004 the Internal Revenue Service ("IRS") issued a so-called
"30 Day Letter" to the Company as a result of 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 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.
11
OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Quarters Ended March 31, 2005 and 2004
($ in Millions, Except Share Data)
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
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 2.5% of
consolidated revenues and 2.2% 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 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.
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
- --------------------------------------------------------------------------------
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.
Old Republic's consolidated net operating earnings before net realized
investment gains, amounted to $109.1, or 59 cents per share, for the first
quarter of 2005, up 12.9 percent from $96.6, or 52 cents per share in the same
period of 2004. The increase stemmed largely from improved performance by the
Company's General and Mortgage Guaranty insurance segments. Year-over-year these
two segments generated greater underwriting income as well as moderate growth of
investment income. Inclusive of net realized investment gains, net income for
this year's first quarter amounted to $114.3, or 62 cents per share, versus
$106.4, or 57 cents per share in the year-ago period. Pretax earnings in last
year's first quarter were affected adversely by required non-recurring stock
option compensation charges of $5.6 (or 2 cents per share after tax),
representing the expense of a non-recurring vesting acceleration of stock option
compensation costs.
The major components of pretax income and resulting consolidated GAAP net
income discussed in this report were as follows:
12
Quarters Ended March 31,
------------------------------------------------
%
2005 2004 Change
------------ ------------ ------------
Pretax operating income (loss):
General ................................................................... $ 84.8 $ 74.3 14.2%
Mortgage Guaranty ......................................................... 64.6 57.4 12.5
Title ..................................................................... 12.8 13.2 -3.3
Corporate and other........................................................ (1.7) (2.5)
Realized investment gains..................................................... 7.9 15.6
------------ ------------
Consolidated pretax income ................................................... 168.5 158.1 6.6
Income taxes............................................................... 54.2 51.7 4.8
------------ ------------ ------------
Net income.................................................................... $ 114.3 $ 106.4 7.4%
============ ============ ============
Components of Diluted Earnings Per Share:
Net operating income ...................................................... $ .59 $ .52 13.5%
Net realized gains ........................................................ .03 .05
------------ ------------
Net income ................................................................ $ .62 $ .57 8.8%
============ ============ ============
Consolidated revenues in the first quarter totaled $880.6, up 7.1 percent
from $822.4 in the same period of 2004. Net premiums and fees earned were $788.8
in this year's first quarter versus $726.6 in the year-ago period.
Old Republic's General Insurance Group, which underwrites principally
commercial property and liability insurance coverages, reported a 14.2 percent
increase in pretax operating income to $84.8 for this year's first quarter. This
compares to $74.3 earned during the same period of 2004. Net premiums earned in
this year's first quarter were $431.1, up 14.5 percent from $376.5 a year ago.
The composite underwriting ratio for the first three months of 2005 reflected a
slight decline to 92.1 percent when compared to 93.0 percent registered in the
first quarter of 2004, and a modest increase from the very low 90.7 percent
posted for all of 2004. The positive underwriting results are attributable to a
reasonably stable pricing environment and well-controlled production and
administrative expenses for substantially all of the Company's general insurance
coverages.
Mortgage Guaranty Group operations posted a double digit rise of 12.5
percent in pretax operating earnings to $64.6 in this year's first quarter. Net
premium revenues in the most recent quarter were $105.4, up 6.8 percent from the
year-ago level of $98.7. Persistency for the traditional primary book of
business continued to improve, rising to 65.2 percent from 50.2 percent in the
first quarter of 2004 and 64.5 percent in the fourth quarter of 2004.
The composite underwriting ratio in the first three months of 2005 was 55.3
percent compared to 58.6 percent posted in the same quarter of 2004, and 61.1
percent for all of last year. Traditional primary business claim severity,
measured in terms of average claim reserves and payments, remained relatively
stable in this year's first quarter, as did claim frequency by comparison to the
fourth quarter of 2004. The loss ratio of 32.2 percent, while moderately higher
than the 29.5 percent loss ratio posted in the first three months of 2004, was
nonetheless lower than the 38.9 percent posted in last year's final quarter and
35.5 percent for all of 2004. Most of the quarter-over-quarter decline in the
expense ratio reflected this segment's share of the aforementioned 2004 stock
option costs, as well as a further reduction in compensation costs in the latest
quarter.
Old Republic's Title Insurance Group reflected slight variations in the key
components of its pretax bottom line, which dropped slightly to $12.8 in this
year's first quarter. Premiums were down 5.0 percent quarter-over-quarter, while
escrow and other fee revenues grew by 9.0 percent. In combination, premium and
fee revenues were basically flat at $231.7 in this year's first quarter. Claim
costs, which are influenced principally by premium revenues, were stable for
both quarterly periods, while other costs, inclusive of commissions paid on
agency-derived premium production, were similarly even year-over-year. In
combination, these factors produced a slightly higher composite ratio of 97.2
percent in this year's first quarter, compared to 97.0 percent and 96.3 percent
in the first quarter and full year of 2004, respectively. While net investment
income grew by 2.0 percent in the first three months of 2005, the gain was not
sufficient to offset the current downward bias of the Company's results from its
basic underwriting/service functions.
Aggregate results for Old Republic's small Life & Health business and the
corporate service operations of its parent Holding Company produced combined
pretax losses of $1.7 and $2.5 in the first quarters of 2005 and 2004,
respectively. Higher life and health pretax income was largely driven by a lower
claim ratio and slightly greater investment income, which were partially offset
by higher operating expenses. Corporate service operations were generally flat
year-over-year.
Consolidated net investment income of $75.7 for the first three months of
2005 was up by 7.4 percent when compared to the preceding year due primarily to
the benefits of the Company's growing invested asset base. Realized investment
gains amounted to $7.9 and $15.6 in the first quarter of 2005 and 2004,
respectively.
13
Cash and invested assets at March 31, 2005, totaled $7.56 billion, or
$41.39 per share, compared to $7.51 billion, or $41.19 per share, at December
31, 2004, and $7.08 billion, or $38.92 per share, at March 31, 2004. The
investment portfolio reflects a current allocation of approximately 87 percent
in fixed-maturity securities and 6 percent in equities. As in the past, it
contains little or no exposure to real estate investments, mortgage-backed
securities, derivatives, junk bonds, private placements or mortgage loans.
Consolidated operating cash flow of $195.6 was slightly below the first quarter
2004 level due primarily to the timing of payments for income taxes, claims, and
the previously announced settlement of the Title Insurance Group California
litigation.
Common shareholders' equity was $3.88 billion at March 31, 2005, compared
to $3.86 billion at December 31, 2004, and $3.66 billion at March 31, 2004. Book
value per share was $21.24 at the end of March 2005, versus $21.17 at year-end
2004 and $20.16 at March 31, 2004. The latest quarter's change in book value
reflects principally additions from earnings in excess of dividend requirements,
offset by a decline in the value of investment securities carried at market
values.
- --------------------------------------------------------------------------------
MANAGEMENT ANALYSIS
- --------------------------------------------------------------------------------
CHANGES IN ACCOUNTING POLICIES
During the first quarter of 2002, the Company adopted Statement of
Financial Accounting Standards No. 142 ("FAS 142") "Goodwill and Other
Intangible Assets". Under FAS 142, goodwill and certain intangible assets will
no longer be amortized against operations but must be tested at least annually
for possible impairment of their carrying values. At March 31, 2005 and December
31, 2004, the Company's consolidated unamortized goodwill asset balance was
$92.8 and $92.2, respectively. During the first quarters of 2005 and 2004, the
Company evaluated the carrying value of its goodwill and intangible assets and
determined that there was no indication of impairment of such assets.
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 148 ("FAS 148") "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS No. 123" for
periods starting after December 15, 2002. As of April 1, 2003, the Company
adopted the requirements of FAS 148 utilizing the prospective method. Under this
method, stock-based compensation expense is recognized for awards granted after
the beginning of the fiscal year of adoption. For all other stock option awards
outstanding, the Company continues to use the intrinsic value method permitted
under existing accounting pronouncements. In estimating the compensation cost of
options, the fair value of options has been calculated using the Black-Scholes
option pricing model. Required stock option compensation charges of $.7 reduced
earnings per share after-tax by less than one cent per share in the first
quarter of 2005. In the first quarter of 2004, expense recognition of stock
option compensation charges of $6.4 reduced earnings per share by 2 cents per
share after-tax, of which $5.6 represented a charge for a non-recurring vesting
acceleration of such costs.
During December, 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 - Revised ("FAS 123R")
"Share-Based Payment". FAS 123R requires entities to recognize the cost of
employee services received in exchange for awards of equity instruments based on
the grant-date fair value of those awards. The effective date of this
pronouncement is the beginning of the first interim or annual reporting period
that begins after June 15, 2005. In April, 2005, the U.S. Securities and
Exchange Commission ("SEC") approved a new rule that, for public companies,
delays the effective date of FAS 123R to the first annual, rather than interim,
reporting period that begins after June 15, 2005. Except for the change in the
effective date, the guidance of FAS 123R is unchanged.
The statement allows for three transition methods of implementation: the
modified prospective application and two versions of the modified retrospective
application. The modified prospective application requires entities to expense
share-based payments for new awards and awards modified, repurchased, or
cancelled after the required effective date. Additionally, it requires entities
to record as an expense, the cost attributable to the unvested options
outstanding as of the required effective date. Modified retrospective
application may be applied either (a) to all prior years for which Statement 123
was effective (fiscal years beginning after December 15, 1994) or (b) only to
prior interim periods in the year of initial adoption if the required effective
date of this statement does not coincide with the beginning of the entity's
fiscal year.
The Company believes that the approximate reduction to fully diluted
earnings per share will be as follows: less than one cent per share cumulatively
for all years from 2006 through 2009 calculated by using the modified
prospective transition method.
FINANCIAL POSITION
The Company's financial position at March 31, 2005 reflected increases in
assets, liabilities and common shareholders' equity of 1.0%, 1.4% and 0.4%,
respectively, when compared to the immediately preceding year-end. Cash and
invested assets represented 70.8% and 71.1% of consolidated assets as of March
31, 2005 and December 31, 2004, respectively. Consolidated operating cash flow
was positive at $195.6 in this year's first quarter, slightly below the first
quarter 2004 level of $219.0 due primarily to the timing of payments for income
taxes, claims, and the settlement of the Title Insurance Group California
litigation. As of March 31, 2005, the invested asset base increased 0.6% to
$7,562.5 principally as a result of positive operating cash flow offset by a
decline in the fair value of fixed maturity and equity investments.
14
During the first three months of 2005 and 2004, the Corporation committed
substantially all investable funds to short to intermediate-term fixed maturity
securities. At both March 31, 2005 and December 31, 2004, approximately 99% of
the Company's investments consisted of marketable securities, including $545.7
and $499.3, respectively, of U.S. Treasury tax and loss bonds held by its
mortgage guaranty subsidiaries for deferred tax purposes. Old Republic continues
to adhere to its long-term policy of investing primarily in investment grade,
marketable securities. Investable funds have not been directed to so-called
"junk bonds" or types of securities categorized as derivatives. At March 31,
2005, Old Republic's commitment to equity securities decreased 9.9% in relation
to the related invested balance at year-end 2004, mostly due to the sales of
equity securities and a reduction in net unrealized gains. At March 31, 2005,
the Company had no fixed maturity investments in default as to principal and/or
interest.
Relatively high short-term maturity investment positions continued to be
maintained as of March 31, 2005. Such positions reflect a large variety of
seasonal and intermediate-term factors including current operating needs,
expected operating cash flows, quarter-end cash flow seasonality, and investment
strategy considerations. Accordingly, the future level of short-term investments
will vary and respond to the interplay of these factors and may, as a result,
increase or decrease from current levels.
The Company does not own or utilize derivative financial instruments for
the purpose of hedging, enhancing the overall return of its investment
portfolio, or reducing the cost of its debt obligations. With regard to its
equity portfolio, the Company does not own any options nor does it engage in any
type of option writing. Traditional investment management tools and techniques
are employed to address the yield and valuation exposures of the invested assets
base. The long-term fixed maturity investment portfolio is managed so as to
limit various risks inherent in the bond market. Credit risk is addressed
through asset diversification and the purchase of investment grade securities.
Reinvestment rate risk is reduced by concentrating on non-callable issues, and
by taking asset-liability matching considerations into account. Purchases of
mortgage and asset backed securities, which have variable principal prepayment
options, are generally avoided. Market value risk is limited through the
purchase of bonds of intermediate maturity. The combination of these investment
management practices is expected to produce a more stable long-term fixed
maturity investment portfolio that is not subject to extreme interest rate
sensitivity and principal deterioration. The market value of the Company's
long-term fixed maturity investment portfolio is sensitive, however, to
fluctuations in the level of interest rates, but not materially affected by
changes in anticipated cash flows caused by any prepayments. The impact of
interest rate movements on the long-term fixed maturity investment portfolio
generally affects net unrealized gains or losses. As a general rule, rising
interest rates enhance currently available yields but typically lead to a
reduction in the fair value of existing fixed maturity investments. By contrast,
a decline in such rates reduces currently available yields but usually serves to
increase the fair value of the existing fixed maturity investment portfolio. All
such changes in fair value are reflected, net of deferred income taxes, directly
in the shareholders' equity account, and as a separate component of the
statement of comprehensive income. Given the Company's inability to forecast or
control the movement of interest rates, Old Republic sets the maturity spectrum
of its fixed maturity securities portfolio within parameters of estimated
liability payouts, and focuses the overall portfolio on high quality
investments. By so doing, Old Republic believes it is reasonably assured of its
ability to hold securities to maturity as it may deem necessary in changing
environments, and of ultimately recovering their aggregate cost.
Possible future declines in fair values for Old Republic's bond and stock
portfolios would affect negatively the common shareholders' equity account at
any point in time, but would not necessarily result in the recognition of
realized investment losses. The Company 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 reviewing
investments for other than temporary impairment, the Company, in addition to a
security's market price history, considers the totality of such factors as the
issuer's operating results, financial condition and liquidity, its ability to
access capital markets, credit rating trends, most current audit opinion,
industry and securities markets conditions, and analyst expectations to reach
its conclusions. Sudden market value declines caused by such adverse
developments as newly emerged or imminent bankruptcy filings, issuer default on
significant obligations, or reports of financial accounting developments that
bring into question the validity of previously reported earnings or financial
condition, are recognized as realized losses as soon as credible publicly
available information emerges to confirm such developments. Accordingly, the
recognition of losses from other than temporary value impairments is subject to
a great deal of judgment as well as turns of events over which the Company can
exercise little or no control. In the event the Company's estimate of other than
temporary impairments is insufficient at any point in time, future periods' net
income would be affected adversely by the recognition of additional realized or
impairment losses, but its financial condition would not necessarily be affected
adversely inasmuch as such losses, or a portion of them, could have been
recognized previously as unrealized losses.
15
The following tables show certain information relating to the Company's
fixed maturity and equity portfolios as of the dates shown:
- ------------------------------------------------------------------------------------------------------------------------------------
Credit Quality Ratings of Fixed Maturity Securities (1)
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2005 2004
----------------- ----------------
Aaa............................................................................. 33.3% 32.6%
Aa.............................................................................. 19.5 19.5
A............................................................................... 27.6 27.5
Baa............................................................................. 19.1 19.8
----------------- -----------------
Total investment grade................................................. 99.5 99.4
All other (2)................................................................... .5 .6
----------------- -----------------
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 other" includes non-investment or non-rated small issues of tax-exempt
bonds.
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified by Industry Concentration for Investment Grade Fixed Maturity Securities
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 2005
-------------------------------
Gross
Amortized Unrealized
Cost Losses
------------ -------------
Fixed Maturity Securities by Industry Concentration:
Municipals................................................................. $ 850.2 $ 15.0
Utilities.................................................................. 286.2 5.6
Finance.................................................................... 175.9 4.7
Service.................................................................... 133.6 2.4
Other (includes 16 industry groups)........................................ 1,320.2 22.0
------------ -------------
Total.................................................................. $ 2,766.4 (3) $ 49.9
============ =============
(3) Represents 43.6 percent of the total fixed maturity securities portfolio.
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified by Industry Concentration for Equity Securities
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 2005
-------------------------------
Gross
Amortized Unrealized
Cost Losses
------------ -------------
Equity Securities by Industry Concentration:
Insurance.................................................................. $ 28.4 $ 1.3
Health Care................................................................ 22.5 1.0
Service.................................................................... 7.2 .9
Mutual Funds............................................................... 54.3 .7
------------ -------------
Total.................................................................. $ 112.5 (4) $ 4.0 (5)
============ =============
(4) Represents 31.2 percent of the total equity securities portfolio.
(5) Represents 1.1 percent of the cost of the total equity securities
portfolio, while gross unrealized gains represent 15.6 percent of the
portfolio.
16
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified For All Fixed Maturity Securities
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 2005
------------------------------------------------------------------------
Amortized Cost
of Fixed Maturity Securities Gross Unrealized Losses
--------------------------------- --------------------------------
Non- Non-
Investment Investment
All Grade Only All Grade Only
------------- ------------- ------------ -------------
Maturity Ranges:
Due in one year or less........................ $ 133.0 $ - $ .4 $ -
Due after one year through five years.......... 867.9 - 15.3 -
Due after five years through ten years......... 1,735.8 - 33.5 -
Due after ten years............................ 29.5 - .6 -
------------- ------------- ------------ -------------
Total....................................... $ 2,766.4 $ - $ 49.9 $ -
============= ============= ============ =============
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Losses Stratified by Duration and Amount of Unrealized Losses
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 2005
-----------------------------------------------------------------------
Amount of Gross Unrealized Losses
-----------------------------------------------------------------------
Total Gross
Less than 20% to 50% More than Unrealized
20 %of Cost of Cost 50% of Cost Loss
------------- ------------- ------------ -------------
Number of Months in Loss Position:
Fixed Maturity Securities:
One to six months.................... $ 32.1 $ - $ - $ 32.1
Seven to twelve months............... 13.2 - - 13.2
More than twelve months.............. 4.5 - - 4.5
------------- ------------- ------------ -------------
Total....................... $ 49.9 $ - $ - $ 49.9
============= ============= ============ =============
Equity Securities:
One to six months.................... $ 3.0 $ - $ - $ 3.0
Seven to twelve months............... .9 - - .9
More than twelve months.............. - - - -
------------- ------------- ------------ -------------
Total....................... $ 4.0 $ - $ - $ 4.0
============= ============= ============ =============
Number of Issues in Loss Position:
Fixed Maturity Securities:
One to six months.................... 553 - - 553
Seven to twelve months............... 100 - - 100
More than twelve months.............. 28 - - 28
------------- ------------- ------------ ------------
Total....................... 681 - - 681 (6)
============= ============= ============ =============
Equity Securities:
One to six months.................... 3 - - 3
Seven to twelve months............... 1 - - 1
More than twelve months.............. - 1 - 1
------------- ------------- ------------ ------------
Total....................... 4 1 - 5 (6)
============= ============= ============ ============
The aging of issues with unrealized losses employs closing market price
comparisons with an issue's original cost. The percentage reduction from
original cost reflects the decline as of a specific point in time (March 31,
2005 in the above table) and, accordingly, is not indicative of a security's
value having been consistently below its cost at the percentages and throughout
the periods shown.
(6) At March 31, 2005 the number of issues in a loss position represent 40.2
percent as to fixed maturities, and 15.6 percent as to equity securities of
the total number of such issues held by the Company.
17
- ------------------------------------------------------------------------------------------------------------------------------------
Age Distribution of Fixed Maturity Securities
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2005 2004
------------------ -----------------
Maturity Ranges:
Due in one year or less........................................................ 9.0% 12.5%
Due after one year through five years.......................................... 43.0 42.9
Due after five years through ten years......................................... 45.3 43.5
Due after ten years through fifteen years...................................... 2.7 1.1
Due after fifteen years........................................................ - -
================== =================
Total...................................................................... 100.0% 100.0%
================== =================
Average Maturity.................................................................... 4.7 Years 4.7 Years
================== =================
Duration (7)........................................................................ 4.2 4.1
================== =================
(7) Duration is used as a measure of bond price sensitivity to interest rate
changes. A duration of 4.2 as of March 31, 2005 implies that a 100 basis
point parallel increase in interest rates from current levels would result
in a possible decline in the market value of the long-term fixed maturity
investment portfolio of approximately 4.2 percent.
- ------------------------------------------------------------------------------------------------------------------------------------
Composition of Unrealized Gains (Losses)
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2005 2004
------------------ -----------------
Fixed Maturity Securities:
Amortized cost................................................................ $ 6,346.4 $ 6,273.2
Estimated fair value.......................................................... 6,420.1 6,455.9
------------------ -----------------
Gross unrealized gains........................................................ 123.6 194.5
Gross unrealized losses....................................................... (49.9) (11.8)
------------------ -----------------
Net unrealized gains ..................................................... $ 73.6 $ 182.7
================== =================
Equity Securities:
Cost.......................................................................... $ 361.3 $ 396.8
Estimated fair value.......................................................... 413.6 459.0
------------------ -----------------
Gross unrealized gains........................................................ 56.2 68.6
Gross unrealized losses....................................................... (4.0) (6.4)
------------------ -----------------
Net unrealized gains...................................................... $ 52.2 $ 62.2
================== =================
Among other major assets, substantially all of the Company's receivables
are not past due. Reinsurance recoverable balances on paid or estimated unpaid
losses are deemed recoverable from solvent reinsurers or have otherwise been
reduced by allowances for estimated amounts unrecoverable. Deferred policy
acquisition costs are estimated by taking into account the variable costs of
producing specific types of insurance policies, and evaluating their
recoverability on the basis of recent trends in claims costs. The Company's
deferred policy acquisition cost balances have not fluctuated substantially from
period-to-period and do not represent significant percentages of assets or
shareholders' equity.
The parent holding company meets its liquidity and capital needs
principally through dividends paid by its subsidiaries. The insurance
subsidiaries' ability to pay cash dividends to the parent company is generally
restricted by law or subject to approval of the insurance regulatory authorities
of the states in which they are domiciled. The Company can receive up to $341.5
in dividends from its subsidiaries in 2005 without the prior approval of
regulatory authorities. The liquidity achievable through such permitted dividend
payments is more than adequate to cover the parent holding company's currently
expected cash outflows represented mostly by interest on outstanding debt and
quarterly cash dividend payments to shareholders. In addition, Old Republic can
access the commercial paper market for up to $150.0 to meet unanticipated
liquidity needs.
Old Republic's capitalization of $4,024.1 at March 31, 2005 consisted of
debt of $143.2 and common shareholders' equity of $3,880.9. The increase in the
common shareholders' equity account during the first quarter of 2005 reflects
primarily the retention of earnings in excess of dividends requirements offset
by a decrease in the value of investments carried at market values. Old Republic
has paid cash dividends to its shareholders without interruption since 1942, and
has increased the annual rate in each of the past 23 years. The annual dividend
rate is typically reviewed and approved by the Board of Directors in the first
quarter of each year. In establishing each year's cash dividend rate the
Corporation does not follow a strict formulaic approach and favors a gradual
rise in the annual dividend rate that is largely reflective of long-term
consolidated operating earnings trends. Accordingly, each year's dividend rate
is set judgmentally in consideration of such key factors as the dividend paying
capacity of the Corporation's insurance subsidiaries, the trends in average
annual statutory and GAAP earnings for the six most recent calendar years, and
the long-term expectations for the Corporation's consolidated business. At its
March, 2005 meeting the Board of Directors approved a quarterly cash dividend
rate of 17 cents per share, up from 13 cents per share, subject to the usual
quarterly authorizations.
18
At its March, 2004 meeting, the Company's Board of Directors authorized the
reacquisition of up to $250.0 of common shares as market conditions warrant
during the two year period from that date; no stock had as yet been acquired
through March 31, 2005 pursuant to this authorization.
RESULTS OF OPERATIONS
Revenues: Premiums & Fees
Pursuant to GAAP applicable to the insurance industry, revenues are
associated with the related benefits, claims, and expenses.
Substantially all general insurance premiums are reflected in income on a
pro-rata basis. Earned but unbilled premiums are generally taken into income on
the billing date, while adjustments for retrospective premiums, commissions and
similar charges or credits are accrued on the basis of periodic evaluations of
current underwriting experience and contractual obligations. Nearly all of the
Company's mortgage guaranty premiums stem from monthly installment policies.
Accordingly, such premiums are written and earned in the month coverage is
effective. With respect to minor numbers of annual or single premium policies,
earned premiums are largely recognized on a pro-rata basis over the terms of the
policies. Title premium and fee revenues stemming from the Company's direct
operations (which includes branch offices of its title insurers and wholly owned
subsidiaries of the Company) represent approximately 38 percent of consolidated
title business revenues. Such premiums are generally recognized as income at the
escrow closing date which approximates the policy effective date. Fee income
related to escrow and other closing services is recognized when the related
services have been performed and completed. The remaining 62 percent of
consolidated title premium and fee revenues is produced by independent title
agents and underwritten title companies. Rather than making estimates that could
be subject to significant variance from actual premium and fee production, the
Company recognizes revenues from those sources upon receipt. Such receipts can
reflect a three to four month lag relative to the effective date of the
underlying title policy, and are offset concurrently by production expenses and
claim reserve provisions.
The major sources of Old Republic's earned premiums and fees for the
periods shown were as follows:
% Change
from prior
General Mortgage Title Other Total period
---------- ---------- --------- ---------- ---------- ------------
Years Ended December 31:
2000............................ $ 857.8 $ 331.4 $ 494.0 $ 53.4 $ 1,736.8 -2.5%
2001............................ 1,000.2 353.1 625.3 50.6 2,029.5 16.9
2002............................ 1,184.1 376.2 813.4 50.1 2,423.9 19.4
2003............................ 1,379.5 400.9 1,103.8 51.6 2,936.0 21.1
2004............................ 1,623.0 403.2 1,025.2 64.6 3,116.1 6.1
Quarters Ended March 31:
2004............................ 376.5 98.7 234.1 17.1 726.6 9.5
2005............................ $ 431.1 $ 105.4 $ 231.7 $ 20.6 $ 788.8 8.6%
========== ========== ========= ========== ========== ============
19
The percentage allocation of net premiums earned for major insurance
coverage in the General Insurance Group was as follows:
Quarters Ended
March 31, Years Ended December 31,
----------------------- ----------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
---------- ---------- ---------- --------- --------- ---------- ----------
Type of Coverage:
Commercial Automobile
(mostly trucking)............. 38.8% 38.3% 37.9% 39.5% 43.0% 45.7% 49.7%
Workers' Compensation............ 22.4 23.4 21.8 20.0 19.1 17.4 16.6
Financial Indemnity.............. 10.9 12.4 11.8 11.7 8.7 7.2 7.9
Property......................... 11.0 11.7 11.3 12.2 12.9 12.8 13.7
General Liability................ 5.9 4.4 5.8 5.3 4.7 5.4 5.1
Other............................ 11.0 9.8 11.4 11.3 11.6 11.5 7.0
---------- ---------- ---------- --------- --------- ---------- ----------
Total............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========= ========= ========== ==========
The following tables provide information on risk exposure trends for Old
Republic's Mortgage Guaranty Group.
Quarters Ended
March 31, Years Ended December 31,
-------------------------- ------------------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- ------------ ----------- -----------
New Insurance Written:
Traditional Primary.... $ 4,705.6 $ 5,899.5 $ 24,749.4 $ 37,255.8 $ 30,809.6 $ 25,085.4 $ 14,929.7
Bulk................... 3,299.5 41.1 4,487.8 6,806.6 5,130.0 2,614.4 35.3
Other.................. 39.8 1,165.0 7,324.7 5,802.8 7,555.5 3,675.3 1,594.8
----------- ----------- ----------- ----------- ------------ ----------- -----------
Total.................. $ 8,045.0 $ 7,105.7 $ 36,562.0 $ 49,865.2 $ 43,495.1 $ 31,375.1 $ 16,559.8
=========== =========== =========== =========== ============ =========== ===========
Net Risk In Force:
Traditional Primary.... $ 15,274.2 $ 15,289.7 $ 15,452.2 $ 15,329.5 $ 15,367.6 $ 15,043.5 $ 14,840.7
Bulk................... 1,094.5 783.3 834.8 802.2 513.0 167.0 8.7
Other.................. 580.4 509.2 580.9 493.4 450.7 336.9 271.5
----------- ----------- ----------- ----------- ------------ ----------- -----------
Total.................. $ 16,949.2 $ 16,582.2 $ 16,868.0 $ 16,625.1 $ 16,331.3 $ 15,547.4 $ 15,120.9
=========== =========== =========== =========== ============ =========== ===========
Quarter Ended
March 31, Years Ended December 31,
-------------------- ---------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- ---------
Analysis of Traditional Primary Risk in Force:
By Fair Isaac & Company ("FICO") Scores (1):
FICO less than 620......................... 8.6% 8.5% 8.6% 8.5% -% -% -%
FICO 620 to 680............................ 31.4 29.8 31.1 29.2 - - -
FICO greater than 680...................... 51.8