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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, 1998
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from_____________________ to _____________________
Commission File Number: 0-4625
OLD REPUBLIC INTERNATIONAL CORPORATION
-----------------------------------------------------
(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:
Share/Par Value Outstanding Name of each exchange
Title of each class February 26, 1999 on which registered
- -------------------------- --------------------------- -----------------------
7% Subordinated Debentures
Due June 15, 2007 $115,000,000 New York Stock Exchange
--------------------------- -----------------------
Common Stock/$1 par value 131,868,948 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 Ill of this Form 10-K or any amendment to this
Form 10-K._X_
The aggregate market value of the Company's voting Common Stock held by
non-affiliates of the registrant computed by reference to the closing price at
which the stock was quoted as of February 26, 1999 was $2,480,454,912.
Documents incorporated by reference:
- -----------------------------------
The following documents are incorporated by reference into that part of this
Form 10-K designated to the right of the document title.
Title Part
Proxy statement for the 1999
Annual Meeting of Shareholders III, Items 10, 11, 12 and 13
Exhibits as specified in exhibit index (page 57) IV, Item 14
There are 58 pages in this report
PART I
Item 1-Business
(a) General Development of Business. Old Republic International Corporation is a
Chicago-based insurance holding company with subsidiaries engaged in the general
(property & liability), mortgage guaranty, title, and life (life & disability)
insurance businesses. In this report, "Old Republic", "the Corporation", or "the
Company" refers to Old Republic International Corporation and its subsidiaries
as the context requires. The aforementioned insurance segments are organized as
the Old Republic General, Mortgage Guaranty, Title, and Life Groups, and
references herein to such groups apply to the Company's subsidiaries engaged in
the respective segments of business.
Financial Information Relating to Segments of Business (a)
The contributions to net revenues, and income (loss) before taxes and
extraordinary item of each Old Republic segment are set forth below for the
years shown, together with their respective assets at the end of each year. The
information below should be read in conjunction with the consolidated financial
statements, the notes thereto, and the "Management Analysis of Financial
Position and Results of Operations" appearing elsewhere herein.
($ in Millions)
-------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------------------------------
Net Revenues (b) Income (Loss) Before Taxes
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
---------- ----------- ---------- ---------- ---------- ----------
General ............................... $ 1,111.3 $ 1,119.5 $ 1,074.9 $ 192.0 $ 208.3 $ 188.8
Mortgage Guaranty...................... 348.3 313.3 262.6 155.3 141.5 120.2
Title.................................. 578.8 423.4 387.9 64.6 36.5 24.6
Life................................... 72.7 75.4(c) 60.5 6.6 19.9(c) 7.0
Other Operations - Net................. 7.4 4.5 2.6 (4.9) (6.1) (13.5)
---------- ----------- ---------- ---------- ---------- ----------
Subtotal............................. 2,118.7 1,936.4 1,788.7 413.7 400.3 327.2
Realized Investment Gains.............. 53.0 26.3 15.1 53.0 26.3 15.1
---------- ----------- ---------- ---------- ---------- ----------
Total................................ $ 2,171.7 $ 1,962.8 $ 1,803.9 $ 466.7 $ 426.7 $ 342.4
========== =========== ========== ========== ========== ==========
Assets at December 31,
-------------------------------------
1998 1997 1996
---------- ---------- ----------
General............................................................................. $ 5,160.2 $ 5,300.6 $ 5,350.5
Mortgage Guaranty................................................................... 1,092.2 922.9 760.5
Title............................................................................... 460.9 419.4 408.2
Life................................................................................ 329.5(d) 309.4 310.3
Consolidated...................................................................... $ 7,019.7 $ 6,923.4 $ 6,656.2
========== ========== ==========
- ------------
(a) 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.
(b) Revenues consist of net premiums, fees, net investment and other income
earned; realized investment gains are shown in total for all groups
combined.
(c) Includes $12.6 of interest income from settlement of prior years' tax
issues.
(d) The Company has entered into an agreement to sell its small annuity book
of business; this will have no material effect on Old Republic's
consolidated results or financial position (see Note 1(f) of the Notes to
Consolidated Financial Statements).
General Insurance Group
Through its General Insurance Group subsidiaries, the Corporation assumes
risks and performs related risk management and marketing services pertaining to
a large variety of property and liability commercial insurance coverages. Old
Republic does not have a meaningful participation in personal lines of
insurance.
Liability Coverages: Workers' compensation, general liability (including
the general liability portion of commercial package policies), and commercial
automobile full coverage protection are the major classes of insurance
underwritten for businesses and public entities such as municipalities. Within
these classes of insurance, Old Republic specializes in a number of industries,
most prominently the transportation, coal and energy services, construction and
forest product industries. Such business is primarily produced through agency
and brokerage channels.
2
The rates charged for all workers' compensation insurance are generally
regulated by the various states. It is therefore possible that the rate
increases necessary to cover any expansion of benefits under state laws or
increases in claim frequency or severity may not always be granted soon enough
to enable insurers to fully recover the amount of the benefits they must pay.
The Corporation has over the past several years 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 1998, production of
commercial automobile (principally trucking) direct insurance premiums accounted
for 48.3% of consolidated direct premiums written by the General Insurance
Group. For the same year, workers' compensation and general liability direct
insurance premiums amounted to 16.3% and 9.8%, respectively, of consolidated
direct premiums written.
Specialty programs have been expanded or initiated to insure corporations'
exposures to directors' and officers' and errors and omissions liability, to
cover owners and operators of private aircraft for hull and liability exposures,
and to insure grain elevators and liquid petroleum gas operations.
The Corporation assumes (primarily on a facultative basis) a moderate
amount of reinsurance business produced by other insurance or reinsurance
companies. Most of this business encompasses workers' compensation, general and
automobile liability lines, as well as a moderate amount of property exposures.
Property and Other Coverages: Old Republic's property insurance business
primarily includes commercial physical damage insurance on trucking risks. A
small volume of business is represented by fire and other physical perils for
houses and commercial properties. All such insurance is produced through agents
or financial intermediaries, such as finance companies, and on a reinsurance
assumed basis.
Fidelity and surety coverages are underwritten through agents by the Old
Republic Surety Group, Inc.
Old Republic Insured Credit Services, Inc., a wholly-owned subsidiary, has
marketed loan and retail installment sales credit guaranty insurance since 1955
through commercial banks and thrift institutions. This coverage provides lenders
with a guaranty against defaults on home equity and home improvement loans and
installment sales contracts.
Auto Warranty and Home Warranty, while still relatively small businesses,
are marketed directly by Old Republic through its own employees and selected
independent agents.
Mortgage Guaranty Group
Real estate mortgage loan insurance protects lending institutions against
certain losses, generally to the extent of 10% to 35% of the sum of the
outstanding amount of each insured mortgage loan, and allowable costs incurred
in the event of default by the borrower. The Corporation insures only first
mortgage loans, primarily on residential properties having one-to-four family
dwelling units.
Mortgage guaranty insurance premiums originate from savings and loan
associations, mortgage bankers and other lending institutions. The Corporation's
residential real estate loan insurance business is originated, approximately 16%
by savings and loan associations, 69% by mortgage bankers and 15% by other
lenders. The Corporation's mortgage guaranty insurance in force at December 31,
1998, was originally produced by approximately 4,100 different lending
institutions and about 2,200 such institutions originated business in 1998. The
profitability of the Corporation's insurance products is not tied in any
significant degree to the financial well-being of these institutions. While it
is possible that the failure of a large number of such institutions could
increase the competition for sales of certain insurance products to the
surviving institutions, it is also likely that other institutions or providers
of financial services would emerge to take their place.
Annual, monthly and single premium plans for residential real estate loan
insurance are offered. Annual plans provide coverage on a year to year basis
with first year premiums being dependent on the loan-to-value ratio and the
coverage offered. Annual renewal premiums are charged on the basis of the
outstanding loan balance on the anniversary date, or, if selected, on the
original loan balance. Monthly plans provide coverage on a month-to-month basis
with premiums being dependent on the loan-to-value ratio and the coverage
offered. In the case of monthly premium plans, the first month and all renewal
months are charged on the basis of the outstanding loan amount on the
anniversary date or, if selected, on the original loan balance. Single premium
plans provide coverage for a period of three to fifteen years, or the number of
years required to amortize a standard mortgage to an 80% loan-to-value ratio, if
selected. The premium charged similarly depends on the loan-to-value ratio, the
coverage offered, the type of loan instrument (whether fixed rate/fixed payment
or an adjustable mortgage loan) and whether the property is to be owner
occupied. Approximately 23% and 76%, respectively of the residential real estate
loan insurance in force at December 31, 1998, has been written under annual and
monthly premium plans. Monthly premium plans, a product that was introduced in
1993, accounted for approximately 98% of the new business written in 1998.
3
The Corporation limits its residential real estate insurance to lenders
approved by it and supervised or regulated by federal or state authorities in
order to obtain reasonable assurance as to the effectiveness of such
institutions' lending practices. A master policy is issued to each approved
lender, but the master policy does not obligate the Corporation to issue
insurance on any particular loan. To obtain insurance on a specific mortgage
loan, an approved lender generally submits an application, supported by a copy
of the borrower's loan application, an appraisal report on the property by
either the lender or an independent appraiser, a written credit report on the
borrower, an affidavit of the borrower's equity and certain other information.
The underwriting department reviews this material and approves or rejects the
application, usually on the day it is received. The Corporation generally
adheres to the underwriting guidelines published by the Federal Home Loan
Mortgage Corporation. Upon approval of an application for insurance of a loan,
the Corporation issues a commitment to insure the loan; this is followed by a
certificate of insurance when the loan is consummated.
Title Insurance Group
The title insurance business consists primarily of the issuance of policies
to real estate purchasers and investors based upon searches of the public
records which contain information concerning interests in real property. The
policy insures against losses arising out of defects, liens and encumbrances
affecting the insured title and not excluded or excepted from the coverage of
the policy.
There are two basic types of title insurance policies: lenders' policies
and owners' policies. Both are issued for a onetime premium. Most mortgages made
in the United States are extended by mortgage bankers, savings and commercial
banks, state and federal agencies, and life insurance companies. The financial
institutions secure title insurance policies to protect their mortgagees'
interest in the real property. This protection remains in effect for as long as
the mortgagee has an interest in the property. A separate title insurance policy
is issued to the owner of the real estate. An owner's policy of title insurance
protects an owner's interest in the title to the property.
The premiums charged for the issuance of title insurance policies vary with
the policy amount and the type of policy issued. The premium is collected in
full when the real estate transaction is closed, there being no recurring fee
thereafter. In many areas, premiums charged on subsequent policies on the same
land may be reduced, depending generally upon the time elapsed between issuance
of the previous policies and the nature of the transactions for which the
policies are issued. Most of the charge to the consumer relates to title
services rendered in conjunction with the issuance of a policy rather than to
the possibility of loss due to risks insured against. Accordingly, the service
performed by a title insurer relates for the most part to the prevention of loss
rather than to the assumption of the risk of loss.
In connection with its title insurance operations, Old Republic also
provides escrow facilities, services for the disbursement of construction funds,
and other services pertaining to real estate transfers.
Life Insurance Group
Credit & Other Life and Disability: Old Republic markets and writes
consumer credit life and disability insurance primarily through automobile
dealers. Borrowers insured under consumer credit life insurance are also
generally covered by consumer credit disability protection. Credit life
insurance provides for the repayment of a loan, installment purchase, or other
debt obligation in the event of the death of the borrower, while credit
disability insurance provides for the payment of installments due on such debt
while the borrower is disabled. Old Republic has also written various
conventional life, disability/accident and health insurance coverages for many
years, principally on a direct marketing basis through banks and other financial
services institutions.
Ordinary term life insurance is sold through independent agents and brokers
for relatively large face amounts, in both the United States and Canada.
Marketing of term life insurance products is aimed principally toward
self-employed individuals, professionals, owners of small businesses, and high
net worth persons.
Annuities: In the past, Old Republic marketed annuity policies, some of
which remain outstanding, through securities dealers in New York State. These
policies provide for annuity benefits based on premiums paid and accumulating
with interest over time. Since 1985, the volume of annuity business has been
inconsequential as the Company has been unwilling to compete in this part of the
insurance business. The Company has entered into an agreement to sell its small
annuity book of business; this will have no material effect on Old Republic's
consolidated results or financial position (see Note 1(f) of the Notes to
Consolidated Financial Statements).
4
Consolidated Underwriting Statistics
The following table reflects underwriting statistics covering: 1) premiums
together with loss, expense, and policyholders' dividend ratios for the major
coverages underwritten solely in the General, Mortgage Guaranty and Title
insurance groups, and disability/accident & health coverages underwritten
directly or through reinsurance in both the Life and General Insurance groups;
2) a summary of net retained life insurance in force at the end of the years
shown:
($ in Millions)
-----------------------------------------------------
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
General Insurance Group:
Overall Experience:
Net Premiums Written............................................... $ 892.1 $ 908.4 $ 866.3
Net Premiums Earned (a)............................................ $ 903.1 $ 907.7 $ 868.2
Loss Ratio......................................................... 72% 72% 73%
Policyholders' Dividend Ratio...................................... -% -% -%
Expense Ratio(a)................................................... 28% 27% 27%
-------------- ------------- -------------
Composite Ratio.................................................... 100% 99% 100%
============== ============= =============
Experience by Major Coverages:
Commercial Automobile (Principally trucking):
Net Premiums Earned (a)............................................ $ 476.0 $ 455.3 $ 397.4
Loss Ratio......................................................... 83% 81% 79%
============== ============= =============
Workers' Compensation:
Net Premiums Earned (a)............................................ $ 148.9 $ 156.9 $ 151.6
Loss Ratio......................................................... 56% 64% 71%
Policyholders' Dividend Ratio...................................... -% -% 1%
============== ============= =============
General Liability:
Net Premiums Earned (a)............................................ $ 49.8 $ 49.5 $ 46.9
Loss Ratio......................................................... 33% 51% 76%
============== ============= =============
Property and Other Coverages:
Net Premiums Earned (a)............................................ $ 228.4 $ 246.0 $ 272.3
Loss Ratio......................................................... 67% 63% 63%
============== ============= =============
Mortgage Guaranty Group:
Net Premiums Earned (b) ........................................... $ 290.7 $ 271.0 $ 226.6
Loss Ratio (b) .................................................... 27% 35% 36%
============== ============= =============
Title Insurance Group:(b)
Net Premiums Earned................................................ $ 315.8 $ 238.6 $ 220.2
Combined Net Premiums & Fees Earned................................ $ 558.2 $ 402.0 $ 367.4
Loss Ratio: To Net Premiums Earned.............................. 9% 8% 8%
To Net Premiums & Fees Earned....................... 5% 5% 5%
============== ============= =============
Disability/Accident & Health (c):
Net Premiums Earned................................................ $ 36.8 $ 35.2 $ 33.9
Loss Ratio......................................................... 40% 40% 42%
============== ============= =============
Net Retained Life Insurance In Force:
Ordinary Life...................................................... $ 6,414.0 $ 4,695.5 $ 3,833.9
Credit and Other Life.............................................. 326.5 217.4 135.7
-------------- ------------- -------------
Total........................................................... $ 6,740.5 $ 4,912.9 $ 3,969.6
============== ============= =============
- ------------
(a) Statutory net premiums earned and expense ratios may vary from amounts
calculated pursuant to generally accepted accounting principles due to
differences in the calculation of unearned premium reserves and
acquisition cost under each accounting method.
(b) Amounts and ratios reported are determined pursuant to generally accepted
accounting principles.
(c) Disability/accident & health data reflect the composite experience of the
Life and General Insurance segments of business. Accordingly, the General
Insurance Group composite experience includes premiums and related costs
for disability/accident & health coverages underwritten directly or
through reinsurance in such group.
5
Variations in the loss (including related claim settlement expense) ratios
are caused by changes in the frequency and severity of claims incurred, changes
in premium rates and the level of premium refunds, and periodic changes in claim
and claim expense reserve estimates resulting from ongoing reevaluations of
reported and unreported claims and claim expenses. Loss, expense, policyholders'
dividends, and composite ratios have been rounded to the nearest percentage
point. The loss ratios include loss adjustment expenses where appropriate.
Policyholders' dividends are a reflection of changes in loss experience for
individual or groups of policies, rather than overall results, and should be
viewed in conjunction with loss ratio trends; policyholders' dividends apply
principally to workers' compensation insurance.
General Insurance Group loss ratios for workers' compensation and liability
insurance coverages in particular may reflect greater variability due to a
number of factors. The variability of claims experience is due in part to chance
events in any one year, changes in loss costs emanating from participation in
involuntary markets (i.e. industry-wide insurance 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, loss and dividend ratios for
these individual coverages should be considered in the light of such a
concurrent underwriting approach. Improved loss experience for workers'
compensation insurance in 1998 and 1997 reflects lower claim costs from
involuntary market participations as well as generally improving industry-wide
loss trends.
The loss ratio for mortgage guaranty insurance decreased in 1998 compared
to 1997; the improvement was mostly attributed to the stable economic conditions
of the past several years which have led to reduced mortgage defaults,
particularly in the California market. The Title Insurance Group loss ratios for
the years presented reflect favorable trends in claims severity and frequency
for business underwritten since 1992.
The increase in net ordinary life insurance in force is attributed to the
introduction of more favorably priced term life products that received greater
market acceptance.
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 administration of
claim departments) to administer known and IBNR claims. Such claim reserves,
except as to classification in the Consolidated Balance Sheets as to 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 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 and actuarial
studies, the professional experience and expertise of the Company's claim
departments' personnel or attorneys and independent adjusters retained to handle
individual claims, the effect of inflationary trends on future claim settlement
costs, and periodic changes in claim frequency patterns such as those caused by
natural disasters, illnesses, accidents, or work-related injuries. Consequently,
the reserve-setting process relies on the judgments and opinions of a large
number of persons, on historical precedent and trends, and on expectations as to
future developments. At any point in time, the Company and the industry are
exposed to possibly higher than anticipated claim costs due to the
aforementioned factors, and to the evolution, interpretation, and expansion of
tort law, as well as to the effects of unexpected jury verdicts.
In establishing claim reserves, the possible increase in future loss
settlement costs caused by inflation is considered implicitly, along with the
many other factors cited above. Reserves are generally set to provide for the
ultimate cost of all claims. With regard to workers' compensation reserves,
however, the ultimate cost of long-term disability or pension-type claims is
discounted to present value based on interest rates ranging from 3.5% to 4.0%.
The Company, where applicable, uses only such discounted reserves in evaluating
the results of its operations, in pricing its products and settling
retrospective and reinsured accounts, in evaluating policy terms and experience,
and for other general business purposes. Solely to comply with reporting rules
mandated by the Securities and Exchange Commission, however, Old Republic has
made statistical studies of applicable workers' compensation reserves to obtain
estimates of the amounts by which claim and claim adjustment expense reserves,
net of reinsurance, have been discounted. These studies have resulted in
estimates of such amounts at approximately $169.5, $167.7 and $163.2 million, as
of December 31, 1998, 1997, and 1996, respectively. It should be noted, however,
that these differences between
6
discounted and non-discounted (terminal) reserves are, fundamentally, of an
informational nature, and are not indicative of an effect on operating results
for any one or series of years for the above-noted reasons.
The Company believes that its overall reserving practices have been
consistently applied over many years, and that its aggregate net reserves have
resulted in reasonable approximations of the ultimate net costs of claims
incurred. However, no representation is made that ultimate net claim and related
costs will not be greater or lower than previously established reserves.
The following table shows the indicated deficiencies or redundancies for
the years 1988 to 1998. In reviewing this tabular data, it should be noted that
prior periods' loss payment and development trends may not be repeated in the
future due to the large variety of factors influencing the reserving process
outlined herein above. The reserve redundancies or deficiencies shown for all
years are not necessarily indicative of the effect on reported results of any
one or series of years since retrospective premium and commission adjustments
employed in various parts of the Company's business tend to partially or fully
offset or negate such effects. (See "Consolidated Underwriting Statistics"
above, and "Reserves, Reinsurance, and Retrospective Adjustments" elsewhere
herein).
The subject of property and liability insurance claim reserves has been
written about and analyzed extensively by a large number of professionals and
regulators. Accordingly, the above discussion summary should, of necessity, be
regarded as a basic outline of the subject and not as a definitive presentation.
($ in Millions/Percentages to Nearest Whole Point)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) As of December 31: 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(b) Liability (1) for unpaid
claims and claim adjustment
expenses(2): $1,271 $1,335 $1,435 $1,540 $1,573 $1,700 $1,768 $1,821 $1,829 $1,846 $1,742
================================================================================================
(c) Paid (cumulative) as of (3):
One year later 21% 20% 22% 24% 20% 21% 22% 22% 20% 22% -%
Two years later 33 34 36 36 33 34 35 33 33 - -
Three years later 43 44 44 45 42 43 42 42 - - -
Four years later 50 49 51 51 49 48 49 - - - -
Five years later 55 55 56 56 52 53 - - - - -
Six years later 59 58 60 58 56 - - - - - -
Seven years later 62 62 61 61 - - - - - - -
Eight years later 65 63 64 - - - - - - - -
Nine years later 66 66 - - - - - - - - -
Ten years later 68% -% -% -% -% -% -% -% -% -% -%
=================================================================================================
(d) Liability reestimated (i.e.,
cumulative payments plus
reestimated ending liability)
as of (4):
One year later 101% 98% 100% 99% 97% 95% 95% 96% 94% 93% -%
Two years later 97 99 100 97 94 91 93 92 88 - -
Three years later 98 98 99 96 93 93 90 87 - - -
Four years later 98 98 99 97 96 91 87 - - - -
Five years later 99 99 100 100 95 89 - - - - -
Six years later 99 100 103 99 93 - - - - - -
Seven years later 101 104 103 98 - - - - - - -
Eight years later 104 103 102 - - - - - - - -
Nine years later 104 102 - - - - - - - - -
Ten years later 104% -% -% -% -% -% -% -% -% -% -%
=================================================================================================
(e) Redundancy (deficiency)(5):
For each year-end at (a): -4% -2% -2% 2% 7% 11% 13% 13% 12% 7% -%
=================================================================================================
Average for all year-ends
at (a): 6.4%
====
(1) Amounts are reported net of reinsurance recoverable. (2) Excluding
unallocated loss adjustment expense reserves. (3) Percent of most recent
reestimated liability (line d). Decreases in paid loss percentages may at
times reflect the reassumption by the Company of certain previously ceded
loss reserves. (4) Percent of beginning liability (line b) for unpaid
claims and claim adjustment expenses. (5) Most current liability
reestimated (line d) as a percent of beginning liability (line b).
7
The following table shows an analysis of changes in aggregate reserves for
the Company's property and liability insurance claims and claim adjustment
expenses (1) for each of the years shown.
($ in Millions)
---------------------------------------
Years Ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Amount of reserves for unpaid claims and claim adjustment expenses
at the beginning of each year, net of reinsurance losses recoverable............ $ 1,845.9 $ 1,829.5 $ 1,820.9
----------- ----------- -----------
Incurred claims and claim adjustment expenses:
Provisions for insured events of the current year............................... 728.0 713.8 668.0
Change in provision for insured events of prior years........................... (123.8) (105.5) (74.4)
----------- ----------- -----------
Total incurred claims and claim adjustment expenses...................... 604.2 608.3 593.6
----------- ----------- -----------
Payments:
Claims and claim adjustment expenses attributable to insured
events of the current year................................................. 322.4 275.3 243.0
Claims and claim adjustment expenses attributable to insured
events of prior years...................................................... 385.8 316.6 342.0
----------- ----------- -----------
Total payments........................................................... 708.2 591.9 585.0
----------- ----------- -----------
Amount of reserves for unpaid claims and claim adjustment expenses
at the end of each year (2), net of reinsurance losses recoverable.............. 1,741.9 1,845.9 1,829.5
Reinsurance losses recoverable.................................................... 1,190.8 1,232.6 1,296.5
----------- ----------- -----------
Amount of reserves for unpaid claims and claim adjustment expenses................ $ 2,932.7 $ 3,078.5 $ 3,126.0
=========== =========== ===========
- ------------
(1) Excluding unallocated loss adjustment expense reserves.
(2) Reserves for incurred but not reported losses amounted to approximately
29.9%, 32.3% and 32.6% of the totals shown as of December 31, 1998, 1997
and 1996, respectively.
The data in the two tables above, incorporates Old Republic's estimates for
various asbestosis and environmental impairment ("A&E") claims or related costs
that have been filed in the normal course of business against a number of its
insurance subsidiaries. Such claims relate primarily to policies issued prior to
1985, many during a short period between 1981 and 1982 pursuant to an agency
agreement canceled in 1982. During all years and through the current date, the
Corporation's insurance subsidiaries have typically issued general liability
insurance policies with face amounts ranging between $1 million and $2 million
and rarely exceeding $10 million. Such policies have, in turn, been subject to
reinsurance cessions which have typically reduced the Corporation's retentions
to $500,000 or less as to each claim.
The Corporation's reserving methods, particularly as they apply to
formula-based reserves, have been established to provide for normal claim
occurrences as well as unusual exposures such as those pertaining to A&E claims
and related costs. At times, however, the Corporation's insurance subsidiaries
also establish specific formula and other reserves as part of their overall
claim and claim expense reserves to cover certain claims such as those emanating
from A&E exposures. These are intended to cover additional litigation and other
costs that are likely to be incurred to protect the Company's interests in
litigated cases in particular. At December 31, 1998, the Corporation's aggregate
indemnity and loss adjustment expense reserves specifically identified with A&E
exposures amounted to approximately $66.6 million gross, and $33.7 million, net
of reinsurance. Based on average annual claims payments during the five most
recent calendar years, such reserves represented 8.0 years (gross) and 12.3
years (net) of average annual claims payments.
Old Republic disagrees with the allegations of liability on virtually all
A&E related claims of which it has knowledge on the grounds that exclusions in
the policies preclude coverage for nearly all such claims, and that the
Corporation never intended to assume such risks. Old Republic's exposure on such
claims cannot therefore be calculated by conventional insurance reserving
methods for this and a variety of reasons, including: a) the absence of
statistically valid data inasmuch as such claims typically involve long
reporting delays and very often uncertainty as to the number and identity of
insureds against whom such claims have arisen or will arise; and b) the
litigation history of such or similar claims for other insurance industry
members that has produced court decisions that have been inconsistent with
regard to such questions as when the alleged loss occurred, which policies
provide coverage, how a loss is to be allocated among potentially responsible
insureds and/or their insurance carriers, how policy coverage exclusions are to
be interpreted, what types of environmental impairment or toxic tort claims are
covered, when the insurer's duty to defend is triggered, how policy limits are
to be calculated, and whether clean-up costs constitute property damage.
8
Individual insurance companies and others who have evaluated the potential
costs of litigating and settling A&E claims have noted with serious concern the
possibility that resolution of such claims, by applying liability retroactively
in the context of the existing insurance system, could likely undermine
materially the financial condition of major participants in the property and
liability insurance industry. In light of this substantial public policy issue,
the Corporation is of the view that the courts will not resolve in the near
future the litigation gridlock stemming from the non-resolution to date of
environmental claims in particular. In recent times, the Executive Branch and/or
the United States Congress have proposed changes in the legislation and rules
affecting the determination of liability for environmental claims. As of
December 31, 1998, however, there is no solid evidence to suggest that
forthcoming changes might mitigate or reduce some or all of these claim
exposures.
Because of the above issues and uncertainties, estimation of reserves for
losses and allocated loss adjustment expenses for the above noted types of
claims is much more difficult or impossible. Accordingly, no representation can
be made that the Corporation's reserves for such claims and related costs will
not prove to be overstated or understated in the future.
(b) Investments. In common with other insurance organizations, Old Republic
invests most funds provided by operations in income-producing investment
securities and bank deposits.
All investments must comply with applicable insurance laws and regulations
which prescribe the nature, form, quality, and relative amounts of investments
which may be made by insurance companies. Generally, these laws and regulations
permit insurance companies to invest within varying limitations in state,
municipal and federal government obligations, corporate obligations, preferred
and common stocks, certain types of real estate, and first mortgage loans. Old
Republic's investment policies are also influenced by the terms of the insurance
coverages written, by its expectations as to the timing of claim and benefit
payments, and by income tax considerations. The following tables show invested
assets at the end of the last three years, together with investment income for
such years.
Consolidated Investments
($ in Millions)
December 31,
--------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Held to Maturity
Fixed Maturity Securities:
Utilities.............................................................. $ 926.1 $ 1,001.8 $ 984.3
Tax-Exempt............................................................. 1,405.4 1,247.0 1,038.3
Redeemable Preferred Stocks............................................ .8 .8 .2
------------ ------------ ------------
2,332.3 2,249.7 2,022.9
------------ ------------ ------------
Other Invested Assets:
Mortgage Loans......................................................... 7.8 7.6 8.7
Policy Loans........................................................... 2.0 2.2 2.0
Collateral Loans....................................................... .4 .4 .2
Sundry................................................................. 14.8 5.1 14.2
------------ ------------ ------------
25.1 15.4 25.1
------------ ------------ ------------
Total held to maturity................................................ 2,357.5 2,265.1 2,048.1
------------ ------------ ------------
Available for Sale
Fixed Maturity Securities:
U.S. & Canadian Governments............................................ 619.1 684.4 758.0
Corporate.............................................................. 1,335.3 1,325.4 1,226.1
------------ ------------ ------------
1,954.4 2,009.9 1,984.2
------------ ------------ ------------
Equity Securities:
Non-redeemable Preferred Stocks........................................ 2.7 3.2 5.0
Common Stocks.......................................................... 162.1 113.8 111.1
------------ ------------ ------------
164.8 117.1 116.1
------------ ------------ ------------
Short-term Investments 377.6 328.0 265.7
------------ ------------ ------------
Total available for sale............................................ 2,497.0 2,455.2 2,366.0
------------ ------------ ------------
Total Investments......................................................... $ 4,854.5 $ 4,720.4 $ 4,414.2
============ ============ ============
9
--------------------------------------------------------------------------------------------------------------------------
Sources of Consolidated Investment Income
($ in Millions)
Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Fixed Maturity Securities:
Taxable................................................................ $ 186.5 $ 194.1 $ 199.1
Tax-Exempt............................................................. 64.6 55.4 41.4
Redeemable Preferred Stocks............................................ - - -
------------ ------------ ------------
251.2 249.5 240.6
------------ ------------ ------------
Equity Securities:
Non-redeemable Preferred Stocks........................................ .2 .2 .3
Common Stocks.......................................................... 2.6 1.7 2.2
------------ ------------ ------------
2.8 1.9 2.6
------------ ------------ ------------
Other Investment Income:
Interest on Short-term Investments..................................... 17.1 16.4 16.0
Sundry................................................................. 8.5 9.0 8.4
------------ ------------ ------------
25.7 25.5 24.5
------------ ------------ ------------
Gross Investment Income................................................... 279.7 277.0 267.7
Less: Investment Expenses (a).......................................... 6.5 6.2 7.2
------------ ------------ ------------
Net Investment Income..................................................... $ 273.1 $ 270.8 $ 260.5
============ ============ ============
- ------------
(a) Investment expenses consist primarily of personnel costs, investment
management and custody service fees and includes interest incurred on
funds held of $1.5, $1.7 and $1.7 for the years ended December 31, 1998,
1997 and 1996, respectively.
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. At December 31, 1998 and 1997, the Company had no investments in default
as to principal and/or interest.
The Company's investment policies are not designed to encourage trading of
its securities or to maximize the realization of investment gains. While the
amount of portfolio turnover varies from year to year, recent years'
dispositions of portfolio investments held to maturity are caused principally by
issuers' calls prior to maturity. The Company's invested assets as of December
31, 1998 have been classified solely as "held to maturity" or "available for
sale" pursuant to the existing investment policy.
The independent credit quality ratings and maturity distribution for Old
Republic's consolidated fixed maturity investments, excluding short-term
investments, at December 31, 1998 and 1997, are shown in the following tables.
These investments, $4.2 billion at December 31, 1998 and 1997, respectively,
represented approximately 61% and 62%, respectively, of consolidated assets, and
91% and 89%, respectively, of consolidated liabilities as of such dates.
10
-------------------------------------------------------------------------------------------------------------------------
Independent Ratings (a)
-------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------
1998 1997
------ ------
(% of total portfolio)
Aaa.................................................................................... 28.8% 30.1%
Aa..................................................................................... 33.3 31.2
A...................................................................................... 30.8 32.2
Baa.................................................................................... 6.3 5.9
------ ------
Total investment grade.............................................................. 99.2 99.4
All others (b)......................................................................... .8 .6
------ ------
Total............................................................................... 100.0% 100.0%
====== ======
- ------------
(a) Ratings are assigned primarily by Moody's with remaining ratings assigned
by Standard & Poor's and converted to the equivalent Moody's rating.
(b) "All others" include securities which when purchased were investment
grade, non-investment grade or non-rated convertible securities, and other
non-rated securities such as small issues of tax exempt bonds.
-------------------------------------------------------------------------------------------------------------------------
Maturity Distribution
-------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------
1998 1997
------ ------
(% of total portfolio)
Due in one year or less................................................................ 9.1% 6.5%
Due after one year through five years.................................................. 49.9 44.9
Due after five years through ten years................................................. 40.0 46.0
Due after ten years through fifteen years.............................................. .1 1.3
Due after fifteen years................................................................ .9 1.3
------ ------
100.0% 100.0%
====== ======
Average life, including short-term investments (years)................................. 4.2 4.7
====== ======
-------------------------------------------------------------------------------------------------------------------------
(c) Marketing. Commercial automobile, workers' compensation and general
liability insurance underwritten for larger commercial enterprises and public
entities is marketed primarily through independent insurance agents and brokers
with the assistance of Old Republic's trained sales, underwriting, actuarial,
and loss control personnel. The remaining property and liability commercial
insurance written by Old Republic is obtained through insurance agents or
brokers who are independent contractors and generally represent other insurance
companies, by direct sales, and through controlled marketing and underwriting
joint ventures. No single source accounted for over 10% of Old Republic's
premium volume in 1998.
Mortgage guaranty insurance is marketed primarily through a direct sales
force which calls on savings and loan associations, other lending institutions,
and mortgage bankers. No sales commissions or other forms of remuneration are
paid to the lending institutions and others for the procurement or development
of business.
11
A substantial portion of the Company's title insurance business is referred
to it by title insurance agents, builders, lending institutions, real estate
developers, realtors, and lawyers. Title insurance is sold through 259 Company
offices located in 32 states and through agencies and underwritten title
companies in the District of Columbia and all states except Iowa and Oregon. The
issuing agents are authorized to issue binders and title insurance policies
based on their own search and examination, or on the basis of abstracts and
opinions of approved attorneys. Policies are also issued through independent
abstract companies (not themselves title insurers) pursuant to underwriting
agreements. These agreements generally provide that the underwritten company may
cause title policies of the Company to be issued, and the latter is responsible
under such policies for any payments to the insured. Typically, the agency or
underwritten title company deducts the major portion of the title insurance
charge to the consumer as its commission and for services. During 1998,
approximately 46% of title insurance premiums and fees were accounted for by
policies issued by agents and underwritten title companies.
Existing differences in various parts of the country with respect to the
acceptance and use of title insurance in real estate sales and loan transactions
have a material effect on title insurance growth and operations in the areas
concerned. In the Western states and certain urban areas of the East and
Midwest, title insurance is widely accepted, with the result that the potential
volume of title insurance premium income is large in relation to the volume of
real estate activity in those areas. In some other parts of the country, title
insurance is not as generally used, particularly in transactions involving
residential real estate. Consequently, in those areas, the growth of title
insurance depends not only upon market share of the title insurance business
within the industry, but also upon the increased use of title insurance in real
estate transactions. The volume of real estate activity is also affected by the
availability and cost of financing, population growth, family movements and
other factors. Also, the title insurance business is seasonal. During the winter
months, new building activity is reduced and, accordingly, the Company does less
title insurance business relative to new construction during such months than
during the rest of the year. The most important factor, insofar as Old
Republic's title business is concerned, however, is the rate of activity in the
resale market for residential properties.
The personal contacts, relationships, and reputations of Old Republic's key
executives are a vital element in obtaining and retaining much of its business.
Many of the Company's customers produce large amounts of premiums and therefore
warrant substantial levels of top executive attention and involvement. In this
respect, Old Republic's mode of operation is similar to that of professional
reinsurers and commercial insurance brokers, and relies on the marketing,
underwriting, and management skills of relatively few key people for large parts
of its business.
Several types of insurance coverages underwritten by Old Republic, such as
credit life and disability, loan credit guaranty, title, and mortgage guaranty
insurance, are affected in varying degrees by changes in national economic
conditions. During periods of economic recession or rising interest rates,
operating and/or claim costs pertaining to such coverages tend to rise
disproportionately to revenues and generally result in reduced levels of
profitability.
At least one Old Republic insurance subsidiary is licensed to do business in
each of the 50 states, the District of Columbia, Puerto Rico, Virgin Islands,
Guam, and each of the Canadian provinces; mortgage insurance subsidiaries are
licensed in 50 states and the District of Columbia; title insurance operations,
however, are licensed to do business in 48 states, the District of Columbia and
Puerto Rico. Consolidated direct premium volume distributed among the various
geographical regions shown was as follows for the past three years:
- ----------------------------------------------------------------------------------------------------------------------------
Geographical Distribution of Direct Premiums Written
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------ ------ ------
United States:
Northeast................................................................. 6.4% 5.8% 5.1%
Mid-Atlantic.............................................................. 7.2 7.6 8.1
Southeast................................................................. 16.3 16.3 16.3
Southwest................................................................. 11.8 13.2 14.0
East North Central........................................................ 16.3 16.9 17.2
West North Central........................................................ 15.0 14.9 16.1
Mountain.................................................................. 8.3 8.7 8.3
Western................................................................... 15.7 13.6 11.9
Foreign (Principally Canada)................................................. 3.0 3.0 2.9
------ ------ ------
Total................................................................. 100.0% 100.0% 100.0%
====== ====== ======
12
(d) Reserves, Reinsurance, and Retrospective Adjustments. Old Republic's
insurance subsidiaries establish reserves for future policy benefits, unearned
premiums, reported claims, claims incurred but not reported, and claim
adjustment expenses, as required in the circumstances. Such reserves are based
on regulatory accounting requirements and generally accepted accounting
principles. In accordance with insurance industry practices, claim reserves are
based on estimates of the amounts that will be paid over a period of time and
changes in such estimates are reflected in the financial statements when they
occur. See "General Insurance Claim Reserves" herein.
To maintain premium production within its capacity and limit maximum losses
and risks for which it might become liable under its policies, Old Republic, as
is the practice in the insurance industry, may cede a portion or all of its
premiums and liabilities on certain classes of insurance, individual policies,
or blocks of business to other insurers and reinsurers. Although the ceding of
insurance does not generally discharge an insurer from its direct liability to a
policyholder, it is industry practice to establish the reinsured part of risks
as the liability of the reinsurer. Old Republic also employs retrospective
premium adjustments, contingent commissions, agency profit and risk-sharing
arrangements, and joint underwriting ventures for parts of its business in order
to minimize losses for which it might become liable under its insurance
policies, and to afford its clients or producers a degree of participation in
the risks and rewards associated with such business. Under retrospective
arrangements, Old Republic collects additional premiums if losses are greater
than originally anticipated and refunds a portion of original premiums if loss
costs are lower. Pursuant to contingent commissions, agency profit and other
risk-sharing arrangements, the Company adjusts commissions or premiums
retroactively to likewise reflect deviations from originally expected loss
costs. The amount of premium, commission, or other retroactive adjustments which
may be made is either limited or unlimited depending on the Company's evaluation
of risks and related contractual arrangements. To the extent that any
reinsurance companies, retrospectively rated risks, or producers might be unable
to meet their obligations under existing reinsurance or retrospective insurance
and commission agreements, Old Republic would be liable for the defaulted
amounts. In these regards, however, the Company generally protects itself by
withholding funds, by securing indemnity agreements, or by otherwise
collateralizing reinsurance obligations through irrevocable letters of credit,
cash, or securities.
Old Republic's reinsurance practices with respect to portions of its
business also result from its desire to bring its sponsoring organizations and
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, sponsors 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 with
independent insurance or reinsurance companies under various quota share and
excess of loss agreements.
Reinsurance protection on property and liability operations generally
limits the net loss on any one risk to a maximum of (in whole dollars): workers'
compensation-$1,000,000; auto liability-$600,000; general liability-$600,000;
and property coverages-$300,000. Substantially all the mortgage guaranty
insurance business is retained, with the exposure on any one risk currently
averaging approximately $26,000. Title insurance risk assumptions, based on the
title insurance subsidiaries' financial resources, are limited to a maximum of
$25,000,000 as to any one policy. The maximum amount of ordinary life insurance
retained on any one life by the Life Insurance Group is $300,000.
(e) Competition. The insurance business is highly competitive and Old Republic
competes with many stock and mutual insurance companies. Many of these
competitors offer more insurance coverages and have substantially greater
financial resources than the Corporation. The rates charged for many of the
insurance coverages in which the Corporation specializes, such as workers'
compensation insurance, other property and liability insurance, title insurance,
and credit life and disability insurance, are primarily regulated by the states
and are also subject to extensive competition among major insurance
organizations. The basic methods of competition available to Old Republic, aside
from rates, are service to customers, expertise in tailoring insurance programs
to the specific needs of its clients, efficiency and flexibility of operations,
personal involvement by its key executives, and, as to title insurance, accuracy
and timely delivery of evidences of title issued. For certain types of
coverages, including loan credit guaranty and mortgage guaranty insurance, the
Company also competes in varying degrees with the Federal Housing Administration
("FHA") and the Veterans Administration ("VA"). In these regards, the
Corporation's insurance subsidiaries compete with the FHA and VA by offering
different coverages and by establishing different requirements relative to such
factors as interest rates, closing costs, and loan processing charges. The
Corporation believes its experience and expertise have enabled it to develop a
variety of specialized insurance programs for its customers and to secure state
insurance departments' approval of these programs.
13
(f) Government Regulation. In common with all insurance companies, the
Corporation's insurance subsidiaries are subject to the regulation and
supervision of the jurisdictions in which they do business. The method of such
regulation varies, but, generally, regulation has been delegated to state
insurance commissioners who are granted broad administrative powers relating to:
the licensing of insurers and their agents; the nature of and limitations on
investments; approval of policy forms; reserve requirements; and trade
practices. In addition to these types of regulation, many classes of insurance,
including most of the Corporation's insurance coverages, are subject to rate
regulations which require that rates be reasonable, adequate, and not unfairly
discriminatory.
The Federal National Mortgage Association ("FNMA") and the Federal Home
Loan Mortgage Corporation ("FHLMC") have various qualifying requirements for
private mortgage guaranty insurers which write mortgage insurance on loans
acquired by the FNMA and FHLMC from mortgage lenders. These requirements include
a basic standard calling for the maintenance of a ratio of aggregate insured
risk to policyholders' surplus (defined as total statutory capital and surplus
plus statutory contingency reserves) of not more than 25 to 1; maintaining the
contingency reserve in accordance with state statutes and maintaining minimum
policyholders' surplus of $5 million.
Most of the Company's savings and loan association customers for mortgage
guaranty insurance are governed by the regulations of the Federal Home Loan Bank
Board. A regulation of that Board prohibits savings and loan associations from
insuring any loan with a mortgage insurance company if certain relationships
exist between such mortgage insurance company and the savings and loan
association. Generally, a savings and loan association may not obtain insurance
from any mortgage insurance company if (1) any commission, fee or other
compensation is paid to the savings and loan association or any of its officers,
directors, employees or affiliates, (2) a savings account is maintained by the
mortgage insurance company with such savings and loan association, (3) any
officer or employee of the mortgage insurance company or its parent company is a
director, officer or controlling person of the savings and loan association, or
(4) either (a) the association or any director, officer, controlling person or
affiliate holds equity securities of the mortgage insurance company or any
parent company thereof having a cost in excess of $50,000 or representing more
than one percent of any class of equity securities of the company, if its assets
are less than $50 million, or one-half percent, if the assets equal or exceed
$50 million, or (b) the association and all of its directors, officers,
controlling persons or affiliates in the aggregate own equity securities of the
mortgage insurance company having a cost in excess of $100,000, or two percent
of a company the assets of which are less than $50 million, or one percent, if
the assets equal or exceed $50 million.
There have been various proposals from time to time with respect to
additional regulation of credit life and disability insurance which could have
an adverse effect on the consumer credit insurance business. The financial
institutions whose customers are insured by Old Republic are also regulated by
federal and state authorities whose regulations have a direct effect on certain
forms of credit life and disability insurance.
The majority of states have also enacted insurance holding company laws
which require registration and periodic reporting by insurance companies
controlled by other corporations licensed to transact business within their
respective jurisdictions. Old Republic's insurance subsidiaries are subject to
such legislation and are registered as controlled insurers in those
jurisdictions in which such registration is required. Such legislation varies
from state to state but typically requires periodic disclosure concerning the
corporation which controls the registered insurers, or ultimate holding company,
and all subsidiaries of the ultimate holding company, and prior approval of
certain intercorporate transfers of assets (including payments of dividends in
excess of specified amounts by the insurance subsidiary) within the holding
company system. Each state has established minimum capital and surplus
requirements to conduct an insurance business. All of the Company's subsidiaries
meet or exceed these requirements, which vary from state to state.
(g) Employees. As of December 31, 1998, Old Republic employed approximately
6,570 persons on a full time basis. Eligible full time employees participate in
various pension plans which provide annuity benefits payable upon retirement.
Eligible employees are also covered by hospitalization and major medical
insurance, group life insurance, and various profit sharing and deferred
compensation plans. The Company considers its employee relations to be good.
14
Item 2-Properties
The principal executive offices of the Company are located in the Old
Republic Building in Chicago, Illinois. This Company owned building contains
151,000 square feet of floor space of which approximately 50% is occupied by Old
Republic, and the remainder is leased to others. In addition to the
Company-owned principal executive offices, a subsidiary of the Title Insurance
Group partially occupies its headquarters building. This building contains
110,000 square feet of floor space of which approximately 65% is occupied by the
Old Republic National Title Insurance Company. The remainder of the building is
leased to others. Eleven smaller buildings are owned by Old Republic and its
subsidiaries in various parts of the country and are primarily used for its
business. The carrying value of all buildings and related land at December 31,
1998 was approximately $18.3 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
There are no material legal proceedings against the Company other than
those arising in the normal course of business and which generally pertain to
claim matters arising from insurance policies and contracts issued by the
Corporation's insurance subsidiaries.
However, various governmental entities have filed suit against or performed
examinations of the records of an underwritten title agency subsidiary operating
in the State of California, which is consolidated in these financial statements.
These actions allege that 1) the subsidiary 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. Additional suits seeking class action status have been filed
on the basis of the same allegations.
Between July 1998, when the Company learned of these actions and February
1999 when a draft examination report was received from a regulatory authority,
the subsidiary conducted an internal review of its records and concluded that it
had certain liabilities for the issues denoted as (1) and (2) in the preceding
paragraph. Through December 31, 1998 it had paid or otherwise provided reserves
aggregating $19.5 million to cover its best estimate of litigation and related
costs associated with these issues. Management believes that the alleged
practices denoted in (3) in the preceding paragraph, are common within the
industry, are not in conflict with various laws and regulations, and that it has
meritorious defenses, which will ultimately lead to a successful resolution of
these matters.
Item 4-Submission of Matters to a Vote of Security Holders
None
Item 4(a)-Executive Officers of the Registrant
Name Age Position
- ---------------------- --- ----------------------------------
Paul D. Adams 53 Senior Vice President, Chief Financial Officer
since 1990 and Treasurer since 1993.
Spencer LeRoy, III 52 Senior Vice President, General Counsel, and
Secretary since 1992.
William A. Simpson 57 Senior Vice President/ Mortgage Guaranty, and
Director since 1980. President since 1972 of
Republic Mortgage Insurance Company, a wholly-
owned subsidiary.
A. C. Zucaro 59 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 has been employed in executive
capacities with the Company and/or its subsidiaries for the past five years.
15
PART II
Item 5 - Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock is traded on the New York Stock Exchange under
the symbol "ORI". The high and low closing prices as reported on the New York
Stock Exchange, and cash dividends declared for each quarterly period during the
past two years were as follows:
Closing Price
------------------------ Cash
High Low Dividends
-------- -------- ---------
1st quarter 1997............................................................ $ 18.25 $ 16.75 $ .073
2nd quarter 1997............................................................ 20.75 16.42 .087
3rd quarter 1997............................................................ 26.54 20.25 .087
4th quarter 1997............................................................ $ 26.59 $ 23.17 $ .087
======== ======== =========
1st quarter 1998............................................................ $ 30.09 $ 23.79 $ .087
2nd quarter 1998............................................................ 31.88 27.38 .100
3rd quarter 1998............................................................ 30.88 22.06 .100
4th quarter 1998............................................................ $ 23.69 $ 18.00 $ .100
======== ======== =========
As of January 29, 1999, there were 3,651 registered holders of the Company's
Common Stock. See Notes 3(b) and 3(c) of the Notes to Consolidated Financial
Statements for a description of certain regulatory restrictions on the payment
of dividends by Old Republic's insurance subsidiaries and certain restrictions
under the terms of Old Republic's loan agreements. Closing prices have been
restated, as necessary, to reflect all stock dividends and splits declared
through December 31, 1998.
16
Item 6-Selected Financial Data
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
FINANCIAL POSITION ($ millions):
Cash and Invested Assets (a)........... $ 4,948.6 $ 4,819.9 $ 4,521.8 $ 4,415.2 $ 3,906.4
Other Assets........................... 2,071.1 2,103.5 2,134.3 2,178.2 2,356.5
Total Assets.................... 7,019.7 6,923.4 6,656.2 6,593.5 6,262.9
Liabilities, Other than Debt........... 4,569.1 4,627.2 4,581.5 4,587.9 4,543.4
Debt and Debt Equivalents.............. 145.1 142.9 154.0 320.5 314.7
Total Liabilities............... 4,714.2 4,770.2 4,735.6 4,908.4 4,858.1
Preferred Stock........................ 1.2 1.0 20.6 72.5 75.4
Common Shareholders' Equity............ 2,304.2 2,152.1 1,900.0 1,612.5 1,329.3
Total Capitalization (b)........ $ 2,450.6 $ 2,296.1 $ 2,074.6 $ 2,005.6 $ 1,719.5
============= ============= ============= ============= =============
- ----------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS ($ millions):
Net Premiums and Fees Earned........... $ 1,810.6 $ 1,628.0 $ 1,507.7 $ 1,374.0 $ 1,423.2
Net Investment and Other Income 308.1 308.4 281.0 272.1 248.0
Realized Investment Gains.............. 53.0 26.3 15.1 49.7 7.7
Net Revenues.................... 2,171.7 1,962.8 1,803.9 1,695.9 1,679.0
Benefits, Claims, Settlement
Expenses and Dividends............... 782.1 787.6 752.0 747.9 761.2
Underwriting and Other Expenses 922.8 748.5 709.4 631.9 691.9
Income Taxes.................... 145.8 129.2 108.5 103.6 73.4
Income Before Items Below.............. 323.7 298.1 234.8 212.7 151.0
Extraordinary Item (c)................. - - (4.4) - -
------------- ------------- ------------- ------------- -------------
Net Income...................... $ 323.7 $ 298.1 $ 230.3 $ 212.7 $ 151.0
============= ============= ============= ============= =============
- ----------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA (d):
Net Income:
Basic Earnings (e):
Income Before Items Below............ $ 2.35 $ 2.22 $ 1.76 $ 1.76 $ 1.23
Extraordinary Item (c)............... - - (.03) - -
------------- ------------- ------------- ------------- -------------
Net Income...................... $ 2.35 $ 2.22 $ 1.73 $ 1.76 $ 1.23
============= ============= ============= ============= =============
Diluted Earnings (f):
Income Before Items Below............ $ 2.33 $ 2.10 $ 1.62 $ 1.52 $ 1.08
Extraordinary Item (c)............... - - (.03) - -
------------- ------------- ------------- ------------- -------------
Net Income...................... $ 2.33 $ 2.10 $ 1.59 $ 1.52 $ 1.08
============= ============= ============= ============= =============
Dividends: Cash..................... $ .387 $ .333 $ .278 $ .227 $ .209
============= ============= ============= ============= =============
Stock.................... 50% -% 50% -% -%
============= ============= ============= ============= =============
Book Value............................. $ 17.27 $ 15.59 $ 14.57 $ 13.58 $ 11.46
============= ============= ============= ============= =============
Common Shares (thousands):
Outstanding.......................... 133,402 138,069 130,408 118,716 115,956
============= ============= ============= ============= =============
Average and Equivalent Shares:
Basic.................... 137,347 133,659 129,030 117,243 116,740
============= ============= ============= ============= =============
Diluted.................. 139,150 141,768 141,967 138,926 138,729
============= ============= ============= ============= =============
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes on Following Page
17
Notes to Item 6-Selected Financial Data
- --------------------------------------------------------------------------------
(a) Consists of cash, investments and investment income due and accrued.
(b) Total capitalization consists of debt and debt equivalents, preferred
stock, and common shareholders' equity.
(c) In February 1996, the Company called for the redemption of its 10%
debentures maturing in 2018 ($75.0 principal amount), and its 5.75%
convertible subordinated debentures maturing in 2002 ($110.0 principal
amount). In April 1996, the Company called for redemption its 11.5%
debentures maturing in 2015 ($30.0 principal amount). Redemption of the
debentures was effected with internally available funds, while the
subordinated debentures were converted by their terms into approximately
9.6 million Old Republic common shares. The early retirement of the
Company's debentures produced a net of tax charge of $4.4 or $.03 per share
that has been reflected as an extraordinary item in 1996.
(d) Effective in 1997, the Company adopted Financial Accounting Statement (FAS)
No. 128 "Earnings Per Share" which establishes a new methodology for
computing earnings per share. It replaces Primary Earnings Per Share with
Basic Earnings Per Share. Basic Earnings Per Share excludes the dilutive
effect of common stock equivalents and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares actually outstanding for the period. Diluted Earnings Per Share per
FAS-128 is computed in a fashion similar to the former Fully Diluted
Earnings Per Share as required by prior authoritative FASB pronouncements.
Prior year data has been retroactively restated.
(e) Calculated after deduction of preferred stock dividend requirements of $.2
in 1998, $1.7 in 1997, $7.5 in 1996, $6.7 in 1995 and $7.0 in 1994.
(f) Calculated after deduction of preferred stock dividend requirements and, as
applicable, after adjustment for post-tax convertible debentures interest
of $4.0 in 1996, $.6 in 1995 and $.9 in 1994.
18
Item 7-Management Analysis of Financial Position and Results of Operations
($ in Millions, Except Share Data)
- --------------------------------------------------------------------------------
OVERVIEW
This analysis pertains to the consolidated accounts of Old Republic
International Corporation. The Company conducts its business through four major
segments, namely its General (property and liability coverages), Mortgage
Guaranty, Title, and Life insurance groups.
NON-RECURRING ITEMS
In the second quarter of 1997, several life insurance subsidiaries
recovered income taxes and related accumulated interest due to favorable
resolution with the Internal Revenue Service of various outstanding issues
pertaining to income tax returns for the years 1979 through 1982. These cash
recoveries, net of miscellaneous charges, increased other income by $12.6,
reduced income tax expense by $5.9 and increased after-tax consolidated earnings
by $14.2 ($0.10 per diluted common share) for the year ended December 31, 1997.
FINANCIAL POSITION
Old Republic's financial position at December 31, 1998 reflected increases
in assets and common shareholders' equity of 1.4% and 7.1%, respectively, and a
decrease in liabilities of 1.2% when compared to the immediately preceding
year-end. Cash and invested assets represented 70.5% and 69.6% of consolidated
assets as of December 31, 1998 and 1997, respectively.
Relatively high short-term maturity investment positions are generally
maintained to provide necessary liquidity for specific operating needs and to
enhance flexibility in investment strategy. Changes in short-term investments
reflect a large variety of seasonal and intermediate-term factors including
seasonal operating cash needs, investment strategy, and expectations as to
trends in interest yields. Accordingly, the future level of short-term
investments will vary and respond to the dynamics of these factors and may, as a
result, increase or decrease from current levels. During 1998 and 1997, the
Corporation committed substantially all investable funds in short to
intermediate-term fixed maturity securities with an emphasis on tax-exempt
bonds. Old Republic continues to adhere to its long-term policy of investing
primarily in investment grade, marketable securities; investable funds have not
been directed to so-called "junk bonds" or types of securities categorized as
derivatives. Old Republic's commitment to equity securities during 1998
increased by 40.7% vis-a-vis the related invested balance at year-end 1997. At
December 31, 1998, the Company had no investments in default as to principal
and/or interest.
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. Old Republic employs
traditional investment management tools and techniques to address the yield and
valuation exposures of its invested assets. 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 adequate diversification and the
purchase of investment grade securities. Reinvestment rate risk is controlled by
concentrating on non-callable issues, and through asset-liability matching
practices. 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 tenets generally provides 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 realized gains or losses when securities are
sold. With a market value of approximately $4,376.7, the long term fixed
maturity investment portfolio has an average maturity of 4.6 years and an
indicated duration of 3.9. This 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 3.9%, or $173. With regard to its $162.1 common stock portfolio,
the Company does not own nor engage in any type of option writing. A 10%
decrease in the U.S. equity market prices could result in a decrease of $16.2 in
the market value of the Company's common stock portfolio. These possible
declines in values for Old Republic's bond and stock portfolios would affect
negatively the common shareholders' equity at any point in time, but would not
necessarily result in the recognition of realized investment losses as long as
operating cash flow and the ongoing emergence of bond
19
maturities continued to provide sufficient funds to meet obligations to
policyholders and claimants, as well as debt service and cash dividend
requirements at the holding company level.
Consolidated operations produced positive cash flows for the latest three
years. Higher cash flow in 1997 vis-a-vis 1996 and 1998 was due mainly to higher
operating cash flow in Old Republic's general insurance segment. The Company's
mortgage, title and life segments' cash flow from operations have been greater
in each of the last three years.
The parent holding company has met its liquidity and capital needs
principally through dividends paid by its subsidiaries. The insurance
subsidiaries' ability to pay cash dividends to the parent company is generally
restricted by law or subject to approval of the insurance regulatory authorities
of the states in which they are domiciled. Additionally, the terms of guarantees
by the Company of bank loans to the trustee of the Company's Employees Savings
and Stock Ownership Plan restrict the amount of debt the Company may incur; this
covenant is being met.
Old Republic's capitalization of $2,450.6 at December 31, 1998 consisted of
debt and debt equivalents of $145.1, convertible preferred stock of $1.2, and
common shareholders' equity of $2,304.2. The increase in the common
shareholders' equity account during the past three years reflects primarily the
retention of earnings in excess of dividends declared on outstanding preferred
and common shares, the conversion of redeemable convertible preferred stock in
1997, the issuance of additional shares to effect a debt conversion in 1996, and
an increase during 1998 and 1997 compared to a decrease during 1996 in the value
of bonds and stocks carried at market value. Common shareholders' equity
increases in 1998 and 1997 were partially offset by the acquisition of $151.1
and $62.1, respectively, of common stock in open market transactions. At its
March 12, 1998 meeting, the Company's Board of Directors authorized the
reacquisition of up to $150.0 of common shares as market conditions would
warrant during the twenty-four month period from that date; as of December 31,
1998, a total of $31.9 of this authorization remained unutilized.
In February 1996, the Company called for the redemption of its 10%
debentures maturing in 2018 ($75.0 principal amount) and its 5.75% convertible
subordinated debentures maturing in 2002 ($110.0 principal amount). In April
1996, the Company called for the redemption of its 11.5% debentures maturing in
2015 ($30.0 principal amount); redemption of these debentures was financed with
internally available funds, while the subordinated debentures were converted by
their terms into approximately 9.6 million Old Republic common shares. As a
result of these redemptions and conversions, the Company's debt declined by
$215.0 while its common shareholders' equity account rose by $108.6 during 1996.
The early retirement of the debentures produced a net of tax charge of $4.4
($0.03 per diluted common share) that has been reflected as an extraordinary
item in 1996. In December 1996, the Company redeemed all ($54.8) of its Series
"H" cumulative preferred stock with available funds. During the second quarter
of 1997, the Company issued $115.0 of 7% debentures maturing June 15, 2007;
proceeds from this offering were used principally to redeem commercial paper
debt.
RESULTS OF OPERATIONS
Revenues:
Consolidated net premiums and fees earned increased by 11.2%, 8.0% and 9.7%
in 1998, 1997 and 1996, respectively. Property and liability earned premiums
decreased 0.4% in 1998 and increased 4.5% in 1997 and 1.9% in 1996; premium
production trends in this segment in the past three years were generally
affected by the continuation of a soft pricing environment for most insurance
coverages. Growth in mortgage guaranty premiums for the past three years was
enhanced principally by a rise in the amount of renewal business, by territorial
expansion, and by relatively strong mortgage lending activity, though 1998
premium revenue growth was hindered by higher loan refinancings. Title Group
premiums and fee revenues increased 38.9% in 1998, 9.4% in 1997 and 20.3% in
1996. Greater housing and mortgage finance activity were the main reasons for
the rise in revenues in these years. Life and disability premium volume
increased during the last three years as a result of greater term life and
accident insurance production.
Net investment income grew by 0.9%, 3.9% and 3.4% in 1998, 1997 and 1996,
respectively. For each of the past three years, this revenue source was affected
by positive consolidated operating cash flows and by a concentration of
investable assets in interest-bearing, fixed maturity securities. The Company,
as previously mentioned, used internal funds in 1998 and 1997 for open market
purchases of its common stock and in 1996 to redeem certain debt and preferred
stock, thus reducing the size and earning power of its invested asset base. The
average annual yield on investments was 5.7%, 5.9% and 6.0% for the years ended
December 31, 1998, 1997 and 1996, respectively. This yield pattern reflects at
once the relatively short
20
maturity of Old Republic's fixed maturity securities portfolio, a generally
declining interest rate climate during the past three years, and the commitment
of a larger percentage of investable funds to tax-exempt fixed maturity
securities that typically bear lower pre-tax yields.
While the Company's investment policies have not been designed to maximize
realized investment gains, such gains were higher in 1998 than those registered
in 1997 and 1996. Dispositions of securities have been caused principally by
calls prior to maturity by issuers of bonds and notes, and by sales of equity
securities. In 1998, 58.3% of total fixed maturity securities dispositions
represented contractual maturities and early calls of existing holdings; for the
year 1997 and 1996 these amounted to 76.9% and 72.5%, respectively.
Expenses:
Consolidated benefit, claim, and related settlement costs, as a percentage
of net premiums and fees earned, were approximately 43.2% in 1998, 48.4% in 1997
and 49.9% in 1996. Variations in these ratios, particularly in 1998, are
partially due to the growth in revenue of the mortgage guaranty and title
segments which have lower loss ratios than the general insurance segment. The
general insurance portion of the claim ratio was affected positively by
improving claims experience for liability insurance coverages and reduced costs
associated with involuntary workers compensation pools; this was in part offset
by higher loss ratios for physical damage coverages and a moderate amount of
catastrophe claims in 1996 and 1998. The loss ratio for mortgage guaranty
insurance decreased in 1998 compared to 1997 which itself had decreased slightly
compared to that of 1996; the improvement was mostly attributable to the stable
economic conditions of the past several years which have led to reduced mortgage
defaults particularly in the California market. The title insurance loss ratio
has been relatively flat in low single digits in each of the past three years
due in part to favorable trends in claims frequency and severity for business
underwritten since 1992.
The ratio of consolidated underwriting, acquisition, and insurance expenses
to net premiums and fees earned was approximately 50.2% in 1998, 45.2% in 1997
and 46.0% in 1996. Variations in these ratios reflect a continually changing mix
of coverages sold and attendant costs of producing business. The property and
liability segment's expense ratios increased in 1998 compared to 1997 and 1996
due in part to the previously mentioned premium production trends. During the
past three years, the mortgage guaranty segment, particularly in 1998,
experienced higher operating expenses due to greater costs associated with
contract underwriting operations. The title insurance expense ratio has trended
lower, especially in 1998, due in part to an increase in premium and fees volume
without a proportional increase in expenses, though higher litigation and
related costs in the second half of 1998 increased this segment's expense ratio
by approximately 3.5% for the year as a whole. Consolidated interest and other
charges, were approximately the same in 1998 and 1997 compared to 1996, due
principally to the aforementioned reduction in outstanding debt.
Pre-Tax and Net Income:
Consolidated income before taxes increased by 9.4%, 24.6% and 8.3% in 1998,
1997 and 1996, respectively. General insurance results declined in 1998 compared
to 1997, due to poorer underwriting experience and a slight decrease in
investment income; 1997 results increased compared to 1996 due to improved
underwriting results in Old Republic's three largest segments and a slight
increase in investment income. The general insurance segment continued as the
largest contributor to consolidated earnings for each of the periods reported
upon. The mortgage guaranty segment reflected rising earnings in each of the
last three years due to increased revenues generating higher income from
underwriting operations and a greater invested assets base. Increases in title
insurance earnings during the past three years resulted from growth in premiums
and fees, a stable loss ratio and a reduction in expense ratios. Life and
disability operations, excluding the aforementioned non-recurring tax recovery
item in 1997, have posted relatively flat earnings in the past three years.
The effective consolidated income tax rates were 31.2% in 1998, 30.3% in
1997 and 31.6% in 1996. The rates for each year reflect primarily the varying
proportions of pre-tax operating income derived from tax-exempt investment
income, on the one hand, and the combination of fully taxable investment income,
realized investment gains, and underwriting and service income, on the other
hand. The lower rate in 1997 was also affected positively by the above noted
income tax recoveries for prior years.
See last paragraph under "Financial Position" above for extraordinary
charge recorded in 1996.
21
Year 2000 Issues:
The Company and its subsidiaries have been aware for several years of the
issues associated with programming codes in existing computer systems as the
Year 2000 approaches. Most Old Republic subsidiaries are operated with
reasonable autonomy, and, accordingly, Year 2000 issues are independently
managed at each of the operating entities. Simply stated, Year 2000 issues stem
from computer programs that were written in earlier years with only two digits
to specify a year, as opposed to four digits; such programs may therefore be
unable to interpret dates beyond 1999, which could cause a system failure or
other computer errors that could lead to a disruption of operations.
Year 2000 issues could adversely affect the Old Republic subsidiaries'
computer systems, and such other systems as communications, facilities
management, service-related equipment and systems of customers, vendors and
other important third party service providers. Possible adverse consequences
include, but are not limited to, the inability to transact business, inability
to execute transactions through financial institutions and the occurrence of
Year 2000-related losses under certain insurance contracts. Accordingly, the
Company could suffer material adverse financial effects if failure by major
subsidiaries, significant vendors, important third parties or various
governmental bodies to properly correct Year 2000 issues were to occur. The
possible financial impact of all such effects cannot currently be estimated
since the Company and its subsidiaries do not operate in a vacuum and cannot
control the situations or actions of the various outside entities with which
they deal.
Old Republic's subsidiaries are scheduled to complete by March 31, 1999,
the identification and implementation of changes, and the testing of systems
affected by Year 2000 issues. Con