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8-K - OLD REPUBLIC INTERNATIONAL CORPORATION FORM 8K DATED NOVEMBER 3, 2009 - OLD REPUBLIC INTERNATIONAL CORP | form8k110309.htm |
NEWS
BULLETIN
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For
Further Information:
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AT
OLD REPUBLIC:
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AT
FINANCIAL RELATIONS BOARD:
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A.C.
Zucaro
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Leslie
Loyet
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Chairman
& CEO
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Analysts/Investors
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(312)
346-8100
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(312)
640-6672
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lloyet@mww.com
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FOR
IMMEDIATE RELEASE
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NYSE: ORI
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TUESDAY,
NOVEMBER 3, 2009
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OLD
REPUBLIC TO FILE THIRD QUARTER, 2009 SEC FORM 10-Q REPORT WITH AN
UNRESOLVED
REVENUE
ACCOUNTING MATTER
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Chicago - November 3, 2009 -
Old Republic International
Corporation ( NYSE : ORI ) today announced that it will shortly file its
third quarter 2009 Form 10-Q report with the Securities and Exchange
Commission. The filing will take place even though the Company’s
independent auditors, PricewaterhouseCoopers LLP (“PwC”) have communicated their
disagreement with the Company’s treatment of certain third quarter 2009
reinsurance transactions consummated by the Company’s Mortgage Guaranty
subsidiary. The transactions and the financial statement treatment afforded to
them were disclosed in the Company’s October 22, 2009 earnings press release as
follows:
“During
this year’s third quarter, the Mortgage Guaranty Group recaptured business
previously ceded to several captives. In substance, the transactions are cut-off
reinsurance arrangements whereby the captives have remitted to the Company the
reserves on existing claim obligations and a risk premium for claims that will
occur after the recapture date. Accordingly, the Company recorded proceeds of
$148.9 million and established a combination of claim reserves ($68.4 million)
and premium reserves ($82.5 million) all of which resulted in little
consequential effect on the pretax loss for the quarter and first nine months of
2009.”
To effect
the transactions the Company calculated a necessary, actuarially determined
total premium designed to at least cover all future claims occurring after
termination of the existing reinsurance contracts. The economic basis of the
premium offered and agreed to by the captives consisted of the combination of an
initial front end risk premium ($82.5 million) paid in cash and marketable
securities, and a subsequent additional risk premium equal to all estimated
future renewal premiums that would have otherwise inured to the captives had the
reinsurance agreements remained in place. Accordingly, to reflect the economic
substance of the cut-off reinsurance arrangements, the initial front end risk
premium has been recorded as a balance sheet unearned premium reserve.
This reserve will revert to earned premiums in future
-more-
Old
Republic International Corporation
Add 1
periods’
income statements pursuant to an amortization schedule that simulates the
estimated timing of the future renewal risk premiums that will henceforth be
retained by the Company. In so doing, the Company will be consistent with its
own and generally accepted industry-wide insurance accounting practices
pertaining to cut-off reinsurance arrangements and, assuming the reasonableness
of its usual risk transfer pricing methodology, its consequent underwriting
results should not be materially better or worse than they would have been if
the reinsurance agreements had remained in place.
PwC has
informed the Company that based on its analysis of the transactions and
interpretation of generally accepted accounting principles (“GAAP”), it has
concluded that immediate recognition of a gain in the amount of $82.5 million is
required in the third quarter of 2009. In addition, PwC has advised
that, as a result of this disagreement, it is unable to complete its review of
the Company’s consolidated financial statements included in the third quarter
2009 Form 10-Q.
In Old
Republic management’s opinion, recognition of the $82.5 million initial front
end risk premium as a current period revenue and bottom line gain would create
the appearance of much improved third quarter 2009 results when none existed or
occurred. Given the economic substance of the transactions, the appearance so
created would also cause misleading inferences relative to such matters as
trends in premium revenue and claim costs as well as the actual underwriting
results of Old Republic’s Mortgage Guaranty line for the nine quarterly periods
since the onset of economic dislocations.
In view
of the un-reconciled financial accounting positions taken by the Company and its
independent auditors, Old Republic intends to petition the SEC to seek
resolution of the matter.
Since
there is no assurance that the Company’s position will prevail, this press
release is being issued to alert shareholders, rating agencies, and others who
may be relying on the Company’s published financial reports to the possibility
that its accounting methodology in the above regards might not be sustained. In
the latter circumstance, and with the further assumption that PwC’s financial
accounting position would be deemed preferable by the SEC, then Old Republic
would be required to restate its previously issued financial statements for the
three and nine months ended September 30, 2009. A summarized version of
financial statements and pertinent statistics reflecting such possible
restatement is shown in the accompanying table.
About
Old Republic
Chicago-based
Old Republic International Corporation is an insurance holding company whose
subsidiaries market, underwrite and provide risk management services for a wide
variety of coverages primarily in the property & liability, mortgage
guaranty, and title insurance fields. One of the nation’s 50 largest publicly
owned insurance organizations, Old Republic has assets of approximately $14.30
billion and shareholders’ equity of $3.90 billion or $16.54 per share. Its
current stock market valuation is approximately $2.5 billion, or $10.65 per
share.
-more-
Old Republic International Corporation
Add 2
The
nature of Old Republic’s business requires that it be managed for the long run.
For the 25 years ended in 2008, the Company’s total market return, with
dividends reinvested, has grown at a compounded annual rate of 9.6 percent per
share. For the same period, the total market return, with dividends reinvested,
for the S&P 500 Index has grown at a 9.8 percent annual compound rate.
During those years, Old Republic’s shareholders’ equity account, inclusive of
cash dividends, has risen at an average annual rate of 12.1 percent per share,
and the regular cash dividend has grown at a 10.3 percent annual compound rate.
According to the most recent edition of Mergent’s Dividend Achievers,
Old Republic is one of just 120 companies, out of 10,000-plus publicly held
corporations, that have posted at least 25 consecutive years of annual dividend
growth.
Safe
Harbor Statement
Historical
data pertaining to the operating results, liquidity, and other performance
indicators applicable to an insurance enterprise such as Old Republic are not
necessarily indicative of results to be achieved in succeeding years. In
addition to the factors cited below, the long-term nature of the insurance
business, seasonal and annual patterns in premium production and incidence of
claims, changes in yields obtained on invested assets, changes in government
policies and free markets affecting inflation rates and general economic
conditions, and changes in legal precedents or the application of law affecting
the settlement of disputed and other claims can have a bearing on
period-to-period comparisons and future operating results.
Some of
the oral or written statements made in the Company’s reports, press releases,
and conference calls following earnings releases, can constitute
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Of necessity, any such forward-looking statements
involve assumptions, uncertainties, and risks that may affect the Company’s
future performance. With regard to Old Republic’s General Insurance segment, its
results can be affected, in particular, by the level of market competition,
which is typically a function of available capital and expected returns on such
capital among competitors, the levels of interest and inflation rates, and
periodic changes in claim frequency and severity patterns caused by natural
disasters, weather conditions, accidents, illnesses, work-related injuries, and
unanticipated external events. Mortgage Guaranty and Title Insurance results can
be affected by similar factors, and by changes in national and regional housing
demand and values, the availability and cost of mortgage loans, employment
trends, and default rates on mortgage loans. Mortgage Guaranty results, in
particular, may also be affected by various risk-sharing arrangements with
business producers, as well as the risk management and pricing policies of
government sponsored enterprises. Life and health insurance earnings can be
affected by the levels of employment and consumer spending, variations in
mortality and health trends, and changes in policy lapsation rates. At the
parent holding company level, operating earnings or losses are generally
reflective of the amount of debt outstanding and its cost, interest income on
temporary holdings of short-term investments, and period-to-period variations in
the costs of administering the Company’s widespread operations.
A more
detailed listing and discussion of the risks and other factors which affect the
Company’s risk-taking insurance business are included in Part I, Item 1A - Risk
Factors, of the Company’s 2008 Form 10-K annual report to the Securities and
Exchange Commission, which Item is specifically incorporated herein by
reference.
-more-
Old
Republic International Corporation
Add 3
Any forwad-looking statements or commentaries speak only as of
their dates. Old Republic undertakes no obligation to publicly update or revise
any and all such comments, whether as a result of new information, future events
or otherwise, and accordingly they may not be unduly relied upon.
Accompanying
Financial Data:
·
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Old
Republic International Corporation: Unresolved Mortgage
Guaranty Revenue Recognition Accounting
Matter
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For
the latest news releases and other corporate documents on Old
Republic:
write
to:
Investor
Relations
Old
Republic International Corporation
307
North Michigan Avenue
Chicago,
IL 60601
312-346-8100
or
visit us at www.oldrepublic.com.
-more-
Old
Republic International Corporation
Add
4
Old
Republic International Corporation:
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Unresolved
Mortgage Guaranty Revenue Recognition Accounting Matter(*)
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($
in millions, except per share data)
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ORI
Consolidated
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Quarters
Ended
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Nine
Months Ended
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September
30,
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September
30,
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With
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With
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Possible
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Possible
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As
Reported
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Restatement(*)
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As
Reported
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Restatement(*)
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2008
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2009
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2009
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2008
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2009
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2009
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Net
premiums and fees earned
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$
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835.2
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$
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856.1
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$
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938.6
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$
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2,517.5
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$
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2,445.4
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$
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2,527.9
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Net
benefits and claims incurred
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683.2
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671.2
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671.2
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2,017.1
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1,962.8
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1,962.8
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Pretax
operating income (loss)
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(80.1)
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(110.7)
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(28.2)
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(208.3)
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(289.6)
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(207.1)
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Income
taxes
(credits)
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(34.8)
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(44.6)
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(15.7)
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(93.3)
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(119.9)
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(91.0)
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Net
operating income (loss)
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$
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(45.3)
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$
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(66.1)
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$
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(12.5)
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$
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(114.9)
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$
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(169.6)
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$
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(116.0)
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Net
operating income (loss)
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per
diluted
share
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$
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(.20)
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$
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(.28)
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$
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(.05)
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$
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(.50)
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$
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(.72)
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$
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(.49)
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Benefits
and claim
ratio
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81.8%
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78.4%
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71.5%
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80.1%
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80.3%
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77.6%
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Ending
Shareholders’ Equity:
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Total
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$
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3,914.3
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$
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3,901.3
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$
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3,954.9
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Per
common
share
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$
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16.96
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$
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16.54
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$
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16.77
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ORI
Mortgage Guaranty Segment
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Quarters
Ended
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Nine
Months Ended
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September
30,
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September
30,
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With
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With
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Possible
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Possible
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As
Reported
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Restatement(*)
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As
Reported
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Restatement(*)
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2008
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2009
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2009
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2008
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2009
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2009
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Net
premiums
earned
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$
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148.4
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$
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138.9
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$
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221.4
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$
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445.2
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$
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425.8
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$
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508.3
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Net
claims
incurred
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301.3
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297.3
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297.3
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855.9
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867.7
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867.7
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Pretax
operating income (loss)
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(152.8)
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(160.4)
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(77.9)
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(415.9)
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(443.0)
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(360.5)
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Income
taxes
(credits)
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(54.8)
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(57.4)
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(28.5)
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(149.7)
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(159.1)
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(130.2)
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Net
operating income (loss)
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$
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(97.9)
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$
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(102.9)
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$
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(49.3)
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$
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(266.2)
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$
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(283.8)
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$
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(230.2)
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Claim
ratio
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203.1%
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214.0%
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134.3%
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192.3%
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203.8%
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170.7%
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Net
Premiums Earned
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Claim
Ratio
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Net
Operating Income (Loss)
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With
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With
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With
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|||||||||||||||||||
As
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Possible
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As
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Possible
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As
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Possible
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||||||||||||||||
Reported
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Restatement(*)
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Reported
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Restatement(*)
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Reported
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Restatement(*)
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||||||||||||||||
3rd
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Quarter
2007
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$
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133.9
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$
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133.9
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161.9
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%
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161.9
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%
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$
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(52.6)
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$
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(52.6)
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4th
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Quarter
2007
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141.2
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141.2
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178.7
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178.7
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(71.5)
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(71.5)
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1st
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Quarter
2008
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147.6
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147.6
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181.1
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181.1
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(78.1)
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(78.1)
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2nd
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Quarter
2008
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149.1
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149.1
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192.5
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192.5
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(90.0)
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(90.0)
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||||||||||||||
3rd
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Quarter
2008
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148.4
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148.4
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203.1
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203.1
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(97.9)
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(97.9)
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4th
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Quarter
2008
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147.2
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147.2
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220.5
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220.5
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(114.5)
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(114.5)
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||||||||||||||
1st
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Quarter
2009
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145.3
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145.3
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199.9
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199.9
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(92.6)
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(92.6)
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2nd
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Quarter
2009
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141.5
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141.5
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197.7
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197.7
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(88.3)
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(88.3)
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3rd
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Quarter
2009
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$
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138.9
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$
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221.4
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214.0
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%
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134.3
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%
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$
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(102.9)
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$
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(49.3)
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(*)
|
Data
in the columns headed “With Possible Restatement” shows the effect that
the immediate recognition of the initial front end risk premium would have
on ORI’s reported earnings and trends therein for the three and nine
months ended September 30, 2009 and in relation to preceding
quarters.
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-###-