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EX-31.1 - EXHIBIT 31.1 SECTION 302 CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER - OLD REPUBLIC INTERNATIONAL CORPexhibit311.htm
EX-32.1 - EXHIBIT 32.1 SECTION 906 CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER - OLD REPUBLIC INTERNATIONAL CORPexhibit321.htm
EX-32.2 - EXHIBIT 32.2 SECTION 906 CERTIFICATION BY THE CHIEF FINANCIAL OFFICER - OLD REPUBLIC INTERNATIONAL CORPexhibit322.htm
EX-31.2 - EXHIBIT 31.2 SECTION 302 CERTIFICATION BY THE CHIEF FINANCIAL OFFICER - OLD REPUBLIC INTERNATIONAL CORPexhibit312.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q

[x]
Quarterly report pursuant to section 13 or 15(d) of the Security Exchange Act of 1934
 
for the quarterly period ended: March 31, 2010 or
   
[  ]
Transition report pursuant to section 13 or 15(d) of the Security Exchange Act of 1934

Commission File Number:
001-10607
 

 
OLD REPUBLIC INTERNATIONAL CORPORATION
 
 
(Exact name of registrant as specified in its charter)
 



Delaware
 
No. 36-2678171
(State or other jurisdiction of
 
(IRS Employer Identification No.)
incorporation or organization)
   


307 North Michigan Avenue, Chicago, Illinois
 
60601
(Address of principal executive office)
 
(Zip Code)



Registrant's telephone number, including area code: 312-346-8100


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes:x  No:¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes:¨ No:¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).



Large accelerated filer x
Accelerated filer ¨
   
Non-accelerated filer ¨
Smaller reporting company ¨


Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes:¨ No:x


 
Class
 
Shares Outstanding
March 31, 2010
Common Stock / $1 par value
 
241,029,255





There are 41 pages in this report

 
 
 
 


OLD REPUBLIC INTERNATIONAL CORPORATION
 
Report on Form 10-Q / March 31, 2010
 
INDEX
   
   
   
 
PAGE NO.
   
PART I
FINANCIAL INFORMATION:
 
     
 
CONSOLIDATED BALANCE SHEETS
3
     
 
CONSOLIDATED STATEMENTS OF INCOME
4
     
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
4
     
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
5
     
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6 - 14
     
 
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
15 - 37
     
 
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
38
     
 
CONTROLS AND PROCEDURES
38
     
PART II
OTHER INFORMATION:
 
     
 
ITEM 1 – LEGAL PROCEEDINGS
39
     
 
ITEM 1A – RISK FACTORS
39
     
 
ITEM 6 – EXHIBITS
39
   
SIGNATURE
40
   
EXHIBIT INDEX
41


 
2
 
 


Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets
($ in Millions, Except Share Data)
   
(Unaudited)
   
   
March 31,
 
December 31,
   
2010
 
2009
         
Assets
           
Investments:
           
Available for sale:
           
Fixed maturity securities (at fair value) (amortized cost: $7,877.1 and $7,896.2)
 
$
8,352.2
 
$
8,326.8
Equity securities (at fair value) (adjusted cost: $358.6 and $357.5)
   
631.4
   
502.9
Short-term investments (at fair value which approximates cost)
   
783.5
   
826.7
Miscellaneous investments
   
23.9
   
24.0
Total
   
9,791.2
   
9,680.5
Other investments
   
7.3
   
7.8
Total investments
   
9,798.5
   
9,688.4
             
Other Assets:
           
Cash
   
74.9
   
77.3
Securities and indebtedness of related parties
   
11.2
   
17.1
Accrued investment income
   
112.5
   
113.3
Accounts and notes receivable
   
794.4
   
788.6
Federal income tax recoverable: Current
   
.4
   
7.3
Prepaid federal income taxes
   
136.0
   
221.4
Reinsurance balances and funds held
   
130.7
   
141.9
Reinsurance recoverable:
Paid losses
   
75.9
   
66.7
 
Policy and claim reserves
   
2,519.9
   
2,491.2
Deferred policy acquisition costs
   
202.0
   
206.9
Sundry assets
   
384.0
   
369.3
     
4,442.3
   
4,501.6
Total Assets
 
$
14,240.9
 
$
14,190.0
             
Liabilities, Preferred Stock, and Common Shareholders’ Equity
           
Liabilities:
           
Losses, claims, and settlement expenses
 
$
7,774.8
 
$
7,915.0
Unearned premiums
   
1,041.7
   
1,038.1
Other policyholders' benefits and funds
   
185.8
   
185.2
Total policy liabilities and accruals
   
9,002.3
   
9,138.4
Commissions, expenses, fees, and taxes
   
267.8
   
266.3
Reinsurance balances and funds
   
335.8
   
321.3
Federal income tax payable: Deferred
   
102.8
   
47.5
Debt
   
347.2
   
346.7
Sundry liabilities
   
188.8
   
178.0
Commitments and contingent liabilities
           
Total Liabilities
   
10,245.0
   
10,298.6
             
Preferred Stock (1)
   
-
   
-
             
Common Shareholders’ Equity:
           
Common stock (1)
   
241.0
   
240.6
Additional paid-in capital
   
416.2
   
412.4
Retained earnings
   
2,911.8
   
2,927.3
Accumulated other comprehensive income (loss)
   
468.3
   
353.7
Unallocated ESSOP shares (at cost)
   
(41.5)
   
(42.7)
Treasury stock (at cost)(1)
   
-
   
-
Total Common Shareholders' Equity
   
3,995.8
   
3,891.4
Total Liabilities, Preferred Stock and Common Shareholders’ Equity
 
$
14,240.9
 
$
14,190.0
               
               
 
(1)  
At March 31, 2010 and December 31, 2009, there were 75,000,000 shares of $0.01 par value preferred stock authorized, of which no shares were outstanding. As of the same dates, there were 500,000,000 shares of common stock, $1.00 par value, authorized, of which 241,029,255 at March 31, 2010 and 240,685,448 at December 31, 2009 were issued. At March 31, 2010 and December 31, 2009, there were 100,000,000 shares of Class B Common Stock, $1.00 par value, authorized, of which no shares were issued. There were no common shares classified as treasury stock as of March 31, 2010 and December 31, 2009.

See accompanying Notes to Consolidated Financial Statements.

 
3
 
 


Old Republic International Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
($ in Millions, Except Share Data)
   
Quarters Ended
   
March 31,
   
2010
 
2009
Revenues:
           
Net premiums earned
 
$
752.3
 
$
721.8
Title, escrow, and other fees
   
76.1
   
55.6
Total premiums and fees
   
828.5
   
777.4
Net investment income
   
96.2
   
93.4
Other income
   
4.8
   
7.6
Total operating revenues
   
929.6
   
878.5
Realized investment gains (losses):
           
From sales
   
2.9
   
-
From impairments
   
-
   
-
Total realized investment gains (losses)
   
2.9
   
-
Total revenues
   
932.6
   
878.5
             
Benefits, Claims and Expenses:
           
Benefits, claims and settlement expenses
   
491.6
   
649.2
Dividends to policyholders
   
2.5
   
2.8
Underwriting, acquisition, and other expenses
   
400.6
   
318.6
Interest and other charges
   
6.5
   
.6
Total expenses
   
901.3
   
971.3
Income (loss) before income taxes (credits)
   
31.2
   
(92.7)
             
Income Taxes (Credits):
           
Current
   
11.4
   
24.7
Deferred
   
(5.2)
   
(63.5)
Total
   
6.2
   
(38.8)
             
Net Income (Loss)
 
$
25.0
 
$
(53.9)
             
Net Income (Loss) Per Share:
           
Basic:
 
$
.11
 
$
(.23)
Diluted:
 
$
.11
 
$
(.23)
             
Average shares outstanding:
Basic
   
236,387,779
   
235,259,226
 
Diluted
   
236,462,231
   
235,259,226
             
Dividends Per Common Share:
           
Cash:
 
$
.1725
 
$
.1700
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited)
   
Quarters Ended
   
March 31,
   
2010
 
2009
Net income (loss) as reported
 
$
25.0
 
$
(53.9)
             
Other comprehensive income (loss):
           
Post-tax net unrealized gains (losses) on securities
   
111.5
   
(9.8)
Other adjustments
   
3.1
   
.5
Net adjustments
   
114.6
   
(9.2)
             
Comprehensive income (loss)
 
$
139.7
 
$
(63.1)



See accompanying Notes to Consolidated Financial Statements.

 
4
 
 


Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
($ in Millions)
   
Quarters Ended
   
March 31,
   
2010
 
2009
         
Cash flows from operating activities:
           
Net income (loss)
 
$
25.0
 
$
(53.9)
Adjustments to reconcile net income (loss) to
           
net cash provided by operating activities:
           
Deferred policy acquisition costs
   
5.3
   
6.1
Premiums and other receivables
   
(1.7)
   
(11.4)
Unpaid claims and related items
   
(144.5)
   
118.3
Other policyholders’ benefits and funds
   
(21.3)
   
(22.0)
Income taxes
   
1.7
   
(40.8)
Prepaid federal income taxes
   
85.4
   
241.9
Reinsurance balances and funds
   
16.4
   
13.9
Realized investment (gains) losses
   
(2.9)
   
-
Accounts payable, accrued expenses and other
   
17.2
   
11.2
Total
   
(19.3)
   
263.3
             
Cash flows from investing activities:
           
Fixed maturity securities:
           
Maturities and early calls
   
169.1
   
208.8
Sales
   
68.9
   
6.9
Sales of:
           
Other investments
   
1.0
   
.3
Purchases of:
           
Fixed maturity securities
   
(221.3)
   
(232.6)
Equity securities
   
(1.0)
   
-
Other – net
   
(5.7)
   
(4.4)
Net decrease (increase) in short-term investments
   
43.5
   
(194.9)
Other-net
   
2.9
   
.2
Total
   
57.4
   
(215.6)
             
Cash flows from financing activities:
           
Issuance of debentures and notes
   
70.0
   
60.0
Issuance of common shares
   
2.3
   
.3
Redemption of debentures and notes
   
(72.5)
   
(72.3)
Dividends on common shares
   
(40.6)
   
(39.9)
Other-net
   
.3
   
.1
Total
   
(40.5)
   
(51.8)
             
Increase (decrease) in cash:
   
(2.3)
   
(4.2)
Cash, beginning of period
   
77.3
   
63.9
Cash, end of period
 
$
74.9
 
$
59.7
             
Supplemental cash flow information:
           
Cash paid during the period for:
Interest
 
$
1.2
 
$
1.2
 
Income taxes
 
$
4.4
 
$
2.0












See accompanying Notes to Consolidated Financial Statements.

 
5
 
 


OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)

1.
Accounting Policies and Basis of Presentation:

The accompanying consolidated financial statements have been prepared in conformity with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) of accounting principles generally accepted in the United States of America (“GAAP”).

Pertinent accounting and disclosure pronouncements issued from time to time by the FASB are adopted by the Company as they become effective. The accompanying financial statements incorporate a new pronouncement which modifies current accounting guidance governing consolidation of variable interest entities. The Company’s adoption of this pronouncement had no effect on the conduct of its business and did not materially affect its reported financial condition or net income (loss). As of the date of this report, the Company is not aware of any new accounting or disclosure requirements that would have a material effect on its consolidated financial statements or the conduct of its business.

The financial accounting and reporting process relies on estimates and on the exercise of judgment. In the opinion of management all adjustments, consisting only of normal recurring accruals necessary for a fair presentation of the results have been recorded for the interim periods. Amounts shown in the consolidated financial statements and applicable notes are stated (except as otherwise indicated and as to share data) in millions, which amounts may not add to totals shown due to truncation. Necessary reclassifications are made in prior periods’ financial statements whenever appropriate to conform to the most current presentation.


 
6
 
 

2.
Common Share Data:

Earnings Per Share - Consolidated basic earnings per share excludes the dilutive effect of common stock equivalents and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares actually outstanding for the period. Diluted earnings per share are similarly calculated with the inclusion of dilutive common stock equivalents. The following table provides a reconciliation of net income (loss) and number of shares used in basic and diluted earnings per share calculations.

   
Quarters Ended
   
March 31,
   
2010
 
2009
         
 
Numerator:
         
 
Net Income (loss)
$
25.0
 
$
(53.9)
 
Numerator for basic earnings per share -
         
 
income (loss) available to common stockholders
 
25.0
   
(53.9)
 
Numerator for diluted earnings per share -
         
 
income (loss) available to common stockholders
         
 
after assumed conversions
$
25.0
 
$
(53.9)
 
Denominator:
         
 
Denominator for basic earnings per share -
         
 
weighted-average shares (a)(b)
 
236,387,779
   
235,259,226
 
Effect of dilutive securities - stock options
 
74,452
   
    -
 
Effect of dilutive securities - convertible senior notes
 
    -
   
    -
 
Denominator for diluted earnings per share -
         
 
adjusted weighted-average shares
         
 
and assumed conversions (a)(b)
 
236,462,231
   
235,259,226
 
Earnings per share:
Basic
$
.11
 
$
(.23)
   
Diluted
$
.11
 
$
(.23)
             
 
Anti-dilutive common share equivalents
         
 
excluded from earning per share computations:
         
 
Stock options
 
14,432,230
   
16,030,334
 
Convertible senior notes
 
27,458,280
   
    -
 
Total
 
41,890,510
   
16,030,334
               
               
 
(a)
All per share statistics have been restated to reflect all stock dividends and splits declared through March 31, 2010.
 
(b)
In calculating earnings per share, pertinent accounting rules require that common shares owned by the Company’s Employee Savings and Stock Ownership Plan that are as yet unallocated to participants in the plan be excluded from the calculation. Such shares are issued and outstanding, have the same voting and other rights applicable to all other common shares, and may be sold at any time by the plan.

3.
Investments:

The Company may classify its invested assets in terms of those assets relative to which it either (1) has the positive intent and ability to hold until maturity, (2) has available for sale or (3) has the intention of trading. As of March 31, 2010 and December 31, 2009, substantially all the Company's invested assets were classified as “available for sale.”

Fixed maturity securities classified as “available for sale” and other preferred and common stocks (equity securities) are included at fair value with changes in such values, net of deferred income taxes, reflected directly in shareholders’ equity. Fair values for fixed maturity securities and equity securities are based on quoted market prices or estimates using values obtained from independent pricing services as applicable.

The Company reviews the status and fair value changes of each of its investments on at least a quarterly basis during the year, and estimates of other-than-temporary impairments (“OTTI”) in the portfolio’s value are evaluated and established at each quarterly balance sheet date. In reviewing investments for OTTI, the Company, in addition to a security’s market price history, considers the totality of such factors as the issuer’s operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audit opinion, industry and securities markets conditions, and analyst expectations to reach its conclusions. Sudden fair value declines caused by such adverse developments as newly emerged or imminent bankruptcy filings, issuer default on significant obligations, or reports of financial accounting developments that bring into question the validity of previously reported earnings or financial condition, are recognized as realized losses as soon as credible publicly available information emerges to confirm such developments. Absent issuer-specific circumstances that would result in a contrary conclusion, any equity security with an unrealized investment loss amounting to a 20% or greater decline for a six month period is considered OTTI. In the event the Company’s estimate of OTTI is insufficient at any point in time, future periods’ net income (loss) would be adversely affected by the recognition of additional realized

 
7
 
 

or impairment losses, but its financial position would not necessarily be affected adversely inasmuch as such losses, or a portion of them, could have been recognized previously as unrealized losses in shareholders’ equity. The Company recognized no OTTI adjustments for the quarters ended March 31, 2010 and 2009.

The amortized cost and estimated fair values of fixed maturity securities are as follows:

       
Gross
 
Gross
 
Estimated
   
Amortized
 
Unrealized
 
Unrealized
 
Fair
   
Cost
 
Gains
 
Losses
 
Value
Fixed Maturity Securities:
                       
March 31, 2010:
                       
U.S. & Canadian Governments
 
$
920.4
 
$
42.8
 
$
.6
 
$
962.6
Tax-exempt
   
2,171.8
   
122.0
   
-
   
2,293.7
Corporates
   
4,784.9
   
317.9
   
7.0
   
5,095.8
   
$
7,877.1
 
$
482.8
 
$
7.7
 
$
8,352.2
                         
December 31, 2009:
                       
U.S. & Canadian Governments
 
$
937.4
 
$
39.6
 
$
3.0
 
$
974.0
Tax-exempt
   
2,209.3
   
135.0
   
.3
   
2,344.0
Corporates
   
4,749.4
   
273.2
   
14.0
   
5,008.7
   
$
7,896.2
 
$
448.0
 
$
17.4
 
$
8,326.8

The amortized cost and estimated fair value of fixed maturity securities at March 31, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

       
Estimated
   
Amortized
 
Fair
   
Cost
 
Value
Fixed Maturity Securities:
           
Due in one year or less
 
$
858.1
 
$
875.4
Due after one year through five years
   
4,189.6
   
4,433.8
Due after five years through ten years
   
2,761.5
   
2,975.9
Due after ten years
   
67.7
   
67.0
   
$
7,877.1
 
$
8,352.2

A summary of the Company's equity securities reflecting reported adjusted cost, net of OTTI adjustments totaling $317.3 at March 31, 2010 and December 31, 2009 follows:

       
Gross
 
Gross
 
Estimated
   
Adjusted
 
Unrealized
 
Unrealized
 
Fair
   
Cost
 
Gains
 
Losses
 
Value
                         
March 31, 2010
 
$
358.6
 
$
281.0
 
$
8.2
 
$
631.4
                         
December 31, 2009
 
$
357.5
 
$
159.0
 
$
13.7
 
$
502.9


 
8
 
 

The following table reflects the Company’s gross unrealized losses and fair value, aggregated by category and length of time that individual securities have been in an unrealized loss position employing closing market price comparisons with an issuer’s adjusted cost at March 31, 2010 and December 31, 2009:

 
12 Months or Less
 
Greater than 12 Months
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
March 31, 2010:
                                 
Fixed Maturity Securities:
                                 
U.S. & Canadian Governments
$
138.9
 
$
.6
 
$
-
 
$
-
 
$
138.9
 
$
.6
Tax-exempt
 
7.6
   
-
   
-
   
-
   
7.6
   
-
Corporates
 
296.1
   
4.0
   
42.0
   
2.9
   
338.1
   
7.0
Subtotal
 
442.7
   
4.8
   
42.0
   
2.9
   
484.7
   
7.7
Equity Securities
 
23.1
   
.3
   
97.0
   
7.9
   
120.2
   
8.2
Total
$
465.9
 
$
5.1
 
$
139.0
 
$
10.8
 
$
605.0
 
$
16.0
                                   
December 31, 2009:
                                 
Fixed Maturity Securities:
                                 
U.S. & Canadian Governments
$
307.1
 
$
3.0
 
$
-
 
$
-
 
$
307.1
 
$
3.0
Tax-exempt
 
13.9
   
.2
   
3.1
   
-
   
17.1
   
.3
Corporates
 
302.5
   
5.1
   
139.3
   
8.9
   
441.8
   
14.0
Subtotal
 
623.6
   
8.4
   
142.5
   
8.9
   
766.1
   
17.4
Equity Securities
 
1.2
   
.2
   
99.5
   
13.4
   
100.8
   
13.7
Total
$
624.9
 
$
8.6
 
$
242.1
 
$
22.4
 
$
867.0
 
$
31.1

At March 31, 2010, the Company held 108 fixed maturity and 5 equity securities in an unrealized loss position, representing 5.3% as to fixed maturities and 31.3% as to equity securities of the total number of such issues held by the Company. Of the 108 fixed maturity securities, 12 had been in a continuous unrealized loss position for more than 12 months. The unrealized losses on these securities are primarily attributable to a post-purchase rising interest rate environment and/or a decline in the credit quality of some issuers. As part of its assessment of other-than-temporary impairment, the Company considers its intent to continue to hold and the likelihood that it will not be required to sell investment securities in an unrealized loss position until cost recovery, principally on the basis of its asset and liability maturity matching procedures. The Company has not sold nor does it expect to sell investments for purposes of generating cash to pay claim or expense obligations.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. A fair value hierarchy is established that prioritizes the sources (“inputs”) used to measure fair value into three broad levels: inputs based on quoted market prices in active markets (Level 1); observable inputs based on corroboration with available market data (Level 2); and unobservable inputs based on uncorroborated market data or a reporting entity’s own assumptions (Level 3). Following is a description of the valuation methodologies and general classification used for securities measured at fair value.

The Company uses quoted values and other data provided by a nationally recognized independent pricing source as inputs into its quarterly process for determining fair values of its fixed maturity and equity securities. To validate the techniques or models used by pricing sources, the Company’s review process includes, but is not limited to: (i) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; and (ii) comparing the fair value estimates to its knowledge of the current market and to independent fair value estimates provided by the investment custodian. The independent pricing source obtains market quotations and actual transaction prices for securities that have quoted prices in active markets using its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.

Level 1 securities include U.S. and Canadian Treasury notes, publicly traded common stocks, the quoted net asset value (“NAV”) mutual funds, and most short-term investments in highly liquid money market instruments. Level 2 securities generally include corporate bonds, municipal bonds and certain U.S. and Canadian government agency securities. Securities classified within Level 3 include non-publicly traded bonds, short-term investments and common stocks.


 
9
 
 

The following table shows a summary of assets measured at fair value segregated among the various input levels described above:

 
Fair value measurements as of March 31, 2010:
 
Level 1
 
Level 2
 
Level 3
 
Total
Available for sale:
                     
Fixed maturity securities
$
345.4
 
$
7,986.3
 
$
20.5
 
$
8,352.2
Equity securities
 
631.0
   
.1
   
.2
   
631.4
Short-term investments
$
777.6
 
$
-
 
$
5.8
 
$
783.5

Investment income is reported net of allocated expenses and includes appropriate adjustments for amortization of premium and accretion of discount on fixed maturity securities acquired at other than par value. Dividends on equity securities are credited to income on the ex-dividend date. Realized investment gains and losses, which result from sales or write-downs of securities, are reflected as revenues in the income state­ment and are determined on the basis of amortized value at date of sale for fixed maturity securities, and cost in regard to equity securities; such bases apply to the specific securities sold. Unrealized investment gains and losses, net of any defer­red income taxes, are recorded directly as a component of accumulated other comprehensive income in shareholders’ equity. At March 31, 2009, the Company and its subsidiaries had no non-income producing fixed maturity securities.

The following table reflects the composition of net investment income, net realized gains or losses, and the net change in unrealized invest­ment gains or losses for each of the years shown.

   
Quarters Ended
   
March 31,
   
2010
 
2009
Investment income from:
           
Fixed maturity securities
 
$
94.3
 
$
88.6
Equity securities
   
.9
   
1.5
Short-term investments
   
.3
   
2.5
Other sources
   
1.3
   
1.3
Gross investment income
   
96.9
   
94.1
Investment expenses (a)
   
.7
   
.7
Net investment income
 
$
96.2
 
$
93.4
             
Realized gains (losses) on:
           
Fixed maturity securities:
           
Gains
 
$
3.0
 
$
-
Losses
   
(.1)
   
-
Net
   
2.9
   
-
             
Equity securities & other long-term investments
   
-
   
-
Total
   
2.9
   
-
Income taxes (credits)(b)
   
1.0
   
-
Net realized gains (losses)
 
$
1.9
 
$
-
Changes in unrealized investment gains (losses) on:
           
Fixed maturity securities
 
$
44.3
 
$
83.2
Less: Deferred income taxes (credits)
   
15.5
   
29.1
Net change
 
$
28.7
 
$
54.1
             
Equity securities & other long-term investments
 
$
127.2
 
$
(83.1)
Less: Deferred income taxes (credits)
   
44.5
   
(19.1)
Net change
 
$
82.7
 
$
(63.9)
               

 
(a)
Investment expenses consist of personnel costs and investment management and custody service fees, as well as a negligible amount of interest incurred on funds held.
 
(b)
Reflects primarily the combination of fully taxable realized investment gains or losses and judgments about the recoverability of deferred tax assets.


 
10
 
 

4.
Pension Plans:

The Company has three pension plans covering a portion of its work force. All three plans have been closed to new participants since December 31, 2004. It is the Company’s policy to fund the plans’ costs as they accrue. Plan assets are comprised principally of bonds, common stocks and short-term investments. The Companies made no cash contributions to their pension plans in the first quarter of 2010, and expect to make cash contributions of $2.5 to their pension plans in the remaining portion of calendar year 2010.

5.
Information About Segments of Business:

The Company is engaged in the single business of insurance underwriting. It conducts its operations through a number of regulated insurance company subsidiaries organized into three major segments, namely its General Insurance (property and liability insurance), Mortgage Guaranty and Title Insurance Groups. The results of a small life & health insurance business are included with those of its corporate and minor service operations. Each of the Company’s segments underwrites and services only those insurance coverages which may be written by it pursuant to state insurance regulations and corporate charter provisions. Segment results exclude net realized investment gains or losses and other-than-temporary impairments as these are aggregated in the consolidated totals. The contributions of Old Republic’s insurance industry segments to consolidated totals are shown in the following table.

   
Quarters Ended
   
March 31,
   
2010
 
2009
         
General Insurance Group:
           
Net premiums earned
 
$
411.8
 
$
457.3
Net investment income and other income
   
67.3
   
66.3
Total revenues before realized gains or losses
 
$
479.1
 
$
523.7
Income (loss) before income taxes (credits) and
           
realized investment gains or losses (a)
 
$
69.2
 
$
58.2
Income tax expense (credits) on above
 
$
21.1
 
$
15.6
             
Mortgage Guaranty Group:
           
Net premiums earned
 
$
136.2
 
$
145.3
Net investment income and other income
   
24.2
   
25.9
Total revenues before realized gains or losses
 
$
160.5
 
$
171.2
Income (loss) before income taxes (credits) and
           
realized investment gains or losses (a)
 
$
(34.1)
 
$
(144.6)
Income tax expense (credits) on above
 
$
(13.2)
 
$
(51.9)
             
Title Insurance Group:
           
Net premiums earned
 
$
179.0
 
$
98.6
Title, escrow and other fees
   
76.1
   
55.6
Sub-total
   
255.2
   
154.3
Net investment income and other income
   
6.8
   
5.9
Total revenues before realized gains or losses
 
$
262.0
 
$
160.2
Income (loss) before income taxes (credits) and
           
realized investment gains or losses (a)
 
$
(8.6)
 
$
(9.0)
Income tax expense (credits) on above
 
$
(3.2)
 
$
(3.5)
             
Consolidated Revenues:
           
Total revenues of above Company segments
 
$
901.7
 
$
855.3
Other sources (b)
   
41.9
   
35.1
Consolidated net realized investment gains (losses)
   
2.9
   
-
Consolidation elimination adjustments
   
(14.0)
   
(11.9)
Consolidated revenues
 
$
932.6
 
$
878.5
             
Consolidated Income (Loss) Before Taxes (Credits):
           
Total income (loss) before income taxes (credits)
           
and realized investment gains or losses of
           
above Company segments
 
$
26.5
 
$
(95.4)
Other sources – net (b)
   
1.8
   
2.6
Consolidated net realized investment gains (losses)
   
2.9
   
-
Consolidated income (loss) before income taxes (credits)
 
$
31.2
 
$
(92.7)
             


 
11
 
 


   
Quarters Ended
   
March 31,
   
2010
 
2009
         
Consolidated Income Tax Expense (Credits):
           
Total income tax expense (credits)
           
for above Company segments
 
$
4.6
 
$
(39.8)
Other sources – net (b)
   
.5
   
.9
Income tax expense (credits) on
           
consolidated net realized investment gains (losses)
   
1.0
   
-
Consolidated income tax expense (credits)
 
$
6.2
 
$
(38.8)

   
March 31,
 
December 31,
   
2010
 
2009
Consolidated Assets:
           
General
 
$
10,017.7
 
$
9,920.8
Mortgage
   
3,083.1
   
3,233.4
Title
   
857.3
   
852.8
Other assets (b)
   
553.5
   
503.5
Consolidation elimination adjustments
   
(270.8)
   
(320.5)
Consolidated
 
$
14,240.9
 
$
14,190.0
               
               
 
(a)
Income (loss) before taxes (credits) is reported net of interest charges on intercompany financing arrangements with Old Republic’s holding company parent for the following segments: General - $5.3 and $2.6 for the quarters ended March 31, 2010 and 2009, respectively; Mortgage - $1.7 and $1.8 for the quarters ended March 31, 2010 and 2009, respectively; and Title - $1.3 and $.9 for the quarters ended March 31, 2010 and 2009, respectively.
 
(b)
Represents amounts for Old Republic’s holding company parent, minor corporate services subsidiaries, and a small life and health insurance operation.

6.
Commitments and Contingent Liabilities:

Legal proceedings against the Company and its subsidiaries routinely arise in the normal course of business and usually pertain to claim matters related to insurance policies and contracts issued by its insurance subsidiaries. Other, non-routine legal proceedings which may prove to be material to the Company or a subsidiary are discussed below.

Purported class action lawsuits are pending against the Company’s principal title insurance subsidiary, Old Republic National Title Insurance Company (“ORNTIC”) in state and federal courts in Connecticut, New Jersey, Ohio, Pennsylvania and Texas. The plaintiffs allege that ORNTIC failed to give consumers reissue and/or refinance credits on the premiums charged for title insurance covering mortgage refinancing transactions, as required by rate schedules filed by ORNTIC or by state rating bureaus with the state insurance regulatory authorities. The suits in Pennsylvania and Texas also allege violations of the federal Real Estate Settlement Procedures Act (“RESPA”). Substantially similar lawsuits are also pending against other unaffiliated title insurance companies in these and other states as well, and additional lawsuits based upon similar allegations could be filed against ORNTIC in the future. Classes have been certified in the New Jersey and Pennsylvania actions. Settlement agreements have been reached in the Connecticut and New Jersey actions and are not expected to cost ORNTIC more than $2.9 and $2.2, respectively, including attorneys’ fees and administrative costs.

Since early February 2008, some 80 purported consumer class action lawsuits have been filed against the title industry’s principal title insurance companies, their subsidiaries and affiliates, and title insurance rating bureaus or associations in at least 10 states. The suits are substantially identical in alleging that the defendant title insurers engaged in illegal price-fixing agreements to set artificially high premium rates and conspired to create premium rates which the state insurance regulatory authorities could not evaluate and therefore, could not adequately regulate. A number of them have been dismissed and others consolidated. Approximately 49 remain nationwide. ORNTIC is currently among the named defendants in 27 of these actions in 4 states; its affiliate, American Guaranty Title Insurance Company, is a named defendant in 10 of the consolidated actions in 1 state. The Company is not a named defendant in any of the actions. No class has yet been certified in any of these suits against ORNTIC, and none of the actions against it allege RESPA violations.

National class action suits have been filed against the Company’s subsidiary, Old Republic Home Protection Company (“ORHP”) in the California Superior Court, San Diego, and the U.S. District Court in Birmingham, Alabama. The California suit has been filed on behalf of all persons who made a claim under an ORHP home warranty contract from March 6, 2003 to the present. The suit alleges breach of contract, breach of the implicit covenant of good faith and fair dealing, violations of certain California consumer protection laws and

 
12
 
 

misrepresentation arising out of ORHP’s alleged failure to adopt and implement reasonable standards for the prompt investigation and processing of claims under its home warranty contracts. The suit seeks unspecified damages consisting of the rescission of the class members’ contracts, restitution of all sums paid by the class members, punitive damages, and declaratory and injunctive relief. No class has been certified in either action. ORHP has removed the action to the U.S. District Court for the Southern District of California. The Alabama suit alleges that ORHP pays fees to the real estate brokers who market its home warranty contracts and that the payment of such fees is in violation of Section 8(a) of RESPA. The suit seeks unspecified damages, including treble damages under RESPA.

On December 19, 2008, Old Republic Insurance Company and Old Republic Insured Credit Services, Inc. (“Old Republic”) filed suit against Countrywide Bank FSB, Countrywide Home Loans, Inc. (“Countrywide”) and Bank of New York Mellon, BNY Mellon Trust of Delaware in the Circuit Court, Cook County, Illinois seeking a declaratory judgment to rescind or terminate various credit indemnity policies issued to insure home equity loans and home equity lines of credit which Countrywide had securitized or held for its own account. In February of 2009, Countrywide filed a counterclaim alleging a breach of contract, bad faith and seeking a declaratory judgment challenging the factual and procedural bases that Old Republic has relied upon to deny or rescind coverage for individual defaulted loans under those policies. As of March 31, 2010, Old Republic had rescinded or denied coverage on more than 14,000 defaulted loans, based upon material misrepresentations either by Countrywide as to the credit characteristics of the loans or by the borrowers in their loan applications.

On December 31, 2009, two of the Company’s mortgage insurance subsidiaries, Republic Mortgage Insurance Company and Republic Mortgage Insurance Company of North Carolina (together “RMIC”) filed a Complaint for Declaratory Judgment in the Supreme Court of the State of New York, County of New York, against Countrywide Financial Corporation, Countrywide Home Loans, Inc., The Bank of New York Mellon Trust Company, N.A., BAC Home Loans Servicing, LP, and Bank of America, N.A. as successor in interest to Countrywide Bank, N.A. (together, “Countrywide”). The suit relates to five mortgage insurance master policies (the “Policies”) issued by RMIC to Countrywide or to The Bank of New York Mellon Trust Company as co-trustee for trusts containing securitized mortgage loans that were originated or purchased by Countrywide. RMIC has rescinded its mortgage insurance coverage on over 1,500 of the loans originally covered under the Policies based upon material misrepresentations of the borrowers in their loan applications or the negligence of Countrywide in its loan underwriting practices or procedures. Each of the coverage rescissions occurred after a borrower had defaulted and RMIC reviewed the claim and loan file submitted by Countrywide. The suit seeks the Court’s review and interpretation of the Policies’ incontestability provisions and its validation of RMIC’s investigation procedures with respect to the claims and underlying loan files.

On January 29, 2010, in response to RMIC’s suit, Countrywide served RMIC with a demand for arbitration under the arbitration clauses of the same Policies. The demand raises largely the same issues as those raised in RMIC’s suit against Countrywide, as well as Countrywide’s and RMIC’s compliance with the terms, provisions and conditions of the Policies. The demand includes a prayer for punitive, compensatory and consequential damages.

Except in the Connecticut and New Jersey actions against the title companies, where settlement agreements have been approved, the ultimate impact of these lawsuits and the arbitration, all of which seek unquantified damages, attorneys’ fees and expenses, is uncertain and not reasonably estimable. The Company and its subsidiaries intend to defend vigorously against each of the aforementioned actions. Although the Company does not believe that these lawsuits will have a material adverse effect on its consolidated financial condition, results of operations or cash flows, there can be no assurance in those regards.

7.
Debt:

On April 29, 2009, the Company completed a public offering of $316.25 aggregate principal amount of Convertible Senior Notes. The notes bear interest at a rate of 8.0% per year, mature on May 15, 2012, and are convertible at any time prior to maturity by the holder into 86.8246 shares of common stock per one thousand dollar note.

Consolidated debt of Old Republic and its subsidiaries is summarized below:

   
March 31, 2010
 
December 31, 2009
   
Carrying
 
Fair
 
Carrying
 
Fair
   
Amount
 
Value
 
Amount
 
Value
8% Convertible Senior Notes due 2012
 
$
316.2
 
$
390.5
 
$
316.2
 
$
358.9
ESSOP debt with an average yield of 3.73%
                       
and 3.85%, respectively
   
25.8
   
25.8
   
27.9
   
27.9
Other miscellaneous debt
   
5.1
   
5.1
   
2.5
   
2.5
Total debt
 
$
347.2
 
$
421.5
 
$
346.7
 
$
389.4

The Company currently has access to the commercial paper market for up to $150.0.


 
13
 
 

8.
Income Taxes:

Tax positions taken or expected to be taken in a tax return by the Company are recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. There are no tax uncertainties that are expected to result in significant increases or decreases to unrecognized tax benefits within the next twelve month period. The Company views its income tax exposures as primarily consisting of timing differences whereby the ultimate deductibility of a taxable amount is highly certain but the timing of its deductibility is uncertain. Such differences relate principally to the timing of deductions for loss and premium reserves. As in prior examinations, the Internal Revenue Service (IRS) could assert that claim reserve deductions were overstated thereby reducing the Company’s statutory taxable income in any particular year. The Company believes that it establishes its reserves fairly and consistently at each balance sheet date, and that it would succeed in defending its tax position in these regards. Because of the impact of deferred tax accounting, the possible accelerated payment of tax to the IRS would not necessarily affect the annual effective tax rate. The Company classifies interest and penalties as income tax expense in the consolidated statement of income. Examinations of the Company’s consolidated Federal income tax returns through year-end 2006 have been completed and no significant adjustments have resulted.


 
14
 
 

OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Quarters Ended March 31, 2010 and 2009
($ in Millions, Except Share Data)

OVERVIEW

This management analysis of financial position and results of operations pertains to the consolidated accounts of Old Republic International Corporation (“Old Republic” or “the Company”). The Company conducts its operations through three major regulatory segments, namely, its General (property and liability), Mortgage Guaranty, and Title insurance segments. A small life and health insurance business, accounting for 2.9% of consolidated operating revenues for the quarter ended March 31, 2010 and 1.8% of consolidated assets as of March 31, 2010, is included within the corporate and other caption of this report.

The consolidated accounts are presented in conformity with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) of accounting principles generally accepted in the United States of America (“GAAP”).

This management analysis should be read in conjunction with the consolidated financial statements and the footnotes appended to them.

The insurance business is distinguished from most others in that the prices (premiums) charged for various insurance products are set without certainty of the ultimate benefit and claim costs that will emerge or be incurred, often many years after issuance and expiration of a policy. This basic fact casts Old Republic as a risk-taking enterprise managed for the long run. Management therefore conducts the business with a primary focus on achieving favorable underwriting results over cycles, and on the maintenance of financial soundness in support of the insurance subsidiaries’ long-term obligations to insurance beneficiaries. To achieve these objectives, adherence to insurance risk management principles is stressed, and asset diversification and quality are emphasized. In addition to income arising from Old Republic’s basic underwriting and related services functions, significant investment income is earned from invested funds generated by those functions and from shareholders’ capital. Investment management aims for stability of income from interest and dividends, protection of capital, and sufficient liquidity to meet insurance underwriting and other obligations as they become payable in the future. Securities trading and the realization of capital gains are not objectives. The investment philosophy is therefore best characterized as emphasizing value, credit quality, and relatively long-term holding periods. The Company’s ability to hold both fixed maturity and equity securities for long periods of time is in turn enabled by the scheduling of maturities in contemplation of an appropriate matching of assets and liabilities.

In light of the above factors, the Company’s affairs are managed without regard to the arbitrary strictures of quarterly or even annual reporting periods that American industry must observe. In Old Republic’s view, such short reporting time frames do not comport well with the long-term nature of much of its business. Management believes that the Company’s operating results and financial condition can best be evaluated by observing underwriting and overall operating performance trends over succeeding five to ten year intervals. Such extended periods can encompass one or two economic and/or underwriting cycles, and thereby provide appropriate time frames for such cycles to run their course and for reserved claim costs to be quantified with greater finality and effect.

EXECUTIVE SUMMARY

Old Republic’s first quarter 2010 consolidated operating results, which exclude net realized investment gains or losses, reflected a substantial turn for the better when compared to the same quarter of 2009. As noted below, most of the gain stemmed from improved underwriting results in the Company’s mortgage guaranty line. The latter arose from the combination of lower claim provisions and the positive effects of largely non-recurring captive reinsurance commutations and terminations of certain pool insurance contracts. General insurance earnings were higher mostly as a result of lower claim costs. Title insurance operating earnings were basically flat quarter-over-quarter.

 
15
 
 

Consolidated Results – The major components of Old Republic’s consolidated results and other data for the periods reported upon are shown below:
   
Quarters Ended March 31,
   
2010
 
2009
 
Change
Operating revenues:
                 
General insurance
 
$
479.1
 
$
523.7
 
-8.5
%
Mortgage guaranty
   
160.5
   
171.2
 
-6.3
 
Title insurance
   
262.0
   
160.2
 
63.5
 
Corporate and other
   
27.8
   
23.2
 
19.8
 
Total
 
$
929.6
 
$
878.5
 
5.8
%
Pretax operating income (loss):
                 
General insurance
 
$
69.2
 
$
58.2
 
19.0
%
Mortgage guaranty
   
(34.1)
   
(144.6)
 
76.4
 
Title insurance
   
(8.6)
   
(9.0)
 
4.3
 
Corporate and other
   
1.8
   
2.6
 
-31.4
 
Sub-total
   
28.3
   
(92.8)
 
130.5
 
Realized investment gains (losses):
                 
From sales
   
2.9
   
-
     
From impairments
   
-
   
-
     
Net realized investment gains (losses)
   
2.9
   
-
 
N/M
 
Consolidated pretax income (loss)
   
31.2
   
(92.7)
 
133.7
 
Income taxes (credits)
   
6.2
   
(38.8)
 
116.0
 
Net income (loss)
 
$
25.0
 
$
(53.9)
 
146.5
%

Consolidated underwriting ratio:
                 
Benefits and claim ratio
 
59.6
%
 
83.9
%
     
Expense ratio
 
47.4
   
39.6
       
Composite ratio
 
107.0
%
 
123.5
%
     

Components of diluted
                 
earnings per share:
                 
Net operating income (loss)
 
$
0.10
 
$
(0.23)
 
143.5
%
Net realized investment gains (losses)
   
0.01
   
-
     
Net income (loss)
 
$
0.11
 
$
(0.23)
 
147.8
%
                   
Cash dividends paid per share
 
$
0.1725
 
$
0.1700
 
1.5
%
                   

N/M: Not meaningful

The above table shows both operating and net income (loss) to highlight the effects of realized investment gain or loss recognition on period-to-period comparisons. Operating income, however, does not replace net income determined in accordance with GAAP as a measure of total profitability.

The recognition of realized investment gains or losses can be highly discretionary and arbitrary due to such factors as the timing of individual securities sales, recognition of estimated losses from write-downs for impaired securities, tax-planning considerations, and changes in investment management judgments relative to the direction of securities markets or the future prospects of individual investees or industry sectors. Likewise, non-recurring items which may emerge from time to time can distort the comparability of the Company’s results from period to period. Accordingly, management uses net operating income, a non-GAAP financial measure, to evaluate and better explain operating performance, and believes its use enhances an understanding of Old Republic’s basic business results.


 
16
 
 

General Insurance Results – First quarter 2010 general insurance earnings were mainly affected by lower earned premiums and the changes in claim costs and expenses reflected in the following table.

   
General Insurance Group
   
Quarters Ended March 31,
   
2010
 
2009
 
Change
Net premiums earned
 
$
411.8
 
$
457.3
 
-10.0
%
Net investment income
   
64.6
   
63.4
 
1.8
 
Pretax operating income (loss)
 
$
69.2
 
$
58.2
 
19.0
%

Claim ratio
 
70.6
%
 
74.8
%
   
Expense ratio
 
26.7
   
25.6
     
Composite ratio
 
97.3
%
 
100.4
%
   

The continuation of a moderate decline in premium rates and recessionary conditions constrained premium growth in the latest quarter and each of the prior two years. Lessened economic activity affects such factors as sales and employment levels, both of which are important elements upon which Old Republic’s commercial insurance premiums are based.

While the Group’s invested asset base grew by approximately 10% year-over-year, net investment income was up negligibly by 1.8% quarter-over-quarter. The disparate growth rates reflect primarily a low yield market environment and the relatively short-term nature of the bond portfolio.

As the above table shows, the overall claim ratio declined by 4.2 percentage points quarter-over-quarter as experience for most insurance coverages reflected relatively stable trends in claim payments and reserve provisions. Moreover, the consumer credit indemnity (“CCI”) coverage impacted adversely the overall claim ratio by 3.9 percentage points compared to a 7.7 percentage point effect in last year’s first quarter. Most of the reduced impact stemmed from lower CCI premium volume, and declining loan delinquency and claim payment trends.

The expense ratio edged up slightly as a small reduction in total expenses lagged the larger drop in earned premiums.

Mortgage Guaranty Results Operating results for the Company’s mortgage guaranty segment improved significantly as downward trends in newly reported and outstanding traditional primary delinquencies resulted in lower claim reserve provisions. First quarter pretax operating results also benefited from gains emanating from additional commutations of two captive reinsurance agreements, and the termination of certain pool insurance contracts. Key indicators of this segment’s performance are shown in the following table.

   
Mortgage Guaranty Group
   
Quarters Ended March 31,
   
2010
 
2009
 
Change
Net premiums earned
 
$
136.2
 
$
145.3
 
-6.2
%
Net investment income
   
23.1
   
22.4
 
3.1
 
Pretax operating income (loss)
 
$
(34.1)
 
$
(144.6)
 
76.4
%

Claim ratio
 
127.2
%
 
199.9
%
   
Expense ratio
 
13.5
   
13.7
     
Composite ratio
 
140.7
%
 
213.6
%
   

As above noted, during this year’s first quarter the Mortgage Guaranty Group negotiated the termination of two captive reinsurance agreements and certain pool insurance contracts. The reinsurance commutations resulted in additional net premiums earned of $5.3 that are intended to cover the Company’s assumption of future losses related to the agreements. Pursuant to GAAP accounting methodology these premiums must be recognized as income upon receipt rather than being deferred to future periods when the related claim costs are expected to arise. The cancellation of pool insurance contracts resulted in a reduction of first quarter 2010 incurred losses of approximately $30.3. Taken together these transactions reduced the incurred claim ratio for the quarter by approximately 27.4 percentage points, increased the paid claim ratio by 128.8 percentage points, and decreased the pretax operating loss by approximately $35.6. As a further consequence, these non-recurring transactions resulted in a reduction of operating cash flow of $167.1.

Leaving aside the additional captive reinsurance premium income of $5.3, mortgage guaranty earned premiums continued to decline in this year’s first quarter. Lower volumes of new insurance and premium refunds related to claim rescissions accounted for most of the decline. New business volume reflected further weakness due to the downturn in overall mortgage originations, lower industry market penetration, and the continuation of more selective underwriting guidelines in place since late 2007.

 
17
 
 


Net investment income grew moderately due to a temporarily higher invested asset base in this year’s first quarter.

First quarter 2010 claim costs were lower as a result of the first sequential decline in outstanding traditional primary loan delinquencies since the first quarter of 2007. The continuation of historically high levels of claim rescissions and denials also affected paid claim and reserve provision trends. The following table shows the major components of incurred claims inclusive of the above noted effect of captive reinsurance and pool insurance terminations.

     
Mortgage Guaranty Group
     
Quarters Ended
     
March 31,
         
2010
 
2009
Components of incurred claim ratio as a
                     
percent of earned premiums:
                     
Paid claims:
                     
Payments, excluding pool terminations
           
107.6
%
 
107.1
%
Pool terminations reserve payments
           
128.8
   
-
 
Total paid claim ratio
           
236.5
   
107.1
 
Claim reserve provisions:
                     
Excluding pool terminations
           
47.0
   
92.8
 
Pool termination reserves released
           
(151.1
)
 
-
 
Net claim reserve provisions (release)
           
(104.2
)
 
92.8
 
Effect of captive commutations
           
(5.1
)
 
-
 
Incurred claim ratio
           
127.2
%
 
199.9
%

Production and operating expense ratios for all periods reported upon reflect continued success in expense management.

Title Insurance Results – Old Republic’s title business continued to generate the more positive operating momentum that emerged in last year’s second half. Key performance indicators are shown in the following table.

   
Title Insurance Group
   
Quarters Ended March 31,
   
2010
 
2009
 
Change
Net premiums and fees earned
 
$
255.2
 
$
154.3
 
65.4
%
Net investment income
   
6.6
   
5.8
 
12.8
 
Pretax operating income (loss)
 
$
(8.6)
 
$
(9.0)
 
4.3
%

Claim ratio
 
7.4
%
 
6.6
%
   
Expense ratio
 
98.5
   
102.9
     
Composite ratio
 
105.9
%
 
109.5
%
   

First quarter 2010 net premiums and fees reflected accelerating growth as the Title Group gained market share from industry dislocations and consolidation. The consolidation of accounts from the Florida joint underwriting venture formed in mid-year 2009 also added to this year’s revenue stream. A greater invested asset base generated meaningful investment income growth even though market yields remain relatively low.

Claim costs, however, rose at a quicker pace than premiums and fees revenues as the Company added moderately to reserve provisions in consideration of recent claim emergence trends. Growth in production and general operating expenses also reflected the greater costs associated with the much higher level of premiums and fees.

Corporate and Other Operations – The Company’s small life and health business and the net costs associated with the parent company and its internal services subsidiaries produced a lower net gain in this year’s first quarter. Period-to-period variations in the results posted by these relatively small elements of Old Republic’s operations usually stem from volatility inherent to the small scale of its life and health business, fluctuations in the costs of external debt, and net interest costs on intra-system financing arrangements.


 
18
 
 

Cash, Invested Assets, and Shareholders’ Equity – The following table reflects Old Republic’s consolidated cash and invested assets as well as shareholders’ equity at the dates shown:

               
% Change
   
March
 
December
 
March
 
March '10/
 
March '10/
   
2010
 
2009
 
2009
 
Dec '09
 
March '09
Cash and invested assets:
Fair value basis
 
$
9,985.9
 
$
9,879.0
 
$
9,052.4
 
1.1
%
 
10.3
%
 
Original cost basis
 
$
9,561.2
 
$
9,625.9
 
$
9,407.1
 
-.7
%
 
1.6
%
                               
Shareholders’ equity:
Total
 
$
3,995.8
 
$
3,891.4
 
$
3,643.2
 
2.7
%
 
9.7
%
 
Per common share
 
$
16.90
 
$
16.49
 
$
15.47
 
2.5
%
 
9.2
%
                               
Composition of shareholders’ equity per share:
                             
Equity before items below
 
$
14.92
 
$
14.99
 
$
15.69
 
-0.5
%
 
-4.9
%
Unrealized investment gains (losses) and other
                             
accumulated comprehensive income (loss)
   
1.98
   
1.50
   
(0.22)
           
Total
 
$
16.90
 
$
16.49
 
$
15.47
 
2.5
%
 
9.2
%

Consolidated cash flow from operating activities produced a deficit of $19.3 for the first three months of 2010. This compares to positive operating cash flow of $263.3 for the same period in 2009. This year’s significant reduction was largely due to the net operating cash flow impact of the previously discussed mortgage guaranty pool terminations.

The investment portfolio reflects a current allocation of approximately 85% to fixed-maturity securities and 6% to equities. As has been the case for many years, Old Republic’s invested assets are managed in consideration of enterprise-wide risk management objectives intended to assure solid funding of its insurance subsidiaries’ long-term obligations to policyholders and other beneficiaries, and of their long-term effect on the stability of capital accounts. The portfolio contains little or no direct insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations (“CDO’s”), derivatives, junk bonds, hybrid securities, or illiquid private equity investments. In a similar vein, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes.

Total equity investments include Old Republic’s common stock holdings in two leading publicly held mortgage guaranty (“MI”) businesses (MGIC Investment Corp. and The PMI Group). These stocks were acquired in 2007 and 2008 as passive long-term investment additions for a core segment of Old Republic’s business in anticipation of a recovery of the MI industry in 2010. In management’s judgment, the past three years’ depressed market valuations of companies operating in the housing and mortgage-lending sectors of the American economy have been impacted significantly by the cyclical and macroeconomic conditions affecting these sectors, and by the recent dysfunctionality of the banking and mortgage-lending industries. As shown in the following table, the March 31, 2010 fair value of the two securities had risen to 61.0% of their original cost compared to the 25.6% other-than-temporarily-impaired level to which they were written down in 2008.

   
As of and for Periods Ended:
   
March 31,
 
December 31,
   
2010
 
2009
 
2008
Total value of the two MI investments:
Original cost
$
416.4
 
$
416.4
 
$
416.4
 
Impaired cost
 
106.8
   
106.8
   
106.8
 
Fair value
 
254.0
   
130.7
   
82.7
 
Underlying equity(*)
$
235.6
 
$
274.6
 
$
515.9
                   
Pretax other-than-temporary impairments
               
recorded in income statement of the period
$
-
 
$
-
 
$
(375.5)
Pretax unrealized investment gains (losses)
               
recorded directly in shareholders’ equity account:
               
For the period
$
123.3
 
$
48.0
 
$
(24.1)
Cumulatively
$
147.2
 
$
23.9
 
$
(24.1)
                   
(*) Underlying equity based on latest reports (which may lag by one quarter) issued by investees.


 
19
 
 

Substantially all changes in the shareholders’ equity account reflect the Company’s net income or loss, dividend payments to shareholders, and impairments or changes in market valuations of invested assets during the periods shown below:

       
Shareholders’ Equity Per Share
       
Three Months Ended March 31,
       
2010
 
2009
Beginning balance
       
$
16.49
 
$
15.91
Changes in shareholders’ equity:
                 
Net operating income (loss)
         
0.10
   
(0.23)
Net realized investment gains (losses):
                 
From sales
         
0.01
   
-
From impairments
         
-
   
-
Subtotal
         
0.01
   
-
Net unrealized investment gains (losses)
         
0.47
   
(0.04)
Total realized and unrealized investment gains (losses)
         
0.48
   
(0.04)
Cash dividends
         
(0.17)
   
(0.17)
Stock issuance, foreign exchange, and other transactions
         
-
   
-
Net change
         
0.41
   
(0.44)
Ending balance
       
$
16.90
 
$
15.47


 
20
 
 


DETAILED MANAGEMENT ANALYSIS

FINANCIAL ACCOUNTING AND REPORTING POLICIES

The Company’s annual and interim financial statements incorporate a large number and types of estimates relative to matters which are highly uncertain at the time the estimates are made. The estimation process required of an insurance enterprise is by its very nature highly dynamic inasmuch as it necessitates a continuous evaluation, analysis, and quantification of factual data as it becomes known to the Company. As a result, actual experienced outcomes can differ from the estimates made at any point in time, and thus affect future periods’ reported revenues, expenses, net income (loss), and financial condition.

Old Republic believes that its most critical accounting estimates relate to: a) the determination of other-than-temporary impairments (“OTTI”) in the value of fixed maturity and equity investments; b) the establishment of deferred acquisition costs which vary directly with the production of insurance premiums; c) the recoverability of reinsured paid and/or outstanding losses; and d) the establishment of reserves for losses and loss adjustment expenses. The major assumptions and methods used in setting these estimates are discussed in the Company’s 2009 Annual Report on Form 10K.

In recent years, the Financial Accounting Standards Board (“FASB”) has issued various releases requiring additional financial statement disclosures, and to provide guidance relative to the application of such releases. Of particular pertinence to the Company’s financial statements are certain disclosures relating to uncertainties affecting income tax provisions, and methodologies for establishing the fair value and recording of other-than-temporary impairments of securities. The requisite disclosures and explanations of those matters have been included in the footnotes to the Company’s financial statements.

FINANCIAL POSITION

The Company’s financial position at March 31, 2010 reflected increases in assets, and common shareholders’ equity of .4% and 2.7%, respectively, and a decrease in liabilities of .5% when compared to the immediately preceding year-end. Cash and invested assets represented 70.1% and 69.6% of consolidated assets as of March 31, 2010 and December 31, 2009, respectively. As of March 31, 2010, cash and invested assets increased 1.1% to $9,985.9 as a result of an increase in the fair value of investments.

Investments - During the first quarter of 2010 and 2009, the Company committed substantially all investable funds to short to intermediate-term fixed maturity securities. At both March 31, 2010 and 2009, approximately 99% of the Company’s investments consisted of marketable securities. Old Republic continues to adhere to its long-term policy of investing primarily in investment grade, marketable securities. The portfolio contains little or no insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations (“CDO’s”), derivatives, junk bonds, hybrid securities, or illiquid private equity investments. In a similar vein, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes. At March 31, 2010, the Company had no fixed maturity investments in default as to principal and/or interest.

Relatively high short-term maturity investment positions continued to be maintained as of March 31, 2010. Such positions reflect a large variety of seasonal and intermediate-term factors including current operating needs, expected operating cash flows, quarter-end cash flow seasonality, and investment strategy considerations. Accordingly, the future level of short-term investments will vary and respond to the interplay of these factors and may, as a result, increase or decrease from current levels.

The Company does not own or utilize derivative financial instruments for the purpose of hedging, enhancing the overall return of its investment portfolio, or reducing the cost of its debt obligations. With regard to its equity portfolio, the Company does not own any options nor does it engage in any type of option writing. Traditional investment management tools and techniques are employed to address the yield and valuation exposures of the invested assets base. The long-term fixed maturity investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through asset diversification and the purchase of investment grade securities. Reinvestment rate risk is reduced by concentrating on non-callable issues, and by taking asset-liability matching considerations into account. Purchases of mortgage and asset backed securities, which have variable principal prepayment options, are generally avoided. Market value risk is limited through the purchase of bonds of intermediate maturity. The combination of these investment management practices is expected to produce a more stable long-term fixed maturity investment portfolio that is not subject to extreme interest rate sensitivity and principal deterioration.

The fair value of the Company’s long-term fixed maturity investment portfolio is sensitive, however, to fluctuations in the level of interest rates, but not materially affected by changes in anticipated cash flows caused by any prepayments. The impact of interest rate movements on the long-term fixed maturity investment portfolio generally affects net unrealized gains or losses. As a general rule, rising interest rates enhance currently available yields but typically lead to a reduction in the fair value of existing fixed maturity investments. By contrast, a decline in such rates reduces currently

 
21
 
 

available yields but usually serves to increase the fair value of the existing fixed maturity investment portfolio. All such changes in fair value are reflected, net of deferred income taxes, directly in the shareholders’ equity account, and as a separate component of the statement of comprehensive income. Given the Company’s inability to forecast or control the movement of interest rates, Old Republic sets the maturity spectrum of its fixed maturity securities portfolio within parameters of estimated liability payouts, and focuses the overall portfolio on high quality investments. By so doing, Old Republic believes it is reasonably assured of its ability to hold securities to maturity as it may deem necessary in changing environments, and of ultimately recovering their aggregate cost.

Possible future declines in fair values for Old Republic’s bond and stock portfolios would negatively affect the common shareholders’ equity account at any point in time, but would not necessarily result in the recognition of realized investment losses. The Company reviews the status and fair value changes of each of its investments on at least a quarterly basis during the year, and estimates of other-than-temporary impairments in the portfolio’s value are evaluated and established at each quarterly balance sheet date. In reviewing investments for other-than-temporary impairment, the Company, in addition to a security’s market price history, considers the totality of such factors as the issuer’s operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audit opinion, industry and securities markets conditions, and analyst expectations to reach its conclusions. Sudden fair value declines caused by such adverse developments as newly emerged or imminent bankruptcy filings, issuer default on significant obligations, or reports of financial accounting developments that bring into question the validity of previously reported earnings or financial condition, are recognized as realized losses as soon as credible publicly available information emerges to confirm such developments. Absent issuer-specific circumstances that would result in a contrary conclusion, any equity security with an unrealized investment loss amounting to a 20% or greater decline for a six month period is considered other-than-temporarily-impaired. In the event the Company’s estimate of other-than-temporary impairments is insufficient at any point in time, future periods’ net income (loss) would be affected adversely by the recognition of additional realized or impairment losses, but its financial condition would not necessarily be affected adversely inasmuch as such losses, or a portion of them, could have been recognized previously as unrealized losses.

The following tables show certain information relating to the Company’s fixed maturity and equity portfolios as of the dates shown:

Credit Quality Ratings of Fixed Maturity Securities (a)

   
March 31,
 
December 31,
   
2010
 
2009
Aaa
 
21.8
%
 
22.3
%
Aa
 
20.2
   
20.3
 
A
 
30.6
   
30.3
 
Baa
 
26.2
   
25.7
 
Total investment grade
 
98.8
   
98.6
 
All other (b)
 
1.2
   
1.4
 
Total
 
100.0
%
 
100.0
%
               

 
(a)
Credit quality ratings used are those assigned primarily by Moody’s for U.S. Governments, Agencies and Corporate issuers and by Standard & Poor’s (“S&P”) for U.S. and Canadian Municipal issuers, which are converted to equivalent Moody’s ratings classifications.
 
(b)
“All other” includes non-investment grade or non-rated issuers.

Gross Unrealized Losses Stratified by Industry Concentration for Non-Investment Grade Fixed Maturity Securities

   
March 31, 2010
       
Gross
   
Amortized
 
Unrealized
   
Cost
 
Losses
Fixed Maturity Securities by Industry Concentration:
           
   Banking
 
$
23.0
 
$
1.4
   Industrial
   
6.5
   
.5
   Retail
   
4.1
   
.2
   Total
 
$
33.7
(c)
$
2.2
               

 (c)
Represents .4% of the total fixed maturity securities portfolio.

 
22
 
 


Gross Unrealized Losses Stratified by Industry Concentration for Investment Grade Fixed Maturity Securities

   
March 31, 2010
       
Gross
   
Amortized
 
Unrealized
   
Cost
 
Losses
Fixed Maturity Securities by Industry Concentration:
           
   Energy
 
$
33.5
 
$
1.1
   Industrial
   
69.8
   
1.0
   Utilities
   
56.5
   
.7
   Banking
   
15.9
   
.6
   Other (includes 13 industry groups)
   
282.8
   
1.8
   Total
 
$
458.7
(d)
$
5.5
               

 
(d)
Represents 5.8% of the total fixed maturity securities portfolio.

Gross Unrealized Losses Stratified by Industry Concentration for Equity Securities

   
March 31, 2010
 
       
Gross
 
       
Unrealized
 
   
Cost
 
Losses
 
Equity Securities by Industry Concentration:
             
   Index Funds
 
$
112.8
 
$
7.9
 
   Health Care
   
15.1
   
.2
 
   Natural Gas
   
.3
   
-
 
   Insurance
   
.2
   
-
 
   Total
 
$
128.5
(e)
$
8.2
(f)
                 

 
(e)
Represents 35.8% of the total equity securities portfolio.
 
(f)
Represents 2.3% of the adjusted cost of the total equity securities portfolio, while gross unrealized gains represent 78.4% of the portfolio.


Gross Unrealized Losses Stratified by Maturity Ranges for All Fixed Maturity Securities

   
March 31, 2010
   
Amortized Cost
   
   
of Fixed Maturity Securities
 
Gross Unrealized Losses
       
Non-
     
Non-
       
Investment
     
Investment
   
All
 
Grade Only
 
All
 
Grade Only
Maturity Ranges:
                       
Due in one year or less
 
$
-
 
$
-
 
$
-
 
$
-
Due after one year through five years
   
94.4
   
13.4
   
1.3
   
1.0
Due after five years through ten years
   
355.3
   
20.3
   
4.8
   
1.1
Due after ten years
   
42.7
   
-
   
1.5
   
-
Total
 
$
492.5
 
$
33.7
 
$
7.7
 
$
2.2
                           


 
23
 
 


Gross Unrealized Losses Stratified by Duration and Amount of Unrealized Losses

   
March 31, 2010
 
   
Amount of Gross Unrealized Losses
 
   
Less than
         
Total Gross
 
   
20% of
 
20% to 50%
 
More than
 
Unrealized
 
   
Cost
 
of Cost
 
50% of Cost
 
Loss
 
Number of Months in Loss Position:
                         
Fixed Maturity Securities:
                         
One to six months
 
$
4.6
 
$
-
 
$
-
 
$
4.6
 
Seven to twelve months
   
.1
   
-
   
-
   
.1
 
More than twelve months
   
2.5
   
.3
   
-
   
2.9
 
Total
 
$
7.3
 
$
.3
 
$
-
 
$
7.7
 
Equity Securities:
                         
One to six months
 
$
.3
 
$
-
 
$
-
 
$
.3
 
Seven to twelve months
   
-
   
-
   
-
   
-
 
More than twelve months
   
7.8
   
-
   
-
   
7.9
 
Total
 
$
8.1
 
$
-
 
$
-
 
$
8.2
 
                           
Number of Issues in Loss Position:
                         
Fixed Maturity Securities:
                         
One to six months
   
92
   
-
   
-
   
92
 
Seven to twelve months
   
4
   
-
   
-
   
4
 
More than twelve months
   
11
   
1
   
-
   
12
 
Total
   
107
   
1
   
-
   
108
(g)
Equity Securities:
                         
One to six months
   
3
   
-
   
-
   
3
 
Seven to twelve months
   
-
   
-
   
-
   
-
 
More than twelve months
   
1
   
1
   
-
   
2
 
Total
   
4
   
1
   
-
   
5
(g)
                             

 
(g)
At March 31, 2010 the number of issues in an unrealized loss position represent 5.3% as to fixed maturities, and 31.3% as to equity securities of the total number of such issues held by the Company.

The aging of issues with unrealized losses employs closing market price comparisons with an issue’s original cost net of other-than-temporary impairment adjustments. The percentage reduction from such adjusted cost reflects the decline as of a specific point in time (March 31, 2010 in the above table) and, accordingly, is not indicative of a security’s value having been consistently below its cost at the percentages and throughout the periods shown.