OLD REPUBLIC INTERNATIONAL CORP - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
|
FORM
10-K
|
X ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
(FEE REQUIRED)
For the fiscal year ended:
December
31, 2007 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(NO
FEE REQUIRED)
|
For the transition period from
________________________
to _________________________
Commission File Number: 001-10607
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OLD
REPUBLIC INTERNATIONAL CORPORATION
(Exact
name of registrant as specified in its
charter)
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Delaware
|
No.
36-2678171
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||
(State
or other jurisdiction of
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(IRS
Employer Identification No.)
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||
incorporation
or organization)
307 North Michigan Avenue, Chicago,
Illinois
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60601
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||
(Address
of principal executive office)
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(Zip
Code)
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Registrant's
telephone number, including area code: 312-346-8100
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Securities
registered pursuant to Section 12(b) of the
Act:
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Title of each
class
|
Name of Each Exchange on Which
Registered
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Common Stock/$1 par
value
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New York Stock
Exchange
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes: X/
No:
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes: _/
No:X
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes: X/
No:
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” 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
The
aggregate market value of the registrant's voting Common Stock held by
non-affiliates of the registrant (assuming, for purposes of this calculation
only, that the registrant’s directors and executive officers, the registrant’s
various employee benefit plans and American Business & Personal Insurance
Mutual, Inc. and its subsidiaries are all affiliates of the registrant), based
on the closing sale price of the registrant’s common stock on June 30, 2007, the
last day of the registrant’s most recently completed second fiscal quarter, was
$4,619,137,346.
The
registrant had 230,472,231 shares of Common Stock outstanding as of February 1,
2008.
Documents incorporated by
reference:
The
following documents are incorporated by reference into that part of this Form
10-K designated to the right of the document title.
Title
Proxy
statement for the 2008 Annual Meeting of Shareholders
Exhibits
as specified in exhibit index (page 79)
|
Part
III,
Items 10, 11, 12, 13 and 14
IV,
Item 15
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_______________
There are
80 pages in this report
PART
I
Item
1 - Business
(a) General Description of
Business. Old Republic International Corporation is a Chicago-based
holding company 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, it’s General (property
and liability insurance), Mortgage Guaranty, and Title Insurance Groups.
References herein to such groups apply to the Company's subsidiaries engaged in
these respective segments of business. The results of a small life and health
insurance business are included within the corporate and other caption of this
report. “Old Republic”, or “the Company” refers to Old Republic
International Corporation and its subsidiaries as the context
requires.
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 the maintenance of financial soundness in
support of its subsidiaries’ long term obligations to insurance beneficiaries.
To achieve these objectives, adherence to certain basic insurance risk
management principles is stressed, and asset diversification and quality are
emphasized. The underwriting principles encompass:
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•
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Disciplined
risk selection, evaluation, and pricing to reduce uncertainty and adverse
selection;
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|
•
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Augmenting
the predictability of expected outcomes through insurance of the largest
number of homogeneous risks as to each type of
coverage;
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•
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Reducing
the insurance portfolio risk profile
through:
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·
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diversification
and spread of insured risks; and
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·
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assimilation
of uncorrelated asset and liability exposures across economic sectors that
tend to offset or counterbalance one another;
and
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•
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Effectively
managing gross and net limits of liability through appropriate use of
reinsurance.
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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.
The
contributions to consolidated net revenues and income before taxes, and the
assets and shareholders’ equity of each Old Republic segment are set forth in
the following table. This information should be read in conjunction with the
consolidated financial statements, the notes thereto, and the “Management
Analysis of Financial Position and Results of Operations” appearing elsewhere in
this report.
2
Financial
Information Relating to Segments of Business
(1)
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Net Revenues
(2)
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($
in Millions)
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Years
Ended December 31:
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2007
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2006
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2005
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||||||||
General
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$ | 2,438.0 | $ | 2,138.7 | $ | 2,017.6 | |||||
Mortgage
Guaranty
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608.3 | 529.9 | 516.0 | ||||||||
Title
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878.5 | 1,007.3 | 1,108.6 | ||||||||
Corporate
& Other – net
(3)
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131.4 | 127.1 | 122.5 | ||||||||
Consolidated
realized investment
gains
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70.3 | 19.0 | 64.9 | ||||||||
Consolidation
elimination
adjustments
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(35.8 | ) | (27.9 | ) | (23.9 | ) | |||||
Consolidated
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$ | 4,091.0 | $ | 3,794.2 | $ | 3,805.9 |
Income (Loss) Before
Taxes
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|||||||||||||
Years
Ended December 31:
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2007
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2006
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2005
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||||||||||
General
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$ | 418.0 | $ | 401.6 | $ | 350.0 | |||||||
Mortgage
Guaranty
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(110.4 | ) | 228.4 | 243.7 | |||||||||
Title
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(14.7 | ) | 31.0 | 88.7 | |||||||||
Corporate
& Other – net
(3)
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15.1 | - | (.1 | ) | |||||||||
Consolidated
realized investment
gains
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70.3 | 19.0 | 64.9 | ||||||||||
Consolidated
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$ | 378.4 | $ | 680.1 | $ | 747.3 |
Assets
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Shareholders’
Equity
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As
of December 31:
|
2007
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2006
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2007
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2006
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||||||||||||
General
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$ | 9,769.9 | $ | 9,363.5 | $ | 2,536.7 | $ | 2,312.8 | ||||||||
Mortgage
Guaranty
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2,523.8 | 2,189.6 | 1,237.7 | 1,292.0 | ||||||||||||
Title
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770.4 | 772.7 | 334.9 | 362.3 | ||||||||||||
Corporate
& Other – net
(3)
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437.9 | 443.4 | 475.4 | 439.2 | ||||||||||||
Consolidation
elimination
adjustments
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(211.5 | ) | (157.0 | ) | (43.2 | ) | (37.3 | ) | ||||||||
Consolidated
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$ | 13,290.6 | $ | 12,612.2 | $ | 4,541.6 | $ | 4,369.2 | ||||||||
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(1)
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Reference
is made to the table in Note 6 of the Notes to Consolidated Financial
Statements, incorporated herein by reference, which shows the contribution
of each subcategory to the consolidated net revenues and income or loss
before income taxes of Old Republic's insurance industry
segments.
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(2)
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Revenues
consist of net premiums, fees, net investment and other income earned;
realized investment gains are shown in total for all groups combined since
the investment portfolio is managed as a
whole.
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(3)
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Represents
amounts for Old Republic’s holding company parent, minor corporate
services subsidiaries, and a small life and health insurance
operation
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3
General
Insurance Group
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Old
Republic’s General Insurance segment is best characterized as a commercial lines
insurance business with a strong focus on liability insurance coverages. Most of
these coverages are provided to businesses, government and other institutions.
The Company does not have a meaningful exposure to personal lines insurance such
as homeowners and private automobile coverages, nor does it insure significant
amounts of commercial or other real property. In continuance of its commercial
lines orientation, Old Republic also focuses on specific sectors of the North
American economy, most prominently the transportation (trucking and general
aviation), commercial construction, forest products, energy, general
manufacturing, and financial services industries. In managing the insurance
risks it undertakes the Company employs various underwriting and loss mitigation
techniques such as utilization of policy deductibles, captive insurance
risk-sharing arrangements, and retrospective rating and policyholder dividend
plans. These underwriting techniques are intended to better correlate premium
charges with the ultimate claims experience pertaining to individual or groups
of assureds.
Over the
years, the General Insurance Group’s operations have been developed steadily
through a combination of internal growth, the establishment of additional
subsidiaries focused on new types of coverages and/or industry sectors, and
through several mergers of smaller companies. As a result, this segment has
become widely diversified with a business base encompassing the following major
coverages:
Automobile Extended Warranty
Insurance (1992): Coverage is provided to the vehicle owner for certain
mechanical or electrical repair or replacement costs after the manufacturer’s
warranty has expired.
Aviation (1983): Insurance policies
protect the value of aircraft hulls and afford liability coverage for acts that
result in injury, loss of life, and property damage to passengers and others on
the ground or in the air. Old Republic’s aviation business does not extend to
commercial airlines.
Commercial Automobile Insurance
(1930’s): Covers vehicles (mostly
trucks) used principally in commercial pursuits. Policies cover damage to
insured vehicles and liabilities incurred by an assured for bodily injury and
property damage sustained by third parties.
Commercial Multi-Peril
(“CMP”)(1920’s): Policies afford
liability coverage for claims arising from the acts of owners or employees, and
protection for the physical assets of large businesses.
Financial Indemnity: Multiple
types of specialty coverages, including most prominently the following five, are
underwritten by Old Republic within this financial indemnity products
classification.
Consumer Credit Indemnity
(“CCI”)(1950’s): Policies provide limited
indemnity to lenders and other financial intermediaries against the risk of
non-payment of consumer loan balances by individual buyers and borrowers arising
from unemployment, bankruptcy, and other failures to pay.
Errors & Omissions(“E&O”)/Directors & Officers
(“D&O”)(1983): E&O liability policies are
written for non-medical professional service providers such as lawyers,
architects and consultants, and provides coverage for legal expenses, and
indemnity settlements for claims alleging breaches of professional
standards. D&O coverage provides for the payment of legal expenses, and
indemnity settlements for claims made against the directors and officers of
corporations from a variety of sources, most typically
shareholders.
Fidelity (1981): Bonds cover
the exposures of financial institutions and commercial and other enterprises for
losses of monies or debt and equity securities due to acts of employee
dishonesty.
Guaranteed Asset Protection
(“GAP”)(2003): This insurance covers an
automobile loan borrower for the dollar value difference between a primary
insurance company’s liability for the total loss (remaining cash value) of an
insured vehicle and the amount still owed on an automobile loan.
Surety (1981): Bonds are
insurance company guarantees of performance by a corporate principal or
individual such as for the completion of a building or road project, or payment
on various types of contracts.
General Liability (1920’s):
Protects against liability of an assured which stems from carelessness,
negligence, or failure to act, and results in property damage or personal injury
to others.
Home Warranty Insurance
(1981): This
product provides repair and/or replacement coverage for home systems (e.g.
plumbing, heating, and electrical) and designated appliances.
Inland Marine (1920’s): Coverage pertains to the
insurance of property in transit over land and of property which is mobile by
nature.
Travel Accident (1970):
Coverages provided under these policies, some of which are also underwritten by
the Company’s Canadian life insurance affiliate, cover monetary losses arising
from trip delay and cancellation for individual insureds.
Workers’ Compensation
(1920’s): This coverage is purchased by employers to provide insurance
for employees’ lost wages and medical benefits in the event of work-related
injury, disability, or death.
(Parenthetical
dates refer to the year(s) when Old Republic’s Companies began underwriting the
coverages)
4
Commercial
automobile, general liability and workers’ compensation insurance are typically
produced in tandem for many assureds. For 2007, production of commercial
automobile direct insurance premiums accounted for approximately 29.7% of
consolidated General Insurance Group direct premiums written, while workers’
compensation and general liability direct premium production amounted to
approximately 22.3% and 13.8%, respectively, of such consolidated
totals.
Approximately
85% of general insurance premiums are produced through independent agency or
brokerage channels, while the remaining 15% is obtained through direct
production facilities.
Mortgage
Guaranty Group
|
Private
mortgage insurance protects mortgage lenders and investors from default related
losses on residential mortgage loans made primarily to homebuyers who make down
payments of less than 20% of the home’s purchase price. The Mortgage Guaranty
Group insures only first mortgage loans, primarily on residential properties
incorporating one-to-four family dwelling units.
There are two principal types of
private mortgage insurance coverage: “primary” and “pool”. Primary mortgage
insurance provides mortgage default protection on individual loans and covers a
stated percentage of the unpaid loan principal, delinquent interest, and certain
expenses associated with the default and subsequent foreclosure. In lieu of
paying the stated coverage percentage, the Company may pay the entire claim
amount, take title to the mortgaged property, and subsequently sell the property
to mitigate its loss. Pool insurance, which is written on a group of loans in
negotiated transactions, provides coverage that ranges up to 100% of the net
loss on each individual loan included in the pool, subject to provisions
regarding deductibles, caps on individual exposures, and aggregate stop loss
provisions which limit aggregate losses to a specified percentage of the total
original balances of all loans in the pool.
Traditional
primary insurance is issued on an individual loan basis to mortgage bankers,
brokers, commercial banks and savings institutions through a network of
Company-managed underwriting sites located throughout the country. Traditional
primary loans are individually reviewed (except for loans insured under
delegated approval programs) and priced according to filed premium rates. In
underwriting traditional primary business, the Company generally adheres to the
underwriting guidelines published by the Federal Home Loan Mortgage Corporation
(“FHLMC” or “Freddie Mac”) or the Federal National Mortgage Association (“FNMA”
or “Fannie Mae”), purchasers of many of the loans the Company insures. Delegated
underwriting programs allow approved lenders to commit the Company to insure
loans provided they adhere to predetermined underwriting guidelines. In 2007,
delegated underwriting approvals accounted for approximately 69% of the
Company’s new traditional primary risk written.
Bulk and
other insurance is issued on groups of loans to mortgage banking customers
through a centralized risk assessment and underwriting department. These groups
of loans are priced in the aggregate, on a bid or negotiated basis. Coverage for
insurance issued in this manner can be provided through primary insurance
policies (loan level coverage) or pool insurance policies (aggregate coverage).
The Company considers transactions designated as bulk insurance to be exposed to
higher risk (as determined by characteristics such as origination channel, loan
amount, credit quality, and loan documentation) than those designated as other
insurance.
Before
insuring any loans, the Company issues to each approved customer a master policy
outlining the terms and conditions under which coverage will be provided.
Primary business is then executed via the issuance of a commitment/certificate
for each loan submitted and approved for insurance. In the case of business
providing pool coverage, a separate pool insurance policy is issued covering the
particular loans applicable to each transaction.
As to all types of mortgage insurance
products, the amount of premium charge depends on loan-to-value ratios, the
level of coverage being provided, the borrower’s credit history, the type of
loan instrument (whether fixed rate/fixed payment or an adjustable
rate/adjustable payment), documentation type, and whether or not the insured
property is categorized as an investment or owner occupied property. Coverage is
non-cancelable by the Company (except in the case of non-payment of premium or
certain master policy violations) and premiums are paid under single, annual, or
monthly payment plans. Single premiums are paid at the inception of coverage and
provide coverage for the entire coverage term. Annual and monthly premiums are
renewable on their anniversary dates with the premium charge determined on the
basis of the original or outstanding loan amount. The majority of the Company’s
direct premiums are written under monthly premium plans. Premiums may be paid by
borrowers as part of their monthly mortgage payment and passed through to the
Company by the servicer of the loan or they may be paid directly by the
originator of, or investor in the mortgage loan.
5
Title
Insurance Group
|
The title
insurance business consists primarily of the issuance of policies to real estate
purchasers and investors based upon searches of the public records, which
contain information concerning interests in real property. The policy insures
against losses arising out of defects, liens and encumbrances affecting the
insured title and not excluded or excepted from the coverage of the policy. For
the year ended December 31, 2007, approximately 32% of the Company’s
consolidated title premium and related fee income stemmed from direct operations
(which include branch offices of its title insurers and wholly owned
subsidiaries of the Company), while the remaining 68% emanated from independent
title agents and underwritten title companies.
There are
two basic types of title insurance policies: lenders' policies and owners'
policies. Both are issued for a onetime premium. Most mortgages made in the
United States are extended by mortgage bankers, savings and commercial banks,
state and federal agencies, and life insurance companies. The financial
institutions secure title insurance policies to protect their mortgagees'
interest in the real property. This protection remains in effect for as long as
the mortgagee has an interest in the property. A separate title insurance policy
may be issued to the owner of the real estate. An owner's policy of title
insurance protects an owner's interest in the title to the
property.
The
premiums charged for the issuance of title insurance policies vary with the
policy amount and the type of policy issued. The premium is collected in full
when the real estate transaction is closed, there being no recurring fee
thereafter. In many areas, premiums charged on subsequent policies on the same
property may be reduced, depending generally upon the time elapsed between
issuance of the previous policies and the nature of the transactions for which
the policies are issued. Most of the charge to the customer relates to title
services rendered in conjunction with the issuance of a policy rather than to
the possibility of loss due to risks insured against. Accordingly, the cost of
service performed by a title insurer relates for the most part to the prevention
of loss rather than to the assumption of the risk of loss. Claim losses that do
occur result primarily from title search and examination mistakes, fraud,
forgery, incapacity, missing heirs and escrow processing errors.
In connection with its title insurance
operations, Old Republic also provides escrow closing and construction
disbursement services, as well as real estate information products and services
pertaining to real estate transfers and loan transactions.
Corporate
and Other Operations
|
Corporate
and other operations include the accounts of a small life and health insurance
business as well as those of the parent holding company and several minor
corporate services subsidiaries that perform investment management, payroll,
administrative and minor marketing services.
The
Company’s small life and health business registered 2007 and 2006 net premium
revenues of $77.0 million and $74.1 million, respectively. This business is
conducted in both the United States and Canada and consists mostly of limited
product offerings sold through financial intermediaries such as automobile
dealers, travel agents, and marketing channels that are also utilized in some of
Old Republic’s general insurance operations. Production of term life insurance,
accounting for net premiums earned of $16.5 million in 2007 and $18.5 million in
2006, was terminated and placed in run off mode as of year end
2004.
6
Consolidated
Underwriting Statistics
|
The
following table reflects underwriting statistics covering premiums and related
loss, expense, and policyholders' dividend ratios for the major coverages
underwritten in the Company’s insurance segments.
($
in Millions)
|
||||||||||||
Years
Ended December 31,
|
||||||||||||
2007
|
2006
|
2005
|
||||||||||
General
Insurance Group:
|
||||||||||||
Overall
Experience:
|
||||||||||||
Net Premiums
Earned
|
$ | 2,155.1 | $ | 1,902.1 | $ | 1,805.2 | ||||||
Claim
Ratio
|
67.4 | % | 65.5 | % | 66.6 | % | ||||||
Policyholders’ Dividend
Benefit
|
.4 | .4 | .3 | |||||||||
Expense
Ratio
|
24.1 | 24.4 | 24.6 | |||||||||
Composite
Ratio
|
91.9 | % | 90.3 | % | 91.5 | % | ||||||
Experience by Major
Coverages:
|
||||||||||||
Commercial Automobile
(Principally Trucking):
|
||||||||||||
Net Premiums
Earned
|
$ | 752.4 | $ | 752.4 | $ | 706.8 | ||||||
Claim
Ratio
|
73.9 | % | 75.3 | % | 66.8 | % | ||||||
Workers’
Compensation:
|
||||||||||||
Net Premiums
Earned
|
$ | 505.6 | $ | 412.8 | $ | 396.5 | ||||||
Claim
Ratio
|
69.7 | % | 73.6 | % | 78.2 | % | ||||||
Policyholders’ Dividend
Benefit
|
1.2 | % | .9 | % | .7 | % | ||||||
General
Liability:
|
||||||||||||
Net Premiums
Earned
|
$ | 168.1 | $ | 96.2 | $ | 96.8 | ||||||
Claim
Ratio
|
59.8 | % | 57.2 | % | 97.1 | % | ||||||
Three Above Coverages
Combined:
|
||||||||||||
Net Premiums
Earned
|
$ | 1,426.2 | $ | 1,261.5 | $ | 1,200.1 | ||||||
Claim
Ratio
|
70.7 | % | 73.4 | % | 73.0 | % | ||||||
Financial Indemnity:
(1)
|
||||||||||||
Net Premiums
Earned
|
$ | 298.0 | $ | 209.4 | $ | 186.3 | ||||||
Claim
Ratio
|
69.6 | % | 40.6 | % | 48.9 | % | ||||||
Inland Marine and CMP:
(2)
|
||||||||||||
Net Premiums
Earned
|
$ | 199.3 | $ | 203.1 | $ | 198.8 | ||||||
Claim
Ratio
|
54.0 | % | 54.0 | % | 51.4 | % | ||||||
Home and Automobile
Warranty:
|
||||||||||||
Net Premiums
Earned
|
$ | 129.8 | $ | 133.1 | $ | 124.8 | ||||||
Claim
Ratio
|
62.9 | % | 63.8 | % | 59.3 | % | ||||||
Other Coverages:
(3)
|
||||||||||||
Net Premiums
Earned
|
$ | 98.9 | $ | 94.0 | $ | 96.8 | ||||||
Claim
Ratio
|
46.7 | % | 43.8 | % | 59.8 | % | ||||||
Mortgage
Guaranty Group:
|
||||||||||||
Net Premiums
Earned
|
$ | 518.2 | $ | 444.3 | $ | 429.5 | ||||||
Claim
Ratio
|
118.8 | % | 42.8 | % | 37.2 | % | ||||||
Expense
Ratio
|
17.7 | 22.5 | 22.4 | |||||||||
Composite
Ratio
|
136.5 | % | 65.3 | % | 59.6 | % | ||||||
Title Insurance Group:
(4)
|
||||||||||||
Net Premiums
Earned
|
$ | 638.5 | $ | 733.6 | $ | 757.2 | ||||||
Combined Net Premiums &
Fees
Earned
|
$ | 850.7 | $ | 980.0 | $ | 1,081.8 | ||||||
Claim
Ratio
|
6.6 | % | 5.9 | % | 6.0 | % | ||||||
Expense
Ratio
|
98.1 | 93.6 | 88.2 | |||||||||
Composite
Ratio
|
104.7 | % | 99.5 | % | 94.2 | % | ||||||
All
Coverages Consolidated:
|
||||||||||||
Net Premiums & Fees
Earned
|
$ | 3,601.2 | $ | 3,400.5 | $ | 3,386.9 | ||||||
Claim and Benefit
Ratio
|
60.2 | % | 45.3 | % | 43.3 | % | ||||||
Expense
Ratio
|
41.3 | 44.7 | 45.2 | |||||||||
Composite
Ratio
|
101.5 | % | 90.0 | % | 88.5 | % | ||||||
|
Any
necessary reclassifications of prior year data are reflected in the above
table to conform to current
presentation.
|
(1)
|
Consists
principally of fidelity, surety, consumer credit indemnity, executive
indemnity (directors & officers and errors &
omissions),
and guaranteed asset protection (GAP)
coverages.
|
(2)
Consists principally of inland marine and commercial multi-peril (“CMP”)
coverages.
(3)
Consists principally of aviation and travel accident coverages.
(4) Title
claim, expense, and composite ratios are calculated on the basis of combined net
premiums and fees earned.
7
Variations
in claim ratios are typically caused by changes in the frequency and severity of
claims incurred, changes in premium rates and the level of premium refunds, and
periodic changes in claim and claim expense reserve estimates resulting from
ongoing reevaluations of reported and incurred but not reported claims and claim
expenses. The Company can therefore experience period-to-period volatility in
the underwriting results for individual coverages as demonstrated in the above
table. As a result of the Company’s basic underwriting focus in the management
of its business, it has attempted to dampen this volatility and thus ensure a
higher degree of overall underwriting stability by diversifying the coverages it
offers and industries it serves.
The claim
ratios include loss adjustment expenses where appropriate. Policyholders'
dividends, which apply principally to workers' compensation insurance, are a
reflection of changes in loss experience for individual or groups of policies,
rather than overall results, and should be viewed in conjunction with loss ratio
trends.
The
general insurance claims ratio reflects reasonably consistent trends for all
reporting periods. This major cost factor reflects largely pricing and risk
selection improvements that have been applied since 2001, together with elements
of reduced loss severity and frequency. General Insurance Group loss ratios for
workers' compensation and liability insurance coverages in particular may
reflect greater variability due to chance events in any one year, changes in
loss costs emanating from participation in involuntary markets (i.e. insurance
assigned risk pools and associations in which participation is basically
mandatory), and added provisions for loss costs not recoverable from
assuming reinsurers which may experience financial difficulties from time to
time. The Company generally underwrites concurrently workers' compensation,
commercial automobile (liability and physical damage), and general liability
insurance coverages for a large number of customers. Accordingly, an evaluation
of trends in premiums, claims and dividend ratios for these individual coverages
should be considered in the light of such a concurrent underwriting approach.
With respect to commercial automobile coverages, higher claims ratios
experienced during the past three years are primarily due to greater claim
frequency. Better results in workers’ compensation in 2007 and 2006 have been
due to improved pricing in general as well as stronger growth of business
subject to captive reinsurance, retrospective premium, or self-insured
deductible programs that are intended to produce lower net loss ratios. The
claims ratio for a relatively small book of general liability coverages has
tended to be highly volatile, usually rising due to the impact of higher claims
emergence and greater than anticipated severity, mostly from legacy asbestos and
environmental claims exposures. The higher claim ratio for financial indemnity
coverages in 2007 was driven principally by greater claim frequencies
experienced in Old Republic’s consumer credit indemnity
coverage.
Mortgage
guaranty claim ratios have continued to rise in recent years, reflecting
modestly higher paid claims, but more significantly, higher reserve provisions
necessitated by increasing numbers of loans in default with higher loan balances
and the expectation that claim frequency and severity will increase in response
to the downturn in housing and related mortgage finance markets over the past
year.
The title
insurance claim ratio has been in the low single digits in each of the past
several years due to favorable trends in claims frequency and severity for
business underwritten in the past fifteen years or so. The Company’s title
business experienced further reductions in premium and fee revenues amid a
continuing downturn in the housing and related mortgage lending industries
resulting in an increased composite ratio for 2007.
The
consolidated claims, expense, and composite ratios reflect all the above factors
and the changing period-to-period contributions of each segment to consolidated
results.
General
Insurance Claim Reserves
The
Company's property and liability insurance subsidiaries establish claim reserves
which consist of estimates to settle: a) reported claims; b) claims which have
been incurred as of each balance sheet date but have not as yet been reported
(“IBNR”) to the insurance subsidiaries; and c) the direct costs, (fees and costs
which are allocable to individual claims) and indirect costs (such as salaries
and rent applicable to the overall management of claim departments) to
administer known and IBNR claims. Such claim reserves, except as to
classification in the Consolidated Balance Sheets as to gross and reinsured
portions, are reported for financial and regulatory reporting purposes at
amounts that are substantially the same.
The
establishment of claim reserves by the Company's insurance subsidiaries is a
reasonably complex and dynamic process influenced by a large variety of factors.
These factors principally include past experience applicable to the anticipated
costs of various types of claims, continually evolving and changing legal
theories emanating from the judicial system, recurring accounting, statistical,
and actuarial studies, the professional experience and expertise of the
Company's claim departments' personnel or attorneys and independent claim
adjusters, ongoing changes in claim frequency or severity patterns such as those
caused by natural disasters, illnesses, accidents, work-related injuries, and
changes in general and industry-specific economic conditions. Consequently, the
reserves established are a reflection of the opinions of a large number of
persons, of the application and interpretation of historical precedent and
trends, of expectations as to future developments, and of management’s judgment
in interpreting all such factors. At any point in time, the Company is exposed
to possibly higher or lower than anticipated claim costs due to all of these
factors, and to the evolution, interpretation, and expansion of tort law, as
well as the effects of unexpected jury verdicts.
In
establishing claim reserves, the possible increase in future loss settlement
costs caused by inflation is considered implicitly, along with the many other
factors cited above. Reserves are generally set to provide for the ultimate cost
of all claims. With regard to workers' compensation reserves, however, the
ultimate cost of long-term disability or pension-type claims is discounted to
present value
8
based on
interest rates ranging from 3.5% to 4.0%. The Company, where applicable, uses
only such discounted reserves in evaluating the results of its operations, in
pricing its products and settling retrospective and reinsured accounts, in
evaluating policy terms and experience, and for other general business purposes.
Solely to comply with reporting rules mandated by the Securities and Exchange
Commission, however, Old Republic has made statistical studies of
applicable workers' compensation reserves to obtain estimates of the amounts by
which claim and claim adjustment expense reserves, net of reinsurance, have been
discounted. These studies have resulted in estimates of such amounts at $148.5
million, $151.0 million and $138.3 million, as of December 31, 2007, 2006 and
2005, respectively. It should be noted, however, that these differences between
discounted and non-discounted (terminal) reserves are, fundamentally, of an
informational nature, and are not indicative of an effect on operating results
for any one or series of years for the above-noted reasons.
Early in
2001, the Federal Department of Labor revised the Federal Black Lung Program
regulations. The revisions basically require a reevaluation of previously
settled, denied, or new occupational disease claims in the context of newly
devised, more lenient standards when such claims are resubmitted. Following a
number of challenges and appeals by the insurance and coal mining industries,
the revised regulations were, for the most part, upheld in June, 2002 and are to
be applied prospectively. Since the final quarter of 2001, black lung claims
filed or refiled pursuant to these anticipated and now final regulations have
increased, though the volume of new claim reports has abated in recent years.
The vast majority of claims filed to date against Old Republic pertain to
business underwritten through loss sensitive programs that permit the charge of
additional or refund of return premiums to wholly or partially offset changes in
estimated claim costs, or to business underwritten as a service carrier on
behalf of various industry-wide involuntary market (i.e. assigned risk) pools. A
much smaller portion pertains to business produced on a traditional risk
transfer basis. The Company has established applicable reserves for claims as
they have been reported and for claims not as yet reported on the basis of its
historical experience as well as assumptions relative to the effect of the
revised regulations. Inasmuch as a variety of challenges are likely as the
revised regulations are implemented through the actual claim settlement process,
the potential impact on reserves, gross and net of reinsurance or retrospective
premium adjustments, resulting from such regulations cannot as yet be estimated
with reasonable certainty.
Old Republic's reserve estimates also
include provisions for indemnity and settlement costs for various asbestosis and
environmental impairment (“A&E”) claims that have been filed in the normal
course of business against a number of its insurance subsidiaries. Many such
claims relate to policies issued prior to 1985, including many issued during a
short period between 1981 and 1982 pursuant to an agency agreement canceled in
1982. Over the years, the Company's property and liability insurance
subsidiaries have typically issued general liability insurance policies with
face amounts ranging between $1.0 million and $2.0 million and rarely exceeding
$10.0 million. Such policies have, in turn, been subject to reinsurance cessions
which have typically reduced the subsidiaries’ net retentions to $.5 million or
less as to each claim. Old Republic's exposure to A&E claims cannot,
however, be calculated by conventional insurance reserving methods for a variety
of reasons, including: a) the absence of statistically valid data inasmuch as
such claims typically involve long reporting delays and very often uncertainty
as to the number and identity of insureds against whom such claims have arisen
or will arise; and b) the litigation history of such or similar claims for
insurance industry members which has produced inconsistent court decisions with
regard to such questions as to when an alleged loss occurred, which policies
provide coverage, how a loss is to be allocated among potentially responsible
insureds and/or their insurance carriers, how policy coverage exclusions are to
be interpreted, what types of environmental impairment or toxic tort claims are
covered, when the insurer's duty to defend is triggered, how policy limits are
to be calculated, and whether clean-up costs constitute property damage. In
recent times, the Executive Branch and/or the Congress of the United States have
proposed or considered changes in the legislation and rules affecting the
determination of liability for environmental and asbestosis claims. As of
December 31, 2007, however, there is no solid evidence to suggest that possible
future changes might mitigate or reduce some or all of these claim exposures.
Because of the above issues and uncertainties, estimation of reserves for losses
and allocated loss adjustment expenses for A&E claims in particular is much
more difficult or impossible to quantify with a high degree of precision.
Accordingly, no representation can be made that the Company's reserves for such
claims and related costs will not prove to be overstated or understated in the
future. At December 31, 2007, Old Republic’s aggregate indemnity and loss
adjustment expense reserves specifically identified with A&E exposures
amounted to approximately $190.5 million gross, and $158.1 million net of
reinsurance. Based on average annual claims payments during the five most recent
calendar years, such reserves represented 7.7 years (gross) and 10.7 years (net
of reinsurance) of average annual claims payments. Fluctuations in this ratio
between years can be caused by the inconsistent pay out patterns associated with
these types of claims. For the five years ended December 31, 2007, incurred
A&E claim and related loss settlement costs have averaged 2.8% of average
annual General Insurance Group claims and related settlement costs.
Over the
years, the subject of property and liability insurance claim reserves has been
written about and analyzed extensively by a large number of professionals and
regulators. Accordingly, the above discussion summary should, of necessity, be
regarded as a basic outline of the subject and not as a definitive presentation.
The Company believes that its overall reserving practices have been consistently
applied over many years, and that its aggregate reserves have generally resulted
in reasonable approximations of the ultimate net costs of claims incurred.
However, no representation is made nor is any guaranty given that ultimate net
claim and related costs will not develop in future years to be greater or lower
than currently established reserve estimates.
9
The following table shows the evolving
redundancies or deficiencies for reserves established as of December 31, of each
of the years 1997 through 2007. In reviewing this tabular data, it should be
noted that prior periods' loss payment and development trends may not be
repeated in the future due to the large variety of factors influencing the
reserving and settlement processes outlined herein above. The reserve
redundancies or deficiencies shown for all years are not necessarily indicative
of the effect on reported results of any one or series of years since cumulative
retrospective premium and commission adjustments employed in various parts of
the Company's business may partially offset such effects. The moderately
deficient development of reserves at year-ends 1998 to 2002 and the reduced
levels of redundancies shown for year-end 1997, pertain mostly to claims
incurred in prior accident years, generally for business written in the 1980’s.
(See “Consolidated Underwriting Statistics” above, and “Reserves, Reinsurance,
and Retrospective Adjustments” elsewhere herein).
($
in Millions)
|
||||||||||||
(a) As
of December 31:
|
2007
|
2006
|
2005
|
2004
|
2003
|
2002
|
2001
|
2000
|
1999
|
1998
|
1997
|
|
(b) Liability(1)
for unpaid claims
|
||||||||||||
and claim
adjustment
|
||||||||||||
expenses(2):
|
$ 3,175
|
$ 2,924
|
$ 2,414
|
$ 2,182
|
$ 1,964
|
$ 1,802
|
$ 1,678
|
$ 1,661
|
$ 1,699
|
$ 1,742
|
$ 1,846
|
|
(c) Paid (cumulative) as of
(3):
|
||||||||||||
One year later
|
- %
|
23.2%
|
14.6%
|
24.8%
|
24.6%
|
23.6%
|
23.5%
|
23.4%
|
22.3%
|
22.6%
|
21.2%
|
|
Two years
later
|
-
|
-
|
30.0
|
33.1
|
39.1
|
38.8
|
37.6
|
37.3
|
37.0
|
35.8
|
35.2
|
|
Three years
later
|
-
|
-
|
-
|
43.5
|
44.3
|
48.6
|
48.0
|
46.5
|
46.2
|
45.1
|
43.1
|
|
Four years
later
|
-
|
-
|
-
|
-
|
50.8
|
51.4
|
54.4
|
53.2
|
52.4
|
51.2
|
49.7
|
|
Five years
later
|
-
|
-
|
-
|
-
|
-
|
55.8
|
55.6
|
58.1
|
57.3
|
55.9
|
54.2
|
|
Six years
later
|
-
|
-
|
-
|
-
|
-
|
-
|
59.0
|
58.2
|
61.3
|
59.9
|
57.9
|
|
Seven years
later
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
61.1
|
60.9
|
63.4
|
61.5
|
|
Eight years
later
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
63.4
|
62.7
|
64.8
|
|
Nine years
later
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
65.0
|
64.0
|
|
Ten years
later
|
- %
|
- %
|
- %
|
- %
|
- %
|
- %
|
- %
|
- %
|
- %
|
- %
|
66.2%
|
|
(d) Liability
reestimated (i.e.,
|
||||||||||||
cumulative payments
plus
|
||||||||||||
reestimated ending
liability)
|
||||||||||||
As of (4):
|
||||||||||||
One year later
|
- %
|
96.2%
|
95.2%
|
97.6%
|
97.2%
|
98.6%
|
99.6%
|
97.3%
|
96.1%
|
96.2%
|
93.3%
|
|
Two years
later
|
-
|
-
|
92.3
|
94.8
|
97.0
|
98.2
|
101.3
|
98.1
|
94.9
|
93.3
|
89.2
|
|
Three years
later
|
-
|
-
|
-
|
93.3
|
95.6
|
99.7
|
102.7
|
100.1
|
96.5
|
93.0
|
87.0
|
|
Four years
later
|
-
|
-
|
-
|
-
|
95.7
|
100.4
|
105.8
|
102.2
|
98.0
|
95.1
|
87.1
|
|
Five years
later
|
-
|
-
|
-
|
-
|
-
|
100.6
|
106.7
|
105.6
|
100.7
|
96.5
|
89.2
|
|
Six years
later
|
-
|
-
|
-
|
-
|
-
|
-
|
107.3
|
106.9
|
104.2
|
99.4
|
90.6
|
|
Seven years
later
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
107.5
|
105.4
|
103.0
|
93.6
|
|
Eight years
later
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
106.1
|
104.1
|
97.0
|
|
Nine years
later
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
104.7
|
98.0
|
|
Ten years
later
|
- %
|
- %
|
- %
|
- %
|
- %
|
- %
|
- %
|
- %
|
- %
|
- %
|
98.6%
|
|
(e) Redundancy
(deficiency)(5)
|
||||||||||||
for each year-end at
(a):
|
- %
|
3.8%
|
7.7%
|
6.7%
|
4.3%
|
-0.6%
|
-7.3%
|
-7.5%
|
-6.1%
|
-4.7%
|
1.4%
|
|
Average redundancy
(deficiency) for all
year-ends at (a):
|
0.5%
|
(1)
Amounts are reported net of reinsurance.
(2)
Excluding unallocated loss adjustment expense reserves.
(3)
|
Percent
of most recent reestimated liability (line d). Decreases in paid loss
percentages may at times reflect the reassumption by the Company of
certain previously ceded loss reserves from assuming reinsurers through
commutations of then existing
reserves.
|
(4)
Percent of beginning liability (line b) for unpaid claims and claim adjustment
expenses.
(5)
Beginning liability less the most current liability reestimated (line d)
as a percent of beginning liability (line b).
10
The
following table shows an analysis of changes in aggregate reserves for the
Company's property and liability insurance claims and allocated claim adjustment
expenses for each of the years shown:
($
in Millions)
|
||||||||||||
Years
Ended December 31,
|
||||||||||||
2007
|
2006
|
2005
|
2004
|
2003
|
2002
|
2001
|
2000
|
1999
|
1998
|
1997
|
||
(a)
Beginning net
reserves
|
$
2,924
|
$
2,414
|
$
2,182
|
$
1,964
|
$
1,802
|
$
1,678
|
$
1,661
|
$
1,699
|
$
1,742
|
$
1,846
|
$
1,829
|
|
Incurred claims and claim
expenses:
|
||||||||||||
(b)
Current year
provision
|
1,490
|
1,295
|
1,191
|
1,070
|
893
|
814
|
749
|
690
|
734
|
728
|
713
|
|
(c)
Change in prior years’ provision
|
(110)
|
(116)
|
(52)
|
(55)
|
(25)
|
(7)
|
(44)
|
(66)
|
(66)
|
(123)
|
(105)
|
|
(d)
Total
incurred
|
1,379
|
1,179
|
1,138
|
1,014
|
868
|
807
|
704
|
623
|
668
|
604
|
608
|
|
Claim payments on:
|
||||||||||||
(e)
Current years’
events
|
476
|
342
|
402
|
332
|
277
|
260
|
269
|
258
|
298
|
322
|
275
|
|
(f)
Prior years’
events
|
652
|
326
|
504
|
463
|
428
|
423
|
418
|
402
|
412
|
385
|
316
|
|
(g)
Total
payments
|
1,128
|
668
|
907
|
796
|
706
|
683
|
687
|
661
|
710
|
708
|
591
|
|
(h)
Ending net reserves (a + d - g)
|
3,175
|
2,924
|
2,414
|
2,182
|
1,964
|
1,802
|
1,678
|
1,661
|
1,699
|
1,742
|
1,846
|
|
(i)
Unallocated loss adjustment
|
||||||||||||
expense
reserves
|
103
|
97
|
92
|
87
|
83
|
78
|
76
|
73
|
71
|
73
|
73
|
|
(j)
Reinsurance recoverable on
|
||||||||||||
claims
reserves
|
1,976
|
1,929
|
1,894
|
1,632
|
1,515
|
1,363
|
1,261
|
1,235
|
1,238
|
1,190
|
1,232
|
|
(k)
Gross claims reserves (h + i + j)
|
$
5,256
|
$
4,951
|
$
4,401
|
$
3,902
|
$
3,562
|
$
3,244
|
$
3,016
|
$
2,969
|
$
3,009
|
$
3,005
|
$
3,151
|
(b) Investments. In common
with other insurance organizations, Old Republic invests most funds provided by
operations in income-producing investment securities. All investments must
comply with applicable insurance laws and regulations which prescribe the
nature, form, quality, and relative amounts of investments which may be made by
insurance companies. Generally, these laws and regulations permit insurance
companies to invest within varying limitations in state, municipal and federal
government obligations, corporate debt, preferred and common stocks,
certain types of real estate, and first mortgage loans. Old Republic's
investment policies are also influenced by the terms of the insurance
coverages written, by its expectations as to the timing of claim and benefit
payments, and by income tax considerations.
For many
years, Old Republic's investment policy has been to acquire and retain primarily
investment grade, publicly traded, fixed maturity securities. Accordingly, the
Company's exposure to so-called “junk bonds”, illiquid private equity
investments, real estate, mortgage loans, mortgage-backed securities,
collateralized debt obligations (“CDO’s”), and derivatives is immaterial or
non-existent. In a similar vein, the Company does not invest in securities whose
values are predicated on non-regulated financial instruments exhibiting
amorphous counter-party risk attributes. Management considers investment-grade
securities to be those rated by Standard & Poor's Corporation (“Standard
& Poor's”) or Moody's Investors Service, Inc. (“Moody's”) that fall within
the top four rating categories, or securities which are not rated but have
characteristics similar to securities so rated. The Company had no bond or note
investments in default as to principal and/or interest at December 31, 2007 and
$4.0 million of such investments at December 31, 2006.
The
Company's investment policies are not designed to maximize or emphasize the
realization of investment gains. The status and market value changes of each
investment is reviewed on at least a quarterly basis, and estimates of
other-than-temporary impairments in the portfolio’s value are evaluated and
established at each balance sheet date. In management’s opinion, the Company’s
high quality and diversified portfolio, which consists largely of publicly
traded securities, has been a basic reason for the absence of major impairment
provisions in the periods reported upon. The combination of gains and losses on
sales of securities and such provisions or write-downs of securities are
reflected as realized gains and losses in the income statement. Dispositions of
securities result principally from scheduled maturities of bonds and notes and
sales of fixed income and equity securities available for sale. Substantially
all of the Company’s invested assets as of December 31, 2007 have been
classified as “available for sale” pursuant to the existing investment
policy.
The
following tables show invested assets at the end of the last two years, together
with investment income for each of the last three years:
11
Consolidated
Investments
|
||||||||
($
in Millions)
|
||||||||
December
31,
|
||||||||
2007
|
2006
|
|||||||
Available
for Sale
|
||||||||
Fixed
Maturity Securities:
|
||||||||
U.S. & Canadian
Governments
|
$ | 723.0 | $ | 714.7 | ||||
Tax-Exempt
|
2,354.5 | 2,229.5 | ||||||
Utilities
|
987.8 | 923.8 | ||||||
Corporate
|
3,318.2 | 2,964.4 | ||||||
7,383.6 | 6,832.6 | |||||||
Equity
Securities
|
842.1 | 669.1 | ||||||
Short-term
Investments
|
462.6 | 493.6 | ||||||
Miscellaneous
Investments
|
64.7 | 52.7 | ||||||
Total available for
sale
|
8,753.1 | 8,048.1 | ||||||
Other
Investments
|
8.1 | 7.9 | ||||||
Total
Investments
|
$ | 8,761.2 | $ | 8,056.1 |
Sources
of Consolidated Investment Income
|
($
in Millions)
|
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Fixed
Maturity Securities:
|
||||||||||||
Taxable
Interest
|
$ | 247.7 | $ | 222.5 | $ | 219.4 | ||||||
Tax-Exempt
Interest
|
85.2 | 75.5 | 64.7 | |||||||||
332.9 | 298.0 | 284.1 | ||||||||||
Equity
Securities
Dividends
|
16.1 | 13.9 | 9.4 | |||||||||
Other
Investment Income:
|
||||||||||||
Interest on Short-term
Investments
|
28.2 | 26.6 | 15.9 | |||||||||
Sundry
|
6.4 | 6.5 | 5.4 | |||||||||
34.6 | 33.1 | 21.3 | ||||||||||
Gross
Investment
Income
|
383.8 | 345.1 | 315.0 | |||||||||
Less: Investment Expenses
(1)
|
3.8 | 3.5 | 4.9 | |||||||||
Net
Investment
Income
|
$ | 379.9 | $ | 341.6 | $ | 310.1 | ||||||
(1)
|
Investment
expenses consist primarily of personnel costs, investment management and
custody service fees, and interest incurred on funds held of $1.1 million,
$1.0 million, and $.7 million for the years ended December 31, 2007, 2006,
and 2005 respectively.
|
The independent credit quality ratings
and maturity distribution for Old Republic's consolidated fixed maturity
investments, excluding short-term investments, at the end of the last two years
are shown in the following tables. These investments, $7.3 billion and $6.8
billion at December 31, 2007 and 2006, respectively, represented approximately
56% and 54%, respectively, of consolidated assets, and 84% and 83%,
respectively, of consolidated liabilities as of such dates.
Credit
Quality Ratings of Fixed Maturity Securities (1)
|
|||||
December
31,
|
|||||
2007
|
2006
|
||||
(%
of total portfolio)
|
|||||
Aaa
|
32.9%
|
32.9%
|
|||
Aa
|
17.0
|
19.0
|
|||
A
|
27.9
|
26.4
|
|||
Baa
|
20.2
|
20.1
|
|||
Total
investment
grade
|
98.0
|
98.4
|
|||
All
others
(2)
|
2.0
|
1.6
|
|||
Total
|
100.0%
|
100.0%
|
|
(1)
|
Credit
quality ratings used are those assigned primarily by Moody’s; other
ratings are assigned by Standard & Poor’s and converted to equivalent
Moody’s ratings classifications.
|
|
(2)
|
“All
others” includes non-investment grade or non-rated small issues of
tax-exempt bonds.
|
|
12
Age
Distribution of Fixed Maturity Securities
|
|||||
December
31,
|
|||||
2007
|
2006
|
||||
(%
of total portfolio)
|
|||||
Maturity
Ranges:
|
|||||
Due
in one year or
less
|
11.7%
|
9.6%
|
|||
Due
after one year through five
years
|
46.8
|
44.4
|
|||
Due
after five years through ten
years
|
41.1
|
45.6
|
|||
Due
after ten years through fifteen
years
|
.4
|
.4
|
|||
Due
after fifteen
years
|
-
|
-
|
|||
100.0% | 100.0% | ||||
Average
Maturity in
Years
|
4.4
|
4.5
|
|||
(c) Marketing. Commercial
automobile (trucking), workers' compensation and general liability insurance
underwritten for business enterprises and public entities is marketed primarily
through independent insurance agents and brokers with the assistance of Old
Republic's trained sales, underwriting, actuarial, and loss control personnel.
The remaining property and liability commercial insurance written by Old
Republic is obtained through insurance agents or brokers who are
independent contractors and generally represent other insurance companies,
and by direct sales. No single source accounted for over 10% of Old Republic's
premium volume in 2007.
Traditional
primary mortgage insurance is marketed primarily through a direct sales force
which calls on mortgage bankers, brokers, commercial banks, savings institutions
and other mortgage originators. No sales commissions or other forms of
remuneration are paid to the lending institutions or others for the
procurement or development of business. The Mortgage Guaranty segment’s ten
largest customers were responsible for 49.5%, 39.7%, and 44.2% of traditional
primary new insurance written in 2007, 2006, and 2005, respectively. The largest
single customer accounted for 9.8% of traditional primary new insurance written
in 2007 compared to 8.8% and 11.5% in 2006 and 2005, respectively.
A
substantial portion of the Company's title insurance business is referred to it
by title insurance agents, builders, lending institutions, real estate
developers, realtors, and lawyers. Title insurance and related real estate
settlement products are sold through 241 Company offices and through agencies
and underwritten title companies in Puerto Rico, the District of Columbia and
all 50 states. The issuing agents are authorized to issue commitments and title
insurance policies based on their own search and examination, or on the basis of
abstracts and opinions of approved attorneys. Policies are also issued through
independent title companies (not themselves title insurers) pursuant to
underwriting agreements. These agreements generally provide that the agency or
underwritten company may cause title policies of the Company to be issued, and
the latter is responsible under such policies for any payments to the insured.
Typically, the agency or underwritten title company deducts the major portion of
the title insurance charge to the customer as its commission for services.
During 2007, approximately 68% of title insurance premiums and fees were
accounted for by policies issued by agents and underwritten title
companies.
Title
insurance premium and fee revenue is closely related to the level of activity in
the real estate market. The volume of real estate activity is affected by the
availability and cost of financing, population growth, family movements and
other factors. Also, the title insurance business is seasonal. During the winter
months, new building activity is reduced and, accordingly, the Company produces
less title insurance business relative to new construction during such months
than during the rest of the year. The most important factors, insofar as Old
Republic's title business is concerned, however, are the rates of activity in
the resale and refinance markets for residential properties.
The
personal contacts, relationships, reputations, and intellectual capital of Old
Republic's key executives are a vital element in obtaining and retaining much of
its business. Many of the Company's customers produce large amounts of premiums
and therefore warrant substantial levels of top executive attention and
involvement. In this respect, Old Republic's mode of operation is similar to
that of professional reinsurers and commercial insurance brokers, and relies on
the marketing, underwriting, and management skills of relatively few key people
for large parts of its business.
Several types of insurance coverages
underwritten by Old Republic, such as consumer credit indemnity, title, and
mortgage guaranty insurance, are affected in varying degrees by changes in
national economic conditions. During periods when housing activity or mortgage
lending are constrained by any combination of rising interest rates, tighter
mortgage underwriting guidelines, falling home prices, excess housing supply
and/or economic recession operating and/or claim costs pertaining to such
coverages tend to rise disproportionately to revenues and can result in
underwriting losses and reduced levels of profitability.
At least
one Old Republic general insurance subsidiary is licensed to do business in each
of the 50 states, the District of Columbia, Puerto Rico, Virgin Islands, Guam,
and each of the Canadian provinces; mortgage insurance subsidiaries are licensed
in 50 states and the District of Columbia; title insurance operations are
licensed to do business in 50 states, the District of Columbia, Puerto Rico and
Guam. Consolidated direct premium volume distributed among the various
geographical regions shown was as follows for the past three years:
13
Geographical
Distribution of Consolidated Direct Premiums Written
|
||||||||||
2007
|
2006
|
2005
|
||||||||
United
States:
|
||||||||||
Northeast
|
10.1
|
%
|
8.4
|
%
|
9.2
|
%
|
||||
Mid-Atlantic
|
8.6
|
8.8
|
9.5
|
|||||||
Southeast
|
20.6
|
21.1
|
19.8
|
|||||||
Southwest
|
12.2
|
12.8
|
11.8
|
|||||||
East
North
Central
|
12.3
|
13.3
|
13.3
|
|||||||
West
North
Central
|
12.4
|
13.0
|
12.7
|
|||||||
Mountain
|
8.2
|
8.1
|
7.7
|
|||||||
Western
|
13.0
|
11.8
|
13.4
|
|||||||
Foreign
(Principally
Canada)
|
2.6
|
2.7
|
2.6
|
|||||||
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
(d) Reserves, Reinsurance, and
Retrospective Adjustments. Old Republic's insurance subsidiaries
establish reserves for unearned premiums, reported claims, claims incurred but
not reported, and claim adjustment expenses, as required in the
circumstances. Such reserves are based on regulatory accounting requirements and
generally accepted accounting principles. In accordance with insurance industry
practices, claim reserves are based on estimates of the amounts that will be
paid over a period of time and changes in such estimates are reflected in the
financial statements of the periods during which they occur. See “General
Insurance Claim Reserves” herein.
To
maintain premium production within its capacity and limit maximum losses and
risks for which it might become liable under its policies, Old Republic, as is
the practice in the insurance industry, may cede a portion or all of its
premiums and liabilities on certain classes of insurance, individual policies,
or blocks of business to other insurers and reinsurers. Although the ceding of
insurance does not generally discharge an insurer from its direct liability
to a policyholder, it is industry practice to establish the reinsured part of
risks as the liability of the reinsurer. Old Republic also employs retrospective
premium adjustments and risk-sharing arrangements for parts of its business in
order to minimize losses for which it might become liable under its insurance
policies, and to afford its customers or producers a degree of participation in
the risks and rewards associated with such business. Under retrospective
arrangements, Old Republic collects additional premiums if losses are greater
than originally anticipated and refunds a portion of original premiums if loss
costs are lower. Pursuant to risk-sharing arrangements, the Company adjusts
production costs or premiums retroactively to likewise reflect deviations from
originally expected loss costs. The amount of premium, production costs and
other retrospective adjustments which may be made is either limited or unlimited
depending on the Company's evaluation of risks and related contractual
arrangements. To the extent that any reinsurance companies, retrospectively
rated risks, or producers might be unable to meet their obligations under
existing reinsurance, retrospective insurance and production agreements, Old
Republic would be liable for the defaulted amounts. In these regards, however,
the Company generally protects itself by withholding funds, by securing
indemnity agreements, by obtaining surety bonds, or by otherwise collateralizing
such obligations through irrevocable letters of credit, cash, or
securities.
Reinsurance
recoverable asset balances represent amounts due from or credited by assuming
reinsurers for paid and unpaid claims and policy reserves. Such reinsurance
balances that are recoverable from non-admitted foreign and certain other
reinsurers such as captive insurance companies owned by assureds or business
producers, as well as similar balances or credits arising from policies that are
retrospectively rated or subject to assureds’ high deductible retentions are
substantially collateralized by letters of credit, securities, and other
financial instruments. Old Republic evaluates on a regular basis the financial
condition of its assuming reinsurers and assureds who purchase its
retrospectively rated or high deductible policies. Estimates of unrecoverable
amounts are included in the Company’s net claim and claim expense reserves since
reinsurance, retrospectively rated and self-insured deductible policies and
contracts do not relieve Old Republic from its direct obligations to assureds or
their beneficiaries.
Old
Republic's reinsurance practices with respect to portions of its business also
result from its desire to bring its sponsoring organizations and customers
into some degree of joint venture or risk sharing relationship. The Company may,
in exchange for a ceding commission, reinsure up to 100% of the underwriting
risk, and the premium applicable to such risk, to insurers owned by or
affiliated with lending institutions, financial and other intermediaries whose
customers are insured by Old Republic, or individual customers who have formed
captive insurance companies. The ceding commissions received compensate Old
Republic for performing the direct insurer's functions of underwriting,
actuarial, claim settlement, loss control, legal, reinsurance, and
administrative services to comply with local and federal regulations, and for
providing appropriate risk management services.
Remaining portions of Old Republic's
business are reinsured in most instances with independent insurance or
reinsurance companies pursuant to excess of loss agreements. Except as noted in
the following paragraph, reinsurance protection on property and liability
coverages generally limits the net loss on most individual claims to a maximum
of : $1.8 million for workers' compensation; $1.8 million for commercial auto
liability; $1.8 million for general liability; $5.6 million for executive
protection (directors & officers and errors & omissions); $1.0 million
for aviation; and $1.0 million for property coverages. Roughly 53% of the
mortgage guaranty traditional primary insurance in force is subject to lender
sponsored captive reinsurance arrangements structured primarily on an excess of
loss basis. All bulk and other insurance risk in force is
14
retained.
Exclusive of reinsurance, the average net primary mortgage guaranty exposure is
approximately (in whole dollars) $35,300. Title insurance risk assumptions are
currently limited to a maximum of $100.0 million as to any one policy. The vast
majority of title policies issued, however, carry exposures of $1.0 million or
less.
Due to
worldwide reinsurance capacity and related cost constraints, effective January
1, 2002, the Company began retaining exposures for all, but most predominantly
workers’ compensation liability insurance coverages in excess of $40.0 million
that were previously assumed by unaffiliated reinsurers for up to $100.0
million. Effective January 1, 2003, reinsurance ceded limits were raised once
again to the $100.0 million level, and as of January 1, 2005, they were further
increased to $200.0 million. Pursuant to regulatory requirements, however, all
workers’ compensation primary insurers such as the Company remain liable for
unlimited amounts in excess of reinsured limits. Other than the substantial
concentration of workers’ compensation losses caused by the September 11, 2001
terrorist attack on America, to the best of the Company’s knowledge there had
not been a similar accumulation of claims in a single location from a single
occurrence prior to that event. Nevertheless, the possibility continues to exist
that non-reinsured losses could, depending on a wide range of severity and
frequency assumptions, aggregate several hundred million dollars to an insurer
such as the Company in the event a catastrophe, such as caused by an earthquake,
lead to the death or injury of a large number of employees concentrated in a
single facility such as a high rise building.
As a
result of the September 11, 2001 terrorist attack on America, the reinsurance
industry eliminated coverage from substantially all contracts for claims arising
from acts of terrorism. Primary insurers such as the Company thereby became
fully exposed to such claims. Late in 2002, the Terrorism Risk Insurance Act of
2002 (the “TRIA”) was signed into law, immediately establishing a temporary
federal reinsurance program administered by the Secretary of the Treasury. The
program applied to insured commercial property and casualty losses resulting
from an act of terrorism, as defined in the TRIA. Congress extended and modified
the program in late 2005 through the Terrorism Risk Insurance Revision and
Extension Act of 2005 (the “TRIREA”). TRIREA expired on December 31, 2007.
Congress enacted a revised program in December 2007 through the Terrorism Risk
Insurance Program Reauthorization Act of 2007 (the “TRIPRA”), a seven year
extension through December 31, 2014. The TRIA automatically voided all policy
exclusions which were in effect for terrorism related losses and obligated
insurers to offer terrorism coverage with most commercial property and casualty
insurance lines. The TRIREA revised the definition of “property and casualty
insurance” to exclude commercial automobile, burglary and theft, surety,
professional liability and farm owners multi-peril insurance. TRIPRA did not
make any further changes to the definition of property and casualty insurance,
however, it does include domestic acts of terrorism within the scope of the
program. Although insurers are permitted to charge an additional premium for
terrorism coverage, insureds may reject the coverage. Under TRIPRA, the
program’s protection is not triggered for losses arising from an act of
terrorism until the industry first suffers losses of $100 billion in the
aggregate during any one year. Once the program trigger is met, the program will
pay 85% of an insurer’s terrorism losses that exceed that individual insurer’s
deductible. The insurer’s deductible is 20% of direct earned premium on property
and casualty insurance. Insurers may reinsure that portion of the risk they
retain under the program, but the reinsurance market has not displayed a
widespread willingness to accept such risks. To date, coverage for acts of
terrorism are excluded from substantially all the Company’s reinsurance treaties
and are effectively retained by it subject to any recovery that would be
collected under the temporary federal reinsurance program.
(e) Competition. The insurance
business is highly competitive and Old Republic competes with many stock and
mutual insurance companies. Many of these competitors offer more insurance
coverages and have substantially greater financial resources than the Company.
The rates charged for many of the insurance coverages in which the Company
specializes, such as workers' compensation insurance, other property and
liability insurance and title insurance, are primarily regulated by the states
and are also subject to extensive competition among major insurance
organizations. The basic methods of competition available to Old Republic, aside
from rates, are service to customers, expertise in tailoring insurance
programs to the specific needs of its clients, efficiency and flexibility of
operations, personal involvement by its key executives, and, as to title
insurance, accuracy and timely delivery of evidences of title issued. Mortgage
insurance companies also compete by providing contract underwriting services to
lenders, enabling the latter to improve the efficiency of their operations by
outsourcing all or part of their mortgage loan underwriting processes. For
certain types of coverages, including loan credit indemnity and mortgage
guaranty insurance, the Company also competes in varying degrees with the
Federal Housing Administration (“FHA”) and the Veterans Administration (“VA”).
In these regards, the Company's insurance subsidiaries compete with the FHA and
VA by offering different coverages and by establishing different requirements
relative to such factors as interest rates, closing costs, and loan processing
charges. The Company believes its experience and expertise have enabled it to
develop a variety of specialized insurance programs and related services for its
customers, and to secure state insurance departments' approval of these
programs.
(f) Government Regulation. In
common with all insurance companies, the Company's insurance subsidiaries are
subject to the regulation and supervision of the jurisdictions in which
they do business. The method of such regulation varies, but, generally,
regulation has been delegated to state insurance commissioners who are granted
broad administrative powers relating to: the licensing of insurers and their
agents; the nature of and limitations on investments; approval of policy forms;
reserve requirements; and trade practices. In addition to these types of
regulation, many classes of insurance, including most of the Company's insurance
coverages, are subject to rate regulations which require that rates be
reasonable, adequate, and not unfairly discriminatory.
The FNMA
and the FHLMC sometimes also referred to as Government Sponsored
Enterprises (“GSE’s”) have various qualifying requirements for
private mortgage guaranty insurers which write mortgage
insurance on loans acquired by the FNMA
and FHLMC from
15
mortgage
lenders. These requirements call for compliance with the applicable laws and
regulations of the insurer’s domiciliary state and those states in which it
conducts business and maintenance of contingency reserves in accordance with
applicable state laws. The requirements also contain guidelines pertaining to
captive reinsurance transactions. The GSE’s also place additional restrictions
on qualified insurers who fail to maintain the equivalent of a AA financial
strength rating from at least two nationally recognized statistical rating
agencies.
The
majority of states have also enacted insurance holding company laws which
require registration and periodic reporting by insurance companies controlled by
other corporations licensed to transact business within their respective
jurisdictions. Old Republic's insurance subsidiaries are subject to such
legislation and are registered as controlled insurers in those
jurisdictions in which such registration is required. Such legislation
varies from state to state but typically requires periodic disclosure concerning
the corporation which controls the registered insurers, or ultimate holding
company, and all subsidiaries of the ultimate holding company, and prior
approval of certain intercorporate transfers of assets (including payments of
dividends in excess of specified amounts by the insurance subsidiary) within the
holding company system. Each state has established minimum capital and surplus
requirements to conduct an insurance business. All of the Company's subsidiaries
meet or exceed these requirements, which vary from state to state.
(g) Employees. As of December
31, 2007, Old Republic employed approximately 5,700 persons on a full time
basis. A majority of eligible full time employees participate in various pension
or similar plans which provide benefits payable upon retirement. Eligible
employees are also covered by hospitalization and major medical insurance, group
life insurance, and various savings, profit sharing, and deferred compensation
plans. The Company considers its employee relations to be good.
(h) Website access. The Company
files various reports with the U.S. Securities and Exchange Commission (“SEC”),
including its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. The
Company’s filings are available for viewing and/or copying at the SEC’s Public
Reference Room located at 450 Fifth Street, NW., Washington, DC 20549.
Information regarding the operation of the Public Reference Room can be obtained
by calling 1-800-SEC-0330. The Company’s reports are also available by visiting
the SEC’s internet website (http://www.sec.gov) and accessing its EDGAR database
to view or print copies of the electronic versions of the Company’s reports.
Additionally, the Company’s reports can be obtained, free of charge, by visiting
its internet website (http://www.oldrepublic.com), selecting Investors then SEC Filings to
view or print copies of the electronic versions of the Company’s reports. The
contents of the Company’s internet website are not intended to be, nor should
they be considered incorporated by reference in any of the reports the Company
files with the SEC.
Item
1A - Risk Factors
Risk
factors are uncertainties and events over which the Company has limited or no
control, and which can have a materially adverse effect on its business, results
of operations or financial condition. The Company and its business segments are
subject to a variety of risk factors and, within individual segments, each type
of insurance coverage may be exposed to varying risk factors. The following
sections set forth management’s evaluation of the most prevalent material risk
factors for the Company as a whole and for each business segment. There may be
risks, which management does not presently consider material or relative to
which it has no present knowledge, that may later prove to be material risk
factors as well.
Parent
Company
|
Dividend Dependence and
Liquidity
The Company is an insurance holding
company with no operations of its own. Its principal assets consist of the
business conducted by its insurance subsidiaries. It relies upon dividends from
such subsidiaries in order to pay the interest and principal on its debt
obligations, dividends to its shareholders and corporate expenses. The ability
of the insurance subsidiaries to declare and pay dividends is subject to
regulations under state laws that limit dividends based on the amount of their
adjusted unassigned surplus, and require them to maintain minimum amounts of
capital, surplus and reserves. Dividends in excess of the ordinary limitations
can only be declared and paid with prior regulatory approval, of which there can
be no assurance. The inability of the insurance subsidiaries to pay dividends in
an amount sufficient to meet debt service and cash dividends on stock, as well
as other cash requirements of the Company could result in liquidity issues for
Old Republic.
Investment
Risks
The
Company’s invested assets and those of its subsidiaries are centrally managed
through a wholly-owned asset management subsidiary. Most of the investments
consist of fixed-maturity securities. Changes in interest rates directly affect
the income from, and the market value of fixed-maturity investments and could
reduce the value of the Company’s investment portfolio and adversely affect the
Company’s, and its subsidiaries’, results of operations and financial condition.
A smaller percentage of total investments are in indexed funds and actively
managed equities. A change in general economic conditions, the stock market, or
many other external factors could adversely affect the value of those
investments and, in turn, the Company’s, or its subsidiaries’ results and
financial condition. Further, the Company
16
manages
its fixed-maturity investments by taking into account the maturities of such
securities and the anticipated liquidity needs of the Company and its
subsidiaries. Should the Company suddenly experience greater than anticipated
liquidity needs for any reason, it could face a liquidity risk that may
adversely affect its financial condition or operating results.
Risk
Factors Common to All Subsidiaries
|
Excessive Losses and Loss
Expenses
Although
the Company’s three major business segments encompass different types of
insurance, the greatest risk factor common to all insurance coverages is
excessive losses due to unanticipated claims frequency, severity or a
combination of both. Many of the factors affecting the frequency and severity of
claims depend upon the type of insurance coverage, but others are shared in
common. Severity and frequency can be affected by changes in national economic
conditions, unexpectedly adverse outcomes in claims litigation, often as a
result of unanticipated jury verdicts, changes in court-made law, adverse court
interpretations of insurance policy provisions resulting in increased liability
or new judicial theories of liability, together with unexpectedly high costs of
defending claims.
Inadequate
Reserves
Reserves
are the amounts that an insurance company sets aside for its anticipated policy
liabilities. Claim reserves are an estimate of liability for unpaid claims and
claims defense and adjustment expenses, and cover both reported as well as
incurred, but not yet reported claims. It is not possible to calculate precisely
what these liabilities will amount to in advance and, therefore, the reserves
represent a best estimate at any point in time. Such estimates are based upon
known historical loss data and expectations of future trends in claims
frequency, severity, interest rates and other considerations which in turn are
affected by a large variety of factors over which insurers have little or no
control. Reserve estimates are periodically reviewed in light of known
developments and, where necessary, adjusted and refined as circumstances may
warrant. Nevertheless, the reserve-setting process is inherently uncertain. If
for any of these reasons reserve estimates prove to be inadequate, the Company’s
subsidiaries can be forced to increase their reported liabilities; such an
occurrence could result in a materially adverse impact on their results of
operations and financial condition.
Inadequate
Pricing
Premium
rates are generally determined on the basis of historical data for claims
frequency and severity as well as related production and other expense patterns.
In the event ultimate claims and expenses exceed historically projected levels,
premium rates are likely to prove insufficient. Premium rate inadequacy may not
become evident quickly and may require time to correct. Inadequate premiums,
much like excessive losses, if material, can adversely affect the Company’s
business, operating results and financial condition.
Liquidity
Risk
As
indicated above, the Company manages its fixed-maturity investments with a view
toward matching the maturities of those investments with the anticipated
liquidity needs of its subsidiaries for the payment of claims and expenses. If a
subsidiary suddenly experienced greater-than-anticipated liquidity needs for any
reason, it could require an injection of funds that might not necessarily be
available to the Company to meet its obligations at a point in
time.
Regulatory
Environment
The
Company’s insurance businesses are subject to extensive governmental regulation
in all of the state and similar jurisdictions in which they operate. These
regulations relate to such matters as licensing requirements, types of insurance
products that may be sold, premium rates, marketing practices, capital and
surplus requirements, investment limitations, underwriting limitations, dividend
payment limitations, transactions with affiliates, accounting practices,
taxation and other matters. While most of the regulation is at the state level,
the federal government has increasingly expressed an interest in regulating the
insurance business and has injected itself through the Graham-Leach-Bliley Act,
the Patriot Act, financial services regulation, changes in the Internal
Revenue Code and other legislation. All of these regulations raise the costs of
conducting an insurance business through increased compliance expenses.
Furthermore, as existing regulations evolve through administrative and court
interpretations, and as new regulations are adopted, there can be no way of
predicting what impact these changes will have on the Company’s businesses in
the future, and the impact could adversely affect the Company’s profitability
and limit its growth.
Competition
Each of
the Company’s lines of insurance business is highly competitive and is likely to
remain so for the foreseeable future. Moreover, existing competitors and the
capital markets have brought an influx of capital and newly-organized entrants
into the industry in recent years, and changes in laws have allowed financial
institutions, like banks and savings and loans, to sell insurance products.
Increases in competition threaten to reduce demand for the Company’s insurance
products, reduce its market share, reduce its growth, reduce its profitability
and generally adversely affect its results of operations and financial
condition.
17
Rating
Downgrades
The
competitive positions of insurance companies, in general, have come to depend
increasingly on independent ratings of their financial strength and
claims-paying ability. The rating agencies base their ratings on criteria they
establish regarding an insurer’s financial strength, operating performance,
strategic position and ability to meet its obligations to policyholders. A
significant downgrade in the ratings of any of the Company’s major
policy-issuing subsidiaries could negatively impact their ability to compete for
new business and retain existing business and, as a result, adversely affect
their results of operations and financial condition.
Financial Institutions
Risk
The
Company’s subsidiaries have significant business relationships with financial
institutions, particularly national banks. The subsidiaries are the
beneficiaries of a considerable amount of security in the form of letters of
credit which they hold as collateral securing the obligations of insureds and
certain reinsurers. Some of the banks themselves have subsidiaries that reinsure
the Company’s business. Other banks are depositories holding large sums of money
in escrow accounts established by the Company’s title subsidiaries. There is
thus a risk of concentrated financial exposures in one or more such banking
institutions. If any of these institutions fail or are unable to honor their
credit obligations, or if escrowed funds become lost or tied up due to the
failure of a bank, the result could be adverse to the Company’s business,
results of operations and financial condition.
In addition to the foregoing, the
following are risk factors that are particular to each of the Company’s three
major business segments.
General
Insurance Group
|
Catastrophic
Losses
While the
Company limits the property exposures it writes, the casualty or liability
insurance it underwrites creates an exposure to claims arising out of
catastrophes. The two principal catastrophe exposures are earthquakes and acts
of terrorism in areas where there are large concentrations of employees of an
insured employer or other individuals who could potentially be injured and
assert claims against an insured.
Following
the September 11, 2001 terrorist attack, the reinsurance industry
eliminated coverage from substantially all reinsurance contracts for claims
arising from acts of terrorism. As discussed elsewhere in this report, the U.S.
Congress subsequently passed TRIA, TRIREA, and TRIPRA legislation that required
primary insurers to offer coverage for certified acts of terrorism under most
commercial property and casualty insurance policies. Although these programs
established a temporary federal reinsurance program through December 31,
2014, primary insurers like the Company’s general insurance subsidiaries retain
significant exposure for terrorist act-related losses.
Long-Tailed
Losses
Coverage
for general liability is considered long-tailed coverage. Written in most cases
on an “occurrence” basis, it often takes longer for the claims to be
reported and become known, adjusted and settled than it does for property
claims, for example, which are generally considered short-tailed. The extremely
long-tailed aspect of such claims as pollution, asbestos, silicosis, manganism
(welding rod fume exposure), black lung, lead paint and other toxic tort claims,
coupled with uncertain and sometimes variable judicial rulings on coverage and
policy allocation issues and the possibility of legislative actions, makes
reserving for these exposures highly uncertain. While the Company believes that
it has reasonably estimated its liabilities for such exposures to date, and that
its exposures are relatively modest, there is a risk of materially adverse
developments in both known and as-yet-unknown claims.
Workers’ Compensation
Coverage
Workers’
compensation coverage is the second largest line of insurance written within the
Company. The frequency and severity of claims under, and the adequacy of
reserves for workers’ compensation claims and expenses can all be significantly
influenced by such risk factors as future wage inflation in states that index
benefits, the speed with which injured employees are able to return to work in
some capacity, the cost and rate of inflation in medical treatments, the types
of medical procedures and treatments, the cost of prescription medications, the
frequency with which closed claims reopen for additional or related medical
issues, the mortality of injured workers with lifetime benefits and medical
treatments, the use of health insurance to cover some of the expenses, the
assumption of some of the expenses by states’ second injury funds, the use of
cost containment practices like preferred provider networks, and the
opportunities to recover against third parties through subrogation. Adverse
developments in any of these factors, if significant, could have a materially
adverse effect on the Company’s operating results and financial
condition.
Reinsurance
Reinsurance
is a contractual arrangement whereby one insurer (the reinsurer) assumes some or
all of the risk exposure written by another insurer (the reinsured). The Company
uses reinsurance to manage its risks both in terms of the amount of coverage it
is able to write, the amount it is able to retain for its own account, and the
price at which it is able to write it. The availability of reinsurance and its
price, however, are determined in the reinsurance market by conditions beyond
the Company’s control.
18
Reinsurance does not relieve the
reinsured company of its primary liability to its insureds in the event of a
loss. It merely reimburses the reinsured company. The ability and willingness of
reinsurers to honor their obligations represent credit risks inherent in
reinsurance transactions. The Company addresses these risks by limiting its
reinsurance to those reinsurers it considers the best credit risks. In recent
years, however, there has been an ever-decreasing number of reinsurers
considered to be acceptable risks by the Company.
There can
be no assurance that the Company will be able to find the desired or even
adequate amounts of reinsurance at favorable rates from acceptable reinsurers in
the future. If unable to do so, the Company would be forced to reduce the volume
of business it writes or retain increased amounts of liability exposure. Because
of the declining number of reinsurers the Company finds acceptable, there is a
risk that too much reinsurance risk may become concentrated in too few
reinsurers. Each of these results could adversely affect the Company’s business,
results of operations and financial condition.
Insureds as Credit
Risks
A
significant amount of the Company’s liability and workers’ compensation
business, particularly for large commercial insureds, is written on the basis of
risk-sharing underwriting methods utilizing large deductibles, captive insurance
risk retentions, or other arrangements whereby the insureds effectively retain
and fund varying and at times significant amounts of their losses. Their
financial strength and ability to pay are carefully evaluated as part of the
underwriting process and monitored periodically thereafter, and their retained
exposures are estimated and collateralized based on pertinent credit analysis
and evaluation. Because the Company is primarily liable for losses incurred
under its policies, the possible failure or inability of insureds to honor their
retained liability represents a credit risk. Any subsequently developing
shortage in the amount of collateral held would also be a risk, as would the
failure or inability of a bank to honor a letter of credit issued as collateral.
These risk factors could have a material adverse impact on the Company’s results
of operations and financial condition.
Guaranty Funds and Residual
Markets
In nearly
all states, licensed property and casualty insurers are required to participate
in guaranty funds through assessments covering a portion of insurance claims
against impaired or insolvent property and casualty insurers. Any increase in
the number or size of impaired companies would likely result in an increase in
the Company’s share of such assessments.
Many states have established
second-injury funds that compensate injured employees for aggravation of prior
injuries or conditions. These second-injury funds are funded by assessments or
premium surcharges.
Residual
market or pooling arrangements exist in many states to provide various types of
insurance coverage to those that are otherwise unable to find private insurers
willing to insure them. All licensed property and casualty insurers writing such
coverage voluntarily are required to participate in these residual market or
pooling mechanisms.
A
material increase in any of these assessments or charges could adversely affect
the Company’s results of operations and financial condition.
Prior Approval of
Rates
Most of the lines of insurance
underwritten by the Company are subject to prior regulatory approval of premium
rates in a majority of the states. The process of securing regulatory approval
can be time consuming and can impair the Company’s ability to effect necessary
rate increases in an expeditious manner. Furthermore, there is a risk that the
regulators will not approve a requested increase, particularly in regard to
workers’ compensation insurance with respect to which rate increases often
confront strong opposition from local business, organized labor, and political
interests.
Mortgage
Guaranty Group
|
Housing and Mortgage Lending
Markets
Any significant development which
adversely affects the housing and related mortgage lending markets could be a
risk factor for the Company’s mortgage insurance subsidiaries. Rising mortgage
interest rates, falling home prices, excessive housing supplies, negative
employment trends, and unfavorable trends in the general health of the national
or regional economies are all factors which may produce lower mortgage loan
origination volumes that could result in a decline of new business and/or an
increase in mortgage defaults, all of which could in turn lead to an increase in
claims.
On the
other hand, low interest rates and rising home prices can also be risk factors
inasmuch as they can threaten persistency of coverage. Declining rates or rising
home prices can encourage mortgage refinance activity. When a mortgage loan
insured by the Company is refinanced, there is a risk the lender will replace
the Company’s coverage with coverage written by another mortgage insurer or,
alternatively, that coverage may no longer be necessary in the event that price
appreciation of the property has served to reduce the loan-to-value ratio below
80%. Each of these factors, if significant enough, could have a materially
adverse affect on the business, results of operations and financial condition of
the Company’s mortgage guaranty subsidiaries.
19
Competition
Competition
is always a risk factor and comes not only from the six other mortgage insurers
which comprise the industry, but also from government-sponsored enterprises
(“GSE”), such as Fannie Mae and Freddie Mac, and the insured mortgage lenders
themselves. The market for private mortgage insurance exists primarily as a
result of restrictions within the federal charters of the GSEs which require an
acceptable form of credit enhancement on loans purchased by the GSEs that have
loan to value (LTV) ratios in excess of 80%. These institutions establish the
levels of required coverage, the underwriting standards for the loans they will
purchase and the loss mitigation efforts that must be followed on insured loans.
Changes in any of these respects can result in a reduction of the Mortgage
Guaranty Group’s business or an increase in its claim costs.
Lender
consolidation has resulted in fewer lenders originating a greater share of all
mortgage loans. In 2007, 53% of all mortgage loans were purchased or
originated by the top 5 nationwide lenders. Consequently, mortgage
insurance business is increasingly becoming controlled by a small number of
nationwide mortgage lenders, some of which have reduced the number of mortgage
insurers they do business with, thus increasing competition among the
insurers.
Increasingly,
mortgage lenders have organized their own captive reinsurers as a means of
extending their business to the underwriting of mortgage guaranty risks. Through
such captives they provide excess of loss, and in some cases, quota share
reinsurance protection to the mortgage guaranty insurers such as the Company’s
subsidiaries in this segment. This involvement is a competitive risk factor
inasmuch as it reduces the amount of business that the Company could otherwise
retain. In February 2008, Freddie Mac announced limitations on the percentage of
risk that can be ceded to captive reinsurers by its approved private mortgage
insurers. This limitation is effective for new risk written subsequent to June
1, 2008. Consequently, over time the Company’s Mortgage Guaranty Group will
likely increase its net retention on the loans it insures.
Other
competitive risk factors faced by the Company’s Mortgage Guaranty Group stem
from certain credit enhancement alternatives to private mortgage insurance.
These include:
·
|
the
use of so-called piggy-back or 80-10-10 type mortgage loan extensions
whose effect is to eliminate the need for mortgage guaranty insurance by
structuring the mortgage note as an 80% loan-to-value first
mortgage;
|
·
|
the
retention of mortgage loans on an uninsured basis in the lender’s
portfolio of assets;
|
·
|
the
use of alternative mortgage insurance programs such as those afforded by
the Federal Housing and Veterans Administrations;
and
|
·
|
capital
markets utilizing alternative credit
enhancements.
|
Litigation and
Regulation
The
possibly adverse effect of litigation and regulation are ever present risk
factors. Captive reinsurance and other risk-participating structures with
mortgage lenders have been challenged in recent years as potential violations of
the Real Estate Settlement Procedures Act (“RESPA”). From time to time, the U.
S. Department of Housing and Urban Development has considered adopting RESPA
regulations which would have adversely impacted mortgage insurance by requiring
that the premiums be combined with all other settlement service charges in a
single package fee. Adverse litigation or regulatory developments could have a
materially adverse effect on the Company’s mortgage guaranty business, results
of operations and financial condition.
Title
Insurance Group
|
Housing and Mortgage Lending
Markets
The fortunes of title insurance are
even more directly tied to the level of real estate activity than are those of
mortgage insurance. The principal risk factor for title insurance is a decline
in residential real estate activity. The major factors that can impact real
estate activity adversely include:
·
|
high
or rising mortgage interest rates;
|
·
|
high
or rising unemployment;
|
·
|
any
downturn in a regional or the national economy, any reduction in the
availability or affordability of housing, as well as, any precipitous
decline in housing prices;
|
·
|
any
reduction in mortgage refinancing activity;
and
|
·
|
any
reduction in the availability of mortgage
funding.
|
20
A significant adverse development among
any of these risk factors could have a materially adverse effect on the
Company’s title insurance business, results of operations and financial
condition.
Competition
Business
comes to title insurers primarily by referral from real estate agents, lenders,
developers and other settlement providers. The sources of business lead to a
great deal of competition among title insurers. Although the top five title
insurance companies account for about 93% of industry-wide premium volume, there
are numerous smaller companies representing the remainder at the regional and
local levels. The smaller companies are an ever-present competitive risk in the
regional and local markets where their business connections can give them a
competitive edge. Moreover, there is almost always competition among the major
companies for key employees, especially those who are engaged in the production
side of the business.
Regulation and
Litigation
Regulation
is also a risk factor for title insurers. The title insurance industry has
recently been, and continues to be, under intense regulatory scrutiny in a
number of states with respect to pricing practices, and possible RESPA
violations and unlawful rebating practices. The regulatory investigations could
lead to industry-wide reductions in premium rates and escrow fees, the inability
to get rate increases when necessary, as well as to changes that could adversely
affect the Company’s ability to compete for or retain business or raise the
costs of additional regulatory compliance.
As with
the Company’s other business segments, litigation poses a risk factor. Recent
litigation in a number of states seeks class certification in actions against a
number of title insurers alleging violations of rate applications in those
states with respect to title insurance issued in certain mortgage refinancing
transactions.
Other
Risks
Inadequate
title searches are among the risk factors faced by the entire industry. If a
title search is conducted thoroughly and accurately, there should theoretically
never be a claim. When the search is less than thorough or complete, title
defects can go undetected and claims result.
To a
lesser extent, fraud is also a risk factor for all title companies -- sometimes
in the form of an agent’s or an employee’s defalcation of escrowed funds,
sometimes in the form of fraudulently issued title insurance
policies.
Item
1B - Unresolved Staff Comments
None
Item
2 - Properties
The
principal executive offices of the Company are located in the Old Republic
Building in Chicago, Illinois. This Company-owned building contains 151,000
square feet of floor space of which approximately 52% is occupied by Old
Republic, and the remainder is leased to others. In addition to its Chicago
building , a subsidiary of the Title Insurance Group partially occupies its
owned headquarters building in Minneapolis, Minnesota. This building contains
110,000 square feet of floor space of which approximately 65% is occupied by the
Old Republic National Title Insurance Company. The remainder of the building is
leased to others. Nine smaller buildings are owned by Old Republic and its
subsidiaries in various parts of the nation and are primarily used for its
business. The carrying value of all owned buildings and related land at December
31, 2007 was $38.9 million.
Certain
other operations of the Company and its subsidiaries are directed from leased
premises. See Note 4(b) of the Notes to Consolidated Financial Statements for a
summary of all material lease obligations.
Item
3 - Legal Proceedings
Legal
proceedings against the Company arise in the normal course of business and
usually pertain to claim matters related to insurance policies and contracts
issued by its insurance subsidiaries. Other legal proceedings are discussed
below.
Purported
class 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, pursuant to rate schedules filed by ORNTIC or
by state rating bureaus with the state insurance regulators, ORNTIC was required
to, but failed to give consumers reissue and/or refinance credits on the
premiums charged for title insurance covering mortgage refinancing transactions.
Substantially similar lawsuits are also pending against other unaffiliated title
insurance companies in these and other states as well. The actions seek damages
and declaratory and injunctive relief. ORNTIC intends to defend vigorously
against the actions but, at this stage in the litigation, the
Company’s cannot estimate the ultimate costs it may incur as the
actions proceed to their conclusions.
During
the fourth quarter of 2007, purported class action lawsuits were filed against
two of the Company’s title agency subsidiaries, Old Republic Title & Escrow,
Ltd. and Old Republic Title Company, in the Superior Court of Washington, King
County, and the U.S. District Court for the Northern
District of California, respectively. The action
in Washington alleges that the Company’s subsidiary
overcharged
21
customers
for escrow-related fees and did not disclose to customers
that it would keep interest or credits or benefits in lieu of interest on money
deposited into escrow. The action in California is brought
by and on behalf of Hispanic home buyers in Monterey County against various real
estate developers, brokers, mortgage brokers, mortgage lenders, mortgage loan
servicers, as well as the Company’s title agency subsidiary, and alleges that
the title agency failed to provide adequate disclosures to protect the buyers
from the abusive sales and predatory lending practices of the other defendants.
Both actions seek damages, declaratory and injunctive relief. The Company’s
subsidiaries intend to defend vigorously against both actions and are unable at
this early stage in the litigation to estimate the costs they may incur in
defending these actions to their conclusions.
Item
4 - Submission of Matters to a Vote of Security Holders
None.
PART
II
Item 5 - Market for the
Registrant's Common Equity, Related Security Holder Matters and Issuer Purchases of
Equity Securities
|
The
Company's common stock is traded on the New York Stock Exchange under the symbol
“ORI”. The high and low closing prices as reported on the New York Stock
Exchange, and cash dividends declared for each quarterly period during the past
two years were as follows:
Closing
Price
|
Cash
|
||||||||||||
High
|
Low
|
Dividends
|
|||||||||||
1st
quarter
|
2006
|
$ | 22.35 | $ | 20.72 | $ | .14 | ||||||
2nd
quarter
|
2006
|
22.35 | 20.20 | .15 | |||||||||
3rd
quarter
|
2006
|
22.15 | 20.79 | .15 | |||||||||
4th
quarter
|
2006
|
$ | 23.50 | $ | 22.04 | $ | .15 | ||||||
1st
quarter
|
2007
|
$ | 23.51 | $ | 21.68 | $ | .15 | ||||||
2nd
quarter
|
2007
|
22.38 | 21.06 | .16 | |||||||||
3rd
quarter
|
2007
|
21.73 | 17.70 | .16 | |||||||||
4th
quarter
|
2007
|
$ | 19.46 | $ | 13.73 | $ | .16 |
As of
January 31, 2008, there were 2,831 registered holders of the Company's Common
Stock. See Note 3(b) of the Notes to Consolidated Financial Statements for a
description of certain regulatory restrictions on the payment of dividends by
Old Republic's insurance subsidiaries. Closing prices have been restated,
as necessary, to reflect all stock dividends and splits declared through
December 31, 2007.
The
Company reacquired 1,566,100 shares of its common stock during 2007 for $28.3
million, or $18.13 per share.
Comparative
Five-Year Performance Graphs for Common Stock
The
following tables, prepared on the basis of market and related data furnished by
Standard & Poor's Total Return Service, reflects total market return data
for the most recent five calendar years ended December 31, 2007. For purposes of
the presentation, the information is shown in terms of $100 invested at the
close of trading on the last trading day preceding the first day of the fifth
preceding year. The $100 investment is deemed to have been made either in Old
Republic Common Stock, in the S&P 500 Index of common stocks, or in an
aggregate of the common shares of the Peer Group of publicly held insurance
businesses selected by Old Republic. In each instance the cumulative total
return assumes reinvestment of cash dividends on a pretax basis.
22
The
information utilized to prepare the following tables has been obtained from
sources believed to be reliable, but no representation is made that it is
accurate or complete in all respects.
Comparison
of Five Year Total Market Return
OLD
REPUBLIC INTERNATIONAL CORPORATION vs. S&P 500 vs. Peer Group 1
(For
the five years ended December 31, 2007)
![](https://www.sec.gov/Archives/edgar/data/0000074260/000007426008000019/form10kpg1.jpg)
Dec
02
|
Dec
03
|
Dec
04
|
Dec
05
|
Dec
06
|
Dec
07
|
||||||
ORI
|
$100.00
|
$142.30
|
$144.88
|
$160.12
|
$182.28
|
$124.75
|
|||||
S&P
500
|
100.00
|
128.68
|
142.69
|
149.70
|
173.34
|
182.86
|
|||||
Peer
Group 1
|
100.00
|
123.50
|
137.22
|
157.90
|
181.12
|
167.06
|
Comparison
of Five Year Total Market Return
OLD
REPUBLIC INTERNATIONAL CORPORATION vs. S&P 500 vs. Peer Group 2
(For
the five years ended December 31, 2007)
![](https://www.sec.gov/Archives/edgar/data/0000074260/000007426008000019/form10kpg2.jpg)
Dec
02
|
Dec
03
|
Dec
04
|
Dec
05
|
Dec
06
|
Dec
07
|
||||||
ORI
|
$100.00
|
$142.30
|
$144.88
|
$160.12
|
$182.28
|
$124.75
|
|||||
S&P
500
|
100.00
|
128.68
|
142.69
|
149.70
|
173.34
|
182.86
|
|||||
Peer
Group 2
|
100.00
|
124.08
|
136.79
|
159.57
|
179.72
|
164.14
|
Peer Group 1 consists of the following
publicly held corporations selected by the Company for its 2002 to 2007
comparison: Ace Limited, American Financial Group, Inc., The Chubb Corporation,
Cincinnati Financial Corporation, First American Corporation, LandAmerica
Financial Group, MGIC Investment Corporation, Markel Corporation, PMI Group
Inc., SAFECO Corporation, St. Paul Travelers Companies, Inc., and XL Capital
Ltd. Peer Group 2 is comprised of the same companies as in Peer Group
1 except for two companies: PMI Group Inc. replaced Radian Group, and
Markel Corporation replaced Ohio Casualty Corporation following the latter’s
acquisition by another insurer, resulting in the absence of Ohio Casualty
Corporations’ effect on the December 2007 Peer Group 2 data. The composition of
the Peer Group companies has been approved by the Compensation
Committee.
23
Item 6 - Selected Financial Data
($ in millions, except share data)
December
31,
|
||||||||||||||||||||
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
FINANCIAL
POSITION:
|
||||||||||||||||||||
Cash
and Invested Assets (1)
|
$ | 8,924.0 | $ | 8,230.8 | $ | 7,394.1 | $ | 7,020.2 | $ | 6,402.6 | ||||||||||
Other
Assets
|
4,366.5 | 4,381.4 | 4,149.0 | 3,550.6 | 3,309.6 | |||||||||||||||
Total
Assets
|
$ | 13,290.6 | $ | 12,612.2 | $ | 11,543.2 | $ | 10,570.8 | $ | 9,712.3 | ||||||||||
Liabilities,
Other than Debt
|
$ | 8,684.9 | $ | 8,098.6 | $ | 7,376.4 | $ | 6,562.1 | $ | 6,020.9 | ||||||||||
Debt
|
64.1 | 144.3 | 142.7 | 143.0 | 137.7 | |||||||||||||||
Total
Liabilities
|
8,749.0 | 8,243.0 | 7,519.1 | 6,705.1 | 6,158.6 | |||||||||||||||
Preferred
Stock
|
- | - | - | - | - | |||||||||||||||
Common
Shareholders' Equity
|
4,541.6 | 4,369.2 | 4,024.0 | 3,865.6 | 3,553.6 | |||||||||||||||
Total
Liabilities and Shareholders’ Equity
|
$ | 13,290.6 | $ | 12,612.2 | $ | 11,543.2 | $ | 10,570.8 | $ | 9,712.3 | ||||||||||
Total Capitalization
(2)
|
$ | 4,605.7 | $ | 4,513.5 | $ | 4,166.7 | $ | 4,008.6 | $ | 3,691.3 |
Years
Ended December 31,
|
||||||||||||||||||||
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
RESULTS
OF OPERATIONS:
|
||||||||||||||||||||
Net
Premiums and Fees Earned
|
$ | 3,601.2 | $ | 3,400.5 | $ | 3,386.9 | $ | 3,116.1 | $ | 2,936.0 | ||||||||||
Net
Investment and Other Income
|
419.3 | 374.6 | 354.0 | 327.5 | 330.5 | |||||||||||||||
Realized
Investment Gains
|
70.3 | 19.0 | 64.9 | 47.9 | 19.3 | |||||||||||||||
Net
Revenues
|
4,091.0 | 3,794.2 | 3,805.9 | 3,491.6 | 3,285.8 | |||||||||||||||
Benefits,
Claims, and
|
||||||||||||||||||||
Settlement
Expenses
|
2,166.2 | 1,539.6 | 1,465.4 | 1,307.9 | 1,112.8 | |||||||||||||||
Underwriting
and Other Expenses
|
1,546.3 | 1,574.3 | 1,593.0 | 1,532.7 | 1,493.2 | |||||||||||||||
Pretax
Income
|
378.4 | 680.1 | 747.3 | 650.9 | 679.7 | |||||||||||||||
Income
Taxes
|
105.9 | 215.2 | 195.9 | 215.9 | 219.9 | |||||||||||||||
Net
Income
|
$ | 272.4 | $ | 464.8 | $ | 551.4 | $ | 435.0 | $ | 459.8 | ||||||||||
COMMON
SHARE DATA: (3)
|
||||||||||||||||||||
Net
Income:
|
||||||||||||||||||||
Basic(4)
|
$ | 1.18 | $ | 2.01 | $ | 2.40 | $ | 1.91 | $ | 2.02 | ||||||||||
Diluted
|
$ | 1.17 | $ | 1.99 | $ | 2.37 | $ | 1.89 | $ | 2.01 | ||||||||||
Dividends:
Cash - Regular
|
$ | .630 | $ | .590 | $ | .512 | $ | .402 | $ | .356 | ||||||||||
- Special
|
- | - | .800 | - | .534 | |||||||||||||||
- Total
|
$ | .630 | $ | .590 | $ | 1.312 | $ | .402 | $ | .890 | ||||||||||
Stock
|
- | % | - | % | 25 | % | - | % | 50 | % | ||||||||||
Book
Value
|
$ | 19.71 | $ | 18.91 | $ | 17.53 | $ | 16.94 | $ | 15.65 | ||||||||||
Common
Shares (thousands):
|
||||||||||||||||||||
Outstanding
|
230,472 | 231,047 | 229,575 | 228,204 | 227,007 | |||||||||||||||
Average: Basic
|
231,370 | 231,017 | 229,487 | 228,177 | 226,936 | |||||||||||||||
Diluted
|
232,912 | 233,034 | 232,108 | 230,759 | 229,128 |
(1)
|
Consists
of cash, investments and accrued investment
income.
|
(2)
|
Total
capitalization consists of debt, preferred stock, and common shareholders'
equity.
|
(3)
|
All
per share statistics herein have been restated to reflect all stock
dividends or splits declared through December 31,
2007.
|
(4)
|
Calculated
after deduction of minor amounts of preferred stock cash
dividends.
|
24
Item
7 - Management Analysis of Financial Position and Results of
Operations
($
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 2.1% of
both consolidated revenues for the year ended December 31, 2007 and consolidated
assets as of December 31, 2007, is included within the corporate and other
caption of this report. The consolidated accounts are presented on the basis of
generally accepted accounting principles (“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 latest consolidated operating results, which exclude realized
investment gains, were affected adversely by a continuation of difficult
economic environments in the housing and mortgage lending industries. The
Company’s mortgage guaranty insurance line bore the brunt of these difficulties,
posting a substantial 2007 operating loss for both the fourth quarter and full
year. The title insurance segment was similarly affected although the operating
loss it produced was of lesser magnitude. The combination of these adverse
outcomes was offset to a significant degree by the favorable operating
performance of the Company’s general insurance business.
Consolidated
net income benefited from the inclusion of greater realized investment gains for
both the final quarter and twelve months ended December 31, 2007. During 2007’s
fourth quarter, a significant portion of Old Republic’s indexed stock portfolio
was sold at a gain. The proceeds were redirected to a more concentrated, select
list of common stocks expected to provide greater long term total
returns.
25
Consolidated Results – The
major components of Old Republic’s consolidated results were as follows for the
periods being reported on:
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||||
Operating
revenues:
|
||||||||||||
General
insurance
|
$ | 2,438.0 | $ | 2,138.7 | $ | 2,017.6 | ||||||
Mortgage
guaranty
|
608.3 | 529.9 | 516.0 | |||||||||
Title
insurance
|
878.5 | 1,007.3 | 1,108.6 | |||||||||
Corporate
and
other
|
95.6 | 99.2 | 98.6 | |||||||||
Total
|
$ | 4,020.6 | $ | 3,775.2 | $ | 3,741.0 | ||||||
Pretax
operating income (loss):
|
||||||||||||
General
insurance
|
$ | 418.0 | $ | 401.6 | $ | 350.0 | ||||||
Mortgage
guaranty
|
(110.4 | ) | 228.4 | 243.7 | ||||||||
Title
insurance
|
(14.7 | ) | 31.0 | 88.7 | ||||||||
Corporate
and
other
|
15.1 | - | (.1 | ) | ||||||||
Sub-total
|
308.0 | 661.1 | 682.4 | |||||||||
Realized
investment gains (losses):
|
||||||||||||
From
sales
|
70.3 | 19.0 | 74.1 | |||||||||
From
impairments
|
- | - | (9.2 | ) | ||||||||
Net
realized investment
gains
|
70.3 | 19.0 | 64.9 | |||||||||
Consolidated
pretax
income
|
378.4 | 680.1 | 747.3 | |||||||||
Income
taxes
|
105.9 | 215.2 | 195.9 | |||||||||
Net
income
|
$ | 272.4 | $ | 464.8 | $ | 551.4 | ||||||
Consolidated
underwriting ratio:
|
||||||||||||
Benefits
and claims
ratio
|
60.2 | % | 45.3 | % | 43.3 | % | ||||||
Expense
ratio
|
41.3 | 44.7 | 45.2 | |||||||||
Composite
ratio
|
101.5 | % | 90.0 | % | 88.5 | % | ||||||
Components
of diluted net income per share:
|
||||||||||||
Net
operating income:
|
||||||||||||
Before
non-recurring income tax
benefit
|
$ | .97 | $ | 1.94 | $ | 1.99 | ||||||
2005
non-recurring income tax
benefit
|
- | - | .20 | |||||||||
Total
|
.97 | 1.94 | 2.19 | |||||||||
Net
realized investment
gains
|
.20 | .05 | .18 | |||||||||
Net
income
|
$ | 1.17 | $ | 1.99 | $ | 2.37 |
The above table shows both operating
and net income to highlight the effects of realized investment gain or loss
recognition and any non-recurring items on period-to-period comparisons.
Operating income, however, does not replace net income computed in accordance
with Generally Accepted Accounting Principles (“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.
26
General Insurance Results –
Favorable year-over-year earnings comparisons for the Company’s General
Insurance Group resulted from positive underwriting performance and continued
growth of net investment income. Key indicators of that performance
follow:
General
Insurance Group
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||||
Net
premiums
earned
|
$ | 2,155.1 | $ | 1,902.1 | $ | 1,805.2 | ||||||
Net
investment
income
|
260.8 | 221.5 | 197.0 | |||||||||
Pretax
operating
income
|
$ | 418.0 | $ | 401.6 | $ | 350.0 | ||||||
Benefits
and claims
ratio
|
67.8 | % | 65.9 | % | 66.9 | % | ||||||
Expense
ratio
|
24.1 | 24.4 | 24.6 | |||||||||
Composite
ratio
|
91.9 | % | 90.3 | % | 91.5 | % |
Increases
in general insurance premiums for 2007 stemmed mainly from a new book of
contractors’ liability insurance acquired in late 2006. Premiums from all other
sources combined were slightly higher, as a moderately declining rate
environment for various liability insurance coverages made it more difficult to
retain and attract new business.
The 2007
benefits and claims ratio of 67.8 percent was slightly higher than 2006’s, and
nearly equal to the average of 67.7 percent registered in the preceding five
years. This basic stability reflects the ongoing benefits of Old Republic’s
widely diversified book of general insurance coverages. The expense ratio of
24.1 percent for 2007 compared favorably with the preceding five years’ average
of 25.4 percent, and remained aligned with premium revenue levels. In
combination, the 2007 composite ratio of claim costs and expenses, the most
widely accepted indicator of underwriting performance in the industry, continued
at a favorable level for the sixth consecutive year.
General
Insurance Group net investment income growth for 2007 and 2006 was aided by
positive operating cash flow that led to a greater invested asset base, and by
slightly higher investment yields.
Mortgage Guaranty Results –
The advance in claim costs which began in earnest in the third quarter of
2006, accelerated at a much faster pace by mid-year 2007. Incurred claims rose
to almost 179 percent of fourth quarter 2007 earned premiums, and to nearly 119
percent of such premiums for the entire year. These costs outpaced a substantial
increase in premium revenues and pressured operating results to unprofitable
levels for the first time in 19 years. Key indicators of this cyclical reversal
in the profitability of Old Republic’s second largest business segment are shown
below.
Mortgage
Guaranty Group
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||||
Net
premiums
earned
|
$ | 518.2 | $ | 444.3 | $ | 429.5 | ||||||
Net
investment
income
|
79.0 | 74.3 | 70.1 | |||||||||
Pretax
operating income
(loss)
|
$ | (110.4 | ) | $ | 228.4 | $ | 243.7 | |||||
Claims
ratio
|
118.8 | % | 42.8 | % | 37.2 | % | ||||||
Expense
ratio
|
17.7 | 22.5 | 22.4 | |||||||||
Composite
ratio
|
136.5 | % | 65.3 | % | 59.6 | % |
Mortgage
Guaranty premiums rebounded throughout 2007 due to higher persistency of
business underwritten in prior years, and greater production of traditional
insurance products in 2007. Persistency of traditional primary insurance
improved to 77.6 percent as of year end 2007 from 73.1 percent at the end of
2006, and traditional new insurance written rose by 85.3 percent year-over-year.
As noted above, however, an unprecedented cyclical downturn in housing and
related mortgage finance markets contributed to much higher claim costs. Such
costs reflect a continuation of unfavorable loan default trends since 2006, and
greater claim severity due to larger insured loan values. Opportunities to
mitigate such costs have been reduced significantly in a market affected by
higher mortgage foreclosures and inflated inventories of unsold homes. While the
net paid loss ratio was 21.8 percent higher for all of 2007, much greater claim
reserve provisions were required to address a deteriorating claims environment.
As of December 31, 2007, net claim reserves of $644.9 million were 158.4 percent
higher than the like amount twelve months earlier. While production and
operating expenses continued to fall in 2007, the beneficial effect of this
trend was blunted by the more severe impact of greater claim costs. As a
consequence, the composite ratio of claims and expenses was materially
unfavorable in the latest quarter and year, reaching levels unseen in twenty and
more years.
The above
factors notwithstanding, Old Republic’s Mortgage Guaranty segment continued to
register strong operating cash flows in 2007. These were aided by rising premium
volume and paid loss growth lagging that of reserve-impacted incurred claim
costs. The positive operating cash flows were additive to an already liquid
invested asset base, and contributed to greater investment income for the
year.
27
Title Insurance Results – Old
Republic’s title insurance business registered an operating loss in 2007. Key
performance indicators follow:
Title
Insurance Group
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||||
Net
premiums and fees
earned
|
$ | 850.7 | $ | 980.0 | $ | 1,081.8 | ||||||
Net
investment
income
|
27.3 | 26.9 | 26.0 | |||||||||
Pretax
operating income
(loss)
|
$ | (14.7 | ) | $ | 31.0 | $ | 88.7 | |||||
Claims
ratio
|
6.6 | % | 5.9 | % | 6.0 | % | ||||||
Expense
ratio
|
98.1 | 93.6 | 88.2 | |||||||||
Composite
ratio
|
104.7 | % | 99.5 | % | 94.2 | % |
Near
break even title results for the first nine months of 2007 turned into a loss
for the fourth quarter and full year. Premium and fee revenues trended down
throughout the year amid an intractable downturn in the housing and related
mortgage lending industries. Direct title production facilities in the Western
United States sustained the greatest adverse effects of this downturn. In the
year’s final quarter more aggressive steps were taken to redress further the
imbalance between revenues and operating costs in that region. Severance, lease
termination, and other expenses incurred in these regards penalized 2007 pretax
operating results by $6.2 million. Together, these factors led to the highest
annual title expense ratio sustained in the past 25 years, and though still
reasonably contained, to higher claim costs as these tend to increase during
periods of serious economic dislocations.
Corporate and Other Operations –
Old Republic’s small life and health business, and the net costs
associated with the parent holding company and its corporate services
subsidiaries produced higher income contributions in 2007. Period-to-period
variability in the results of these relatively minor elements of the Company’s
operations usually stems from the volatility inherent to the Company’s small
scaled life and health business, fluctuations in the timing of expense
recognition related to such variable costs as stock option expenses, interest on
intercompany financing arrangements, and costs associated with a relatively
small debt level.
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:
As of December
31,
|
2007
|
2006
|
%
Change
|
|||||||||
Cash
and invested
assets
|
$ | 8,924.0 | $ | 8,230.8 | 8.4 | % | ||||||
Shareholders’
equity:
|
||||||||||||
Total
|
$ | 4,541.6 | $ | 4,369.2 | 3.9 | % | ||||||
Per
share
|
$ | 19.71 | $ | 18.91 | 4.2 | % | ||||||
Composition
of shareholders’ equity per share:
|
||||||||||||
Equity
before items
below
|
$ | 19.31 | $ | 18.72 | 3.2 | % | ||||||
Unrealized
investment gains or losses and other accumulated comprehensive
income
|
.40 | .19 | ||||||||||
Total
|
$ | 19.71 | $ | 18.91 | 4.2 | % |
Cash flow
from operating activities added significantly to the invested asset base, and
amounted to $862.5 million for the year ended 2007 versus $1,004.7 million for
2006. Operating cash flow in 2006 included approximately $198 million
stemming from the aforementioned acquisition of a book of contractors’ liability
insurance acquired late in the year.
The
investment portfolio reflects a current allocation of approximately 84 percent
to fixed-maturity securities and 10 percent 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 subsidiaries’ long-term obligations to insurance policyholders and other
beneficiaries. Consequently, it contains little or no insurance
risk-correlated exposures to real estate investments, mortgage loans,
mortgage-backed securities, collateralized debt obligations (“CDO’s”),
derivatives, junk bonds, or illiquid private equity investments. In a similar
vein, the Company does not invest in securities whose values are predicated on
non-regulated financial instruments exhibiting amorphous counter-party risk
attributes.
Substantially
all of the changes in the shareholders’ equity account for the periods reported
upon reflect earnings retained in excess of dividend payments. Pursuant to
standing authority, the Company reacquired a total of 1,566,100
shares of its common stock during 2007’s third quarter for $28.3 million or
$18.13 per share. A summary of all changes affecting book value per share
follows:
28
Years Ended December
31,
|
2007
|
2006
|
||||||
Beginning
book value per
share
|
$ | 18.91 | $ | 17.53 | ||||
Changes
in shareholders’ equity for the periods:
|
||||||||
Net operating
income
|
.98 | 1.96 | ||||||
Net realized investment gains
(losses)
|
.20 | .05 | ||||||
Net unrealized investment
gains
(losses)
|
.05 | .07 | ||||||
Cash
dividends
|
(.63 | ) | (.59 | ) | ||||
Treasury stock
acquired
|
.01 | - | ||||||
Stock issuance, foreign
exchange, and other
transactions
|
.19 | (.11 | ) | |||||
Net
change
|
.80 | 1.38 | ||||||
Ending
book value per
share
|
$ | 19.71 | $ | 18.91 |
TECHNICAL MANAGEMENT
ANALYSIS
|
CRITICAL
ACCOUNTING ESTIMATES
|
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, and financial condition.
Old Republic believes that its most
critical accounting estimates relate to: a) the determination of
other-than-temporary impairments 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 pertinent sections of this
Management Analysis and are summarized as follows:
(a)
Other-than-temporary impairments in the value of investments:
Individual securities are considered
for a possible write-down:
·
|
In
the event their market value has dropped by 20% or more below their par or
amortized cost and/or the security has been in an unrealized loss position
for twelve consecutive months;
|
·
|
In
the event of issuer default on significant obligations or emergence of
such adverse information as to bring into question the validity of
previously reported earnings or financial condition;
and
|
·
|
When
the probability of non-recovery of the original investment is established,
the foregoing events or occurrences
notwithstanding.
|
For the three years ended December 31,
2007, pretax charges due to other-than-temporary impairments in the value of
securities reduced pretax income within a range of 0% and 1.2% and averaged .4%
of such income.
(b)
Establishment of deferred acquisition costs (“DAC”)
The eligibility for deferral and the
recoverability of DAC is based on the current terms and estimated profitability
of the insurance contracts to which they relate. As of the three most recent
year ends, consolidated DAC balances ranged between 1.9% and 2.1% and averaged
2.0% of consolidated assets. The annual change in DAC balances for the
three-year period reduced underwriting, acquisition and other expenses within a
range of -1.2% and 1.6%, and averaged .3% of such expenses.
(c)
The recoverability of reinsured paid and/or outstanding losses
Assets consisting of gross paid losses
recoverable from assuming reinsurers, and balance sheet date reserves similarly
recoverable in future periods as gross losses are settled and paid, are
established at the same time as the gross losses are paid or recorded as
reserves. Accordingly, these assets are subject to the same estimation processes
and valuations as the related gross amounts that are discussed below. As of the
three most recent year ends, paid and outstanding reinsurance recoverable
balances ranged between 32.9% and 39.7% and averaged 36.2% of the related gross
reserves.
(d)
The reserves for losses and loss adjustment expenses
As discussed in pertinent sections of
this Management Analysis, the reserves for losses and related loss adjustment
expenses are based on a wide variety of factors and calculations. Among these
the Company believes the most critical are:
29
·
|
The
establishment of expected loss ratios for the three latest accident years,
particularly for so-called long-tail coverages as to which information
about covered losses emerges and becomes more accurately quantified over
long periods of time. Long-tail lines of business generally include
workers compensation, auto liability, general liability, errors and
omissions and directors and officers’ liability, and title insurance.
Gross loss reserves related to such long-tail coverages ranged between
79.1% and 85.1%, and averaged 82.7% of gross consolidated claim reserves
as of the three most recent year ends. Net of reinsurance recoverables,
such reserves ranged between 75.4% and 84.0% and averaged 80.5% as of the
same dates.
|
·
|
Loss
trend factors that are used to establish the above noted expected loss
ratios. These factors take into account such variables as judgments and
estimates relative to premium rate trends and adequacy, current and
expected interest rates, current and expected social and economic
inflation trends, and insurance industry statistical claim
trends.
|
·
|
Loss
development factors, expected claim rates and average claim costs all of
which are based on Company and/or industry statistics used to project
reported and unreported losses for each accounting
period.
|
For each of the three most recent
calendar years, prior accident years’ consolidated claim costs have developed
favorably and have had the consequent effect of reducing consolidated annual
loss costs between 2.9% and 6.9%, or by an average of approximately 4.3% per
annum. As a percentage of each of these years’ consolidated earned premiums and
fees the favorable developments have ranged between 1.3% and 3.4%, and have
averaged 2.2%.
In all the above regards the Company
anticipates that future periods’ financial statements will continue to reflect
changes in estimates. As in the past such changes will result from altered
circumstances, the continuum of newly emerging information and its effect on
past assumptions and judgments, the effects of securities markets valuations,
and changes in inflation rates and future economic conditions beyond the
Company’s control. As a result, Old Republic cannot predict, quantify, or
guaranty the likely impact that probable changes in estimates will have on its
future financial condition or results of operations.
CHANGES
IN ACCOUNTING POLICIES
|
On January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123-Revised (“FAS 123R”),
“Share-Based Payment” using the modified prospective transition method. The
impact of the adoption of FAS123R is discussed in Note 1(r) of the notes to
consolidated financial statements.
On
December 31, 2006, the Company adopted the recognition provisions of Statement
of Financial Accounting Standards No. 158 (“FAS 158”) “Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans”. Additionally, the
measurement date provisions of FAS 158 were adopted by the Company effective
December 31, 2007. The impact of the adoption of FAS 158 is discussed in Note
1(n) of the notes to the consolidated financial statements.
In July
2006, the Financial Accounting Standards Board (FASB) issued its Interpretation
No. 48 (“FIN 48”), “Accounting
for Uncertainty in Income Taxes”, which became effective for the Company
in the first quarter of 2007. FIN 48 provides recognition criteria and a related
measurement model for uncertain tax positions taken or expected to be taken in
income tax returns. FIN 48 requires that a position taken or expected to be
taken in a tax return be recognized in the financial statements when it is more
likely than not that the position would be sustained upon examination by tax
authorities. The Company’s unrecognized tax benefits, including interest and
penalty accruals, are not considered material to the consolidated financial
statements and did not change significantly upon the adoption of FIN 48. 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. As
indicated in Note 1(j) of the Notes to Consolidated Financial Statements, the
Company believes that the major uncertainties relating to its tax position
pertain to timing differences in the recognition of taxable income. Accordingly,
the annual effective tax rate, other than possible interest and penalties, would
be largely unaffected as an increase in currently due income taxes would likely
be offset by a corresponding deferred income tax adjustment.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157 (“FAS 157”) “Fair Value Measurements”, which establishes a framework for
measuring fair value. FAS 157 applies to existing accounting pronouncements that
require or permit fair value measurements, and becomes effective for fiscal
years beginning after November 15, 2007. Disclosure requirements associated with
the standard will be incorporated in the Company’s 2008 quarterly and annual
reports, and its adoption in the first quarter of 2008 is not expected to have a
material impact on the consolidated financial statements or on the conduct of
its business.
The above
accounting policy changes resulted primarily in additional financial statement
disclosures and are not expected to have any effect on management’s conduct of
the business.
FINANCIAL
POSITION
|
The Company’s financial position at
December 31, 2007 reflected increases in assets, liabilities and common
shareholders’ equity of 5.4%, 6.1% and 3.9%, respectively, when compared to the
immediately preceding year-end. Cash and invested assets represented 67.1% and
65.3% of consolidated assets as of December 31, 2007 and December
31, 2006, respectively. Consolidated operating cash flow was positive
at
30
$862.5
million in 2007 compared to $1,004.7 million in 2006 and $833.6 in 2005. As of
December 31, 2007, the invested asset base increased 8.8% to $8,761.2 million
principally as a result of positive operating cash flows.
Investments - During 2007 and
2006, the Company committed substantially all investable funds to short to
intermediate-term fixed maturity securities. At both December 31, 2007 and 2006,
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. Investable funds
have not been directed to so-called “junk bonds”, illiquid private equity
investments, real estate, mortgage loans, mortgage-backed securities,
collateralized debt obligations (“CDO’s”), or derivatives. In a similar vein,
the Company does not invest in securities whose values are predicated on
non-regulated financial instruments exhibiting amorphous counter-party risk
attributes. At December 31, 2007, 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
December 31, 2007. Such positions reflect a large variety of seasonal and
intermediate-term factors including current operating needs, expected operating
cash flows, quarter-end cash flow seasonality, and investment strategy
considerations. Accordingly, the future level of short-term investments will
vary and respond to the interplay of these factors and may, as a result,
increase or decrease from current levels.
The Company does not own or utilize
derivative financial instruments for the purpose of hedging, enhancing the
overall return of its investment portfolio, or reducing the cost of its debt
obligations. With regard to its equity portfolio, the Company does not own any
options nor does it engage in any type of option writing. Traditional investment
management tools and techniques are employed to address the yield and valuation
exposures of the invested assets base. The long-term fixed maturity investment
portfolio is managed so as to limit various risks inherent in the bond market.
Credit risk is addressed through asset diversification and the purchase of
investment grade securities. Reinvestment rate risk is reduced by concentrating
on non-callable issues, and by taking asset-liability matching considerations
into account. Purchases of mortgage and asset backed securities, which have
variable principal prepayment options, are generally avoided. Market value risk
is limited through the purchase of bonds of intermediate maturity. The
combination of these investment management practices is expected to produce a
more stable long-term fixed maturity investment portfolio that is not subject to
extreme interest rate sensitivity and principal deterioration.
The market value of the Company’s
long-term fixed maturity investment portfolio is sensitive, however, to
fluctuations in the level of interest rates, but not materially affected by
changes in anticipated cash flows caused by any prepayments. The impact of
interest rate movements on the long-term fixed maturity investment portfolio
generally affects net unrealized gains or losses. As a general rule, rising
interest rates enhance currently available yields but typically lead to a
reduction in the fair value of existing fixed maturity investments. By contrast,
a decline in such rates reduces currently available yields but usually serves to
increase the fair value of the existing fixed maturity investment portfolio. All
such changes in fair value are reflected, net of deferred income taxes, directly
in the shareholders’ equity account, and as a separate component of the
statement of comprehensive income. Given the Company’s inability to forecast or
control the movement of interest rates, Old Republic sets the maturity spectrum
of its fixed maturity securities portfolio within parameters of estimated
liability payouts, and focuses the overall portfolio on high quality
investments. By so doing, Old Republic believes it is reasonably assured of its
ability to hold securities to maturity as it may deem necessary in changing
environments, and of ultimately recovering their aggregate cost.
Possible future declines in fair values
for Old Republic’s bond and stock portfolios would affect negatively the common
shareholders’ equity account at any point in time, but would not necessarily
result in the recognition of realized investment losses. The Company reviews the
status and market value changes of each of its investments on at least a
quarterly basis during the year, and estimates of other-than-temporary
impairments in the portfolio’s value are evaluated and established at each
quarterly balance sheet date. In reviewing investments for other-than-temporary
impairment, the Company, in addition to a security’s market price history,
considers the totality of such factors as the issuer’s operating results,
financial condition and liquidity, its ability to access capital markets, credit
rating trends, most current audit opinion, industry and securities markets
conditions, and analyst expectations to reach its conclusions. Sudden market
value declines caused by such adverse developments as newly emerged or imminent
bankruptcy filings, issuer default on significant obligations, or reports of
financial accounting developments that bring into question the validity of
previously reported earnings or financial condition, are recognized as realized
losses as soon as credible publicly available information emerges to confirm
such developments. Accordingly, the recognition of losses from
other-than-temporary value impairments is subject to a great deal of judgment as
well as turns of events over which the Company can exercise little or no
control. In the event the Company’s estimate of other-than-temporary impairments
is insufficient at any point in time, future periods’ net income would be
affected adversely by the recognition of additional realized or impairment
losses, but its financial condition would not necessarily be affected adversely
inasmuch as such losses, or a portion of them, could have been recognized
previously as unrealized losses.
31
The following tables show certain
information relating to the Company’s fixed maturity and equity portfolios as of
the dates shown:
Credit
Quality Ratings of Fixed Maturity Securities
(1)
|
December
31,
|
2007
|
2006
|
|||
Aaa
|
32.9%
|
32.9%
|
||
Aa
|
17.0
|
19.0
|
||
A
|
27.9
|
26.4
|
||
Baa
|
20.2
|
20.1
|
||
Total investment
grade
|
98.0
|
98.4
|
||
All
other
(2)
|
2.0
|
1.6
|
||
Total
|
100.0%
|
100.0%
|
(1)
|
Credit
quality ratings used are those assigned primarily by Moody’s; other
ratings are assigned by Standard & Poor’s and converted to equivalent
Moody’s ratings classifications.
|
(2) “All
other” includes non-investment or non-rated small issues of tax-exempt
bonds.
Gross
Unrealized Losses Stratified by Industry Concentration for Non-Investment
Grade Fixed Maturity Securities
|
December
31, 2007
|
Amortized
Cost
|
Gross
Unrealized
Losses
|
|||
Fixed
Maturity Securities by Industry Concentration:
|
||||
Consumer
Durables
|
$
40.2
|
$
3.9
|
||
Service
|
34.7
|
3.6
|
||
Financial
|
13.9
|
1.3
|
||
Retail
|
19.1
|
.7
|
||
Other
(includes 5 industry
groups)
|
17.3
|
.5
|
||
Total
|
$
125.3
|
(3)
|
$
10.2
|
(3) Represents
1.7% of the total fixed maturity securities portfolio.
Gross
Unrealized Losses Stratified by Industry Concentration for Investment
Grade Fixed Maturity Securities
|
December
31, 2007
|
Amortized
Cost
|
Gross
Unrealized
Losses
|
|||
Fixed
Maturity Securities by Industry Concentration:
|
||||
Utilities
|
$
362.1
|
$ 5.3
|
||
Financial
|
144.2
|
3.3
|
||
Service
|
120.4
|
2.7
|
||
Banking
|
157.5
|
2.2
|
||
Other
(includes 16 industry
groups)
|
1,317.6
|
11.6
|
||
Total
|
$
2,102.0
|
(4)
|
$
25.3
|
(4) Represents
28.7% of the total fixed maturity securities portfolio.
Gross
Unrealized Losses Stratified by Industry Concentration for Equity
Securities
|
December
31, 2007
|
Cost
|
Gross
Unrealized
Losses
|
||||
Equity
Securities by Industry Concentration:
|
|||||
Insurance
|
$
237.4
|
$
66.8
|
|||
Banking
|
102.0
|
10.8
|
|||
Health
Care
|
22.4
|
2.7
|
|||
Natural
Gas
|
.4
|
-
|
|||
Total
|
$
362.3
|
(5)
|
$
80.4
|
(6)
|
(5) Represents
44.9% of the total equity securities portfolio.
(6)
|
Represents
10.0% of the cost of the total equity securities portfolio, while gross
unrealized gains represent 14.3% of the
portfolio.
|
32
Gross
Unrealized Losses Stratified by Maturity Ranges for All Fixed Maturity
Securities
|
December
31, 2007
|
Amortized
Cost
of
Fixed Maturity Securities
|
Gross
Unrealized Losses
|
All
|
Non-
Investment
Grade
Only
|
All
|
Non-
Investment
Grade
Only
|
|||||
Maturity
Ranges:
|
||||||||
Due
in one year or
less
|
$
438.5
|
$
33.9
|
$
2.3
|
$
1.0
|
||||
Due
after one year through five years
|
1,026.9
|
78.5
|
15.7
|
6.6
|
||||
Due
after five years through ten years
|
758.3
|
12.8
|
17.4
|
2.6
|
||||
Due
after ten
years
|
3.6
|
-
|
-
|
-
|
||||
Total
|
$
2,227.4
|
$ 125.3
|
$
35.6
|
$
10.2
|
Gross
Unrealized Losses Stratified by Duration and Amount of Unrealized
Losses
|
December
31, 2007
|
|||
Amount
of Gross Unrealized Losses
|
Less
than
20%
of
Cost
|
20%
to 50%
of
Cost
|
More
than
50%
of Cost
|
Total
Gross Unrealized
Loss
|
||||||
Number
of Months in Loss Position:
|
|||||||||
Fixed
Maturity Securities:
|
|||||||||
One
to six
months
|
$ 3.2
|
$
-
|
$
-
|
$
3.2
|
|||||
Seven
to twelve
months
|
1.9
|
-
|
-
|
1.9
|
|||||
More
than twelve
months
|
25.8
|
4.5
|
-
|
30.4
|
|||||
Total
|
$
31.0
|
$
4.5
|
$ -
|
$
35.6
|
|||||
Equity
Securities:
|
|||||||||
One
to six
months
|
$
12.2
|
$
68.1
|
$ -
|
$
80.4
|
|||||
Seven
to twelve
months
|
-
|
-
|
-
|
-
|
|||||
More
than twelve
months
|
-
|
-
|
-
|
-
|
|||||
Total
|
$
12.2
|
$
68.2
|
$ -
|
$
80.4
|
|||||
Number
of Issues in Loss Position:
|
|||||||||
Fixed
Maturity Securities:
|
|||||||||
One
to six
months
|
71
|
-
|
-
|
71
|
|||||
Seven
to twelve
months
|
43
|
-
|
-
|
43
|
|||||
More
than twelve
months
|
424
|
4
|
-
|
428
|
|||||
Total
|
538
|
4
|
-
|
542
|
(7)
|
||||
Equity
Securities:
|
|||||||||
One
to six
months
|
11
|
2
|
-
|
13
|
|||||
Seven
to twelve
months
|
-
|
-
|
-
|
-
|
|||||
More
than twelve
months
|
-
|
1
|
-
|
1
|
|||||
Total
|
11
|
3
|
-
|
14
|
(7)
|
(7) At
December 31, 2007 the number of issues in an unrealized loss position represent
27.6% as to fixed maturities, and 56.0% 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. The percentage reduction from original cost reflects
the decline as of a specific point in time (December 31, 2007 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.
33
Age
Distribution of Fixed Maturity
Securities
|
December
31,
|
2007
|
2006
|
|||
Maturity
Ranges:
|
||||
Due
in one year or
less
|
11.7%
|
9.6%
|
||
Due
after one year through five
years
|
46.8
|
44.4
|
||
Due
after five years through ten
years
|
41.1
|
45.6
|
||
Due
after ten years through fifteen
years
|
.4
|
.4
|
||
Due
after fifteen
years
|
-
|
-
|
||
Total
|
100.0%
|
100.0%
|
Average
Maturity in
Years
|
4.4
|
4.5
|
||||
Duration
(8)
|
3.8
|
3.9
|
(8)
|
Duration
is used as a measure of bond price sensitivity to interest rate changes. A
duration of 3.8 as of December 31, 2007 implies that a 100 basis point
parallel increase in interest rates from current levels would result in a
possible decline in the market value of the long-term fixed maturity
investment portfolio of approximately
3.8%.
|
Composition
of Unrealized Gains (Losses)
|
December
31,
|
||||||||
2007
|
2006
|
|||||||
Fixed
Maturity Securities:
|
||||||||
Amortized
cost
|
$ | 7,312.2 | $ | 6,873.8 | ||||
Estimated
fair
value
|
7,383.6 | 6,832.6 | ||||||
Gross
unrealized
gains
|
106.9 | 46.6 | ||||||
Gross
unrealized
losses
|
(35.6 | ) | (87.8 | ) | ||||
Net
unrealized gains
(losses)
|
$ | 71.3 | $ | (41.2 | ) | |||
Equity
Securities:
|
||||||||
Cost
|
$ | 807.3 | $ | 534.7 | ||||
Estimated
fair
value
|
842.1 | 669.1 | ||||||
Gross
unrealized
gains
|
115.1 | 136.1 | ||||||
Gross
unrealized
losses
|
(80.4 | ) | (1.8 | ) | ||||
Net
unrealized
gains
|
$ | 34.7 | $ | 134.3 |
Other Assets - Among other
major assets, substantially all of the Company’s receivables are not past due.
Reinsurance recoverable balances on paid or estimated unpaid losses are deemed
recoverable from solvent reinsurers or have otherwise been reduced by allowances
for estimated amounts unrecoverable. Deferred policy acquisition costs are
estimated by taking into account the variable costs of producing specific types
of insurance policies, and evaluating their recoverability on the basis of
recent trends in claims costs. The Company’s deferred policy acquisition cost
balances have not fluctuated substantially from period-to-period and do not
represent significant percentages of assets or shareholders’
equity.
Liquidity - The parent
holding company meets its liquidity and capital needs principally through
dividends paid by its subsidiaries. The insurance subsidiaries' ability to pay
cash dividends to the parent company is generally restricted by law or subject
to approval of the insurance regulatory authorities of the states in which they
are domiciled. The Company can receive up to $414.7 million in dividends from
its subsidiaries in 2008 without the prior approval of regulatory authorities.
The liquidity achievable through such permitted dividend payments is more than
adequate to cover the parent holding company’s currently expected cash outflows
represented mostly by interest on outstanding debt and quarterly cash dividend
payments to shareholders. In addition, Old Republic can access the commercial
paper market for up to $300.0 million to meet short-term liquidity needs of
which $60.0 million was outstanding at December 31, 2007.
Capitalization - Old
Republic’s total capitalization of $4,605.7 million at December 31, 2007
consisted of debt of $64.1 million and common shareholders' equity of $4,541.6
million. Changes in the common shareholders’ equity account for the three most
recent years reflect primarily the retention of earnings in excess of dividend
requirements. Old Republic has paid cash dividends to its shareholders without
interruption since 1942, and has increased the annual rate in each of the past
26 years. The annual dividend rate is typically reviewed and approved by the
Board of Directors during the first quarter of each year. In establishing each
year’s cash dividend rate the Company does not follow a strict formulaic
approach. Rather it favors a gradual rise in the annual dividend rate that is
largely reflective of long-term consolidated operating earnings trends.
Accordingly, each year’s dividend rate is set judgmentally in consideration of
such key factors as the dividend paying capacity of the Company’s insurance
subsidiaries, the trends in average annual statutory and GAAP earnings for the
six most recent calendar years, and management’s
long-term expectations for the Company’s consolidated
business. At its February 22, 2007 meeting, the
34
Board of Directors approved a new quarterly cash dividend rate of
16 cents per share effective in the second quarter of 2007, up from 15 cents per
share, subject to the usual quarterly authorizations.
At its May, 2006 meeting, the Company’s
Board of Directors authorized the reacquisition of up to $500.0 million of
common shares as market conditions warrant during the two year period from that
date. The Company reacquired 1,566,100 shares of its common stock during 2007
for $28.3 million or $18.13 per share. As of December 31, 2007, a total of
$471.6 million of this authorization remains unutilized.
Contractual Obligations - The
following table shows certain information relating to the Company’s contractual
obligations as of December 31, 2007:
Payments
Due in the Following Years
|
Total
|
2008
|
2009
and
2010
|
2011
and
2012
|
2013
and
after
|
|||||||||||||||
Contractual Obligations:
|
|||||||||||||||||||
Debt
|
$ | 64.1 | $ | 61.0 | $ | 1.7 | $ | 1.2 | $ | - | |||||||||
Interest
on
Debt
|
.6 | .2 | .2 | - | - | ||||||||||||||
Operating
Leases
|
166.9 | 39.0 | 52.3 | 26.8 | 48.5 | ||||||||||||||
Pension
Benefits Contributions
(1)
|
45.8 | 5.0 | 12.8 | 19.4 | 8.6 | ||||||||||||||
Claim
& Claim Expense Reserves (2)
|
6,231.1 | 1,554.4 | 1,374.9 | 606.4 | 2,695.2 | ||||||||||||||
Total
|
$ | 6,508.5 | $ | 1,659.8 | $ | 1,442.2 | $ | 653.9 | $ | 2,752.4 |
(1)
|
Represents
estimated minimum funding of contributions for the Old Republic
International Salaried Employees Restated Retirement Plan (the Old
Republic Plan), Bituminous Casualty Corporation Retirement Income Plan
(the Bitco Plan), and the Old Republic National Title Group Pension Plan
(the Title Plan). Funding of the plans is dependent on a number of factors
including actual performance versus actuarial assumptions made at the time
of the actuarial valuations, as well as, maintaining certain funding
levels relative to regulatory
requirements.
|
(2)
|
Amounts
are reported gross of reinsurance. As discussed herein with respect to the
nature of loss reserves and the estimating process utilized in their
establishment, the Company’s loss reserves do not have a contractual
maturity date. Estimated gross loss payments are based primarily on
historical claim payment patterns, are subject to change due to a wide
variety of factors, do not reflect anticipated recoveries under the terms
of reinsurance contracts, and cannot be predicted with certainty. Actual
future loss payments may differ materially from the current estimates
shown in the table above.
|
RESULTS
OF OPERATIONS
|
Revenues: Premiums
& Fees
|
Pursuant
to GAAP applicable to the insurance industry, revenues are associated with the
related benefits, claims, and expenses.
Substantially all general insurance
premiums are reflected in income on a pro-rata basis. Earned but unbilled
premiums are generally taken into income on the billing date, while adjustments
for retrospective premiums, commissions and similar charges or credits are
accrued on the basis of periodic evaluations of current underwriting experience
and contractual obligations.
The Company’s mortgage guaranty
premiums primarily stem from monthly installment policies. Accordingly,
substantially all such premiums are generally written and earned in the month
coverage is effective. With respect to annual or single premium policies, earned
premiums are largely recognized on a pro-rata basis over the terms of the
policies.
Title premium and fee revenues stemming
from the Company’s direct operations (which include branch offices of its title
insurers and wholly owned agency subsidiaries) represent approximately 32% of
2007 consolidated title business revenues. Such premiums are generally
recognized as income at the escrow closing date which approximates the policy
effective date. Fee income related to escrow and other closing services is
recognized when the related services have been performed and completed. The
remaining 68% of consolidated title premium and fee revenues is produced by
independent title agents and underwritten title companies. Rather than making
estimates that could be subject to significant variance from actual premium and
fee production, the Company recognizes revenues from those sources upon receipt.
Such receipts can reflect a three to four month lag relative to the effective
date of the underlying title policy, and are offset concurrently by production
expenses and claim reserve provisions.
35
The major sources of Old Republic’s
earned premiums and fees for the periods shown were as follows:
Earned
Premiums and Fees
|
General
|
Mortgage
|
Title
|
Other
|
Total
|
%
Change
from
prior
period
|
|||||||||||||||||||
Years
Ended December 31:
|
||||||||||||||||||||||||
2005
|
$ | 1,805.2 | $ | 429.5 | $ | 1,081.8 | $ | 70.3 | $ | 3,386.9 | 8.7 | % | ||||||||||||
2006
|
1,902.1 | 444.3 | 980.0 | 74.1 | 3,400.5 | .4 | ||||||||||||||||||
2007
|
$ | 2,155.1 | $ | 518.2 | $ | 850.7 | $ | 77.0 | $ | 3,601.2 | 5.9 | % |
Earned premiums in the General
Insurance Group grew by 13.3%, 5.4%, and 11.2% in 2007, 2006, and 2005,
respectively, as a result of additional business produced in a reasonably stable
underwriting environment and the year-end 2006 acquisition of a liability
insurance book of business. 2007 mortgage guaranty premium revenue trends
reflect greater business persistency and increased demand for traditional
insurance products. Although overall mortgage originations were lower for 2006,
mortgage guaranty premium production was affected favorably by improved business
persistency and higher bulk insurance production. Title Group premium and fee
revenues decreased by 13.2% and 9.4% in 2007 and 2006 respectively. The decline
was particularly accentuated in the segment’s direct operations, most of which
are concentrated in the Western United States, and all of which reflected a
downturn in home sales and resales.
The percentage allocation of net
premiums earned for major insurance coverages in the General Insurance Group was
as follows:
General
Insurance Earned Premiums by Type of
Coverage
|
Commercial
Automobile
(mostly
trucking)
|
Workers’
Compensation
|
Financial
Indemnity
|
Inland
Marine
and
Property
|
General
Liability
|
Other
|
|||||||||||||||||||
Years
Ended December 31:
|
||||||||||||||||||||||||
2005
|
39.1 | % | 21.9 | % | 10.3 | % | 11.0 | % | 5.4 | % | 12.3 | % | ||||||||||||
2006
|
39.6 | 21.7 | 11.0 | 10.7 | 5.1 | 11.9 | ||||||||||||||||||
2007
|
35.0 | % | 23.5 | % | 13.8 | % | 9.3 | % | 7.8 | % | 10.6 | % |
The following tables provide
information on production and related risk exposure trends for Old Republic’s
Mortgage Guaranty Group:
Mortgage
Guaranty Production by Type
|
New Insurance
Written:
|
Traditional
Primary
|
Bulk
|
Other
|
Total
|
||||||||||||
Years
Ended December 31:
|
||||||||||||||||
2005
|
$ | 20,554.5 | $ | 9,944.3 | $ | 498.2 | $ | 30,997.1 | ||||||||
2006
|
17,187.0 | 13,716.7 | 583.7 | 31,487.5 | ||||||||||||
2007
|
$ | 31,841.7 | $ | 10,800.3 | $ | 901.6 | $ | 43,543.7 |
New Risk Written by
Type:
|
Traditional
Primary
|
Bulk
|
Other
|
Total
|
||||||||||||
Years
Ended December 31:
|
||||||||||||||||
2005
|
$ | 5,112.4 | $ | 1,053.1 | $ | 11.7 | $ | 6,177.4 | ||||||||
2006
|
4,246.8 | 1,146.6 | 12.2 | 5,405.7 | ||||||||||||
2007
|
$ | 7,844.5 | $ | 724.5 | $ | 15.2 | $ | 8,584.4 |
Premium
and Persistency Trends
by Type:
|
Earned
Premiums
|
Persistency
|
||||||||||||||
Direct
|
Net
|
Traditional
Primary
|
Bulk
|
|||||||||||||
2005
|
$ | 508.0 | $ | 429.5 | 65.5 | % | 59.5 | % | ||||||||
2006
|
524.7 | 444.3 | 73.1 | 70.5 | ||||||||||||
2007
|
$ | 612.7 | $ | 518.2 | 77.6 | % | 73.7 | % |
While
there is no consensus in the marketplace as to the precise definition of
“sub-prime”, Old Republic generally views loans with credit (FICO) scores less
than 620, loans underwritten with reduced levels of documentation and loans with
loan to value ratios in excess of 95% as having a higher risk of default. Risk
in force concentrations by these attributes are disclosed in the following
tables for both traditional primary and bulk production. Premium rates for loans
exhibiting greater risk attributes are typically higher in anticipation of
potentially greater defaults and claim costs. Additionally, bulk insurance
policies, which represent 11.6% of total net risk in force, are frequently
subject to deductibles and aggregate stop losses which serve to limit the
overall risk on a pool of insured loans. As the decline in the housing markets
has accelerated and mortgage lending standards have tightened, rising defaults
and the attendant increases in reserves and paid claims on higher
36
risk loans
have become more significant drivers of increased claim costs.
Risk
in Force
|
Net Risk in
Force:
|
Traditional
Primary
|
Bulk
|
Other
|
Total
|
||||||||||||
As
of December 31:
|
||||||||||||||||
2005
|
$ | 14,711.2 | $ | 1,758.8 | $ | 586.1 | $ | 17,056.2 | ||||||||
2006
|
14,582.1 | 2,471.1 | 578.9 | 17,632.2 | ||||||||||||
2007
|
$ | 18,808.5 | $ | 2,539.9 | $ | 511.1 | $ | 21,859.5 |
Analysis
of Risk in Force
|
Risk in Force By Fair
Issac & Company (“FICO”) Scores:
|
FICO
less
than
620
|
FICO
620
to
680
|
FICO
Greater
than
680
|
Unscored/
Unavailable
|
||||||||||||
Traditional Primary:
|
||||||||||||||||
As
of December 31:
|
||||||||||||||||
2005
|
8.3 | % | 31.8 | % | 53.1 | % | 6.8 | % | ||||||||
2006
|
8.5 | 32.6 | 54.6 | 4.3 | ||||||||||||
2007
|
8.5 | % | 33.6 | % | 55.1 | % | 2.8 | % | ||||||||
Bulk(1):
|
||||||||||||||||
As
of December 31:
|
||||||||||||||||
2005
|
21.2 | % | 38.7 | % | 38.7 | % | 1.4 | % | ||||||||
2006
|
24.1 | 35.7 | 39.8 | .4 | ||||||||||||
2007
|
19.4 | % | 34.9 | % | 45.4 | % | .3 | % |
Risk in Force By Loan
to Value (“LTV”) Ratio:
|
LTV
less
than
85
|
LTV
85
to 90
|
LTV
90
to 95
|
LTV
Greater
than
95
|
||||||||||||
Traditional
Primary:
|
||||||||||||||||
As
of December 31:
|
||||||||||||||||
2005
|
5.4 | % | 37.7 | % | 39.1 | % | 17.8 | % | ||||||||
2006
|
5.0 | 37.4 | 36.0 | 21.6 | ||||||||||||
2007
|
4.7 | % | 34.4 | % | 32.0 | % | 28.9 | % | ||||||||
Bulk(1):
|
||||||||||||||||
As
of December 31:
|
||||||||||||||||
2005
|
57.3 | % | 27.4 | % | 11.6 | % | 3.7 | % | ||||||||
2006
|
63.4 | 23.1 | 9.0 | 4.5 | ||||||||||||
2007
|
62.0 | % | 20.9 | % | 9.3 | % | 7.8 | % |
Risk in Force Distribution
By Top Ten States:
Traditional
Primary
|
FL
|
TX
|
GA
|
IL
|
OH
|
CA
|
NJ
|
MI
|
NC
|
PA
|
|||||||||||||||||||||||||||||||
As
of December 31:
|
||||||||||||||||||||||||||||||||||||||||
2005
|
9.0 | % | 7.1 | % | 6.3 | % | 5.4 | % | 3.7 | % | 3.6 | % | 3.1 | % | 3.1 | % | 4.7 | % | 3.8 | % | ||||||||||||||||||||
2006
|
9.0 | 7.5 | 5.8 | 5.4 | 3.7 | 3.1 | 3.1 | 3.1 | 4.8 | 4.0 | ||||||||||||||||||||||||||||||
2007
|
8.9 | % | 7.7 | % | 5.3 | % | 5.2 | % | 3.4 | % | 4.5 | % | 3.1 | % | 2.9 | % | 4.5 | % | 3.8 | % |
Bulk
(1)
|
FL
|
TX
|
GA
|
IL
|
OH
|
CA
|
NJ
|
AZ
|
CO
|
NY
|
|||||||||||||||||||||||||||||||
As
of December 31:
|
||||||||||||||||||||||||||||||||||||||||
2005
|
8.3 | % | 4.5 | % | 3.3 | % | 4.9 | % | 3.6 | % | 19.0 | % | 3.8 | % | 4.0 | % | 2.7 | % | 6.3 | % | ||||||||||||||||||||
2006
|
9.4 | 4.8 | 3.6 | 4.5 | 3.4 | 17.7 | 3.2 | 4.4 | 2.8 | 4.6 | ||||||||||||||||||||||||||||||
2007
|
9.3 | % | 4.8 | % | 4.2 | % | 4.1 | % | 3.1 | % | 17.5 | % | 3.4 | % | 4.2 | % | 3.0 | % | 5.5 | % |
37
Risk in Force By Level of
Documentation:
|
Full
Documentation
|
Reduced
Documentation
|
||||||
Traditional Primary:
|
||||||||
As
of December 31:
|
||||||||
2005
|
90.6 | % | 9.4 | % | ||||
2006
|
89.4 | 10.6 | ||||||
2007
|
88.0 | % | 12.0 | % | ||||
Bulk
(1):
|
||||||||
As
of December 31:
|
||||||||
2005
|
51.9 | % | 48.1 | % | ||||
2006
|
51.9 | 48.1 | ||||||
2007
|
49.6 | % | 50.4 | % |
Risk in Force By Loan
Type:
|
Fixed
Rate
|
Adjustable
Rate
|
||||||
Traditional Primary:
|
||||||||
As
of December 31:
|
||||||||
2005
|
90.9 | % | 9.1 | % | ||||
2006
|
92.3 | 7.7 | ||||||
2007
|
94.4 | % | 5.6 | % | ||||
Bulk (1):
|
||||||||
As
of December 31:
|
||||||||
2005
|
64.6 | % | 35.4 | % | ||||
2006
|
65.7 | 34.3 | ||||||
2007
|
70.9 | % | 29.1 | % |
(1)
|
Bulk
pool risk in-force, which represented 43.0% of total bulk risk in-force at
December 31, 2007, has been allocated pro-rata based on insurance
in-force.
|
The
following table shows the percentage distribution of Title Group premium and fee
revenues by production sources:
Title
Production
|
Direct
Operations
|
Independent
Title
Agents
& Other
|
|||||||
Years
Ended December 31:
|
||||||||
2005
|
37.1 | % | 62.9 | % | ||||
2006
|
32.3 | 67.7 | ||||||
2007
|
32.1 | % | 67.9 | % |
Revenues:
Net Investment Income
|
Net investment income is affected by
trends in interest and dividend yields for the types of securities in which the
Company’s funds are invested during each reporting period. The following tables
reflect the segmented and consolidated invested asset bases as of the indicated
dates, and the investment income earned and resulting yields on such assets.
Since the Company can exercise little control over market values, yields are
evaluated on the basis of investment income earned in relation to the amortized
cost of the underlying invested assets, though yields based on the market values
of such assets are also shown in the statistics below.
Market
|
Invested
|
||||
Invested
Assets at Cost
|
Value
|
Assets
at
|
General
|
Mortgage
|
Title
|
Corporate
and Other
|
Total
|
Adjust-
ment
|
Market
Value
|
||||||||||||||||||||||
As
of December 31:
|
||||||||||||||||||||||||||||
2006
|
$ | 5,524.8 | $ | 1,571.6 | $ | 611.1 | $ | 246.6 | $ | 7,954.3 | $ | 101.8 | $ | 8,056.1 | ||||||||||||||
2007
|
$ | 5,984.9 | $ | 1,795.8 | $ | 606.0 | $ | 252.9 | $ | 8,639.7 | $ | 121.4 | $ | 8,761.2 |
38
Net
Investment Income
|
Yield
at
|
General
|
Mortgage
|
Title
|
Corporate
and Other
|
Total
|
Cost
|
Market
|
||||||||||||||||||||||
Years
Ended
|
||||||||||||||||||||||||||||
December
31:
|
||||||||||||||||||||||||||||
2005
|
$ | 197.0 | $ | 70.1 | $ | 26.0 | $ | 16.9 | $ | 310.1 | 4.51 | % | 4.40 | % | ||||||||||||||
2006
|
221.5 | 74.3 | 26.9 | 18.7 | 341.6 | 4.52 | 4.47 | |||||||||||||||||||||
2007
|
$ | 260.8 | $ | 79.0 | $ | 27.3 | $ | 12.7 | $ | 379.9 | 4.58 | % | 4.52 | % |
Consolidated net investment income grew
by 11.2%, 10.2% and 6.6% in 2007, 2006 and 2005, respectively. This revenue
source was affected by a rising invested asset base caused by positive
consolidated operating cash flows, by a concentration of investable assets in
interest-bearing securities, and by changes in market rates of return. Yield
trends reflect the relatively short maturity of Old Republic’s fixed maturity
securities portfolio as well as continuation of a relatively lower yield
environment during the past several years.
Revenues:
Net Realized Gains
|
The Company's investment policies have
not been designed to maximize or emphasize the realization of investment gains.
Rather, these policies aim for a stable source of income from interest and
dividends, protection of capital, and the providing of sufficient liquidity to
meet insurance underwriting and other obligations as they become payable in the
future. Dispositions of fixed maturity securities arise mostly from scheduled
maturities and early calls; in 2007, 2006 and 2005, 85.1%, 77.2% and
67.9%, respectively, of all such dispositions resulted from these occurrences.
Sales of equity securities at a realized gain or loss reflect such factors as
ongoing assessments of issuers’ business prospects, rotation among industry
sectors, and tax planning considerations. Additionally, the amount of net
realized gains and losses registered in any one accounting period are affected
by the aforementioned assessments of securities’ values for other-than-temporary
impairment. As a result of the interaction of all these factors and
considerations, net realized investment gains or losses can vary significantly
from period-to-period, and in the Company’s view are not indicative of any
particular trend or result in the basics of its insurance business.
The following table reflects the
composition of net realized gains or losses for the periods shown. As previously
noted, a significant portion of Old Republic’s indexed stock portfolio was sold
at a gain, with proceeds redirected to a more concentrated, select list of
common stocks expected to provide greater long-term total returns. Relatively
greater realized gains in equity securities in 2005 resulted largely from sales
of substantial portions of actively managed equity holdings and reinvestment of
proceeds in index-style investment portfolios.
Realized
Gains on Disposition of:
|
Impairment
Losses on:
|
Fixed
maturity
securities
|
Equity
securities
and
miscell-
aneous
investments
|
Total
|
Fixed
maturity
securities
|
Equity
securities
and
miscell-
aneous
investments
|
Total
|
Net
realized
gains
|
||||||||||||||||||||||
Years
Ended
December
31:
|
||||||||||||||||||||||||||||
2005
|
$ | 4.5 | $ | 69.6 | $ | 74.1 | $ | (2.7 | ) | $ | (6.5 | ) | $ | (9.2 | ) | $ | 64.9 | |||||||||||
2006
|
2.0 | 16.9 | 19.0 | - | - | - | 19.0 | |||||||||||||||||||||
2007
|
$ | 2.2 | $ | 68.1 | $ | 70.3 | $ | - | $ | - | $ | - | $ | 70.3 |
Expenses:
Benefits and Claims
|
In order to achieve a necessary
matching of premium and fee revenues and expenses, the Company records the
benefits, claims and related settlement costs that have been incurred during
each accounting period. Total claim costs are affected by the amount of paid
claims and the adequacy of reserve estimates established for current and prior
years’ claim occurrences at each balance sheet date.
39
The following table shows a
breakdown of gross and net of reinsurance claim reserve estimates for major
types of insurance coverages as of December 31, 2007 and 2006:
December
31,
|
||||||||||||||||
2007
|
2006
|
|||||||||||||||
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||
Claim
and Loss Adjustment Expense Reserves:
|
||||||||||||||||
Commercial
automobile (mostly
trucking)
|
$ | 1,041.6 | $ | 845.6 | $ | 977.7 | $ | 810.9 | ||||||||
Workers'
compensation
|
2,195.5 | 1,265.8 | 2,093.2 | 1,175.7 | ||||||||||||
General
liability
|
1,173.2 | 587.1 | 1,123.8 | 537.3 | ||||||||||||
Other
coverages
|
691.2 | 476.9 | 610.0 | 400.7 | ||||||||||||
Unallocated
loss adjustment expense reserves
|
154.8 | 104.0 | 147.0 | 97.8 | ||||||||||||
Total general insurance
reserves
|
5,256.5 | 3,279.7 | 4,951.8 | 3,022.6 | ||||||||||||
Mortgage
guaranty
|
645.2 | 642.9 | 248.6 | 247.9 | ||||||||||||
Title
|
273.5 | 273.5 | 278.4 | 278.4 | ||||||||||||
Life
and
health
|
30.3 | 24.7 | 28.4 | 21.6 | ||||||||||||
Unallocated
loss adjustment expense reserves –
other
coverages
|
25.4 | 25.4 | 27.2 | 27.2 | ||||||||||||
Total claim and loss adjustment
expense reserves
|
$ | 6,231.1 | $ | 4,246.3 | $ | 5,534.7 | $ | 3,598.0 | ||||||||
Asbestosis
and environmental claim reserves included
in
the above general insurance reserves:
|
||||||||||||||||
Amount
|
$ | 190.5 | $ | 158.1 | $ | 194.9 | $ | 157.8 | ||||||||
%
of total general insurance
reserves
|
3.6 | % | 4.8 | % | 3.9 | % | 5.2 | % |
The Company’s reserve for loss and loss
adjustment expenses represents the accumulation of estimates of ultimate losses,
including incurred but not reported losses and loss adjustment expenses. The
establishment of claim reserves by the Company’s insurance subsidiaries is a
reasonably complex and dynamic process influenced by a large variety of factors
as further discussed below. Consequently, reserves established are a reflection
of the opinions of a large number of persons, of the application and
interpretation of historical precedent and trends, of expectations as to future
developments, and of management’s judgment in interpreting all such factors. At
any point in time the Company is exposed to possibly higher or lower than
anticipated claim costs and the resulting changes in estimates are recorded in
operations of the periods during which they are made. Increases to prior reserve
estimates are often referred to as unfavorable development whereas any changes
that decrease previous estimates of the Company’s ultimate liability are
referred to as favorable development.
Overview
of Loss Reserving Process
Most of Old Republic’s consolidated
claim and related expense reserves stem from its general
insurance business. At December 31, 2007, such reserves accounted for
84.4% and 77.2% of consolidated gross and net of reinsurance reserves,
respectively, while similar reserves at December 31, 2006 represented 89.5% and
84.0% of the respective consolidated amounts.
The Company’s reserve setting process
reflects the nature of its insurance business and the decentralized basis upon
which it is conducted. Old Republic’s general insurance operations
encompass a large variety of lines or classes of commercial insurance; it has
negligible exposure to personal lines such as homeowners or private passenger
automobile insurance that exhibit wide diversification of risks, significant
frequency of claim occurrences, and high degrees of statistical credibility.
Additionally, the Company’s insurance subsidiaries do not provide significant
amounts of insurance protection for premises; most of its property insurance
exposures relate to cargo, incidental property, and insureds’ inland marine
assets. Consequently, the wide variety of policies issued and commercial
insurance customers served require that loss reserves be analyzed and
established in the context of the unique or different attributes of each block
or class of business produced by the Company. For example, accident liability
claims emanating from insured trucking companies or from general aviation
customers become known relatively quickly, whereas claims of a general liability
nature arising from the building activities of a construction company may emerge
over extended periods of time. Similarly, claims filed pursuant to errors and
omissions or directors and officers’ (“E&O/D&O”) liability coverages are
usually not prone to immediate evaluation or quantification inasmuch as many
such claims may be litigated over several years and their ultimate costs may be
affected by the vagaries of judged or jury verdicts. Approximately 86% of the
general insurance
group’s claim reserves stem from liability insurance coverages for commercial
customers which typically require more extended periods of investigation and at
times protracted litigation before they are finally settled. As a consequence of
these and other factors, Old Republic does not utilize a single, overarching
loss reserving approach.
The Company prepares periodic analyses
of its loss reserve estimates for its significant insurance coverages. It
establishes point estimates for most losses on an insurance coverage
line-by-line basis for individual subsidiaries, sub-classes, individual
accounts, blocks of business or other unique concentrations of insurance risks
such as directors and officers’ liability, that have similar attributes.
Actuarially or otherwise derived ranges of reserve levels are not utilized as
such in setting these reserves. Instead the reported reserves encompass the
Company’s best point estimates at each reporting date and the overall reserve
level at any point in time therefore represents the compilation of a very
large number of reported reserve estimates and the
results of a variety of formula calculations largely driven by statistical
analysis of
40
historical
data. Reserve releases or additions are implicitly covered by the point
estimates incorporated in total reserves at each balance sheet date. The Company
does not project future variability or make an explicit provision for
uncertainty when determining its best estimate of loss reserves, although, as
discussed below, over the most recent ten-year period management’s estimates
have developed slightly favorably on an overall basis.
Aggregate loss reserves consist of
liability estimates for claims that have been reported (“case”) to the Company’s
insurance subsidiaries and reserves for claims that have been incurred but not
yet reported (“IBNR”) or whose ultimate costs may not become fully apparent
until a future time. Additionally, the Company establishes unallocated loss
adjustment expense reserves for loss settlement costs that are not directly
related to individual claims. Such reserves are based on prior years’ cost
experience and trends, and are intended to cover the unallocated costs of claim
departments’ administration of case and IBNR claims over time. Long-term,
disability-type workers’ compensation reserves are discounted to present value
based on interest rates that range from 3.5% to 4.0%. The amount of discount
reflected in the year end net reserves totaled $148.5 million, $151.0 million
and $138.3 million as of December 31, 2007, 2006, and 2005,
respectively.
A large variety of statistical analyses
and formula calculations are utilized to provide for IBNR claim costs as well as
additional costs that can arise from such factors as monetary and social
inflation, changes in claims administration processes, changes in reinsurance
ceded and recoverability levels, and expected trends in claim costs and related
ratios. Typically, such formulas take into account so-called link ratios that
represent prior years’ patterns of incurred or paid loss trends between
succeeding years, or past experience relative to progressions of the number of
claims reported over time and ultimate average costs per claim.
Overall, reserves pertaining to several
hundred large individual commercial insurance accounts that exhibit sufficient
statistical credibility, and at times may be subject to retrospective premium
rating plans or the utilization of varying levels or types of self-insured
retentions through captive insurers and similar risk management mechanisms are
established on an account by account basis using case reserves and applicable
formula-driven methods. Large account reserves are usually set and analyzed for
groups of coverages such as workers compensation, commercial auto and general
liability that are typically underwritten jointly for many customers. For
certain so-called long-tail categories of insurance such as retained or assumed
excess liability or excess workers’ compensation, officers and directors’
liability, and commercial umbrella liability relative to which claim development
patterns are particularly long, more volatile, and immature in their early
stages of development, the Company judgmentally establishes the most current
accident years’ loss reserves on the basis of expected loss ratios. Such
expected loss ratios typically reflect currently estimated loss ratios from
prior accident years, adjusted for the effect of actual and anticipated rate
changes, actual and anticipated changes in coverage, reinsurance, mix of
business, and other anticipated changes in external factors such as trends in
loss costs or the legal and claims environment. Expected loss ratios are
generally used for the two to three most recent accident years depending on the
individual class or category of business. As actual claims data emerges in
succeeding interim and annual periods, the original accident year loss ratio
assumptions are validated or otherwise adjusted sequentially through the
application of statistical projection techniques such as the
Bornhuetter/Ferguson method which utilizes data from the more mature experience
of prior years to arrive at a likely indication of more recent years’ loss
trends and costs.
Mortgage
guaranty insurance loss reserves are based
on statistical calculations that take into account the number of reported
insured mortgage loan defaults as of each balance sheet date, as well as
experience-based estimates of IBNR. Further, the loss reserve estimating process
also takes into account a large number of variables including trends in claim
severity, potential salvage recoveries, expected cure rates for reported loan
delinquencies at various stages of default, and judgments relative to future
employment levels, housing market activity, and mortgage loan interest costs,
demand, and availability.
Title
insurance and related escrow
services loss and loss adjustment expense reserves are established as point
estimates to cover the projected settlement costs of known as well as IBNR
losses related to premium and escrow service revenues of each reporting period.
Reserves for known claims are based on an assessment of the facts available to
the Company during the settlement process. The point estimates covering all
claim reserves take into account IBNR claims based on past experience and
evaluations of such variables as changing trends in the types of policies
issued, changes in real estate markets and interest rate environments, and
changing levels of loan refinancing, all of which can have a bearing on the
emergence, number, and ultimate costs of claims.
Incurred
Loss Experience
Management is of the opinion that the
Company’s overall reserving practices have been consistently applied over many
years. For at least the past ten years, previously established aggregate
reserves have produced reasonable estimates of the cumulative ultimate net costs
of claims incurred. However, there are no guarantees that such outcomes will
continue, and accordingly, no representation is made that ultimate net claim and
related costs will not develop in future years to be greater or lower than
currently established reserve estimates. In management’s opinion, however, such
potential development is not likely to have a material effect on the Company’s
consolidated financial position, although it could affect materially its
consolidated results of operations for any one annual or interim reporting
period. See further discussion in this Annual Report on Form 10-K under Item 1A
- Risk Factors.
41
The following table shows an analysis
of changes in aggregate reserves for the Company’s losses, claims, and
settlement expenses for each of the years shown:
Years Ended December
31:
|
2007
|
2006
|
2005
|
|||||||||
Gross
reserves at beginning of
year
|
$ | 5,534.7 | $ | 4,939.8 | $ | 4,403.5 | ||||||
Less:
reinsurance losses recoverable
|
1,936.6 | 1,902.1 | 1,639.6 | |||||||||
Net
reserves at beginning of
year
|
3,598.0 | 3,037.6 | 2,763.8 | |||||||||
Incurred
claims and claim adjustment expenses:
|
||||||||||||
Provisions
for insured events of the current year
|
2,224.2 | 1,646.4 | 1,504.5 | |||||||||
Change
in provision for insured events of prior years
|
(66.1 | ) | (114.0 | ) | (43.9 | ) | ||||||
Total
incurred claims and claim adjustment expenses
|
2,158.1 | 1,532.5 | 1,460.7 | |||||||||
Payments:
|
||||||||||||
Claims
and claim adjustment expenses attributable to
|
||||||||||||
insured
events of the current
year
|
579.7 | 432.4 | 484.6 | |||||||||
Claims
and claim adjustment expenses attributable to
|
||||||||||||
insured
events of prior
years
|
930.0 | 539.6 | 702.1 | |||||||||
Total
payments
|
1,509.8 | 972.1 | 1,186.8 | |||||||||
Amount
of reserves for unpaid claims and claim adjustment
|
||||||||||||
expenses
at the end of each year, net of reinsurance
|
||||||||||||
losses
recoverable
|
4,246.3 | 3,598.0 | 3,037.6 | |||||||||
Reinsurance
losses
recoverable
|
1,984.7 | 1,936.6 | 1,902.1 | |||||||||
Gross
reserves at end of
year
|
$ | 6,231.1 | $ | 5,534.7 | $ | 4,939.8 |
The percentage of net claims,
benefits and related settlement expenses incurred as a percentage of premiums
and related fee revenues of the Company’s three major operating segments and for
consolidated operations were as follows:
Years Ended December
31:
|
2007
|
2006
|
2005
|
|||||||||
General
|
67.8 | % | 65.9 | % | 66.9 | % | ||||||
Mortgage
|
118.8 | 42.8 | 37.2 | |||||||||
Title
|
6.6 | 5.9 | 6.0 | |||||||||
Consolidated
benefits and claims
ratio
|
60.2 | % | 45.3 | % | 43.3 | % |
Reconciliation
of consolidated ratio:
|
||||||||||||
Provision
for insured events of the current
year
|
62.0 | % | 48.7 | % | 44.6 | % | ||||||
Change
in provision for insured events of prior years:
|
||||||||||||
Due
to asbestos and
environmental
|
.1 | 1.1 | 1.5 | |||||||||
Due
to all other
coverages
|
(1.9 | ) | (4.5 | ) | (2.8 | ) | ||||||
Net
(favorable) unfavorable
development
|
(1.8 | ) | (3.4 | ) | (1.3 | ) | ||||||
Consolidated
benefits and claims
ratio
|
60.2 | % | 45.3 | % | 43.3 | % |
The consolidated benefits and claims
ratio reflects the changing effects of period-to-period contributions of each
segment to consolidated results, and this ratio’s variances within each segment.
For the three most recent calendar years, the above table indicates that the
one-year development of consolidated reserves at the beginning of each year
produced average favorable developments that reduced the consolidated loss ratio
by 2.2%.
The percentage of net claims,
benefits and related settlement expenses measured against premiums earned by
major types of general
insurance coverage were as follows:
General
Insurance Claims Ratios by Type of Coverage
|
|||||||||||||||||||||||||
Commercial
Automobile
(mostly
trucking)
|
Workers’
Compensation
|
Financial
Indemnity
|
Inland
Marine
and
Property
|
General
Liability
|
Other
|
||||||||||||||||||||
Years
Ended December 31:
|
|||||||||||||||||||||||||
2005
|
66.9 | % | 78.9 | % | 48.9 | % | 52.1 | % | 97.4 | % | 59.5 | % | |||||||||||||
2006
|
75.4 | 74.5 | 40.6 | 55.0 | 57.5 | 55.6 | |||||||||||||||||||
2007
|
74.0 | % | 70.9 | % | 69.6 | % | 54.9 | % | 59.9 | % | 55.9 | % |
The general insurance portion of
the claims ratio reflects reasonably consistent trends for all reporting
periods. To a large extent this major cost factor reflects pricing and risk
selection improvements that have been applied since 2001, together with elements
of reduced loss severity and frequency. The higher claim ratio for financial
indemnity coverages in 2007 was driven principally by greater claim frequencies
experienced in Old Republic’s consumer credit indemnity coverage. During the
three most recent calendar years, the general insurance group
experienced favorable development of prior year loss reserves primarily due to
the commercial automobile and the E&O/D&O (financial indemnity) lines of
business; these were partially offset by unfavorable development in excess
workers compensation coverages and for ongoing development of asbestos
and environmental (“A&E”) exposures (general liability).
Unfavorable developments attributable to A&E
42
claim
reserves are due to periodic re-evaluations of such reserves as well as
reclassifications of other coverages’ reserves, typically workers compensation,
deemed assignable to A&E types of losses.
Except for a small portion that
emanates from ongoing primary insurance operations, a large majority of the
A&E claim reserves posted by Old Republic stem mainly from its
participations in assumed reinsurance treaties and insurance pools which were
discontinued fifteen or more years ago and have since been in run-off status.
With respect to the primary portion of gross A&E reserves, Old Republic
administers the related claims through its claims personnel as well as outside
attorneys, and posted reserves reflect its best estimates of ultimate claim
costs. Claims administration for the assumed portion of the Company’s A&E
exposures is handled by the claims departments of unrelated primary or ceding
reinsurance companies. While the Company performs periodic reviews of certain
claim files managed by third parties, the overall A&E reserves it
establishes respond to the paid claim and case reserve activity reported to the
Company as well as available industry statistical data such as so-called
survival ratios. Such ratios represent the number of years’ average paid losses
for the three or five most recent calendar years that are encompassed by an
insurer’s A&E reserve level at any point in time. According to this
simplistic appraisal of an insurer’s A&E loss reserve level, Old Republic’s
average five year survival ratios stood at 7.7 years (gross) and 10.7 years (net
of reinsurance) as of December 31, 2007 and 7.6 years (gross) and 10.9 years
(net of reinsurance) as of December 31, 2006. Fluctuations in this ratio between
years can be caused by the inconsistent pay out patterns associated with these
types of claims. Incurred net losses for A&E claims have averaged 2.8% of
general insurance group
net incurred losses for the five years ended December 31, 2007.
A summary of reserve activity,
including estimates for IBNR, relating to A&E claims at December 31, 2007
and 2006 is as follows:
December
31,
|
2007
|
2006
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||
Asbestos:
|
||||||||||||||||
Reserves
at beginning of
year
|
$ | 151.8 | $ | 117.3 | $ | 141.1 | $ | 108.9 | ||||||||
Loss
and loss expenses
incurred
|
10.4 | 9.8 | 29.6 | 18.1 | ||||||||||||
Claims
and claim adjustment expenses paid
|
(12.8 | ) | (5.3 | ) | (18.9 | ) | (9.6 | ) | ||||||||
Reserves
at end of
year
|
149.4 | 121.9 | 151.8 | 117.3 | ||||||||||||
Environmental:
|
||||||||||||||||
Reserves
at beginning of
year
|
43.1 | 40.4 | 29.6 | 23.2 | ||||||||||||
Loss
and loss expenses
incurred
|
(3.1 | ) | (7.1 | ) | 20.1 | 19.9 | ||||||||||
Claims
and claim adjustment expenses paid
|
1.1 | 2.8 | (6.7 | ) | (2.7 | ) | ||||||||||
Reserves
at end of
year
|
41.1 | 36.1 | 43.1 | 40.4 | ||||||||||||
Total
asbestos and environmental reserves
|
$ | 190.5 | $ | 158.1 | $ | 194.9 | $ | 157.8 |
Average mortgage guaranty paid
claims, and certain delinquency ratio data as of the end of the periods shown
are listed below:
Average
Paid Claim
Amount
(1)
|
Delinquency
Ratio
|
Traditional
Primary
|
Bulk
|
Traditional
Primary
|
Bulk
|
|||||||||||||
Years
Ended December 31:
|
||||||||||||||||
2005
|
$ | 24,255 | $ | 20,639 | 4.67 | % | 3.67 | % | ||||||||
2006
|
25,989 | 21,846 | 4.41 | 3.29 | ||||||||||||
2007
|
$ | 32,214 | $ | 34,951 | 5.47 | % | 6.85 | % |
(1)
Amounts are in whole dollars.
43
Traditional
Primary Delinquency Ratios for Top Ten States
(2):
|
FL
|
TX
|
GA
|
IL
|
OH
|
CA
|
NJ
|
MI
|
NC
|
PA
|
|||||||||||||||||||||||||||||||
As
of December 31:
|
||||||||||||||||||||||||||||||||||||||||
2005
|
3.1 | % | 5.7 | % | 5.9 | % | 4.2 | % | 8.3 | % | 1.8 | % | 4.1 | % | 7.3 | % | 4.9 | % | 4.7 | % | ||||||||||||||||||||
2006
|
2.7 | 4.5 | 6.1 | 4.5 | 7.8 | 2.9 | 4.1 | 8.2 | 4.6 | 4.8 | ||||||||||||||||||||||||||||||
2007
|
7.7 | % | 4.5 | % | 7.2 | % | 5.4 | % | 8.1 | % | 6.7 | % | 5.4 | % | 9.8 | % | 4.8 | % | 5.2 | % |
Bulk
Delinquency Ratios for Top Ten States
(2):
|
FL
|
TX
|
GA
|
IL
|
OH
|
CA
|
NJ
|
AZ
|
CO
|
NY
|
|||||||||||||||||||||||||||||||
As
of December 31:
|
||||||||||||||||||||||||||||||||||||||||
2005
|
1.9 | % | 5.5 | % | 5.8 | % | 3.0 | % | 8.4 | % | .9 | % | 3.7 | % | .9 | % | 3.0 | % | 4.3 | % | ||||||||||||||||||||
2006
|
1.6 | 4.0 | 4.4 | 4.2 | 9.3 | 1.6 | 3.5 | 1.0 | 3.3 | 4.4 | ||||||||||||||||||||||||||||||
2007
|
7.8 | % | 5.4 | % | 7.3 | % | 8.6 | % | 10.6 | % | 7.0 | % | 6.6 | % | 5.1 | % | 5.8 | % | 6.6 | % |
Total
Delinquency Ratios for Top Ten States (includes “other” business)
(2):
|
FL
|
TX
|
GA
|
IL
|
OH
|
CA
|
NJ
|
AZ
|
NC
|
PA
|
|||||||||||||||||||||||||||||||
As
of December 31:
|
||||||||||||||||||||||||||||||||||||||||
2005
|
2.4 | % | 5.3 | % | 5.3 | % | 2.8 | % | 7.5 | % | .9 | % | 3.7 | % | 1.6 | % | 3.8 | % | 4.3 | % | ||||||||||||||||||||
2006
|
2.0 | 4.1 | 5.2 | 3.1 | 7.3 | 1.4 | 3.6 | 1.5 | 3.3 | 4.3 | ||||||||||||||||||||||||||||||
2007
|
6.9 | % | 4.5 | % | 6.7 | % | 5.0 | % | 8.0 | % | 5.5 | % | 5.5 | % | 4.4 | % | 4.1 | % | 5.1 | % |
(2)
|
As
determined by risk in force as of December 31, 2007, these 10 states
represent approximately 49%, 59%, and 50%, of traditional primary, bulk,
and total risk in force,
respectively.
|
The title insurance loss ratios
remain in the low single digits due to favorable trends in claims frequency and
severity for business underwritten since 1992 in particular. Though still
reasonably contained, the moderate increase in claim costs in 2007 is reflective
of the continuing downturn in the housing and related mortgage lending
industries.
Volatility
of Reserve Estimates and Sensitivity
There is a great deal of uncertainty in
the estimates of loss and loss adjustment expense reserves, and unanticipated
events can have both a favorable or unfavorable impact on such estimates. The
Company believes that the factors most responsible, in varying and continually
changing degrees, for such favorable or unfavorable development are as
follows:
General insurance net claim
reserves can be affected by lower than expected frequencies of claims incurred
but not reported, the effect of reserve discounts applicable to workers’
compensation claims, higher than expected severity of litigated claims in
particular, governmental or judicially imposed retroactive conditions in the
settlement of claims such as noted elsewhere in this document in regard to black
lung disease claims, greater than anticipated inflation rates applicable to
repairs and the medical benefits portion of claims, and higher than expected
IBNR due to the slower and highly volatile emergence patterns applicable to
certain types of claims such as those stemming from litigated, assumed
reinsurance, or the A&E types of claims noted above.
Mortgage guaranty net claim
reserve levels can be affected adversely by several factors, including a change
in the mix of insured business toward loans that have a higher probability of
default, an increase in the average risk per insured loan, a deterioration of
regional or national economic conditions leading to a reduction in borrowers’
income and thus their ability to make mortgage payments, and a drop in housing
values and/or an increase in housing supply that can increase the rate at which
defaults evolve into claim and the overall severity of such claims.
Title insurance loss reserve
levels can be impacted adversely by such developments as reduced loan
refinancing activity, the effect of which can be to lengthen the period during
which title policies remain exposed to loss emergence, or reductions in either
property values or the volume of transactions which, by virtue of the
speculative nature of some real estate developments, can lead to increased
occurrences of fraud, defalcations or mechanics’ liens.
With respect to Old Republic’s small
life and health
insurance operations, reserve adequacy may be affected adversely by
greater than anticipated medical care cost inflation as well as greater than
expected frequency and severity of claims. In life insurance, as in general
insurance, concentrations of insured lives coupled with a catastrophic event
would represent the Company’s largest exposure.
Loss reserve uncertainty is illustrated
by the variability in loss reserve development presented in the schedule which
appears under Item 1 of this Annual Report. That schedule shows the cumulative
loss reserve development for each of the past ten years through December 31,
2007 for the general
insurance business which comprises the largest portion of Old Republic’s
loss and loss adjustment expense reserves at 77.2% of the total. For each of
these ten calendar years, prior accident years’ general insurance claim
reserves have developed, as a percentage of the original estimates, within a
range of 7.5% unfavorable in 2000 to a 7.7% favorable development in 2005. For
the ten year period the net development has averaged .5% favorable.
44
On a consolidated basis, which includes
all coverages provided by the Company, the annual favorable development on prior
year loss reserves over the same ten year period has ranged from 1.6% to 7.4%
and averaged 4.1%. Although management does not have a practical business reason
for making projections of likely outcomes of future loss developments, its
analysis and evaluation of Old Republic’s existing business mix, current
aggregate loss reserve levels, and loss development patterns suggests the
reasonable likelihood that 2007 year-end loss reserves could ultimately develop
within a range of +/- 5%. The most significant factors impacting the potential
reserve development for each of the Company’s insurance segments is discussed
above. While the Company has generally experienced favorable loss developments
for the latest ten year period on an overall basis, the current analysis of loss
development factors and economic conditions influencing the Company’s insurance
coverages indicates a gradual downward trend in favorable development during the
most recent three years. Consequently, management believes that using a 5%
potential range of reserve development provides a reasonable benchmark for a
sensitivity analysis of the Company’s reserves as of December 31,
2007.
Reinsurance
Programs
To maintain premium production within
its capacity and limit maximum losses and risks for which it might become liable
under its policies, Old Republic may cede a portion or all of its premiums and
liabilities on certain classes of insurance, individual policies, or blocks of
business to other insurers and reinsurers. Further discussion of the Company’s
reinsurance programs can be found in Part 1 of this Annual Report on Form
10-K.
Subsidiaries within the general insurance segment
have generally obtained reinsurance coverage from independent insurance or
reinsurance companies pursuant to excess of loss agreements. Under excess of
loss reinsurance agreements, the Company is generally reimbursed for losses
exceeding contractually agreed-upon levels. During the three year period ended
December 31, 2007, the Company’s net retention has been increasing gradually
within the general insurance segment; however, such changes have not had a
material impact on the Company’s consolidated financial statements.
Generally, mortgage guaranty insurance
risk is reinsured through excess of loss contracts through insurers owned by or
affiliated with lending institutions, and financial and other intermediaries
whose customers are insured by Old Republic. Except for minor amounts of
facultative reinsurance covering large risks, the title insurance segment does
not utilize reinsurance in managing its insurance risk.
The
Company does not anticipate any significant changes to its reinsurance programs
during 2008.
Expenses:
Underwriting Acquisition and Other
Expenses
|
The following table sets forth the
expense ratios registered by each major business segment and in consolidation
for the periods shown:
General
|
Mortgage
|
Title
|
Consolidated
|
|||||||||||||
Years
Ended December 31:
|
||||||||||||||||
2005
|
24.6 | % | 22.4 | % | 88.2 | % | 45.2 | % | ||||||||
2006
|
24.4 | 22.5 | 93.6 | 44.7 | ||||||||||||
2007
|
24.1 | % | 17.7 | % | 98.1 | % | 41.3 | % |
Variations in the Company’s
consolidated expense ratios reflect a continually changing mix of coverages
sold and attendant costs of producing business in the Company’s three largest
business segments. To a significant degree, expense ratios for both the general
and title insurance segments are mostly reflective of variable costs, such as
commissions or similar charges, that rise or decline along with corresponding
changes in premium and fee income, as well as changes in general operating
expenses which can contract or expand in differing proportions due to varying
levels of operating efficiencies and expense management opportunities in the
face of changing market conditions.
The decline in the Mortgage Guaranty
segment’s 2007 ratio is reflective of the growth in net earned premium coupled
with continued emphasis on operating efficiency; the slight increase in the 2006
expense ratio in comparison to 2005 reflects higher stock option compensation
costs.The increase in the Title segment’s 2007 and 2006 expense ratios result
from a decline in revenues from direct operations during these periods, most of
which are concentrated in the Western United States, to a level lower than
necessary to support the fixed portion of the operating expense
structure.
Expenses:
Total
|
The composite ratios of the above
summarized net claims, benefits and underwriting expenses that reflect the sum
total of all the factors enumerated above have been as follows:
General
|
Mortgage
|
Title
|
Consolidated
|
|||||||||||||
Years
Ended December 31:
|
||||||||||||||||
2005
|
91.5 | % | 59.6 | % | 94.2 | % | 88.5 | % | ||||||||
2006
|
90.3 | 65.3 | 99.5 | 90.0 | ||||||||||||
2007
|
91.9 | % | 136.5 | % | 104.7 | % | 101.5 | % |
45
Expenses:
Income Taxes
|
The effective consolidated income tax
rates were 28.0% in 2007, 31.7% in 2006 and 26.2% in 2005. The 2005 effective
tax rate was reduced and net earnings enhanced by tax and related interest
recoveries of $57.9 million ($45.9 million net of tax, or 20 cents per share)
due to the favorable resolution of tax issues applicable to the three years
ended December 31, 1990. Excluding the effects of these tax and related interest
recoveries, the effective tax rates remained consistent with those of the
corresponding prior periods. The rates for each year reflect primarily the
varying proportions of pretax operating income derived from partially
tax-sheltered investment income (principally state and municipal tax-exempt
interest) on the one hand, and the combination of fully taxable investment
income, realized investment gains or losses, and underwriting and service
income, on the other hand.
OTHER
INFORMATION
|
Reference is here made to “Information
About Segments of Business” appearing elsewhere herein.
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 statements made in this
report and other Company-published reports, as well as oral statements or
commentaries made by the Company’s management in 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, commentaries, or inferences, 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, most particularly, 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
discussion of all the foregoing risks appears in Part I, Item 1A – Risk Factors,
of this Annual Report, which is specifically incorporated herein by
reference.
Any forward-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.
46
Item
7A - Quantitative and Qualitative Disclosure About Market
Risk
|
Market risk represents the potential
for loss due to adverse changes in the fair value of financial instruments as a
result of changes in interest rates, equity prices, foreign exchange rates and
commodity prices. Old Republic’s primary market risks consist of interest rate
risk associated with investments in fixed maturities and equity price risk
associated with investments in equity securities. The Company has no material
foreign exchange or commodity risk.
The Company does not own or utilize
derivative financial instruments for the purpose of hedging, enhancing the
overall return of its investment portfolio, or reducing the cost of its debt
obligations. With regard to its equity portfolio, the Company does not own any
options nor does it engage in any type of option writing. Traditional investment
management tools and techniques are employed to address the yield and valuation
exposures of the invested assets base. The long-term fixed maturity investment
portfolio is managed so as to limit various risks inherent in the bond market.
Credit risk is addressed through asset diversification and the purchase of
investment grade securities. Reinvestment rate risk is reduced by concentrating
on non-callable issues, and by taking asset-liability matching considerations
into account. Purchases of mortgage and asset backed securities, which have
variable principal prepayment options, are generally avoided. Market value risk
is limited through the purchase of bonds of intermediate maturity. The
combination of these investment management practices is expected to produce a
more stable long-term fixed maturity investment portfolio that is not subject to
extreme interest rate sensitivity and principal deterioration.
The market value of the Company’s
long-term fixed maturity investment portfolio is sensitive, however, to
fluctuations in the level of interest rates, but not materially affected by
changes in anticipated cash flows caused by any prepayments. The impact of
interest rate movements on the long-term fixed maturity investment portfolio
generally affects net unrealized gains or losses. As a general rule, rising
interest rates enhance currently available yields but typically lead to a
reduction in the fair value of existing fixed maturity investments. By contrast,
a decline in such rates reduces currently available yields but usually serves to
increase the fair value of the existing fixed maturity investment portfolio. All
such changes in fair value are reflected, net of deferred income taxes, directly
in the shareholders’ equity account, and as a separate component of the
statement of comprehensive income. Given the Company’s inability to forecast or
control the movement of interest rates, Old Republic sets the maturity spectrum
of its fixed maturity securities portfolio within parameters of estimated
liability payouts, and focuses the overall portfolio on high quality
investments. By so doing, Old Republic believes it is reasonably assured of its
ability to hold securities to maturity as it may deem necessary in changing
environments, and of ultimately recovering their aggregate cost.
The following table illustrates the
hypothetical effect on the fixed income and equity investment portfolios
resulting from movements in interest rates and fluctuations in the equity
securities markets, using the S&P 500 index as a proxy, at December 31,
2007:
Estimated
Fair
Value
|
Hypothetical
Change in
Interest
Rates or S&P 500
|
Estimated
Fair Value
After
Hypothetical Change in Interest Rates or S&P 500
|
|
Interest
Rate Risk:
|
|||
Fixed
Maturities
|
$ 7,383.6
|
100
basis point rate increase
|
$ 7,103.8
|
200
basis point rate increase
|
6,823.9
|
||
100
basis point rate decrease
|
7,663.4
|
||
200
basis point rate decrease
|
$ 7,943.3
|
||
Equity
Price Risk:
|
|||
Equity
Securities
|
$ 842.1
|
10%
increase in the S&P 500
|
$ 954.9
|
20%
increase in the S&P 500
|
1,067.8
|
||
10%
decline in the S&P 500
|
729.3
|
||
20%
decline in the S&P 500
|
$ 616.4
|
Item
8 - Financial Statements and Supplementary
Data
|
Listed
below are the consolidated financial statements included herein for Old Republic
International Corporation and Subsidiaries:
Page No.
|
|
Consolidated
Balance
Sheets
|
48
|
Consolidated
Statements of
Income
|
49
|
Consolidated
Statements of Comprehensive
Income
|
50
|
Consolidated
Statements of Preferred Stock and
|
|
Common
Shareholders'
Equity
|
51
|
Consolidated
Statements of Cash
Flows
|
52
|
Notes
to Consolidated Financial
Statements
|
53
– 73
|
Report
of Independent Registered Public Accounting
Firm
|
74
|
47
Old
Republic International Corporation and Subsidiaries
Consolidated
Balance Sheets
($
in Millions, Except Share Data)
December
31,
|
2007
|
2006
|
|||||||
Assets
|
||||||||
Investments:
|
||||||||
Available
for sale:
|
||||||||
Fixed
maturity securities (at fair value) (cost: $7,312.2 and
$6,873.8)
|
$ | 7,383.6 | $ | 6,832.6 | ||||
Equity
securities (at fair value) (cost: $807.3 and $534.7)
|
842.1 | 669.1 | ||||||
Short-term
investments (at fair value which approximates cost)
|
462.6 | 493.6 | ||||||
Miscellaneous
investments
|
64.7 | 52.7 | ||||||
Total
|
8,753.1 | 8,048.1 | ||||||
Other
investments
|
8.1 | 7.9 | ||||||
Total
investments
|
8,761.2 | 8,056.1 | ||||||
Other
Assets:
|
||||||||
Cash
|
54.0 | 71.6 | ||||||
Securities
and indebtedness of related
parties
|
15.3 | 21.8 | ||||||
Accrued
investment
income
|
108.7 | 102.9 | ||||||
Accounts
and notes
receivable
|
880.3 | 962.1 | ||||||
Federal
income tax recoverable:
Current
|
6.2 | 15.5 | ||||||
Prepaid
federal income
taxes
|
536.5 | 468.4 | ||||||
Reinsurance
balances and funds
held
|
69.9 | 74.2 | ||||||
Reinsurance
recoverable: Paid losses
|
65.8 | 58.6 | ||||||
Policy and claim
reserves
|
2,193.4 | 2,172.7 | ||||||
Deferred
policy acquisition
costs
|
246.5 | 264.9 | ||||||
Sundry
assets
|
352.3 | 342.9 | ||||||
4,529.3 | 4,556.1 | |||||||
Total
Assets
|
$ | 13,290.6 | $ | 12,612.2 | ||||
Liabilities,
Preferred Stock, and Common Shareholders’ Equity
|
||||||||
Liabilities:
|
||||||||
Losses,
claims, and settlement
expenses
|
$ | 6,231.1 | $ | 5,534.7 | ||||
Unearned
premiums
|
1,182.2 | 1,209.4 | ||||||
Other
policyholders' benefits and
funds
|
190.2 | 188.6 | ||||||
Total
policy liabilities and
accruals
|
7,603.5 | 6,932.8 | ||||||
Commissions,
expenses, fees, and
taxes
|
225.9 | 243.5 | ||||||
Reinsurance
balances and
funds
|
288.7 | 314.4 | ||||||
Federal
income tax payable: Deferred
|
417.7 | 469.4 | ||||||
Debt
|
64.1 | 144.3 | ||||||
Sundry
liabilities
|
148.8 | 138.4 | ||||||
Commitments
and contingent
liabilities
|
||||||||
Total
Liabilities
|
8,749.0 | 8,243.0 | ||||||
Preferred
Stock:
|
||||||||
Convertible
preferred stock
(1)
|
- | - | ||||||
Common
Shareholders’ Equity:
|
||||||||
Common
stock
(1)
|
232.0 | 231.0 | ||||||
Additional
paid-in
capital
|
344.4 | 319.5 | ||||||
Retained
earnings
|
3,900.1 | 3,773.9 | ||||||
Accumulated
other comprehensive
income
|
93.3 | 44.6 | ||||||
Treasury
stock (at
cost)(1)
|
(28.3 | ) | - | |||||
Total
Common Shareholders'
Equity
|
4,541.6 | 4,369.2 | ||||||
Total
Liabilities, Preferred Stock and Common Shareholders’
Equity
|
$ | 13,290.6 | $ | 12,612.2 |
(1)
|
At
December 31, 2007 and 2006, 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 232,038,331 in 2007 and 231,047,890 in
2006 were issued. At December 31, 2007 and 2006, there were 100,000,000
shares of Class B Common Stock, $1.00 par value, authorized, of which no
shares were issued. Common shares classified as treasury stock were
1,566,100 and 0 as of December 31, 2007 and 2006,
respectively.
|
See
accompanying Notes to Consolidated Financial
Statements.
|
48
Old
Republic International Corporation and Subsidiaries
Consolidated
Statements of Income
($
in Millions, Except Share Data)
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Revenues:
|
||||||||||||
Net
premiums
earned
|
$ | 3,389.0 | $ | 3,154.1 | $ | 3,062.3 | ||||||
Title,
escrow, and other
fees
|
212.1 | 246.3 | 324.6 | |||||||||
Total
premiums and
fees
|
3,601.2 | 3,400.5 | 3,386.9 | |||||||||
Net
investment
income
|
379.9 | 341.6 | 310.1 | |||||||||
Other
income
|
39.4 | 33.0 | 43.9 | |||||||||
Total
operating
revenues
|
4,020.6 | 3,775.2 | 3,741.0 | |||||||||
Realized
investment
gains
|
70.3 | 19.0 | 64.9 | |||||||||
Total
revenues
|
4,091.0 | 3,794.2 | 3,805.9 | |||||||||
Benefits,
Claims and Expenses:
|
||||||||||||
Benefits,
claims, and settlement
expenses
|
2,156.9 | 1,532.3 | 1,460.1 | |||||||||
Dividends
to
policyholders
|
9.3 | 7.3 | 5.3 | |||||||||
Underwriting,
acquisition, and other
expenses
|
1,538.9 | 1,564.4 | 1,583.4 | |||||||||
Interest
and other
charges
|
7.3 | 9.9 | 9.5 | |||||||||
Total
expenses
|
3,712.6 | 3,114.0 | 3,058.5 | |||||||||
Income
before income
taxes
|
378.4 | 680.1 | 747.3 | |||||||||
Income
Taxes (Credits):
|
||||||||||||
Current
|
172.5 | 158.8 | 263.0 | |||||||||
Deferred
|
(66.5 | ) | 56.4 | (67.1 | ) | |||||||
Total
|
105.9 | 215.2 | 195.9 | |||||||||
Net
Income
|
$ | 272.4 | $ | 464.8 | $ | 551.4 | ||||||
Net
Income Per Share:
|
||||||||||||
Basic:
|
$ | 1.18 | $ | 2.01 | $ | 2.40 | ||||||
Diluted:
|
$ | 1.17 | $ | 1.99 | $ | 2.37 | ||||||
Average
shares outstanding:
Basic
|
231,370,242 | 231,017,947 | 229,487,273 | |||||||||
Diluted
|
232,912,728 | 233,034,986 | 232,108,491 | |||||||||
Dividends
Per Common Share:
|
||||||||||||
Cash:
Regular
|
$ | .630 | $ | .590 | $ | .512 | ||||||
Special
|
- | - | .800 | |||||||||
Total
|
$ | .630 | $ | .590 | $ | 1.312 | ||||||
Stock
|
- | % | - | % | 25 | % |
See
accompanying Notes to Consolidated Financial
Statements.
|
49
Old
Republic International Corporation and Subsidiaries
Consolidated
Statements of Comprehensive Income
($
in Millions)
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Net
income as
reported
|
$ | 272.4 | $ | 464.8 | $ | 551.4 | ||||||
Other
comprehensive income (loss):
|
||||||||||||
Foreign
currency translation
adjustment
|
20.7 | (1.4 | ) | 2.9 | ||||||||
Unrealized
gains (losses) on securities:
|
||||||||||||
Unrealized
gains (losses) arising during period
|
89.5 | 44.2 | (120.5 | ) | ||||||||
Less:
elimination of pretax realized gains
|
||||||||||||
included
in income as
reported
|
70.3 | 19.0 | 64.9 | |||||||||
Pretax
unrealized gains (losses) on securities
|
||||||||||||
carried
at market
value
|
19.1 | 25.2 | (185.4 | ) | ||||||||
Deferred
income taxes
(credits)
|
6.6 | 8.7 | (64.9 | ) | ||||||||
Net
unrealized gains (losses) on
securities
|
12.4 | 16.4 | (120.5 | ) | ||||||||
Defined
benefit pension plans:
|
||||||||||||
Minimum
pension liability, net of
tax
|
- | (11.1 | ) | (1.1 | ) | |||||||
Net
pension gain, net of
tax
|
15.0 | - | - | |||||||||
Net
impact of defined benefit pension
plans
|
15.0 | (11.1 | ) | (1.1 | ) | |||||||
Net
adjustments
|
48.3 | 3.8 | (118.7 | ) | ||||||||
Comprehensive
income
|
$ | 320.8 | $ | 468.7 | $ | 432.6 |
See
accompanying Notes to Consolidated Financial
Statements.
|
50
Old
Republic International Corporation and Subsidiaries
Consolidated
Statements of Preferred Stock
and
Common Shareholders' Equity
($
in Millions)
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Convertible
Preferred Stock:
|
||||||||||||
Balance,
end of
year
|
$ | - | $ | - | $ | - | ||||||
Common
Stock:
|
||||||||||||
Balance,
beginning of
year
|
$ | 231.0 | $ | 229.5 | $ | 185.4 | ||||||
Stock
dividend
|
- | - | 45.9 | |||||||||
Dividend
reinvestment
plan
|
- | - | - | |||||||||
Exercise
of stock
options
|
.9 | 1.4 | .9 | |||||||||
Stock
awards
|
- | - | - | |||||||||
Treasury
stock restored to unissued
status
|
- | - | (2.8 | ) | ||||||||
Balance,
end of
year
|
$ | 232.0 | $ | 231.0 | $ | 229.5 | ||||||
Additional
Paid-in Capital:
|
||||||||||||
Balance,
beginning of
year
|
$ | 319.5 | $ | 288.6 | $ | 270.4 | ||||||
Dividend
reinvestment
plan
|
1.0 | 1.1 | 2.0 | |||||||||
Exercise
of stock
options
|
13.0 | 16.4 | 18.1 | |||||||||
Stock
option
compensation
|
10.8 | 13.3 | 4.8 | |||||||||
Stock
awards
|
- | - | .2 | |||||||||
Treasury
stock restored to unissued
status
|
- | - | (7.1 | ) | ||||||||
Balance,
end of
year
|
$
|
344.4 | $ | 319.5 | $ | 288.6 | ||||||
Retained
Earnings:
|
||||||||||||
Balance,
beginning of
year
|
$ | 3,773.9 | $ | 3,444.9 | $ | 3,240.1 | ||||||
Net
income
|
272.4 | 464.8 | 551.4 | |||||||||
Dividends
on common stock:
cash
|
(145.4 | ) | (135.8 | ) | (300.7 | ) | ||||||
stock
|
- | - | (45.9 | ) | ||||||||
Effects
of changing pension plan measurement date
pursuant
to FAS 158, net of
tax
|
(.8 | ) | - | - | ||||||||
Balance,
end of
year
|
$ | 3,900.1 | $ | 3,773.9 | $ | 3,444.9 | ||||||
Accumulated
Other Comprehensive Income:
|
||||||||||||
Balance,
beginning of
year
|
$ | 44.6 | $ | 60.8 | $ | 179.5 | ||||||
Foreign
currency translation
adjustments
|
20.7 | (1.4 | ) | 2.9 | ||||||||
Net
unrealized gains (losses) on securities, net of tax
|
12.4 | 16.4 | (120.5 | ) | ||||||||
Minimum
pension liability, net of tax
credits
|
- | (11.1 | ) | (1.1 | ) | |||||||
Adjustment
to apply FAS 158, net of
tax
|
.3 | (20.0 | ) | - | ||||||||
Net
pension gain, net of
tax
|
15.0 | - | - | |||||||||
Balance,
end of
year
|
$ | 93.3 | $ | 44.6 | $ | 60.8 | ||||||
Treasury
Stock:
|
||||||||||||
Balance,
beginning of
year
|
$ | - | $ | - | $ | (10.0 | ) | |||||
Acquired
during the
year
|
(28.3 | ) | - | - | ||||||||
Restored
to unissued
status
|
- | - | 10.0 | |||||||||
Balance,
end of
year
|
$ | (28.3 | ) | $ | - | $ | - |
See
accompanying Notes to Consolidated Financial
Statements.
|
51
Old
Republic International Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
($
in Millions)
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 272.4 | $ | 464.8 | $ | 551.4 | ||||||
Adjustments
to reconcile net income to
|
||||||||||||
net
cash provided by operating activities:
|
||||||||||||
Deferred
policy acquisition
costs
|
21.2 | (24.6 | ) | (7.2 | ) | |||||||
Premiums
and other
receivables
|
82.2 | (85.5 | ) | (212.7 | ) | |||||||
Unpaid
claims and related
items
|
646.4 | 560.2 | 273.9 | |||||||||
Other
policyholders’ benefits and
funds
|
(1.3 | ) | 138.9 | 96.2 | ||||||||
Income
taxes
|
(57.1 | ) | (89.1 | ) | 53.9 | |||||||
Prepaid
federal income
taxes
|
(68.1 | ) | 77.3 | (46.4 | ) | |||||||
Reinsurance
balances and
funds
|
(29.3 | ) | (77.7 | ) | 154.3 | |||||||
Realized
investment
gains
|
(70.3 | ) | (19.0 | ) | (64.9 | ) | ||||||
Accounts
payable, accrued expenses and other
|
66.5 | 59.6 | 34.9 | |||||||||
Total
|
862.5 | 1,004.7 | 833.6 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Fixed
maturity securities:
|
||||||||||||
Maturities
and early
calls
|
692.0 | 729.1 | 794.7 | |||||||||
Sales
|
120.9 | 215.3 | 375.2 | |||||||||
Sales
of:
|
||||||||||||
Equity
securities
|
393.3 | 21.7 | 325.8 | |||||||||
Other
investments
|
10.6 | 21.2 | 12.9 | |||||||||
Fixed
assets for company
use
|
4.9 | .8 | 5.7 | |||||||||
Investment
in
subsidiary
|
- | 7.7 | - | |||||||||
Cash
and short-term investments of subsidiaries acquired
|
.5 | 17.6 | 1.2 | |||||||||
Purchases
of:
|
||||||||||||
Fixed
maturity
securities
|
(1,257.8 | ) | (1,517.5 | ) | (1,748.4 | ) | ||||||
Equity
securities
|
(604.6 | ) | (50.7 | ) | (380.8 | ) | ||||||
Other
investments
|
(10.0 | ) | (9.2 | ) | (5.2 | ) | ||||||
Fixed
assets for company
use
|
(20.3 | ) | (19.6 | ) | (37.6 | ) | ||||||
Investments
in
subsidiaries
|
(4.9 | ) | (71.3 | ) | (10.1 | ) | ||||||
Cash
and short-term investments of subsidiaries sold
|
- | (5.5 | ) | - | ||||||||
Net decrease
(increase) in short-term investments
|
32.4 | (218.2 | ) | 118.9 | ||||||||
Other-net
|
- | (8.9 | ) | 4.0 | ||||||||
Total
|
(643.0 | ) | (887.4 | ) | (543.5 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Issuance
of debentures and
notes
|
121.3 | 3.2 | 1.0 | |||||||||
Issuance
of common
shares
|
15.0 | 18.9 | 18.4 | |||||||||
Redemption
of debentures and
notes
|
(201.6 | ) | (1.5 | ) | (1.4 | ) | ||||||
Dividends
on common
shares
|
(145.4 | ) | (135.8 | ) | (300.7 | ) | ||||||
Purchase
of treasury
stock
|
(28.3 | ) | - | - | ||||||||
Other-net
|
1.8 | 1.2 | .2 | |||||||||
Total
|
(237.1 | ) | (113.9 | ) | (282.4 | ) | ||||||
Increase
(decrease) in cash:
|
(17.6 | ) | 3.3 | 7.7 | ||||||||
Cash,
beginning of
year
|
71.6 | 68.3 | 60.5 | |||||||||
Cash,
end of
year
|
$ | 54.0 | $ | 71.6 | $ | 68.3 | ||||||
Supplemental
cash flow information:
|
||||||||||||
Cash
paid during the year for:
Interest
|
$ | 7.1 | $ | 9.7 | $ | 9.4 | ||||||
Income
taxes
|
$ | 162.5 | $ | 302.0 | $ | 138.4 |
See
accompanying Notes to Consolidated Financial
Statements.
|
52
Old
Republic International Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
($
in Millions, Except as Otherwise Indicated)
Old Republic International Corporation
is a Chicago-based insurance holding company with subsidiaries engaged mainly in
the general (property and liability), mortgage guaranty and title insurance
businesses. In this report, “Old Republic”, or “the Company” refers to Old
Republic International Corporation and its subsidiaries as the context
requires. The aforementioned insurance segments are organized as the Old
Republic General Insurance, Mortgage Guaranty and Title Insurance Groups, and
references herein to such groups apply to the Company's subsidiaries engaged in
the respective segments of business. Results of a small life and health
insurance business are included in the corporate and other caption of this
report.
Note 1 - Summary of Significant
Accounting Policies - The significant accounting policies employed by Old
Republic International Corporation and its subsidiaries are set forth in the
following summary.
(a) Accounting Principles –
The Company’s insurance subsidiaries are managed pursuant to the laws and
regulations of the various states in which they operate. As a result, the
subsidiaries maintain their accounts in conformity with accounting practices
permitted by various states’ insurance regulatory authorities. Federal income
taxes and dividends to shareholders are based on financial statements and
reports complying with such practices. The statutory accounting requirements
vary from generally accepted accounting principles (“GAAP”) in the following
major respects: (1) the costs of selling insurance policies are charged to
operations immediately, while the related premiums are taken into income over
the terms of the policies; (2) investments in fixed maturity securities
designated as available for sale are generally carried at amortized cost rather
than their estimated fair value; (3) certain assets classified as “non-admitted
assets” are excluded from the balance sheet through a direct charge to earned
surplus; (4) changes in allowed deferred income tax assets or liabilities are
recorded directly in earned surplus and not through the income statement; (5)
mortgage guaranty contingency reserves intended to provide for future
catastrophic losses are established as a liability through a charge to earned
surplus; (6) title insurance premium reserves, which are intended to cover
losses that will be reported at a future date are based on statutory formulas,
and changes therein are charged in the income statement against each year’s
premiums written; (7) the effect of discounting the medical and loss adjustment
expense portion of workers compensation reserves is excluded from losses
incurred; and (8) certain required formula-derived liabilities are established
for claim reserves in excess of amounts considered adequate by the Company as
well as for credits taken relative to reinsurance placed with other insurance
companies not licensed in the respective states, all of which are charged
directly against earned surplus. In consolidating the statutory financial
statements of its insurance subsidiaries, the Company has therefore made
necessary adjustments to conform their accounts with GAAP. The following table
reflects a summary of all such adjustments:
Shareholders’
Equity
|
Net
Income (Loss)
|
||
December
31,
|
Years
Ended December 31,
|
2007
|
2006
|
2007
|
2006
|
2005
|
||||||||||||||||
Statutory
totals of insurance
company
subsidiaries:
|
||||||||||||||||||||
General
|
$ | 2,378.3 | $ | 2,239.0 | $ | 329.2 | $ | 240.3 | $ | 312.4 | ||||||||||
Mortgage
Guaranty
|
236.2 | 231.2 | (99.6 | ) | 226.7 | 93.4 | ||||||||||||||
Title
|
173.6 | 182.1 | 21.5 | 34.9 | 43.3 | |||||||||||||||
Life
&
Health
|
70.6 | 54.7 | 7.2 | 5.3 | 3.0 | |||||||||||||||
Sub-total
|
2,858.7 | 2,707.0 | 258.3 | 507.2 | 452.1 | |||||||||||||||
GAAP
totals of non-insurance company
subsidiaries
and consolidation adjustments
|
261.4 | 261.9 | (32.3 | ) | (20.9 | ) | (6.1 | ) | ||||||||||||
Unadjusted
totals
|
3,120.3 | 2,969.0 | 226.1 | 486.3 | 446.1 | |||||||||||||||
Adjustments
to conform to GAAP:
|
||||||||||||||||||||
Deferred
policy acquisition costs
|
240.7 | 260.6 | (21.4 | ) | 26.3 | 7.8 | ||||||||||||||
Fair
value of fixed maturity securities
|
73.9 | (39.7 | ) | - | - | - | ||||||||||||||
Non-admitted
assets
|
48.2 | 58.2 | - | - | - | |||||||||||||||
Deferred
income
taxes
|
(539.7 | ) | (574.0 | ) | 63.7 | (62.0 | ) | 73.9 | ||||||||||||
Mortgage
contingency reserves
|
1,429.7 | 1,545.0 | - | - | - | |||||||||||||||
Title
unearned
premiums
|
356.1 | 363.0 | (6.8 | ) | 3.8 | 13.6 | ||||||||||||||
Loss
reserves
|
(254.1 | ) | (264.8 | ) | 10.6 | 6.6 | (3.9 | ) | ||||||||||||
Sundry
adjustments
|
66.2 | 52.0 | .2 | 3.8 | 14.2 | |||||||||||||||
Total
adjustments
|
1,421.0 | 1,399.8 | 46.4 | (21.5 | ) | 105.0 | ||||||||||||||
Consolidated
GAAP
totals
|
$ | 4,541.6 | $ | 4,369.2 | $ | 272.4 | $ | 464.8 | $ | 551.4 |
The
preparation of financial statements in conformity with either statutory
practices or generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from those
estimates.
53
(b) Consolidation Practices -
The consolidated financial statements include the accounts of the Company and
those of its majority owned insurance underwriting and service subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
(c) Statement Presentation
- 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.
(d) 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 December 31, 2007
and 2006, 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
market value changes of each of its investments on at least a quarterly basis
during the year, and estimates of other-than-temporary impairments in the
portfolio’s value are evaluated and established at each quarterly balance sheet
date. In reviewing investments for other-than-temporary impairment, the Company,
in addition to a security’s market price history, considers the totality of such
factors as the issuer’s operating results, financial condition and liquidity,
its ability to access capital markets, credit rating trends, most current audit
opinion, industry and securities markets conditions, and analyst expectations to
reach its conclusions. Sudden market value declines caused by such adverse
developments as newly emerged or imminent bankruptcy filings, issuer default on
significant obligations, or reports of financial accounting developments that
bring into question the validity of previously reported earnings or financial
condition, are recognized as realized losses as soon as credible publicly
available information emerges to confirm such developments. Accordingly, the
recognition of losses from other-than-temporary value impairments is subject to
a great deal of judgment as well as turns of events over which the Company can
exercise little or no control. In the event the Company’s estimate of
other-than- temporary impairments is insufficient at any point in time, future
periods’ net income would be adversely affected by the recognition of additional
realized 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. The Company recognized no
other-than-temporary impairments of investments for the years ended December 31,
2007 and 2006 while recognizing $9.2 million for the year ended December 31,
2005.
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:
|
||||||||||||||||
December
31, 2007:
|
||||||||||||||||
U.S.
& Canadian Governments
|
$ | 696.8 | $ | 26.6 | $ | .3 | $ | 723.0 | ||||||||
Tax-exempt
|
2,328.7 | 27.4 | 1.6 | 2,354.5 | ||||||||||||
Utilities
|
985.2 | 10.2 | 7.5 | 987.8 | ||||||||||||
Corporate
|
3,301.5 | 42.7 | 26.0 | 3,318.2 | ||||||||||||
$ | 7,312.2 | $ | 106.9 | $ | 35.6 | $ | 7,383.6 | |||||||||
December
31, 2006:
|
||||||||||||||||
U.S.
& Canadian Governments
|
$ | 708.7 | $ | 11.6 | $ | 5.6 | $ | 714.7 | ||||||||
Tax-exempt
|
2,234.1 | 10.1 | 14.7 | 2,229.5 | ||||||||||||
Utilities
|
936.5 | 7.2 | 19.8 | 923.8 | ||||||||||||
Corporate
|
2,994.4 | 17.6 | 47.6 | 2,964.4 | ||||||||||||
$ | 6,873.8 | $ | 46.6 | $ | 87.8 | $ | 6,832.6 |
54
The amortized cost and estimated fair
value of fixed maturity securities at December 31, 2007, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because 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
|
$ | 856.9 | $ | 858.3 | ||||
Due
after one year through five
years
|
3,422.8 | 3,460.7 | ||||||
Due
after five years through ten
years
|
3,007.9 | 3,039.6 | ||||||
Due
after ten
years
|
24.5 | 24.8 | ||||||
$ | 7,312.2 | $ | 7,383.6 |
Bonds and other investments with a
statutory carrying value of $356.1 million as of December 31, 2007 were on
deposit with governmental authorities by the Company's insurance subsidiaries to
comply with insurance laws.
A summary of the Company's equity
securities follows:
Gross
|
Gross
|
Estimated
|
||||||||||||||
Unrealized
|
Unrealized
|
Fair
|
||||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
December
31, 2007:
|
||||||||||||||||
Equity
securities
|
$ | 807.3 | $ | 115.1 | $ | 80.4 | $ | 842.1 | ||||||||
December
31, 2006:
|
||||||||||||||||
Equity
securities
|
$ | 534.7 | $ | 136.1 | $ | 1.8 | $ | 669.1 |
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 are comprised of
sales of securities and provisions 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.
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 original
cost at December 31, 2007 and 2006:
12
Months or Less
|
Greater
than 12 Months
|
Total
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||||||||
December
31, 2007:
|
||||||||||||||||||||||||
Fixed
Maturity Securities:
|
||||||||||||||||||||||||
U.S.
& Canadian Governments
|
$ | 16.2 | $ | - | $ | 75.1 | $ | .3 | $ | 91.4 | $ | .3 | ||||||||||||
Tax-exempt
|
30.3 | .1 | 347.0 | 1.4 | 377.3 | 1.6 | ||||||||||||||||||
Corporates
|
317.1 | 4.9 | 1,405.8 | 28.6 | 1,722.9 | 33.6 | ||||||||||||||||||
363.7 | 5.2 | 1,828.0 | 30.4 | 2,191.8 | 35.6 | |||||||||||||||||||
Equity
Securities
|
281.8 | 80.4 | - | - | 281.9 | 80.4 | ||||||||||||||||||
Total
|
$ | 645.6 | $ | 85.6 | $ | 1,828.0 | $ | 30.4 | $ | 2,473.7 | $ | 116.0 | ||||||||||||
December
31, 2006:
|
||||||||||||||||||||||||
Fixed
Maturity Securities:
|
||||||||||||||||||||||||
U.S.
& Canadian Governments
|
$ | 210.6 | $ | 2.0 | $ | 229.5 | $ | 3.5 | $ | 440.2 | $ | 5.6 | ||||||||||||
Tax-exempt
|
402.9 | 1.7 | 925.7 | 13.0 | 1,328.7 | 14.7 | ||||||||||||||||||
Corporates
|
1,047.5 | 11.7 | 1,825.6 | 55.7 | 2,873.1 | 67.5 | ||||||||||||||||||
1,661.1 | 15.5 | 2,980.9 | 72.3 | 4,642.1 | 87.8 | |||||||||||||||||||
Equity
Securities
|
25.1 | 1.8 | - | - | 25.1 | 1.8 | ||||||||||||||||||
Total
|
$ | 1,686.3 | $ | 17.3 | $ | 2,980.9 | $ | 72.3 | $ | 4,667.3 | $ | 89.7 |
At December 31, 2007, the Company held
542 fixed maturity and 14 equity securities in an unrealized loss position,
representing 27.6% as to fixed maturities and 56.0% as to equity securities of
the total number of such issues held by the Company. Of the 542 fixed maturity
securities, 428 had been in a continuous unrealized loss position for greater
than 12 months. The unrealized losses on these securities are primarily
attributable to a rising interest rate environment as opposed to a decline in
credit quality of the issuer. As part of its assessment of other-than-temporary
impairment, the Company considers its intent and ability to
continue to hold investment securities in an unrealized loss
55
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, thereby supporting its ability to continue to hold securities until
their cost basis may be recovered.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157 (“FAS 157”) “Fair Value Measurements”, which establishes a framework for
measuring fair value. FAS 157 applies to existing accounting pronouncements that
require or permit fair value measurements, and becomes effective for fiscal
years beginning after November 15, 2007. Disclosure requirements associated with
the standard will be incorporated in the Company’s 2008 quarterly and annual
reports, and its adoption in the first quarter of 2008 is not expected to have a
material impact on the consolidated financial statements or on the conduct of
its business.
At December 31, 2007, 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:
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Investment
income from:
|
||||||||||||
Fixed
maturity
securities
|
$ | 332.9 | $ | 298.0 | $ | 284.1 | ||||||
Equity
securities
|
16.1 | 13.9 | 9.4 | |||||||||
Short-term
investments
|
28.2 | 26.6 | 15.9 | |||||||||
Other
sources
|
6.4 | 6.5 | 5.4 | |||||||||
Gross
investment
income
|
383.8 | 345.1 | 315.0 | |||||||||
Investment
expenses
(1)
|
3.8 | 3.5 | 4.9 | |||||||||
Net
investment
income
|
$ | 379.9 | $ | 341.6 | $ | 310.1 | ||||||
Realized
gains (losses) on:
|
||||||||||||
Fixed
maturity securities:
|
||||||||||||
Gains
|
$ | 2.4 | $ | 2.7 | $ | 5.8 | ||||||
Losses
|
(.2 | ) | (.6 | ) | (4.0 | ) | ||||||
Net
|
2.2 | 2.0 | 1.7 | |||||||||
Equity
securities & other long-term investments
|
68.1 | 16.9 | 63.1 | |||||||||
Total
|
70.3 | 19.0 | 64.9 | |||||||||
Income
taxes
|
24.6 | 6.6 | 22.6 | |||||||||
Net
realized
gains
|
$ | 45.7 | $ | 12.3 | $ | 42.2 |
Changes
in unrealized investment gains (losses) on:
|
||||||||||||
Fixed
maturity
securities
|
$ | 112.1 | $ | (49.2 | ) | $ | (174.7 | ) | ||||
Less:
Deferred income taxes
(credits)
|
39.2 | (17.3 | ) | (61.1 | ) | |||||||
Net
changes in unrealized investment gains (losses)
|
$ | 72.9 | $ | (31.9 | ) | $ | (113.5 | ) | ||||
Equity
securities & other long-term investments
|
$ | (93.0 | ) | $ | 74.4 | $ | (10.7 | ) | ||||
Less:
Deferred income taxes
(credits)
|
(32.5 | ) | 26.0 | (3.7 | ) | |||||||
Net
changes in unrealized investment gains (losses)
|
$ | (60.5 | ) | $ | 48.3 | $ | (6.9 | ) |
|
(1)
|
Investment
expenses consist of personnel costs and investment management and custody
service fees, as well as interest incurred on funds held of $1.1 million,
$1.0 million and $.7 million for the years ended December 31, 2007, 2006
and 2005, respectively.
|
(e) Revenue Recognition -
Pursuant to GAAP applicable to the insurance industry, revenues are associated
with the related benefits, claims, and expenses by application of numerous
management estimates, accounting rules, and conventions.
Substantially all general insurance
premiums are reflected in income on a pro-rata basis. Earned but unbilled
premiums are generally taken into income on the billing date, while adjustments
for retrospective premiums, commissions and similar charges or credits are
accrued on the basis of periodic evaluations of current underwriting experience
and contractual obligations.
The Company’s mortgage guaranty
premiums primarily stem from monthly installment policies. Accordingly,
substantially all such premiums are generally written and earned in the month
coverage is effective. With respect to annual or single premium policies, earned
premiums are recognized on a pro-rata basis over the terms of the
policies.
Title premium and fee revenues stemming
from the Company’s direct operations (which include branch offices of its title
insurers and wholly owned agency subsidiaries) represent a pproximately
32% of 2007 consolidated title business revenues. Such premiums
are generally
56
recognized
as income at the escrow closing date which approximates the policy effective
date. Fee income related to escrow and other closing services is recognized when
the related services have been performed and completed. The remaining 68% of
consolidated title premium and fee revenues is produced by independent title
agents and underwritten title companies. Rather than making estimates that could
be subject to significant variance from actual premium and fee production, the
Company recognizes revenues from those sources upon receipt. Such receipts can
reflect a three to four month lag relative to the effective date of the
underlying title policy, and are offset concurrently by production expenses and
claim reserve provisions.
(f) Deferred Policy Acquisition
Costs - The Company's insurance subsidiaries, other than title companies,
defer certain costs which vary with and are primarily related to the production
of business. Deferred costs consist principally of commissions, premium taxes,
marketing, and policy issuance expenses. With respect to most coverages,
deferred acquisition costs are amortized on the same basis as the related
premiums are earned or, alternatively, over the periods during which premiums
will be paid. To the extent that future revenues on existing policies are not
adequate to cover related costs and expenses, deferred policy acquisition costs
are charged to earnings.
The following table summarizes deferred
policy acquisition costs and related data for the years shown:
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Deferred,
beginning of
year
|
$ | 264.9 | $ | 240.0 | $ | 232.3 | ||||||
Acquisition
costs deferred:
|
||||||||||||
Commissions
– net of
reinsurance
|
210.6 | 241.7 | 219.1 | |||||||||
Premium
taxes
|
78.5 | 68.2 | 75.5 | |||||||||
Salaries
and other marketing
expenses
|
94.7 | 81.6 | 92.6 | |||||||||
Sub-total
|
384.1 | 391.8 | 387.4 | |||||||||
Amortization
charged to
income
|
(402.5 | ) | (366.9 | ) | (379.8 | ) | ||||||
Change
for the
year
|
(18.4 | ) | 24.9 | 7.6 | ||||||||
Deferred,
end of
year
|
$ | 246.5 | $ | 264.9 | $ | 240.0 |
(g) Unearned Premiums -
Unearned premium reserves are generally calculated by application of pro-rata
factors to premiums in force. At December 31, 2007 and 2006, unearned premiums
consisted of the following:
December
31,
|
2007
|
2006
|
|||||||
General
Insurance
Group
|
$ | 1,101.7 | $ | 1,153.8 | ||||
Mortgage
Guaranty
Group
|
80.4 | 55.6 | ||||||
Total
|
$ | 1,182.2 | $ | 1,209.4 |
(h) Losses, Claims and Settlement
Expenses - The establishment of claim reserves by the Company’s insurance
subsidiaries is a reasonably complex and dynamic process influenced by a large
variety of factors. These factors principally include past experience applicable
to the anticipated costs of various types of claims, continually evolving and
changing legal theories emanating from the judicial system, recurring
accounting, statistical, and actuarial studies, the professional experience and
expertise of the Company's claim departments' personnel or attorneys and
independent claim adjusters, ongoing changes in claim frequency or severity
patterns such as those caused by natural disasters, illnesses, accidents,
work-related injuries, and changes in general and industry-specific economic
conditions. Consequently, the reserves established are a reflection of the
opinions of a large number of persons, of the application and
interpretation of historical precedent and trends, of expectations as to future
developments, and of management’s judgment in interpreting all such factors. At
any point in time, the Company is exposed to possibly higher or lower than
anticipated claim costs due to all of these factors, and to the evolution,
interpretation, and expansion of tort law, as well as the effects of unexpected
jury verdicts.
All reserves are necessarily based on
estimates which are periodically reviewed and evaluated in the light of emerging
claim experience and changing circumstances. The resulting changes in estimates
are recorded in operations of the periods during which they are made. Return and
additional premiums and policyholders’ dividends, all of which tend to be
affected by development of claims in future years, may offset, in whole or in
part, developed claim redundancies or deficiencies for certain coverages such as
workers’ compensation, portions of which are written under loss sensitive
programs that provide for such adjustments. The Company believes that its
overall reserving practices have been consistently applied over many years, and
that its aggregate net reserves have produced reasonable estimates of the
ultimate net costs of claims incurred. However, no representation is made that
ultimate net claim and related costs will not be greater or lower than
previously established reserves.
General Insurance Group reserves are
established to provide for the ultimate expected cost of settling unpaid
losses and claims reported at each balance sheet date. Such reserves are based
on continually evolving assessments of the facts available to the Company during
the settlement process which may stretch over long periods of time. Long-term
disability-type workers' compensation reserves are discounted to present
value based on interest rates ranging from 3.5% to 4.0%. Losses and claims
incurred but not reported, as well as expenses required to settle losses and
claims are established on the basis of a large number of formulas that take into
account various criteria, including historical cost experience and
anticipated costs of servicing reinsured and other risks. Estimates of
possible recoveries from salvage
57
or
subrogation opportunities are considered in the establishment of such reserves
as applicable. As part of overall claim and claim expense reserves, the point
estimates incorporate amounts to cover net estimates of unusual claims such as
those emanating from asbestosis and environmental (“A&E”) exposures as
discussed below. Such reserves can affect claim costs and related loss ratios
for such insurance coverages as general liability, commercial automobile
(truck), workers’ compensation and property.
Early in 2001, the Federal Department
of Labor revised the Federal Black Lung Program regulations. The revisions
basically require a reevaluation of previously settled, denied, or new
occupational disease claims in the context of newly devised, more lenient
standards when such claims are resubmitted. Following a number of challenges and
appeals by the insurance and coal mining industries, the revised regulations
were, for the most part, upheld in June, 2002 and are to be applied
prospectively. Since the final quarter of 2001 black lung claims filed or
refiled pursuant to these anticipated and now final regulations have increased,
though the volume of new claim reports has abated in recent years. The vast
majority of claims filed to date against Old Republic pertain to business
underwritten through loss sensitive programs that permit the charge of
additional or refund of return premiums to wholly or partially offset changes in
estimated claim costs, or to business underwritten as a service carrier on
behalf of various industry-wide involuntary market (i.e. assigned risk) pools. A
much smaller portion pertains to business produced on a traditional risk
transfer basis. The Company has established applicable reserves for claims as
they have been reported and for claims not as yet reported on the basis of its
historical experience as well as assumptions relative to the effect of the
revised regulations. Inasmuch as a variety of challenges are likely as the
revised regulations are implemented through the actual claim settlement process,
the potential impact on reserves, gross and net of reinsurance or retrospective
premium adjustments, resulting from such regulations cannot as yet be estimated
with reasonable certainty.
Old Republic's reserve estimates also
include provisions for indemnity and settlement costs for various asbestosis and
environmental impairment (“A&E”) claims that have been filed in the normal
course of business against a number of its insurance subsidiaries. Many such
claims relate to policies issued prior to 1985, including many issued during a
short period between 1981 and 1982 pursuant to an agency agreement canceled in
1982. Over the years, the Company's property and liability insurance
subsidiaries have typically issued general liability insurance policies with
face amounts ranging between $1.0 million and $2.0 million and rarely exceeding
$10.0 million. Such policies have, in turn, been subject to reinsurance cessions
which have typically reduced the subsidiaries’ net retentions to $.5 million or
less as to each claim. Old Republic's exposure to A&E claims cannot,
however, be calculated by conventional insurance reserving methods for a variety
of reasons, including: a) the absence of statistically valid data inasmuch as
such claims typically involve long reporting delays and very often uncertainty
as to the number and identity of insureds against whom such claims have arisen
or will arise; and b) the litigation history of such or similar claims for
insurance industry members which has produced inconsistent court decisions with
regard to such questions as when an alleged loss occurred, which policies
provide coverage, how a loss is to be allocated among potentially responsible
insureds and/or their insurance carriers, how policy coverage exclusions are to
be interpreted, what types of environmental impairment or toxic tort claims are
covered, when the insurer's duty to defend is triggered, how policy limits are
to be calculated, and whether clean-up costs constitute property damage. In
recent times, the Executive Branch and/or the Congress of the United States have
proposed or considered changes in the legislation and rules affecting the
determination of liability for environmental and asbestosis claims. As of
December 31, 2007, however, there is no solid evidence to suggest that possible
future changes might mitigate or reduce some or all of these claim exposures.
Because of the above issues and uncertainties, estimation of reserves for losses
and allocated loss adjustment expenses for A&E claims in particular is much
more difficult or impossible to quantify with a high degree of precision.
Accordingly, no representation can be made that the Company's reserves for such
claims and related costs will not prove to be overstated or understated in the
future. At December 31, 2007 and 2006, Old Republic’s aggregate indemnity and
loss adjustment expense reserves specifically identified with A&E exposures
amounted to $190.5 million and $194.9 million gross, respectively, and $158.1
million and $157.8 million net of reinsurance, respectively. Old Republic’s
average five year survival ratios stood at 7.7 years (gross) and 10.7 years (net
of reinsurance) as of December 31, 2007 and 7.6 years (gross) and 10.9 years
(net of reinsurance) as of December 31, 2006. Fluctuations in this ratio between
years can be caused by the inconsistent pay out patterns associated with these
types of claims.
Mortgage guaranty insurance loss
reserves are based on statistical calculations that take into account the number
of reported insured mortgage loan defaults as of each balance sheet date, as
well as experience-based estimates of loan defaults that have occurred but have
not as yet been reported. Further, the loss reserve estimating process also
takes into account a large number of variables including trends in claim
severity, potential salvage recoveries, expected cure rates for reported loan
delinquencies at various stages of default, and judgments relative to future
employment levels, housing market activity, and mortgage loan interest costs,
demand and availability.
Title insurance and related escrow
services loss and loss adjustment expense reserves are established as point
estimates to cover the projected settlement costs of known as well as claims
incurred but not reported, concurrently with the recognition of premium and
escrow service revenues of each reporting period. Reserves for known claims are
based on an assessment of the facts available to the Company during the
settlement process. The point estimates covering all claim reserves take into
account incurred but not reported (“IBNR”) claims based on past experience and
evaluations of such variables as changing trends in the types of policies
issued, changes in real estate markets and interest rate environments, and
changing levels of loan refinancing, all of which can have a bearing on the
emergence, number, and ultimate cost of claims.
58
In addition to the above reserve
elements, the Company establishes reserves for loss settlement costs that are
not directly related to individual claims. Such reserves are based on prior
years’ cost experience and trends, and are intended to cover the unallocated
costs of claim departments’ administration of known and IBNR
claims.
The following table shows an analysis
of changes in aggregate reserves for the Company's losses, claims and settlement
expenses for each of the years shown:
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Gross
reserves at beginning of
year
|
$ | 5,534.7 | $ | 4,939.8 | $ | 4,403.5 | ||||||
Less:
reinsurance losses recoverable
|
1,936.6 | 1,902.1 | 1,639.6 | |||||||||
Net
reserves at beginning of
year
|
3,598.0 | 3,037.6 | 2,763.8 | |||||||||
Incurred
claims and claim adjustment expenses:
|
||||||||||||
Provisions
for insured events of the current year
|
2,224.2 | 1,646.4 | 1,504.5 | |||||||||
Change
in provision for insured events of prior years
|
(66.1 | ) | (114.0 | ) | (43.9 | ) | ||||||
Total
incurred claims and claim adjustment expenses
|
2,158.1 | 1,532.5 | 1,460.7 | |||||||||
Payments:
|
||||||||||||
Claims
and claim adjustment expenses attributable to
|
||||||||||||
insured
events of the current
year
|
579.7 | 432.4 | 484.6 | |||||||||
Claims
and claim adjustment expenses attributable to
|
||||||||||||
insured
events of prior
years
|
930.0 | 539.6 | 702.1 | |||||||||
Total
payments
|
1,509.8 | 972.1 | 1,186.8 | |||||||||
Amount
of reserves for unpaid claims and claim adjustment
|
||||||||||||
expenses
at the end of each year, net of reinsurance
|
||||||||||||
losses
recoverable
|
4,246.3 | 3,598.0 | 3,037.6 | |||||||||
Reinsurance
losses
recoverable
|
1,984.7 | 1,936.6 | 1,902.1 | |||||||||
Gross
reserves at end of
year
|
$ | 6,231.1 | $ | 5,534.7 | $ | 4,939.8 |
For the three most recent calendar
years, the above table indicates that the one-year development of consolidated
reserves at the beginning of each year produced average favorable annual
developments of 2.4%. The Company believes that the factors most
responsible, in varying and continually changing degrees, for such redundancies
or deficiencies included differences in originally estimated salvage and
subrogation recoveries, in sales and prices of homes that can impact claim costs
upon the sale of foreclosed properties, by changes in regional or local economic
conditions and employment levels, by the extent of loan refinancing activity
that can reduce the period of time over which a policy remains at risk, by lower
than expected frequencies of claims incurred but not reported, by the effect of
reserve discounts applicable to workers’ compensation claims, by higher than
expected severity of litigated claims in particular, by governmental or
judicially imposed retroactive conditions in the settlement of claims such as
noted above in regard to black lung disease claims, by greater than anticipated
inflation rates applicable to repairs and the medical portion of claims in
particular, and by higher than expected claims incurred but not reported due to
the slower and highly volatile emergence patterns applicable to certain types of
claims such as those stemming from litigated, assumed reinsurance, or the
A&E types of claims noted above.
(i) Reinsurance - The cost of
reinsurance is recognized over the terms of reinsurance contracts. Amounts
recoverable from reinsurers for loss and loss adjustment expenses are estimated
in a manner consistent with the claim liability associated with the reinsured
business. The Company evaluates the financial condition of its reinsurers on a
regular basis. Allowances are established for amounts deemed uncollectible and
are included in the Company’s net claim and claim expense reserves.
(j) Income Taxes - The
Company and most of its subsidiaries file a consolidated tax return and provide
for income taxes payable currently. Deferred income taxes included in the
accompanying consolidated financial statements will not necessarily become
payable/recoverable in the future. The Company uses the asset and liability
method of calculating deferred income taxes. This method calls for the
establishment of a deferred tax, calculated at currently enacted tax rates that
are applied to the cumulative temporary differences between financial statement
and tax bases of assets and liabilities.
The provision for combined current and
deferred income taxes reflected in the consolidated statements of income does
not bear the usual relationship to income before income taxes as the result of
permanent and other differences between pretax income and taxable income
determined under existing tax regulations. The more significant differences,
their effect on the statutory income tax rate, and the resulting effective
income tax rates are summarized below:
59
Years
Ended December 31,
|
2007
|
2006
|
2005
|
|||||||||||
Statutory
tax
rate
|
35.0 | % | 35.0 | % | 35.0 | % | |||||||
Tax
rate increases (decreases):
|
|||||||||||||
Tax-exempt
interest
|
(6.7 | ) | (3.3 | ) | (2.6 | ) | |||||||
Dividends
received
exclusion
|
(.9 | ) | (.4 | ) | (.2 | ) | |||||||
Other
items – net
(1)
|
.6 | .4 | (6.0 | ) | |||||||||
Effective
tax
rate
|
28.0 | % | 31.7 | % | 26.2 | % | |||||||
(1)
|
Tax
and related interest recoveries of $57.9 million ($45.9 million net of
tax) were recorded in the second quarter of 2005 due to the favorable
resolution of tax issues applicable to the three years ended December 31,
1990. This adjustment reduced the 2005 effective tax rate by approximately
6.2 percentage points.
|
The tax effects of temporary
differences that give rise to significant portions of the Company's net deferred
tax assets (liabilities) are as follows at the dates shown:
December
31,
|
2007
|
2006
|
2005
|
||||||||||
Deferred
Tax Assets:
|
||||||||||||
Losses,
claims, and settlement
expenses
|
$ | 207.6 | $ | 192.0 | $ | 176.5 | ||||||
Pension
and deferred compensation
plans
|
27.9 | 30.3 | 9.6 | |||||||||
Other
timing
differences
|
6.9 | 1.9 | 6.2 | |||||||||
Total
deferred tax assets
(1)
|
242.5 | 224.3 | 192.3 | |||||||||
Deferred
Tax Liabilities:
|
||||||||||||
Unearned
premium
reserves
|
23.4 | 22.6 | 29.5 | |||||||||
Deferred
policy acquisition
costs
|
80.2 | 87.2 | 77.7 | |||||||||
Mortgage
guaranty insurers' contingency reserves
|
501.3 | 536.6 | 468.5 | |||||||||
Fixed
maturity securities adjusted to
cost
|
9.3 | 7.6 | 6.8 | |||||||||
Net
unrealized investment
gains
|
41.3 | 35.0 | 26.9 | |||||||||
Title
plants and
records
|
4.4 | 4.4 | 4.4 | |||||||||
Total
deferred tax
liabilities
|
660.3 | 693.7 | 614.0 | |||||||||
Net
deferred tax
liabilities
|
$ | 417.7 | $ | 469.4 | $ | 421.6 |
(1)
|
The
Company has evaluated its deferred tax assets as of each of these dates
and has concluded that no valuation allowance is
warranted.
|
Pursuant to special provisions of the
Internal Revenue Code pertaining to mortgage guaranty insurers, a contingency
reserve (established in accordance with insurance regulations designed to
protect policyholders against extraordinary volumes of claims) is deductible
from gross income. The tax benefits obtained from such deductions must, however,
be invested in a special type of non-interest bearing U.S. Treasury Tax and Loss
Bonds which aggregated $536.5 million at December 31, 2007. For Federal income
tax purposes, amounts deducted from the contingency reserve are taken into gross
statutory taxable income in the period in which they are released. Contingency
reserves may be released when incurred losses exceed thresholds established
under state law or regulation, upon special request and approval by state
insurance regulators, or in any event, upon the expiration of ten years. During
2007, the Company released net contingency reserves of $115.2 million and
consequently, $35.3 million of U.S. Treasury Tax and Loss Bonds were to be
redeemed during the first quarter of 2008.
Through December 31, 2005, cumulative
tax and loss bonds purchased and subsequent redemptions were reflected as U.S.
government securities within the investments section of the consolidated balance
sheets. Effective January 1, 2006 the Company has reclassified such bonds to
conform to more common industry reporting practices and to better align these
investments with the corresponding long-term deferred income tax liabilities to
which they relate. As a result of this reclassification, invested asset balances
have been reduced and the prepaid income tax asset has been increased, while
periodic operating cash flow and cash flow from investing activities have been
adjusted by correspondingly identical amounts. The reclassification has no
effect on the financial position or net income of the Company, nor does it call
for the receipt or disbursement of any additional cash resources.
In July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48) which became effective for the
Company in the first quarter of 2007. FIN 48 provides recognition criteria and a
related measurement model for uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 requires that a position taken or expected
to be taken in a tax return be recognized in the financial statements when it is
more likely than not that the position would be sustained upon examination by
tax authorities. The Company’s unrecognized tax benefits, including interest and
penalty accruals, are not considered material to the consolidated financial
statements and did not change significantly upon the adoption of FIN 48. 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 consisting of timing differences
whereby the ultimate deductibility of a tax position 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 taxable income in any particular
year. The Company believes that it establishes its reserves fairly and
consistently at each balance
60
sheet
date, and that it would succeed in defending its tax position in these regards.
Because of the impact of deferred tax accounting, other than possible interest
and penalties, the possible accelerated payment of tax to the IRS would not
affect the annual effective tax rate. The Company classifies interest and
penalties as income tax expense in the consolidated statement of income. The IRS
has audited the Company’s consolidated Federal income tax returns through year
end 2003 and no significant adjustments ultimately resulted.
(k) Property and Equipment -
Property and equipment is generally depreciated or amortized over the estimated
useful lives of the assets, (2 to 27 years), substantially by the straight-line
method. Depreciation and amortization expenses related to property and equipment
were $18.3 million, $18.5 million, and $19.0 million in 2007, 2006, and 2005,
respectively. Expenditures for maintenance and repairs are charged to income as
incurred, and expenditures for major renewals and additions are
capitalized.
(l) Title Plants and Records
- Title plants and records are carried at original cost or appraised
value at the date of purchase. Such values represent the cost of producing
or acquiring interests in title records and indexes and the appraised value
of purchased subsidiaries' title records and indexes at dates of acquisition.
The cost of maintaining, updating, and operating title records is charged to
income as incurred. Title records and indexes are ordinarily not amortized
unless events or circumstances indicate that the carrying amount of the
capitalized costs may not be recoverable.
(m) Goodwill and Intangible Assets
- Goodwill resulting from business combinations is no longer amortizable
against operations but must be tested annually for possible impairment of its
continued value ($159.1 million and $155.6 million at December 31, 2007 and
2006, respectively). No impairment charges were required for any period
presented. Goodwill and intangible assets of $58.5 million were recorded during
2006 as a result of the November 30, 2006 acquisition of a casualty insurance
book of business (see Note 7). Intangible assets related to the acquisition will
be amortized against future operating results.
(n) Employee Benefit Plans -
The Company has three pension plans covering a portion of its work force. The
three plans are the Old Republic International Salaried Employees Restated
Retirement Plan (the Old Republic Plan), the Bituminous Casualty Corporation
Retirement Income Plan (the Bituminous Plan) and the Old Republic National Title
Group Pension Plan (the Title Plan). The plans are defined benefit plans
pursuant to which pension payments are based primarily on years of service and
employee compensation near retirement. It is the Company's policy to fund
the plans' costs as they accrue. These plans have been closed to new
participants since December 31, 2004. Plan assets are comprised principally
of bonds, common stocks and short-term investments. Prior to 2007, the dates
used to determine pension measurements were December 31 for the Old Republic
Plan and the Bituminous Plan, and September 30 for the Title Plan. Effective
December 31, 2007, the Company adopted the measurement date provision of
Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”), which
requires the Company to measure the funded status of its plans as of the end of
the fiscal year. Consequently, the Title Plan changed its measurement date to
December 31. The adoption of the measurement date provisions of FAS 158 did not
have a material impact on the consolidated financial statements.
Effective December 31, 2006, the
Company adopted the recognition and disclosure provisions of FAS 158 which
requires that the funded status of pension and other postretirement plans be
recognized in the consolidated balance sheet. The funded status is measured as
the difference between the fair value of plan assets and the projected benefit
obligations on a plan-by-plan basis. The funded status of an overfunded benefit
plan is recognized as a net pension asset while the funded status for
underfunded benefit plans is recognized as a net pension liability; offsetting
entries are reflected as a component of shareholders’ equity in accumulated
other comprehensive income, net of deferred taxes. Changes in the funded status
of the plans are recognized in the period in which they occur. The adoption of
FAS 158’s recognition provision resulted in a reduction to accumulated other
comprehensive income of $20.0 million in 2006.
The changes in the projected benefit
obligation are as follows at the above measurement dates:
2007
|
2006
|
2005
|
||||||||||
Projected
benefit obligation at beginning of year
|
$ | 250.1 | $ | 230.9 | $ | 214.4 | ||||||
Increases
(decreases) during the year attributable to:
|
||||||||||||
Service
cost
|
9.6 | 9.3 | 8.5 | |||||||||
Interest
cost
|
15.2 | 13.0 | 12.2 | |||||||||
Actuarial
(gains)
losses
|
(22.6 | ) | 5.9 | 4.4 | ||||||||
Benefits
paid
|
(10.4 | ) | (9.1 | ) | (8.7 | ) | ||||||
Net
increase (decrease) for the
year
|
(8.1 | ) | 19.1 | 16.5 | ||||||||
Projected
benefit obligation at end of
year
|
$ | 242.0 | $ | 250.1 | $ | 230.9 |
61
The changes in the fair value of net
assets available for plan benefits as of the above measurement dates are as
follows:
2007
|
2006
|
2005
|
||||||||||
Fair
value of net assets available for plan benefits
|
||||||||||||
At
beginning of the
year
|
$ | 210.5 | $ | 195.6 | $ | 185.7 | ||||||
Increases
(decreases) during the year attributable to:
|
||||||||||||
Actual
return on plan
assets
|
14.9 | 17.1 | 10.8 | |||||||||
Sponsor
contributions
|
5.0 | 6.8 | 8.0 | |||||||||
Benefits
paid
|
(10.4 | ) | (9.1 | ) | (8.7 | ) | ||||||
Administrative
expenses
|
- | - | (.1 | ) | ||||||||
Net
increase for
year
|
9.4 | 14.8 | 9.8 | |||||||||
Fair
value of net assets available for plan benefits
|
||||||||||||
At
end of the
year
|
$ | 219.9 | $ | 210.5 | $ | 195.6 |
The components of aggregate annual
net periodic pension costs that take into account the above measurement dates
consisted of the following:
2007
|
2006
|
2005
|
||||||||||
Service
cost
|
$ | 8.7 | $ | 9.3 | $ | 8.5 | ||||||
Interest
cost
|
14.1 | 13.0 | 12.2 | |||||||||
Expected
return on plan
assets
|
(16.0 | ) | (14.8 | ) | (14.7 | ) | ||||||
Recognized
loss
|
3.2 | 3.4 | 2.4 | |||||||||
Net
cost
|
$ | 9.9 | $ | 10.9 | $ | 8.5 |
The pretax amounts recognized in other
comprehensive income consist of the following:
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Amounts
arising during the period:
|
||||||||||||
Net
recognized gain
(loss)
|
$ | 20.1 | $ | - | $ | - | ||||||
Net
prior service
cost
|
- | - | - | |||||||||
Reclassification
adjustment to components
Of
net periodic pension cost:
|
||||||||||||
Net
recognized (gain)
loss
|
3.2 | - | - | |||||||||
Net
prior service
cost
|
- | - | - | |||||||||
Minimum
pension
liability
|
- | (16.9 | ) | (1.7 | ) | |||||||
Net
pretax amount recognized
|
$ | 23.3 | $ | (16.9 | ) | $ | (1.7 | ) |
The amounts included in accumulated
other comprehensive income that have not yet been recognized as components of
net periodic pension cost consist of the following as of December
31:
2007
|
2006
|
|||||||
Net
recognized gain (loss)
|
$ | (29.8 | ) | $ | (53.7 | ) | ||
Net
prior service cost
|
- | - | ||||||
Total
|
$ | (29.8 | ) | $ | (53.7 | ) |
The amounts included in accumulated
other comprehensive income expected to be recognized as components of net
periodic pension cost during 2008 consist of the following:
Net
recognized gain
(loss)
|
$ | (.7 | ) | |
Net
prior service
cost
|
- | |||
Total
|
$ | (.7 | ) |
The projected benefit obligations for
the plans were determined using the following weighted-average assumptions as of
the above measurement dates:
2007
|
2006
|
|||
Settlement
discount
rates
|
6.50%
|
5.75%
|
||
Rates
of compensation
increase
|
4.25%
|
3.92%
|
The net periodic benefit cost for the
plans were determined using the following weighted-average assumptions, for the
plan years taking into account the above measurement dates:
2007
|
2006
|
|||
Settlement
discount
rates
|
5.75%
|
5.67%
|
||
Rates
of compensation
increase
|
3.92%
|
3.59%
|
||
Long-term
rates of return on plans’
assets
|
7.83%
|
7.83%
|
The assumed settlement discount rates
were determined by matching the current estimate of each Plan’s projected cash
outflows against spot rate yields on a portfolio of high quality
bonds as of the measurement date. To develop the expected long-term
rate of return on
62
assets
assumption, the Plans considered the historical returns and the future
expectations for returns for each asset class, as well as the target asset
allocation of the pension portfolios.
The accumulated benefit obligation for
the plans was $214.1 million and $221.1 million for the 2007 and 2006 plan years
taking into account the above measurement dates, respectively.
The following information is being
provided for plans with projected benefit obligations in excess of plan assets
as of the above measurement dates:
2007
|
2006
|
|||||||
Projected
benefit
obligations
|
$ | 160.0 | $ | 250.1 | ||||
Fair
value of plan
assets
|
$ | 134.0 | $ | 210.5 |
The following information is being
provided for plans with accumulated benefit obligations in excess of plan assets
as of the above measurement dates:
2007
|
2006
|
|||||||
Projected
benefit
obligations
|
$ | 79.4 | $ | 165.1 | ||||
Accumulated
benefit
obligations
|
69.7 | 145.5 | ||||||
Fair
value of plan
assets
|
$ | 61.0 | $ | 125.7 |
The benefits expected to be paid as of
December 31, 2007 for the next 10 years are as follows: 2008: $11.2 million;
2009: $11.7 million; 2010: $12.5 million; 2011: $13.0 million; 2012: $13.9
million and for the five years after 2012: $86.3 million.
The Companies made cash contributions
of $5.0 million to their pension plans in 2007 and expect to make cash
contributions of approximately $5 million in calendar year 2008.
The weighted-average asset
allocations of the Plans as of the above measurement dates are as
follows:
Plan
Assets
|
Investment
Policy Asset
|
2007
|
2006
|
Allocation
% Range Target
|
||||
Equity
securities:
|
||||||
Common
shares of Company stock
|
- %
|
- %
|
||||
Other
|
52.9
|
52.4
|
||||
Sub-total
|
52.9
|
52.4
|
30%
to 70%
|
|||
Debt
securities
|
45.5
|
44.5
|
30%
to 70%
|
|||
Other
(including short-term and
|
||||||
accrued
interest and dividends)
|
1.6
|
3.1
|
1%
to 20%
|
|||
Total
|
100.0%
|
100.0%
|
Plan assets are managed pursuant to
the investment policies set forth at Note 1(d).
The Company has a number of profit
sharing and other incentive compensation programs for the benefit of a
substantial number of its employees. The costs related to such programs are
summarized below:
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Employees
Savings and Stock Ownership Plan
|
$ | 2.5 | $ | 6.8 | $ | 6.5 | ||||||
Other
profit sharing
plans
|
5.1 | 9.6 | 9.3 | |||||||||
Cash
and deferred incentive
compensation
|
$ | 24.2 | $ | 25.7 | $ | 29.1 |
The Company sponsors an Employees
Savings and Stock Ownership Plan (ESSOP) in which a majority of its employees
participate. Current Company contributions are directed to the open market
purchase of its shares. Dividends on shares are allocated to participants as
earnings, and likewise invested in Company stock. The Company's annual
contributions are based on a formula that takes the growth in net operating
income per share over consecutive five year periods into account. As of December
31, 2007, there were 9,845,934 Old Republic common shares owned by the ESSOP,
all of which were allocated to employees’ account balances. There are no
repurchase obligations in existence.
(o) Escrow Funds - Segregated
cash deposit accounts and the offsetting liabilities for escrow deposits in
connection with Title Insurance Group real estate transactions in the same
amounts ($660.8 million and $928.6 million at December 31, 2007 and 2006,
respectively) are not included as assets or liabilities in the accompanying
consolidated balance sheets as the escrow funds are not available for regular
operations.
(p) Earnings Per Share -
Consolidated basic earnings per share excludes the dilutive effect of
common stock equivalents and is computed by dividing income available to common
stockholders by the weighted-average number of common shares actually
outstanding for the year. Diluted earnings per share are similarly calculated
with the inclusion of dilutive common stock equivalents. The following table
provides a reconciliation of net income and number of shares used in basic and
diluted earnings per share calculations.
63
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Numerator:
|
||||||||||||
Net
Income
|
$ | 272.4 | $ | 464.8 | $ | 551.4 | ||||||
Less:
Convertible preferred stock dividends
|
- | - | - | |||||||||
Numerator
for basic earnings per share -
|
||||||||||||
Income
available to common stockholders
|
272.4 | 464.8 | 551.4 | |||||||||
Effect
of dilutive securities:
|
||||||||||||
Convertible
preferred stock dividends
|
- | - | - | |||||||||
Numerator
for diluted earnings per share -
|
||||||||||||
income
available to common stockholders
|
||||||||||||
after
assumed
conversions
|
$ | 272.4 | $ | 464.8 | $ | 551.4 | ||||||
Denominator:
|
||||||||||||
Denominator
for basic earnings per share -
|
||||||||||||
weighted-average
shares
|
231,370,242 | 231,017,947 | 229,487,273 | |||||||||
Effect
of dilutive securities (2):
|
||||||||||||
Stock
options
|
1,542,486 | 2,017,039 | 2,621,218 | |||||||||
Convertible
preferred
stock
|
- | - | - | |||||||||
Dilutive
potential common
shares
|
1,542,486 | 2,017,039 | 2,621,218 | |||||||||
Denominator
for diluted earnings per share -
|
||||||||||||
adjusted
weighted-average shares and
|
||||||||||||
assumed
conversions
|
232,912,728 | 233,034,986 | 232,108,491 | |||||||||
Basic
earnings per share
(1)
|
$ | 1.18 | $ | 2.01 | $ | 2.40 | ||||||
Diluted
earnings per share
(1)
|
$ | 1.17 | $ | 1.99 | $ | 2.37 |
(1)
|
All
per share statistics have been restated to reflect all stock dividends or
splits declared through December 31,
2007.
|
(2)
|
Outstanding
stock option awards totaling 4,864,000, 1,517,025 and 0 shares as of
December 31, 2007, 2006 and 2005, respectively, were excluded from the
computation of earnings per share because their effect would have been
antidilutive to the periods
presented.
|
(q) Concentration of Credit Risk
- The Company is not exposed to material concentrations of credit risks
as to any one issuer.
(r) Stock Option Compensation
- Effective April 1, 2003, the Company adopted the requirements of
Statement of Financial Accounting Standards No. 148 (“FAS 148”), “Accounting for
Stock-Based Compensation – Transition and Disclosure – an amendment of FAS No.
123” on a prospective basis. Under FAS 148, stock-based compensation expense is
recognized for awards granted after the beginning of the fiscal year of
adoption, as such awards become vested. Prior to April 1, 2003, the Company
accounted for stock options under APB Opinion No. 25 (“APB 25”), “Accounting for
Stock Issued to Employees” and related interpretations under Statement of
Financial Accounting Standards No. 123 (“FAS 123”), “Accounting for Stock-Based
Compensation” which permitted the inclusion of stock-based compensation as a pro
forma disclosure in the financial statements.
On January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123-Revised (“FAS 123R”),
“Share-Based Payment” using the modified prospective transition method. Under
this method, compensation cost in 2006 includes the portion vesting in the
period for (1) all stock option awards granted prior to, but not vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of FAS 123, and (2) all stock option awards granted
subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of FAS 123R. Further, FAS 123R requires that
compensation cost be recognized immediately for awards granted to the Company’s
retirement eligible employees after January 1, 2006. Earnings for 2007 and 2006
include the accelerated recognition of stock option expenses of $2.0 million
($1.3 million net of tax) and $3.7 million ($2.4 million net of tax),
respectively, attributable to the 2007 and 2006 option grants to retirement
eligible employees who meet certain age and service criteria, typically
long-term employees who are ages 57 or older. Prior to adoption of FAS 123R, the
Company recognized compensation cost for such awards on a straight line basis
over the nominal vesting period. Results for prior periods have not been
restated. The cumulative effect of the initial adoption of FAS 123R on the
Company’s financial statements and earnings per share information was
immaterial.
64
The following table presents the stock
based compensation expense and income tax benefit recognized in the financial
statements:
2007
|
2006
|
2005
|
||||||||||
Stock
based compensation
expense
|
$ | 10.5 | $ | 10.6 | $ | 4.6 | ||||||
Income
tax
benefit
|
$ | 3.6 | $ | 3.7 | $ | 1.6 |
The following table illustrates the
effect on net income and earnings per share as if the Company had applied the
fair value provisions of FAS 123 to all options granted under the Company’s
stock option plans during 2005.
Years
Ended December 31,
|
2005
|
|||
Net
income, as
reported
|
$ | 551.4 | ||
Add:
Stock-based compensation expense included in reported income,
net
of related tax
effects
|
3.0 | |||
Deduct:
Total stock-based employee compensation expense determined
under
the
fair value based method for all awards, net of related tax
effects
|
8.6 | |||
Pro
forma
basis
|
$ | 545.7 | ||
Basic
earnings per share:
|
||||
As
reported
|
$ | 2.40 | ||
Pro
forma
basis
|
2.38 | |||
Diluted
earnings per share:
|
||||
As
reported
|
2.37 | |||
Pro
forma
basis
|
$ | 2.35 |
The fair value of each stock option
award is estimated on the date of grant using the Black-Scholes-Merton Model.
The following table presents the assumptions used in the Black-Scholes Model for
the awards granted during the periods presented. Expected volatilities are based
on the historical experience of Old Republic’s common stock. The expected term
of stock options represents the period of time that stock options granted are
assumed to be outstanding. Beginning in 2006, the Company uses historical data
to estimate the effect of stock option exercise and employee departure behavior;
groups of employees that have similar historical behavior are considered
separately for valuation purposes. The risk-free rate of return for periods
within the contractual term of the share option is based on the U.S. Treasury
rate in effect at the time of the grant.
2007
|
2006
|
2005
|
||||||||||
Expected
volatility
|
.19 | .25 | .26 | |||||||||
Expected
dividends
|
3.56 | % | 3.35 | % | 3.82 | % | ||||||
Expected
term (in
years)
|
7 | 7 | 10 | |||||||||
Risk-free
rate
|
4.43 | % | 4.81 | % | 4.62 | % |
A summary of stock option activity
under the plan as of December 31, 2007, 2006 and 2005, and changes in
outstanding options during the years then ended is presented below:
As
of and for the Years Ended December
31,
|
2007
|
2006
|
2005
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
Average
|
Average
|
Average
|
||||||||||||||||||||||
Exercise
|
Exercise
|
Exercise
|
||||||||||||||||||||||
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||||||||
Outstanding
at beginning of year
|
13,282,329 | $ | 17.26 | 12,266,170 | $ | 15.76 | 11,602,443 | $ | 15.00 | |||||||||||||||
Granted
|
2,329,000 | 21.78 | 2,511,800 | 22.01 | 2,057,500 | 18.44 | ||||||||||||||||||
Exercised
|
932,593 | 14.98 | 1,419,404 | 12.56 | 1,249,709 | 13.04 | ||||||||||||||||||
Forfeited
and
canceled
|
108,159 | 19.47 | 76,238 | 18.66 | 144,064 | 17.01 | ||||||||||||||||||
Outstanding
at end of
year
|
14,570,577 | 18.12 | 13,282,329 | 17.26 | 12,266,170 | 15.76 | ||||||||||||||||||
Exercisable
at end of
year
|
8,919,827 | $ | 16.38 | 8,077,223 | $ | 15.51 | 7,725,233 | $ | 14.31 | |||||||||||||||
Weighted
average fair value of
|
||||||||||||||||||||||||
options
granted during the year (1)
|
$ | 3.73 |
per
share
|
$ | 5.12 |
per
share
|
$ | 4.34 |
per
share
|
(1) Based on
the Black-Scholes option pricing model and the assumptions outlined
above.
65
A summary of stock options outstanding
and exercisable at December 31, 2007 follows:
Options
Outstanding
|
Options
Exercisable
|
Weighted
– Average
|
Weighted
|
Year(s)
|
Number
|
Remaining
|
Average
|
|||||||||
Of
|
Out-
|
Contractual
|
Exercise
|
Number
|
Exercise
|
|||||||
Ranges
of Exercise Prices
|
Grant
|
Standing
|
Life
|
Price
|
Exercisable
|
Price
|
||||||
$15.49
|
1998
|
491,733
|
0.25
|
$
15.49
|
491,733
|
$
15.49
|
||||||
$ 9.37 to $10.40
|
1999
|
452,208
|
1.25
|
10.40
|
449,239
|
10.40
|
||||||
$ 6.40 to $ 7.23
|
2000
|
411,859
|
2.25
|
6.40
|
399,801
|
6.40
|
||||||
$14.36
|
2001
|
1,195,579
|
3.25
|
14.36
|
1,152,731
|
14.36
|
||||||
$16.85
|
2002
|
1,499,199
|
4.25
|
16.85
|
1,499,199
|
16.85
|
||||||
$14.37
|
2003
|
1,482,229
|
5.25
|
14.37
|
1,482,229
|
14.37
|
||||||
$19.32 to $20.02
|
2004
|
2,304,532
|
6.25
|
19.33
|
1,639,948
|
19.33
|
||||||
$18.41 to $20.87
|
2005
|
1,941,737
|
7.25
|
18.44
|
908,482
|
18.44
|
||||||
$21.36 to $22.35
|
2006
|
2,471,375
|
8.25
|
22.00
|
652,048
|
22.02
|
||||||
$21.78 to $23.16
|
2007
|
2,320,125
|
9.25
|
21.78
|
244,416
|
21.78
|
||||||
Total
|
14,570,577
|
$
18.12
|
8,919,827
|
$
16.38
|
Pursuant
to the Company’s self-imposed limits, the maximum number of options available
for future issuance as of December 31, 2007, is 6,171,924 shares.
As
of December 31, 2007, there was $15.8 million of total unrecognized compensation
cost related to nonvested stock-based compensation arrangements granted under
the plan. That cost is expected to be recognized over a weighted average period
of approximately 3 years.
The cash received from stock option
exercises, the total intrinsic value of stock options exercised, and the actual
tax benefit realized for the tax deductions from option exercises are as
follows:
2007
|
2006
|
2005
|
||||||||||
Cash
received from stock option
exercise
|
$ | 13.9 | $ | 17.8 | $ | 16.3 | ||||||
Intrinsic
value of stock options
exercised
|
5.1 | 13.1 | 9.4 | |||||||||
Actual
tax benefit realized for tax deductions
from
stock options
exercised
|
$ | 1.7 | $ | 4.6 | $ | 3.3 |
Note 2 - Debt - Consolidated
debt of Old Republic and its subsidiaries is summarized below:
December
31,
|
2007
|
2006
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
Commercial
paper due within 180 days with an
|
||||||||||||||||
average
yield of 5.09% and 5.51%, respectively
|
$ | 59.8 | $ | 59.8 | $ | 18.8 | $ | 18.8 | ||||||||
Debentures
maturing in 2007 at
7.0%
|
- | - | 114.9 | 115.7 | ||||||||||||
Other
miscellaneous
debt
|
4.2 | 4.2 | 10.5 | 10.5 | ||||||||||||
Total
Debt
|
$ | 64.1 | $ | 64.1 | $ | 144.3 | $ | 145.1 |
The Company has access to the
commercial paper market for up to $300.0 million of which $240.0 million remains
unused as of December 31, 2007. The carrying amount of the Company's commercial
paper borrowings approximates its fair value. The fair value of publicly traded
debt is based on its quoted market price.
Scheduled maturities of the above debt
at December 31, 2007 are as follows: 2008: $61.0 million; 2009: $.8 million;
2010: $.8 million; 2011: $.7 million; 2012: $.4 million; 2013 and after: $ -.
During 2007, 2006 and 2005, $6.8 million, $9.8 million and $9.5 million,
respectively, of interest expense on debt was charged to consolidated
operations.
66
Note 3 - Shareholders' Equity
- All common and preferred share data herein has been retroactively
adjusted as applicable for stock dividends or splits declared through December
31, 2007.
(a) Preferred Stock - The
following table shows certain information pertaining to the Company's
preferred shares issued and outstanding:
Convertible
|
||
Preferred
Stock Series:
|
Series
G(1)
|
|
Annual
cumulative dividend rate per
share
|
$
(1)
|
|
Conversion
ratio of preferred into common
shares
|
1
for .95
|
|
Conversion
right
begins
|
Anytime
|
|
Redemption
and liquidation value per
share
|
(1)
|
|
Redemption
beginning in
year
|
(1)
|
|
Total
redemption value
(millions)
|
(1)
|
|
Vote
per
share
|
one
|
|
Shares
outstanding:
|
||
December
31,
2006
|
0
|
|
December
31,
2007
|
0
|
|
(1)
|
The
Company has authorized up to 1,000,000 shares of Series G Convertible
Preferred Stock for issuance pursuant to the Company's Stock Option Plan.
Series G had been issued under the designation “G-2”. As of December 31,
2003, all Series “G-2” had been converted into shares of common stock. In
2001, the Company created a new designation, “G-3”, from which no shares
have been issued as of December 31, 2007. Management believes this
designation will be the source of possible future issuances of Series G
stock. Except as otherwise stated, Series “G-2” and Series “G-3” are
collectively referred to as Series “G”. Each share of Series G pays a
floating rate dividend based on the prime rate of interest. At December
31, 2007, the annual dividend rate for Series “G-3” would have been 86
cents per share. Each share of Series G is convertible at any time, after
being held six months, into .95 shares of Common Stock (See Note 3(c)).
Unless previously converted, Series G shares may be redeemed at the
Company's sole option five years after their
issuance.
|
(b) Cash Dividend Restrictions
- The payment of cash dividends by the Company is principally dependent
upon the amount of its insurance subsidiaries' statutory policyholders' surplus
available for dividend distribution. The insurance subsidiaries' ability to pay
cash dividends to the Company is in turn generally restricted by law or subject
to approval of the insurance regulatory authorities of the states in which they
are domiciled. These authorities recognize only statutory accounting practices
for determining financial position, results of operations, and the ability of an
insurer to pay dividends to its shareholders. Based on 2007 data, the maximum
amount of dividends payable to the Company by its insurance and a small number
of non-insurance company subsidiaries during 2008 without the prior approval of
appropriate regulatory authorities is approximately $414.7 million.
(c) Stock Option Plan - The
Company has had stock option plans in effect for certain eligible key employees
since 1978. An amended plan adopted in 1992 was replaced at its
expiration by a plan approved by the shareholders in 2002, and the 2002 plan was
replaced by the 2006 Incentive Compensation Plan approved by the shareholders in
May 2006. Under the current plan, options awarded at the date of grant together
with options previously issued and then-outstanding may not exceed 9% of the
Company’s outstanding common stock at the end of the month immediately preceding
an option grant. Under the current plan, like its predecessors, the exercise
price of stock options is equal to the closing market price of the Company’s
common stock on the date of the grant, and the contractual life of the grant is
generally ten years from the date of the grant. Options granted in 2001 and
prior years under the 1992 plan may be exercised to the extent of 10% of the
number of shares covered thereby on and after the date of grant, and
cumulatively, to the extent of an additional 10% on and after each of the first
through ninth subsequent calendar years. Options granted in 2002 and thereafter
may be exercised to the extent of 10% of the number of shares covered thereby as
of December 31st of the year of the grant and, cumulatively, to the extent of an
additional 15%, 20%, 25% and 30% on and after the second through fifth calendar
years, respectively. Options granted to employees who meet certain retirement
eligibility provisions become fully vested upon retirement.
In the event the closing market price
of Old Republic’s common stock reaches a pre-established value (“the vesting
acceleration price”), options granted in 2001 and prior years may be exercised
cumulatively to the extent of 10% of the number of shares covered by the grant
for each year of employment by the optionee. For grants in 2002 and 2003,
optionees become vested on an accelerated basis to the extent of the greater of
10% of the options granted times the number of years of employment, or the sum
of the optionee’s already vested grant plus 50% of the remaining unvested grant.
There is no vesting acceleration for 2004 and subsequent years’
grants.
The option plans enable optionees to,
alternatively, exercise their options that have vested through December 31,
2004, into Series “G” Convertible Preferred Stock. The exercise of options into
such Preferred Stock reduces by 5% the number of equivalent common shares which
would otherwise be obtained from the exercise of options into common
shares.
67
(d) Common Stock - At December
31, 2007, there were 500,000,000 shares of common stock authorized. At the same
date, there were 100,000,000 shares of Class “B” common stock authorized, though
none were issued or outstanding. Class “B” common shares have the same rights as
common shares except for being entitled to 1/10th of a vote per share. The
Company reacquired a total of 1,566,100 shares of its common stock during 2007
for $28.3 million or $18.13 per share.
(e) Undistributed Earnings -
At December 31, 2007, the equity of the Company in the GAAP undistributed
earnings, and net unrealized investment gains (losses) of its subsidiaries
amounted to $3,273.3 million and $79.2 million, respectively. Dividends declared
during 2007, 2006 and 2005, to the Company by its subsidiaries amounted
to $175.8 million, $362.3 million and $287.2 million,
respectively.
Note
4 - Commitments and Contingent Liabilities:
(a) Reinsurance and Retention Limits
- In order to maintain premium production within their capacity and to
limit maximum losses for which they might become liable under policies they’ve
underwritten, Old Republic's insurance subsidiaries, as is the common
practice in the insurance industry, may cede all or a portion of their
premiums and related liabilities on certain classes of business to other
insurers and reinsurers. Although the ceding of insurance does not ordinarily
discharge an insurer from liability to a policyholder, it is industry practice
to establish the reinsured part of risks as the liability of the reinsurer. Old
Republic also employs retrospective premium and a large variety of risk-sharing
procedures and arrangements for parts of its business in order to reduce
underwriting losses for which it might become liable under insurance policies it
issues. To the extent that any reinsurance companies, assured or producer might
be unable to meet their obligations under existing reinsurance, retrospective
insurance and production agreements, Old Republic would be liable for the
defaulted amounts. As deemed necessary, reinsurance ceded to other companies is
secured by letters of credit, cash, and/or securities.
Except as noted in the following
paragraph, reinsurance protection on property and liability coverages generally
limits the net loss on most individual claims to a maximum of : $1.8 million for
workers' compensation; $1.8 million for commercial auto liability; $1.8 million
for general liability; $5.6 million for executive protection (directors &
officers and errors & omissions); $1.0 million for aviation; and $1.0
million for property coverages. Roughly 53% of the mortgage guaranty traditional
primary insurance in force is subject to lender sponsored captive reinsurance
arrangements structured primarily on an excess of loss basis. All bulk and other
insurance risk in force is retained. Exclusive of reinsurance, the average net
primary mortgage guaranty exposure is approximately (in whole dollars) $35,300.
Title insurance risk assumptions are currently limited to a maximum of $100.0
million as to any one policy. The vast majority of title policies issued,
however, carry exposures of $1.0 million or less.
Due to worldwide reinsurance capacity
and related cost constraints, effective January 1, 2002, the Company began
retaining exposures for all, but most predominantly workers’ compensation
liability insurance coverages in excess of $40.0 million that were previously
assumed by unaffiliated reinsurers for up to $100.0 million. Effective January
1, 2003 reinsurance ceded limits were raised to the $100.0 million level, and as
of January 1, 2005, they were further increased to $200.0 million. Pursuant to
regulatory requirements, however, all workers’ compensation primary insurers
such as the Company remain liable for unlimited amounts in excess of reinsured
limits. Other than the substantial concentration of workers’ compensation losses
caused by the September 11, 2001 terrorist attack on America, to the best of the
Company’s knowledge there had not been a similar accumulation of claims in a
single location from a single occurrence prior to that event. Nevertheless, the
possibility continues to exist that non-reinsured losses could, depending on a
wide range of severity and frequency assumptions, aggregate several hundred
million dollars for an insurer such as the Company. Such aggregations could
result from a catastrophe such as caused by an earthquake that could lead to the
death or injury of a large number of employees concentrated in a single facility
such as a high rise building.
As a result of the September 11, 2001
terrorist attack on America, the reinsurance industry eliminated coverage from
substantially all contracts for claims arising from acts of terrorism. Primary
insurers such as the Company thereby became fully exposed to such claims. Late
in 2002, the Terrorism Risk Insurance Act of 2002 (the “TRIA”) was signed into
law, immediately establishing a temporary federal reinsurance program
administered by the Secretary of the Treasury. The program applied to insured
commercial property and casualty losses resulting from an act of terrorism, as
defined in the TRIA. Congress extended and modified the program in late 2005
through the Terrorism Risk Insurance Revision and Extension Act of 2005 (the
“TRIREA”). TRIREA expired on December 31, 2007. Congress enacted a revised
program in December 2007 through the Terrorism Risk Insurance Program
Reauthorization Act of 2007 (the “TRIPRA”), a seven year extension through
December 2014. The TRIA automatically voided all policy exclusions which were in
effect for terrorism related losses and obligated insurers to offer terrorism
coverage with most commercial property and casualty insurance lines. The TRIREA
revised the definition of “property and casualty insurance” to exclude
commercial automobile, burglary and theft, surety, professional liability and
farm owners multi-peril insurance. TRIPRA did not make any further changes to
the definition of property and casualty insurance, however, it does include
domestic acts of terrorism within the scope of the program. Although insurers
are permitted to charge an additional premium for terrorism coverage, insureds
may reject the coverage. Under TRIPRA, the program’s protection is not triggered
for losses arising from an act of terrorism until the industry first suffers
losses of $100 billion in the aggregate during any one year. Once the program
trigger is met, the program will pay 85% of an insurer’s terrorism losses that
exceed an individual insurer’s deductible. The insurer’s deductible is 20% of
direct earned premium on property and casualty insurance.
Insurers may reinsure that portion of the risk
they retain under the program, but the
reinsurance market has not
68
displayed
a widespread willingness to accept such risks. To date, coverage for acts of
terrorism are excluded from substantially all the Company’s reinsurance treaties
and are effectively retained by it subject to any recovery that would be
collected under the temporary federal reinsurance program.
Reinsurance ceded by the Company's
insurance subsidiaries in the ordinary course of business is typically placed on
an excess of loss basis. Under excess of loss reinsurance agreements, the
companies are generally reimbursed for losses exceeding contractually
agreed-upon levels. Quota share reinsurance is most often effected between the
Company’s insurance subsidiaries and industry-wide assigned risk plans or
captive insurers owned by assureds. Under quota share reinsurance, the Company
remits to the assuming entity an agreed upon percentage of premiums written and
is reimbursed for underwriting expenses and proportionately related claims
costs.
Reinsurance recoverable asset balances
represent amounts due from or credited by assuming reinsurers for paid and
unpaid claims and premium reserves. Such reinsurance balances as are recoverable
from non-admitted foreign and certain other reinsurers such as captive insurance
companies owned by assureds, as well as similar balances or credits arising from
policies that are retrospectively rated or subject to assureds’ high deductible
retentions are substantially collateralized by letters of credit, securities,
and other financial instruments. Old Republic evaluates on a regular basis the
financial condition of its assuming reinsurers and assureds who purchase its
retrospectively rated or self-insured deductible policies. Estimates of
unrecoverable amounts totaling $28.7 million as of December 31, 2007 and $30.2
million as of December 31, 2006 are included in the Company’s net claim and
claim expense reserves since reinsurance, retrospectively rated, and
self-insured deductible policies and contracts do not relieve Old Republic from
its direct obligations to assureds or their beneficiaries.
At December 31, 2007, the Company’s ten
largest reinsurers represented approximately 66% of reinsurance recoverable on
paid and unpaid losses, with Munich Re America, Inc. the largest reinsurer
representing 32.1% of the total recoverable balance. Of the balance due from
these ten reinsurers, 79.4% was recoverable from A or better rated reinsurance
companies, 12.6% from industry-wide insurance assigned risk pools, and 8.0% from
captive reinsurance companies.
The following information relates to
reinsurance and related data for the General Insurance and Mortgage Guaranty
Groups for the three years ended December 31, 2007. Reinsurance transactions of
the Title Insurance Group and small life and health insurance operation are not
material.
Property and liability insurance
companies are required to annualize certain policy premiums in their regulatory
financial statements though such premiums may not be contractually due nor
ultimately collectable. The annualization process relies on a large number of
estimates, and has the effect of increasing direct, ceded, and net premiums
written, and of grossing up corresponding balance sheet premium balances and
liabilities such as unearned premium reserves. The accrual of these estimates
has no effect on net premiums earned or GAAP net income. During 2005, the
Company further refined certain premium annualization estimates. In
the following table, the sum total of these adjustments had the effect of
increasing general insurance direct premiums written by $66.3 million, premiums
written ceded by $43.2 million, and net premiums written by $23.1 million for
2005.
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
General
Insurance Group
|
||||||||||||
Written
premiums:
Direct
|
$ | 2,685.2 | $ | 2,389.4 | $ | 2,424.9 | ||||||
Assumed
|
61.5 | 137.8 | 37.9 | |||||||||
Ceded
|
$ | 634.7 | $ | 504.4 | $ | 573.5 | ||||||
Earned
premiums:
Direct
|
$ | 2,644.7 | $ | 2,345.4 | $ | 2,291.9 | ||||||
Assumed
|
173.4 | 30.7 | 35.9 | |||||||||
Ceded
|
663.0 | $ | 474.0 | $ | 522.6 | |||||||
Claims
ceded
|
$ | 366.2 | $ | 330.3 | $ | 469.0 | ||||||
Mortgage
Guaranty Group
|
||||||||||||
Written
premiums:
Direct
|
$ | 637.9 | $ | 534.9 | $ | 511.7 | ||||||
Assumed
|
- | .1 | .1 | |||||||||
Ceded
|
$ | 95.1 | $ | 81.0 | $ | 79.3 | ||||||
Earned
premiums:
Direct
|
$ | 612.7 | $ | 524.7 | $ | 508.0 | ||||||
Assumed
|
.4 | .6 | .8 | |||||||||
Ceded
|
$ | 94.9 | $ | 81.0 | $ | 79.3 | ||||||
Claims
ceded
|
$ | 1.9 | $ | .3 | $ | .5 | ||||||
Insurance
in force as of December 31:
|
||||||||||||
Direct
|
$ | 124,738.4 | $ | 111,172.7 | $ | 102,919.7 | ||||||
Assumed
|
1,737.1 | 1,964.6 | 2,196.3 | |||||||||
Ceded
|
$ | 7,419.7 | $ | 6,940.7 | $ | 6,467.2 |
69
(b) Leases - Some of the
Company's subsidiaries maintain their offices in leased premises. Some of these
leases provide for the payment of real estate taxes, insurance, and other
operating expenses. Rental expenses for operating leases amounted to $42.5
million, $41.0 million and $39.9 million in 2007, 2006 and 2005, respectively.
These expenses relate primarily to building leases of the Company. A number of
the Company’s subsidiaries also lease other equipment for use in their
businesses. At December 31, 2007, aggregate minimum rental commitments (net
of expected sub-lease receipts) under noncancellable operating leases are
summarized as follows: 2008: $39.0 million; 2009: $30.6 million; 2010: $21.7
million; 2011: $15.6 million; 2012: $11.2 million; 2013 and after: $48.5
million.
(c) General - In the normal
course of business, the Company and its subsidiaries are subject to various
contingent liabilities, including possible income tax assessments resulting from
tax law interpretations or issues raised by taxing or regulatory authorities in
their regular examinations, catastrophic claim occurrences not indemnified by
reinsurers such as noted at 4(a) above, or failure to collect all amounts on its
investments or balances due from assureds and reinsurers. The Company does not
have a basis for anticipating any significant losses or costs that could result
from any known or existing contingencies.
(d) Legal Proceedings - Legal
proceedings against the Company arise in the normal course of business and
usually pertain to claim matters related to insurance policies and contracts
issued by its insurance subsidiaries. Other legal proceedings are discussed
below.
Purported
class 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, pursuant to rate schedules filed by ORNTIC or
by state rating bureaus with the state insurance regulators, ORNTIC was required
to, but failed to give consumers reissue and/or refinance credits on the
premiums charged for title insurance covering mortgage refinancing transactions.
Substantially similar lawsuits are also pending against other unaffiliated title
insurance companies in these and other states as well. The actions seek damages
and declaratory and injunctive relief. ORNTIC intends to defend vigorously
against the actions but, at this stage in the litigation, the Company cannot
estimate the ultimate costs it may incur as the actions proceed to their
conclusions.
During
the fourth quarter of 2007, purported class action lawsuits were filed against
two of the Company’s title agency subsidiaries, Old Republic Title & Escrow,
Ltd. and Old Republic Title Company, in the Superior Court of Washington, King
County, and the U.S. District Court for the Northern District of California,
respectively. The action in Washington alleges that the Company’s subsidiary
overcharged customers for escrow-related fees and did not disclose to customers
that it would keep interest or credits or benefits in lieu of interest on money
deposited into escrow. The action in California is brought by and on behalf of
Hispanic home buyers in Monterey County against various real estate developers,
brokers, mortgage brokers, mortgage lenders, mortgage loan servicers, as well as
the Company’s title agency subsidiary, and alleges that the title agency failed
to provide adequate disclosures to protect the buyers from the abusive sales and
predatory lending practices of the other defendants. Both actions seek damages,
declaratory and injunctive relief. The Company’s subsidiaries intend to defend
vigorously against both actions and are unable at this early stage in the
litigation to estimate the costs they may incur in defending these actions to
their conclusions.
Note 5 - Consolidated Quarterly
Results - Unaudited - Old Republic's consolidated quarterly operating
data for the two years ended December 31, 2007 is presented below.
In the
opinion of management, all adjustments consisting of normal recurring
adjustments necessary for a fair statement of quarterly results have been
reflected in the data which follows. It is also management's opinion, however,
that quarterly operating data for insurance enterprises such as the Company is
not indicative of results to be achieved in succeeding quarters or years. The
long-term nature of the insurance business, seasonal and cyclical factors
affecting premium production, the fortuitous nature and, at times, delayed
emergence of claims, and changes in yields on invested assets are some of the
factors necessitating a review of operating results, changes in shareholders'
equity, and cash flows for periods of several years to obtain a proper indicator
of performance trends. The data below should be read in conjunction with
the “Management Analysis of Financial Position and Results of
Operations”:
1st
|
2nd
|
3rd
|
4th
|
|||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
Year Ended December 31,
2007:
|
||||||||||||||||
Operating
Summary:
|
||||||||||||||||
Net
premiums, fees, and other
income
|
$ | 879.2 | $ | 925.2 | $ | 930.7 | $ | 905.2 | ||||||||
Net
investment income and realized gains (losses)
|
94.4 | 107.0 | 99.0 | 149.5 | ||||||||||||
Total
revenues
|
973.9 | 1,032.2 | 1,029.8 | 1,054.9 | ||||||||||||
Benefits,
claims, and
expenses
|
818.2 | 865.0 | 994.8 | 1,034.4 | ||||||||||||
Net
income
|
$ | 107.7 | $ | 115.1 | $ | 29.2 | $ | 20.2 | ||||||||
Net income per
share:
Basic
|
$ | .47 | $ | .50 | $ | .13 | $ | .09 | ||||||||
Diluted
|
$ | .46 | $ | .49 | $ | .12 | $ | .09 | ||||||||
Average
shares outstanding:
|
||||||||||||||||
Basic
|
231,388,190 | 231,558,161 | 231,014,468 | 230,458,010 | ||||||||||||
Diluted
|
233,614,450 | 233,556,032 | 232,298,642 | 231,121,858 |
70
1st
|
2nd
|
3rd
|
4th
|
|||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
Year Ended December 31,
2006:
|
||||||||||||||||
Operating
Summary:
|
||||||||||||||||
Net
premiums, fees, and other
income
|
$ | 852.6 | $ | 858.0 | $ | 876.9 | $ | 845.6 | ||||||||
Net
investment income and realized gains (losses)
|
90.2 | 90.7 | 87.8 | 91.6 | ||||||||||||
Total
revenues
|
942.9 | 948.9 | 964.9 | 937.4 | ||||||||||||
Benefits,
claims, and
expenses
|
770.9 | 762.4 | 795.7 | 784.8 | ||||||||||||
Net
income
|
$ | 117.4 | $ | 126.6 | $ | 116.1 | $ | 104.6 | ||||||||
Net income per share:
Basic
|
$ | .51 | $ | .55 | $ | .50 | $ | .45 | ||||||||
Diluted
|
$ | .51 | $ | .54 | $ | .50 | $ | .45 | ||||||||
Average
shares outstanding:
|
||||||||||||||||
Basic
|
229,835,408 | 230,013,892 | 230,470,356 | 231,037,520 | ||||||||||||
Diluted
|
231,999,922 | 232,240,816 | 232,517,359 | 233,244,626 |
Note 6 - Information About Segments
of Business - The Company’s major business segments are organized as the
General Insurance (property and liability insurance), Mortgage Guaranty and
Title Insurance Groups. The Company includes the results of its small life &
health insurance business with those of its holding company parent and minor
corporate services 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 realized investment gains or losses and impairments, and these are
aggregated in consolidated totals. The contributions of Old Republic’s insurance
industry segments to consolidated totals are shown in the following
table.
The
Company does not derive over 10% of its consolidated revenues from any one
customer. Revenues and assets connected with foreign operations are not
significant in relation to consolidated totals.
The
General Insurance Group provides property and liability insurance primarily to
commercial clients. Old Republic does not have a meaningful participation in
personal lines of insurance. Commercial automobile (principally trucking)
insurance is the largest type of coverage underwritten by the General Insurance
Group, accounting for 29.7% of the Group’s direct premiums written in 2007. The
remaining premiums written by the General Insurance Group are derived largely
from a wide variety of coverages, including workers’ compensation, general
liability, loan credit indemnity, general aviation, directors and officers
indemnity, fidelity and surety indemnities, and home and auto
warranties.
Private mortgage insurance produced by
the Mortgage Guaranty Group protects mortgage lenders and investors from default
related losses on residential mortgage loans made primarily to homebuyers who
make down payments of less than 20% of the home’s purchase price. The Mortgage
Guaranty Group insures only first mortgage loans, primarily on residential
properties having one-to-four family dwelling units. The Mortgage Guaranty
segment’s ten largest customers were responsible for 49.5%, 39.7% and 44.2% of
traditional primary new insurance written in 2007, 2006 and 2005, respectively.
The largest single customer accounted for 9.8% of traditional primary new
insurance written in 2007 compared to 8.8% and 11.5% in 2006 and 2005,
respectively.
The title insurance business consists
primarily of the issuance of policies to real estate purchasers and investors
based upon searches of the public records which contain information concerning
interests in real property. The policy insures against losses arising out of
defects, loans and encumbrances affecting the insured title and not excluded or
excepted from the coverage of the policy.
The
accounting policies of the segments parallel those described in the summary of
significant accounting policies pertinent thereto.
71
Segment
Reporting
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
General
Insurance:
|
||||||||||||
Net premiums
earned
|
$ | 2,155.1 | $ | 1,902.1 | $ | 1,805.2 | ||||||
Net investment income and other
income
|
282.9 | 236.5 | 212.4 | |||||||||
Total
revenues before realized gains or
losses
|
$ | 2,438.0 | $ | 2,138.7 | $ | 2,017.6 | ||||||
Income before taxes and realized
investment gains or losses (2)
|
$ | 418.0 | $ | 401.6 | $ | 350.0 | ||||||
Income
tax expense on above
(1)
|
$ | 126.5 | $ | 123.2 | $ | 62.9 | ||||||
Segment assets - at year
end
|
$ | 9,769.9 | $ | 9,363.5 | $ | 8,178.9 | ||||||
Mortgage
Guaranty:
|
||||||||||||
Net
premiums
earned
|
$ | 518.2 | $ | 444.3 | $ | 429.5 | ||||||
Net
investment income and other
income
|
90.1 | 85.6 | 86.5 | |||||||||
Total
revenues before realized gains or
losses
|
$ | 608.3 | $ | 529.9 | $ | 516.0 | ||||||
Income (loss) before taxes
(credits)
and realized investment gains or
losses
|
$ | (110.4 | ) | $ | 228.4 | $ | 243.7 | |||||
Income
tax expense (credits) on
above
|
$ | (44.0 | ) | $ | 75.3 | $ | 81.1 | |||||
Segment assets - at year
end
|
$ | 2,523.8 | $ | 2,189.6 | $ | 2,211.8 | ||||||
Title
Insurance:
|
||||||||||||
Net premiums
earned
|
$ | 638.5 | $ | 733.6 | $ | 757.2 | ||||||
Title, escrow and other
fees
|
212.1 | 246.3 | 324.6 | |||||||||
Sub-total
|
850.7 | 980.0 | 1,081.8 | |||||||||
Net
investment income and other
income
|
27.7 | 27.3 | 26.7 | |||||||||
Total
revenues before realized gains or
losses
|
$ | 878.5 | $ | 1,007.3 | $ | 1,108.6 | ||||||
Income (loss) before taxes
(credits)
and realized investment gains or
losses
(2)
|
$ | (14.7 | ) | $ | 31.0 | $ | 88.7 | |||||
Income
tax expense (credits) on
above
|
$ | (6.4 | ) | $ | 9.9 | $ | 30.1 | |||||
Segment assets - at year
end
|
$ | 770.4 | $ | 772.7 | $ | 776.3 | ||||||
72
Reconciliations
of Segmented Amounts to Consolidated Totals
Years
Ended December 31,
|
2007
|
2006
|
2005
|
||||||||||
Consolidated
Revenues:
|
||||||||||||
Total
revenues of above Company segments
|
$ | 3,925.0 | $ | 3,676.0 | $ | 3,642.3 | ||||||
Other
sources
(3)
|
131.4 | 127.1 | 122.5 | |||||||||
Consolidated
net realized investment
gains
|
70.3 | 19.0 | 64.9 | |||||||||
Consolidation
elimination
adjustments
|
(35.8 | ) | (27.9 | ) | (23.9 | ) | ||||||
Consolidated
revenues
|
$ | 4,091.0 | $ | 3,794.2 | $ | 3,805.9 | ||||||
Consolidated
Income before taxes:
|
||||||||||||
Total
income before taxes and realized investment
|
||||||||||||
gains
or losses of above Company segments
|
$ | 292.9 | $ | 661.2 | $ | 682.6 | ||||||
Other
sources – net
(3)
|
15.1 | - | (.1 | ) | ||||||||
Consolidated
net realized investment
gains
|
70.3 | 19.0 | 64.9 | |||||||||
Consolidated
income before income taxes
|
$ | 378.4 | $ | 680.1 | $ | 747.3 | ||||||
Consolidated
Income Tax Expense:
|
||||||||||||
Total
income tax expense of above Company segments
|
$ | 75.9 | $ | 208.6 | $ | 174.2 | ||||||
Other
sources – net
(3)
|
5.3 | - | (.9 | ) | ||||||||
Income
tax expense on consolidated net realized
|
||||||||||||
investment
gains
|
24.6 | 6.6 | 22.6 | |||||||||
Consolidated
income tax
expense
|
$ | 105.9 | $ | 215.2 | $ | 195.9 |
December
31,
|
||||||||
2007
|
2006
|
|||||||
Consolidated
Assets:
|
||||||||
Total
assets for above Company
segments
|
$ | 13,064.2 | $ | 12,325.9 | ||||
Other
assets
(3)
|
437.9 | 443.4 | ||||||
Consolidation
elimination
adjustments
|
(211.5 | ) | (157.0 | ) | ||||
Consolidated
assets
|
$ | 13,290.6 | $ | 12,612.2 |
In the
above tables, net premiums earned on a GAAP basis differ slightly from statutory
amounts due to certain differences in calculations of unearned premium reserves
under each accounting method.
(1)
|
General
Insurance tax expense was reduced by $45.9 million in 2005 as discussed in
Note 1(j).
|
(2)
|
In
the above tables, income before taxes is reported net of interest charges
on intercompany financing arrangements within Old Republic’s holding
company system for the following segments: General - $15.4 million, $3.0
million, and $1.2 million for the years ended December 31, 2007, 2006 and
2005, respectively; Title - $2.3 million, $.1 million, and $ -
for the years ended December 31, 2007, 2006, and 2005,
respectively.
|
(3)
|
Represents
amounts for Old Republic’s holding company parent, minor corporate
services subsidiaries, and a small life and health insurance
operation.
|
Note 7 - Acquisition of Contractors
Insurance Book of Business – On November 30, 2006, Old Republic Insurance
Company (“ORINSCO”), a wholly owned subsidiary of the Company, acquired a
casualty insurance book of business from an insurance subsidiary of Aon
Corporation (“Aon”). ORINSCO acquired policy renewal rights and certain other
minor assets for a purchase price of $85 million, inclusive of deferred policy
acquisition costs. Concurrently, the Company assumed certain insurance assets
and liabilities through a quota share reinsurance agreement covering the net
liabilities of the Aon insurance subsidiary. The liabilities assumed included
unearned premium and claim reserves of $106.9 million and $228.3 million,
respectively, which relate to business previously written through the Aon
insurance subsidiary. The insurance book of business is focused on specialized
casualty insurance coverages and services for trade contractors and large
commercial construction projects. Renamed Old Republic Construction Program
Group, Inc., the business has been organized as a joint underwriting venture
between Old Republic and certain principals previously associated with the book
of business.
73
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Old
Republic International Corporation:
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, preferred stock and
common shareholders' equity and cash flows, present fairly, in all material
respects, the financial position of Old Republic International Corporation and
its subsidiaries at
December 31, 2007 and 2006, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
2007 in conformity
with accounting principles generally accepted in the United States of America.
Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007 based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for these
financial statements, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Management’s Report on Internal Control Over
Financial Reporting under Item 9A of the 2007 Form 10-K Annual Report. Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Chicago,
Illinois
February
25, 2008
74
Management’s
Responsibility for Financial Statements
Management is responsible for the
preparation of the Company’s consolidated financial statements and related
information appearing in this report. Management believes that the consolidated
financial statements fairly reflect the form and substance of transactions and
that the financial statements reasonably present the Company’s financial
position and results of operations in conformity with generally accepted
accounting principles. Management also has included in the Company’s financial
statement amounts that are based on estimates and judgments which it believes
are reasonable under the circumstances.
The independent registered public
accounting firm has advised that it audits the Company’s consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board and provides an objective, independent review of the fairness of
reported operating results and financial position.
The Board of Directors of the Company
has an Audit Committee composed of five non-management Directors. The committee
meets periodically with financial management, the internal auditors and the
independent registered public accounting firm to review accounting, control,
auditing and financial reporting matters.
Item
9 - Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
9A - Controls and Procedures
|
Evaluation
of Disclosure Controls and
Procedures
|
The
Company’s principal executive officer and its principal financial officer have
evaluated the Company’s disclosure controls and procedures as of the end of the
period covered by this annual report. Based upon their evaluation, the principal
executive officer and principal financial officer have concluded that the
Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are effective for the above
referenced evaluation period.
Changes
in Internal Control
During
the three month period ended December 31, 2007, there were no changes in
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
|
Management’s
Report on Internal Control Over Financial
Reporting
|
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company’s internal control
over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Based on
our evaluation under the framework in Internal Control – Integrated
Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2007.
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
has audited the effectiveness of our internal control over financial reporting
as of December 31, 2007. Their report is shown on the preceding page in this
Annual Report.
75
Item
9B - Other Information
Pursuant to the requirements of Section
303A.12(a) of the New York Stock Exchange Listed Company Manual, the Company has
filed the Annual CEO Certification with the New York Stock Exchange on June 8,
2007.
PART
III
Item
10 - Directors and Executive Officers of the Registrant
Executive
Officers of the Registrant
The
following table sets forth certain information as of December 31, 2007,
regarding the senior executive officers of the Company:
Name
|
Age
|
Position
|
Charles
S. Boone
|
54
|
Senior
Vice President - Investments and Treasurer since August,
2001.
|
James
A. Kellogg
|
56
|
President
and Chief Operating Officer since July, 2006 and President of Old Republic
Insurance Company since October, 2002.
|
Spencer
LeRoy, III
|
61
|
Senior
Vice President, Secretary and General Counsel since
1992.
|
Karl
W. Mueller
|
48
|
Senior
Vice President and Chief Financial Officer since October, 2004. Prior to
joining Old Republic, Mr. Mueller was a partner with the public accounting
firm of KPMG LLP.
|
Christopher
S. Nard
|
44
|
Senior
Vice President - Mortgage Guaranty since May, 2005. President and Chief
Executive Officer of Republic Mortgage Insurance Companies since May,
2005.
|
R.
Scott Rager
|
59
|
Senior
Vice President - General Insurance and President and Chief Operating
Officer of Old Republic General Insurance Companies since July,
2006.
|
Rande
K. Yeager
|
59
|
Senior
Vice President - Title Insurance since March, 2003; President and Chief
Executive Officer of Old Republic Title Insurance Companies since March,
2002.
|
Aldo
C. Zucaro
|
68
|
Chairman
of the Board, Chief Executive Officer, and Director since 1993, 1990 and
1976, respectively.
|
The term of office of each officer of
the Company expires on the date of the annual meeting of the board of directors,
which is generally held in May of each year. There is no family relationship
between any of the executive officers named above. Each of these named officers,
except for Karl W. Mueller, has been employed in executive capacities with the
Company and/or its subsidiaries for the past five years.
The Company will file with the
Commission prior to March 28, 2008 a definitive proxy statement pursuant to
Regulation 14a in connection with its Annual Meeting of Shareholders to be held
on May 23, 2008. A list of Directors appears on the “Signature” page of this
report. Information about the Company’s directors is contained in the Company’s
definitive proxy statement for the 2008 Annual Meeting of shareholders, which is
incorporated herein by reference.
The Company has adopted a code of
ethics that applies to its principal executive officer and principal financial
officer. A copy has been filed with the Commission and appears as Exhibit (14)
in the exhibit index under item 15. The Company has also posted the text of its
code of ethics on its internet website at www.oldrepublic.com.
Item
11 - Executive Compensation
Information with respect to this Item
is incorporated herein by reference to the section entitled “Executive
Compensation” in the Company’s proxy statement in connection with the Annual
Meeting of Shareholders to be held on May 23, 2008, which will be on file with
the Commission by March 28, 2008.
Item
12 - Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
Information with respect to this Item
is incorporated herein by reference to the sections entitled “General
Information” and “Principal Holders of Securities” in the Company’s proxy
statement to be filed with the Commission by March 28, 2008, in connection with
the Annual Meeting of Shareholders to be held on May 23, 2008.
76
Item
13 - Certain Relationships and Related Transactions
Information with respect to this Item
is incorporated herein by reference to the section entitled “Principal Holders
of Securities” in the Company’s Proxy Statement in connection with the Annual
Meeting of Shareholders to be held on May 23, 2008, which will be on file with
the Commission by March 28, 2008.
Item
14 - Principal Accountant Fees and Services
Information with respect to this Item
is incorporated herein by reference to the section entitled “Board Committees”
in the Company’s Proxy Statement in connection with the Annual Meeting of
Shareholders to be held on May 23, 2008, which will be on file with the
Commission by March 28, 2008.
PART
IV
Item
15 - Exhibits and Financial Statement Schedules
|
Documents
filed as a part of this report:
|
1. Financial statements: See
Item 8, Index to Financial Statements.
2. Financial statement
schedules will be filed on or before April 11, 2008 under cover of Form
10-K/A.
3. See exhibit index on page
79 of this report.
77
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized (Name, Title or Principal Capacity, and
Date).
(Registrant): Old Republic International
Corporation
By
: /s/ Aldo C.
Zucaro
02/25/08
Aldo C. Zucaro, Chairman of the Board,
Date
Chief Executive Officer and Director
By
: /s/ Karl W.
Mueller
02/25/08
Karl W. Mueller, Senior Vice President
Date
and Chief Financial Officer
Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated (Name, Title or Principal
Capacity, and Date).
|
/s/ Harrington Bischof | /s/ Arnold L. Steiner | |
Harrington
Bischof, Director*
|
Arnold L.
Steiner, Director*
|
|
/s/ Jimmy A. Dew | /s/ Fredicka Taubitz | |
Jimmy A. Dew,
Director*
Vice Chairman
of
Republic
Mortgage Insurance Company
|
Fredicka
Taubitz, Director*
|
|
/s/ John M. Dixon | /s/ Charles F. Titterton | |
John M.
Dixon, Director*
|
Chalres F.
Titterton, Director*
|
|
/s/ Leo E. Knight, Jr. | /s/ Dennis P. Van Mieghem | |
Leo E.
Knight, Jr., Director*
|
Dennis P. Van
Mieghem, Director*
|
|
/s/ John W. Popp | /s/ Steven Walker | |
Jophn W.
Popp*
|
Steven
Walker, Director*
|
|
/s/ William A. Simpson | ||
William A.
Simpson, Director*
Chairman of
Republic Mortgage
Insurance
Company
|
|
|
|
* By/s/Aldo C.
Zucaro
Attorney-in-fact
Date:
February 21, 2008
78
EXHIBIT
INDEX
An index of exhibits required by Item 601 of Regulation S-K
follows:
(3)
Articles of incorporation and
by-laws.
(A) * Restated
Certificate of Incorporation. (Exhibit 3(A) to Registrant’s Annual Report on
Form 10-K for 2004).
(B) * By-laws,
as amended. (Exhibit 99.2 to Form 8-K filed September 4, 2007).
(4)
Instruments defining the rights of security holders, including
indentures.
|
(A)
|
*
|
Amended
and Restated Rights Agreement dated as of November 19, 2007 between Old
Republic International Corporation and Wells Fargo Bank, NA. (Exhibit 4.1
to Registrant’s Form 8-A filed November 19,
2007).
|
|
(B)
|
*
|
Agreement
to furnish certain long term debt instruments to the Securities &
Exchange Commission upon request. (Exhibit 4(D) on Form 8 dated August 28,
1987).
|
(10)
Material contracts.
**
|
(A)
|
*
|
Amended
and Restated Old Republic International Corporation Key Employees
Performance Recognition Plan. (Exhibit 10(A) to Registrant’s Annual Report
on Form 10-K for 2002).
|
**
|
(B)
|
*
|
Old
Republic International Corporation 2005 Key Employees Performance
Recognition Plan. (Exhibit 10(B) to Registrant’s Annual Report on Form
10-K for 2006).
|
**
|
(C)
|
*
|
Amended
and Restated 1992 Old Republic International Corporation Non-qualified
Stock Option Plan. (Exhibit 10(B) to Registrant’s Annual Report on Form
10-K for 2002).
|
**
|
(D)
|
*
|
Amended
and Restated 2002 Old Republic International Corporation Non-qualified
Stock Option Plan. (Exhibit 10(C) to Registrant’s Annual Report on Form
10-K for 2005).
|
**
|
(E)
|
*
|
Old
Republic International Corporation 2006 Incentive Compensation Plan.
(Exhibit 99.1 to Form 8-K/A filed June 2,
2006).
|
**
|
(F)
|
*
|
Amended
and Restated Old Republic International Corporation Executives Excess
Benefits Pension Plan. (Exhibit 10(E) to Registrant’s Annual Report on
Form 10-K for 1997).
|
**
|
(G)
|
*
|
Form
of Indemnity Agreement between Old Republic International Corporation and
each of its directors and certain officers. (Exhibit 10 to Form S-3
Registration Statement No.
33-16836).
|
**
|
(H)
|
*
|
RMIC
Corporation/Republic Mortgage Insurance Company Amended and Restated Key
Employees Performance Recognition Plan. (Exhibit 10(I) to Registrant’s
Annual Report on Form 10-K for
2000).
|
**
|
(I)
|
*
|
RMIC/Republic
Mortgage Insurance Company 2005 Key Employees Performance Recognition
Plan. (Exhibit 10(J) to Registrant’s Annual Report on Form 10-K for
2006).
|
**
|
(J)
|
*
|
RMIC
Corporation/Republic Mortgage Insurance Company Executives Excess Benefits
Pension Plan. (Exhibit 10(J) to Registrant’s Annual Report on Form 10-K
for 2000).
|
**
|
(K)
|
*
|
Amended
and Restated Old Republic Risk Management Key Employees Recognition Plan.
(Exhibit 10(J) to Registrant’s Annual Report on Form 10-K for
2002).
|
79
|
(Exhibit
Index, Continued)
|
**
|
(L)
|
*
|
Old
Republic Risk Management, Inc. 2005 Key Employees Performance Recognition
Plan. (Exhibit 10(M) to Registrant’s Annual Report on Form 10-K for
2006).
|
**
|
(M)
|
*
|
Old
Republic National Title Group Incentive Compensation Plan. (Exhibit 10(K)
to Registrant’s Annual Report on Form 10-K for
2003).
|
**
|
(N)
|
*
|
ORI
Great West Holdings, Inc. Key Employees Performance Recognition Plan.
(Exhibit 10(O) to Registrant’s Annual Report on Form 10-K for
2006).
|
**
|
(O)
|
*
|
ORI
Great West Holdings, Inc. 2005 Key Employees Performance Recognition Plan.
(Exhibit 10(P) to Registrant’s Annual Report on Form 10-K for
2006).
|
(12)
|
Not
applicable
|
(13)
|
Not
applicable
|
(14)
|
*
|
Code
of Ethics for the Principal Executive Officer and Senior Financial
Officer. (Exhibit 14 to Registrant’s Annual Report on Form 10-K for
2003).
|
(21)
|
Subsidiaries
of the registrant.
|
(23)
|
Consent
of PricewaterhouseCoopers LLP.
|
(24)
|
Powers
of attorney.
|
(28)
|
Consolidated
Schedule P (To be filed by
amendment).
|
(31.1)
|
Certification
by Aldo C. Zucaro, Chief Executive Officer, pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbannes-Oxley Act of 2002.
|
(31.2)
|
Certification
by Karl W. Mueller, Chief Financial Officer, pursuant to Rule 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbannes-Oxley Act of 2002.
|
(32.1)
|
Certification
by Aldo C. Zucaro, Chief Executive Officer, pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section
906 of the Sarbannes-Oxley Act of
2002.
|
(32.2)
|
Certification
by Karl W. Mueller, Chief Financial Officer, pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section
906 of the Sarbannes-Oxley Act of
2002.
|
(99.1)
|
*
|
Old
Republic International Corporation Audit Committee Charter. (Exhibit 99.1
of Registrant’s Form 8-K filed February 27,
2006).
|
(99.2)
|
*
|
Old
Republic International Corporation Nominating Committee Charter. (Exhibit
99.2 to Registrant’s Annual Report on Form 10-K for
2003).
|
(99.3)
|
*
|
Old
Republic International Corporation Compensation Committee Charter.
(Exhibit 99.2 of Registrant’s Form 8-K filed February 27,
2006).
|
(99.4)
|
*
|
Code
of Business Conduct and Ethics. (Exhibit 99.4 to Registrant’s Annual
Report on Form 10-K for 2003).
|
(99.5)
|
*
|
Corporate
Governance Guidelines. (Exhibit 99.5 to Registrant’s Annual Report on Form
10-K for 2003).
|
_______________
|
*
|
Exhibit
incorporated herein by reference.
|
|
**
|
Denotes
a management or compensatory plan or arrangement required to be filed as
an exhibit pursuant to Item 601 of Regulation
S-K.
|
80