Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10 - Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period September 30, 2002 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 0-4625
OLD REPUBLIC INTERNATIONAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 36-2678171
- ------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
307 North Michigan Avenue, Chicago, Illinois 60601
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 312-346-8100
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Shares Outstanding
Class September 30, 2002
--------------------------- ----------------------
Common Stock / $1 par value 120,552,882
There are 19 pages contained in this report.
2
OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / September 30, 2002
INDEX
- --------------------------------------------------------------------------------
PAGE NO.
---------
PART I FINANCIAL INFORMATION:
CONSOLIDATED SUMMARY BALANCE SHEETS 3
CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 10
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 11 - 14
CONTROLS AND PROCEDURES 15
PART II OTHER INFORMATION 16
SIGNATURES 17
CERTIFICATIONS 18 & 19
3
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2002 2001
---------------- ----------------
Assets
Investments: Held to maturity:
Fixed maturity securities (at amortized cost)(fair value: $2,049.7 and $2,173.6) $1,930.8 $2,111.8
Other long-term investments 59.8 60.8
---------------- ----------------
Total 1,990.7 2,172.7
---------------- ----------------
Available for sale:
Fixed maturity securities (at fair value) (cost: $2,823.8 and $2,536.4) 2,999.7 2,610.2
Equity securities (at fair value) (cost: $498.7 and $318.3) 447.9 391.6
Short-term investments (at fair value which approximates cost) 338.8 298.5
---------------- ----------------
Total 3,786.5 3,300.4
---------------- ----------------
Total investments 5,777.2 5,473.1
---------------- ----------------
Other Assets: Cash 72.8 38.0
Accrued investment income 74.9 75.4
Accounts and notes receivable 504.5 447.5
Federal income tax recoverable: Current 2.1 ---
Reinsurance balances and funds held 57.8 60.5
Reinsurance recoverable:Paid losses 37.2 25.0
Policy and claim reserves 1,433.6 1,390.3
Deferred policy acquisition costs 197.9 179.8
Sundry assets 249.3 230.1
---------------- ----------------
2,630.6 2,447.0
---------------- ----------------
Total Assets $8,407.9 $7,920.2
================ ================
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, Preferred Stock and
Common Shareholders' Equity
Liabilities: Future policy benefits $103.0 $110.4
Losses, claims and settlement expenses 3,557.4 3,451.0
Unearned premiums 701.1 604.1
Other policyholders' benefits and funds 55.8 53.3
---------------- ----------------
Total policy liabilities and accruals 4,417.4 4,218.8
Commissions, expenses, fees and taxes 165.3 165.8
Reinsurance balances and funds 135.1 121.2
Federal income tax payable: Current --- 7.2
Deferred 414.3 376.5
Debt 141.8 159.0
Sundry liabilities 86.7 87.4
---------------- ----------------
Total liabilities 5,360.8 5,136.1
---------------- ----------------
Preferred
Stock: Convertible preferred stock --- 0.3
---------------- ----------------
Common Common stock (*) 123.7 122.1
Shareholders' Additional paid-in capital 252.2 219.8
Equity: Retained earnings 2,626.2 2,383.2
Accumulated other comprehensive income 77.4 91.1
Treasury stock (at cost) (*) (32.6) (32.6)
---------------- ----------------
Total Common Shareholders' Equity 3,047.0 2,783.7
---------------- ----------------
Total Liabilities, Preferred Stock
and Common Shareholders' Equity $8,407.9 $7,920.2
================ ================
(*) At September 30, 2002 and December 31, 2001 there were 500,000,000 shares
of common stock, $1.00 par value, authorized, of which 123,745,479 at
September 30, 2002 and 122,168,699 at December 31, 2001 were issued and
outstanding. As of the same dates, there were 100,000,000 shares of Class B
Common Stock, $1.00 par value, authorized, of which no shares were issued.
Common shares classified as treasury stock were 3,192,597 and 3,191,368 as
of September 30, 2002 and December 31, 2001, respectively.
See accompanying notes.
4
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited)
($ in Millions, Except Common Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Revenues: Net premiums earned $549.6 $463.1 $1,551.1 $1,305.1
Title, escrow and other fees 73.6 61.3 199.5 178.1
---------------- ---------------- ---------------- ----------------
Sub-total 623.3 524.4 1,750.7 1,483.2
Net investment income 68.8 68.0 203.7 205.1
Realized investment gains (losses) (3.2) (2.4) 10.9 20.6
Other income 12.1 9.5 32.7 27.3
---------------- ---------------- ---------------- ----------------
Net revenues 701.0 599.5 1,998.1 1,736.3
---------------- ---------------- ---------------- ----------------
Expenses: Benefits, claims and settlement expenses 253.1 222.1 708.3 631.9
Underwriting, acquisition and
insurance expenses 304.7 253.3 859.1 720.2
Interest and other expenses 1.4 4.4 6.9 14.6
---------------- ---------------- ---------------- ----------------
Total expenses 559.3 479.9 1,574.4 1,366.8
---------------- ---------------- ---------------- ----------------
Income before income taxes and items below 141.6 119.6 423.6 369.5
---------------- ---------------- ---------------- ----------------
Income Taxes: Currently payable 28.1 27.8 78.5 69.9
Deferred 17.1 10.4 45.4 44.0
---------------- ---------------- ---------------- ----------------
Total income taxes 45.2 38.2 123.9 113.9
---------------- ---------------- ---------------- ----------------
96.4 81.3 299.6 255.5
Other items - net --- 1.0 (0.2) 2.4
---------------- ---------------- ---------------- ----------------
Net Income: $96.3 $82.4 $299.4 $257.9
================ ================ ================ ================
Net Income
Per Share: Basic $0.80 $0.69 $2.48 $2.17
================ ================ ================ ================
Diluted $0.79 $0.69 $2.46 $2.14
================ ================ ================ ================
Dividends Per
Common Share: Cash dividends $0.16 $0.15 $0.47 $0.44
================ ================ ================ ================
Average number of common and common
equivalent shares outstanding:
Basic 120,549,496 118,928,107 120,529,081 118,917,122
================ ================ ================ ================
Diluted 121,487,344 120,260,624 121,558,013 120,336,152
================ ================ ================ ================
See accompanying notes.
5
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Net income as reported $96.3 $82.4 $299.4 $257.9
---------------- ---------------- ---------------- ----------------
Other comprehensive income (loss):
Foreign currency translation adjustment (3.0) (1.7) --- (1.9)
---------------- ---------------- ---------------- ----------------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period (8.7) 40.1 (10.3) 69.6
Less: elimination of pretax realized gains (losses)
included in income as reported (3.2) (2.4) 10.9 20.6
---------------- ---------------- ---------------- ----------------
Pretax unrealized gains (losses) on securities
carried at market value (5.4) 42.5 (21.3) 49.0
Deferred income taxes (credits) (1.7) 14.9 (7.5) 17.1
---------------- ---------------- ---------------- ----------------
Net unrealized gains (losses) on securities (3.7) 27.6 (13.7) 31.8
---------------- ---------------- ---------------- ----------------
Net adjustments (6.8) 25.9 (13.7) 29.9
---------------- ---------------- ---------------- ----------------
Comprehensive income $89.5 $108.3 $285.7 $287.9
================ ================ ================ ================
See accompanying notes.
6
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
----------------------------------
2002 2001
---------------- ----------------
Cash flows from operating activities:
Net income $299.4 $257.9
Adjustment to reconcile net income to
net cash provided by operating activities:
Deferred policy acquisition costs (18.5) (29.8)
Premiums and other receivables (42.5) (154.0)
Unpaid claims and related items 78.3 24.8
Future policy benefits and policyholders' funds 73.2 181.0
Income taxes 36.0 79.7
Reinsurance balances and funds 4.7 18.8
Accounts payable, accrued expenses and other 20.6 16.0
---------------- ----------------
Total 451.4 394.6
---------------- ----------------
Cash flows from investing activities:
Sales of fixed maturity securities:
Held to maturity:
Maturities and early calls 245.8 212.4
Other 1.1 ---
Available for sale:
Maturities and early calls 208.3 195.3
Other 158.3 39.7
Sales of equity securities 85.4 45.7
Sales of other investments 1.5 2.4
Sales of fixed assets held for company use 0.8 1.3
Cash and short-term investments of subsidiary acquired 1.7 ---
Purchases of fixed maturity securities:
Held to maturity (71.7) (250.9)
Available for sale (660.1) (364.9)
Purchases of equity securities (272.7) (100.1)
Purchases of other investments (2.0) (2.7)
Purchases of fixed assets held for company use (10.2) (10.0)
Other-net (13.4) (3.6)
---------------- ----------------
Total (327.3) (235.5)
---------------- ----------------
Cash flows from financing activities:
Increase in term loans --- 30.0
Issuance of preferred and common stocks 21.3 8.7
Repayments of term loans (15.0) (47.0)
Redemption of debentures and notes (2.5) (0.9)
Dividends on common shares (56.4) (52.2)
Dividends on preferred shares --- ---
Purchase of treasury stock --- ---
Other-net 3.6 1.8
---------------- ----------------
Total (49.1) (59.6)
---------------- ----------------
Increase (decrease) in cash and short-term investments 75.0 99.4
Cash and short-term investments, beginning of period 336.6 411.0
---------------- ----------------
Cash and short-term investments, end of period $411.6 $510.5
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for: Interest $4.9 $8.2
================ ================
Income taxes $80.1 $31.8
================ ================
See accompanying notes.
7
OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)
- --------------------------------------------------------------------------------
1. Accounting Policies and Basis of Presentation:
The accompanying consolidated summary financial statements have been
prepared in conformity with generally accepted accounting principles
("GAAP") as described in the Corporation's latest annual report to
shareholders or as disclosed herein. The financial accounting and reporting
process relies on estimates and on the exercise of judgment, but in the
opinion of management all adjustments, consisting of normal recurring
accruals, necessary to a fair presentation of the accompanying statements
have been reflected therein.
During the first quarter of 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 (FAS 142) "Goodwill and Other Intangible
Assets". Under FAS 142, goodwill and certain intangible assets are no longer
being amortized against operations but must be tested periodically for
possible impairment of their carrying values. The Company completed the
transitional goodwill impairment test required by FAS 142 in the first
quarter of 2002 and determined that there was no indication of goodwill or
intangible asset impairment.
2. Common Share Data:
Common share data has been retroactively adjusted to reflect all stock
dividends and splits. The following table provides a reconciliation of the
income before extraordinary items and number of shares used in basic and
diluted earnings per share calculations.
Quarters Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Numerator:
Income before extraordinary item......................... $ 96.3 $ 82.4 $ 299.4 $ 257.9
Less Preferred stock dividends........................... -- -- -- --
------------ ------------ ------------ ------------
Numerator for basic earnings per share -
income available to common stockholders................ 96.3 82.4 299.4 257.9
Effect of dilutive securities:
Convertible preferred stock dividends.................... -- -- -- --
------------ ------------ ------------ ------------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions................................ $ 96.3 $ 82.4 $ 299.4 $ 257.9
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share -
weighted-average shares............................... 120,549,496 118,928,107 120,529,081 118,917,122
Effect of dilutive securities:
Stock options............................................ 932,338 1,288,446 1,017,299 1,373,168
Convertible preferred stock.............................. 5,510 44,071 11,633 45,862
------------ ------------ ------------ ------------
Dilutive potential common shares......................... 937,848 1,332,517 1,028,932 1,419,030
------------ ------------ ------------ ------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions...................................... 121,487,344 120,260,624 121,558,013 120,336,152
============ ============ ============ ============
Basic earnings per share................................... $ 0.80 $ 0.69 $ 2.48 $ 2.17
============ ============ ============ ============
Diluted earnings per share................................. $ 0.79 $ 0.69 $ 2.46 $ 2.14
============ ============ ============ ============
8
3. Unrealized Appreciation of Investments:
Cumulative net unrealized gains on fixed maturity securities available for
sale and equity securities credited to a separate account in common
shareholders' equity amounted to $89.3 at September 30, 2002. Unrealized
appreciation of investments, before applicable deferred income taxes of
$48.1, at September 30, 2002 included gross unrealized gains and (losses) of
$254.4 and ($116.9), respectively.
For the nine months ended September 30, 2002 and 2001, net unrealized
appreciation (depreciation) of investments, net of deferred income taxes
(credits), amounted to $(13.7) and $31.8, respectively.
4. Information About Segments of Business
The Corporation's business segments are organized as the General Insurance
(property and liability insurance), Mortgage Guaranty, Title Insurance and
Life Insurance Groups. The contributions of Old Republic's insurance
industry segments to consolidated revenues and operating results, and
certain balance sheet data pertaining thereto are shown in the following
tables on the basis of GAAP. Each of the Corporation's segments underwrites
and services only those insurance coverages which may be written by it
pursuant to state insurance regulations and corporate charter provisions.
Segment Reporting
- -------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
General Insurance Group:
Net premiums earned.................................... $ 303.4 $ 257.7 $ 858.5 $ 734.2
Net investment income and other income (a)............. 48.3 48.0 144.7 146.7
------------ ------------ ------------ ------------
Total............................................. $ 351.8 $ 305.8 $ 1,003.3 $ 880.9
============ ============ ============ ============
Income before taxes.................................... $ 46.8 $ 36.1 $ 132.1 $ 107.7
============ ============ ============ ============
Income tax expense..................................... $ 13.1 $ 9.0 $ 25.1 $ 26.7
============ ============ ============ ============
Mortgage Guaranty Group:
Net premiums earned.................................... $ 95.9 $ 86.9 $ 278.6 $ 262.0
Net investment income and other income (a)............. 23.2 20.9 66.1 60.1
------------ ------------ ------------ ------------
Total............................................. $ 119.1 $ 107.9 $ 344.8 $ 322.1
============ ============ ============ ============
Income before taxes.................................... $ 70.8 $ 65.9 $ 212.7 $ 193.1
============ ============ ============ ============
Income tax expense..................................... $ 23.9 $ 22.2 $ 71.9 $ 65.3
============ ============ ============ ============
Title Insurance Group:
Net premiums earned.................................... $ 135.6 $ 105.1 $ 374.5 $ 270.4
Title, escrow and other fees ......................... 73.6 61.3 199.5 178.1
------------ ------------ ------------ ------------
Sub-total......................................... 209.2 166.5 574.1 448.6
Net investment income and other income (a)............. 5.7 5.9 17.2 17.7
------------ ------------ ------------ ------------
Total............................................. $ 215.0 $ 172.4 $ 591.3 $ 466.3
============ ============ ============ ============
Income before taxes.................................... $ 26.9 $ 21.3 $ 68.4 $ 52.8
============ ============ ============ ============
Income tax expense..................................... $ 9.2 $ 7.4 $ 23.3 $ 18.2
============ ============ ============ ============
Life Insurance Group:
Net premiums earned.................................... $ 14.6 $ 13.2 $ 39.3 $ 38.4
Net investment income and other income (a)............. 1.8 1.9 5.2 5.9
------------ ------------ ------------ ------------
Total............................................. $ 16.4 $ 15.1 $ 44.5 $ 44.4
============ ============ ============ ============
Income before taxes.................................... $ 1.3 $ 1.2 $ 4.7 $ 4.0
============ ============ ============ ============
Income tax expense .................................... $ 0.5 $ 0.4 $ 1.8 $ 1.4
============ ============ ============ ============
9
Reconciliations of Segments to Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Total revenues for reportable segments................. $ 702.5 $ 601.4 $ 1,984.1 $ 1,713.7
Net realized investment gains (losses) ................ (3.2) (2.4) 10.9 20.6
Other revenues......................................... 2.7 2.7 5.8 10.0
Elimination of intersegment revenues (b)............... (0.9) (2.1) (2.8) (8.0)
------------ ------------ ------------ ------------
Total consolidated revenues....................... $ 701.0 $ 599.5 $ 1,998.1 $ 1,736.3
============ ============ ============ ============
Income before taxes:
Total income before taxes of reportable segments....... $ 145.9 $ 124.6 $ 418.0 $ 357.7
Net realized investment gains (losses) ................ (3.2) (2.4) 10.9 20.6
Other revenues - net................................... (1.0) (2.5) (5.3) (8.8)
------------ ------------ ------------ ------------
Income before income taxes and
extraordinary items............................... $ 141.6 $ 119.6 $ 423.6 $ 369.5
============ ============ ============ ============
---------
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.
(a) Including unallocated investment income derived from invested
capital and surplus funds./(b) Represents results of holding company
parent, consolidation eliminating adjustments, and general corporate
expenses, as applicable.
5. Legal Proceedings
Legal proceedings against the Company arise in the normal course of business
and generally pertain to claim matters related to insurance policies and
contracts issued by the Corporation's insurance subsidiaries.
The Federal Department of Labor has revised the Federal Black Lung Program
regulations effective January 19, 2001. These new regulations, which require
a re-evaluation of previously settled or denied occupational disease claims,
were challenged by the insurance and coal mining industries in a lawsuit
filed in the United States District Court for the District of Columbia. The
challenge was summarily dismissed by the Court and an appeal was filed by
the insurance and coal mining industries before the United States Court of
Appeals for the D.C. Circuit. The Court of Appeals upheld the regulations,
for the most part, to be applied on a non-retroactive basis. It also
remanded the regulations back to the Department of Labor to make certain
changes. Further challenges are anticipated as the revised regulations are
applied in actual claims. At this time, the potential impact on gross and
net of reinsurance reserves or retrospectively rated policies due to the
revised regulations is not measurable.
In December 1999, a class action lawsuit was filed against one of the
Company's mortgage guaranty insurance subsidiaries in the Federal District
Court for the Southern District of Georgia. The suit alleges that the
subsidiary provided pool insurance and other services to mortgage lenders at
preferential, below market prices in return for mortgage insurance business,
and that such practices violated the Real Estate Settlement Procedures Act.
The Court ruled in favor of a summary judgment motion filed by the Company's
subsidiary and dismissed the lawsuit. The class plaintiffs appealed and the
U.S. Court of Appeals for the Eleventh Circuit vacated the judgment and
remanded the case back to the District Court. The Company's subsidiary has
filed a motion seeking a summary judgment on grounds asserted in its earlier
motion but not considered by the District Court. While the District Court
has not yet ruled on the subsidiary's summary judgment motion, it recently
denied a similar summary judgment motion filed by an unrelated mortgage
guaranty insurer in a similar class action lawsuit before the same Court.
The ultimate outcome of the litigation cannot be foreseen at the present
time, but as a result of these recent developments, the subsidiary has
established a $4.8 million reserve charge for estimated legal and other
expenses likely to be incurred in this litigation.
The City and County of San Francisco and certain escrow customers of an
underwritten title agency subsidiary headquartered in the State of
California have filed lawsuits alleging that the subsidiary: 1) failed to
escheat unclaimed escrow funds; 2) charged for services not necessarily
provided; and 3) collected illegal interest payments or fees from banks on
the basis of funds held for escrow customers. The subsidiary in turn
conducted an internal review of its records and concluded that it had
certain liabilities for part of the issues denoted at (1) and (2). The
subsidiary defended against the alleged practice denoted at (3) on the
grounds that such practices are common within the industry, are not in
conflict with any laws or regulations, and other meritorious defenses. The
10
consolidated lawsuits have been tried and a judgment rendered, affirming in
part and denying in part the subsidiary's defenses. In the aggregate, the
judgment, excluding post-judgment interest, amounts to approximately $33.0
million. The subsidiary has appealed the most significant portions of the
judgment, and management believes the judgment will be substantially reduced
on appeal. Through September 30, 2002, the subsidiary has continually
evaluated its exposures since the litigation began and has paid or otherwise
provided cumulatively $47.5 million including its best estimate of its
remaining liability and costs associated with all these issues.
11
OLD REPUBLIC INTERNATIONAL CORPORATION MANAGEMENT ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 2002 and 2001
- --------------------------------------------------------------------------------
OVERVIEW
This analysis pertains to the consolidated accounts of Old Republic
International Corporation which are presented on the basis of generally accepted
accounting principles ("GAAP"). The Company conducts its business through four
separate segments, namely its General (property and liability coverages),
Mortgage Guaranty, Title, and Life insurance groups.
CHANGE IN ACCOUNTING POLICIES
During the first quarter of 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 (FAS 142) "Goodwill and Other Intangible Assets".
Under FAS 142, goodwill and certain intangible assets are no longer being
amortized against operations but must be tested periodically for possible
impairment of their carrying values. The Company completed the transitional
goodwill impairment test required by FAS 142 in the first quarter of 2002 and
determined that there was no indication of goodwill or intangible asset
impairment. For the three most recent calendar years, quarterly goodwill
amortization charges against consolidated operations averaged approximately $1.0
million.
FINANCIAL POSITION
Old Republic's financial position at September 30, 2002 reflected increases in
assets, liabilities and common shareholders' equity when compared to the
immediately preceding year-end of 6.2%, 4.4% and 9.5%, respectively. Cash and
invested assets represented 70.5% of consolidated assets as of September 30,
2002 and December 31, 2001. Consolidated operating cash flow was positive at
$451.4 million in the latest nine month period, compared to $394.6 million in
the same period of 2001. The increase in consolidated operating cash flow was
largely due to contributions by the Company's three largest operating segments,
most notably the General Insurance Group. As of September 30, 2002, the invested
asset base had increased 6.1% to $5.92 billion when compared to the immediately
preceding year-end principally as a result of such greater operating cash flow.
Relatively high short-term maturity investment positions continued to be
maintained as of September 30, 2002. Short-term investment positions reflect a
large variety of seasonal and intermediate-term factors including current
operating needs, expected operating cash flows, and the timing of longer term
investment commitments. 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. During the first nine months of 2002,
the Corporation committed substantially all investable funds in short to
intermediate-term fixed maturity 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" or
types of securities categorized as derivatives. During the first nine months of
2002, Old Republic's investment in equity securities increased 14.4% in relation
to the related invested balance at year-end 2001 due to portfolio additions
offset by net unrealized losses caused by declining securities markets. At
September 30, 2002, the carrying value of bond and note investments in default
as to principal and/or interest was immaterial in relation to consolidated
assets or shareholders' equity.
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. Traditional investment management
tools and techniques are employed to address the yield and valuation exposures
of its 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 controlled 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 realized gains or losses when securities are sold. With a
market value of approximately $5.04 billion, the long-term fixed maturity
investment portfolio has an average maturity of 4.0 years and an indicated
duration of 3.6. With regard to its $447.9 million equity portfolio, the Company
does not own nor engage in any type of option writing.
Possible declines in values for Old Republic's bond and stock portfolios would
affect negatively the level of the common shareholders' equity account at any
point in time, but would not necessarily result in the recognition of realized
investment losses. In such circumstances,
12
the likely combination of positive operating cash flow and the scheduled
emergence of maturities from the Company's short duration bond portfolio should
provide sufficient funds to meet obligations to policyholders and claimants, as
well as debt service and cash dividend requirements at the holding company
level. The Company reviews the status and market value changes of its securities
portfolio throughout the year, and provisions for other than temporary
impairments in the portfolio's value are evaluated and established at each
quarterly balance sheet date. 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. Unrealized gains or losses on
securities classified as available for sale and carried at fair value are
reflected directly in shareholders' equity.
Among other major assets, substantially all of the Company's receivables are not
past due, and reinsurance recoverable balances on paid or estimated unpaid
losses are deemed to be fairly stated and recoverable from responsible
reinsurers. 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
underwriting results. The Company's deferred acquisition cost balances have not
fluctuated materially from period to period and do not represent significant
percentages of assets, shareholders' equity, or premium reserves.
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. In contemplation of such restrictions and approvals,
the Company can receive up to $199.5 million in dividends from its subsidiaries
in 2002. The liquidity achievable through such permitted dividend payments is
more than adequate to cover the parent holding company's cash outflow
represented mostly by interest on outstanding debt and quarterly cash dividend
payments to shareholders. In addition, Old Republic can access the commercial
paper market for up to $150.0 million to meet unanticipated liquidity needs.
During 2002, the Company used a part of available cash flow to redeem a portion
of its commercial paper outstanding, thus reducing consolidated debt by
approximately $15.0 million.
Old Republic's capitalization of $3.18 billion at September 30, 2002 consisted
of debt of $141.8 million, a minor amount of convertible preferred stock, and
common shareholders' equity of $3.04 billion. The increase in the common
shareholders' equity account during the nine months ended September 30, 2002
reflects primarily the retention of earnings in excess of dividend requirements,
partially offset by a decline in the value of investments carried at fair
values. At its March 21, 2002 meeting, the Company's Board of Directors
authorized the reacquisition of up to $200.0 million of common shares as market
conditions warrant during the two year period from that date; no stock has as
yet been acquired through September 30, 2002.
RESULTS OF OPERATIONS
Revenues:
The composition of Old Republic's earned premiums and fees for the periods
reported upon was as follows:
Quarters Ended Nine Months Ended
September 30, September 30,
------------------------------------------ ------------------------------------------
2002 2001 % 2002 2001 %
------------ ------------ ------------ ------------ ------------ ------------
General.................................. $ 303.4 $ 257.7 17.8% $ 858.5 $ 734.2 16.9%
Mortgage Guaranty........................ 95.9 86.9 10.3 278.6 262.0 6.4
Title.................................... 209.2 166.5 25.7 574.1 448.6 28.0
Life & Health............................ 14.6 13.2 10.6 39.3 38.4 2.3
Consolidated......................... $ 623.3 $ 524.4 18.9% $ 1,750.7 $ 1,483.2 18.0%
========================================== ==========================================
In 2002, general insurance premium growth has resulted principally from the
positive pricing and risk selection changes the Company has effected during the
past three years, as well as additional business produced in an environment
marked by a more restrictive marketing stance on the part of many competitors.
Mortgage guaranty premium income trends reflect greater sales opportunities
arising from strong housing and mortgage lending markets, offset in part by a
high level of mortgage refinancing activity and a greater amount of reinsurance
cessions. High loan refinancing activity tends to reduce mortgage guaranty
insurers' policies in force, and thus renewal premium production, since
previously insured mortgages may no longer require coverage or may become
insured by competitors. In 2002, title insurance premium and fee revenues
reflect a continuation of favorable market conditions for the sale of new and
used homes, and most importantly strong mortgage refinancing activity driven by
a fairly consistent drop in mortgage rates during the past twenty-four months.
Premium volume in the Company's smallest segment of life and health insurance
has continued to reflect the flattish trends of the past several years as growth
for the Company's limited product offerings has been inhibited by significant
price competition among life and health insurers.
13
Consolidated net investment income of $203.7 million in the first nine months of
2002 and $68.8 million in the third quarter of 2002 was basically flat when
compared to $205.1 million and $68.0 million posted in the same respective
periods of 2001 due to a lower yield environment offsetting the benefits of a
higher invested asset base. The average annualized yield on investments was
approximately 4.8% and 5.2% at the end of September 30, 2002 and 2001,
respectively. Yield trends reflect at once the relatively short maturity of Old
Republic's fixed maturity securities portfolio, the continuation of a low yield
environment during the first nine months of 2002, and a moderate increase in
equity investments which typically produce lower current yields.
The Company's investment policies have not been designed to maximize realized
investment gains. Net realized gains of $10.9 million in the first nine months
of 2002, compared to $20.6 million in the prior year period, result from
dispositions and write-downs of fixed maturity and equity securities. For the
third quarter of 2002, net realized losses were $3.2 million compared to net
realized losses of $2.4 million reported for the third quarter of 2001.
Dispositions of fixed maturity securities arise mostly from scheduled maturities
and early calls; for the first nine months of 2002 and 2001, 74.0% and 91.1%,
respectively, of all such dispositions resulted from these factors.
Expenses:
The percentage of net benefits, claims, and related settlement expenses measured
against premiums and related fee revenues of the Company's operating segments
were as follows:
Quarters Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
General......................................................... 73.0% 74.7% 73.2% 74.8%
Mortgage Guaranty............................................... 13.6 15.5 12.6 16.9
Title........................................................... 4.9 4.2 4.8 4.0
Life & Health................................................... 64.9 65.6 58.5 59.3
Consolidated................................................ 40.6% 42.4% 40.5% 42.6%
=========================== ===========================
The 2002 general insurance claims ratios compare to 75.3% and 77.9% registered
for all of 2001 and 2000, respectively. The downtrend in this major cost factor
is deemed to reflect the aforementioned pricing and risk selection improvements
effected in the past thirty-six months or so. The lower mortgage guaranty claims
ratios for the 2002 periods result from a decline in claim provisions driven
principally by a decline in expected claim severity. For 2001, the mortgage
guaranty loss ratio was 16.1% vs. 15.0% for all of 2000. The uptrend in the 2002
title insurance claims ratio stems from a rise in the net provision for ultimate
claim costs from the historically low levels of 4.0% and 3.6% achieved in years
2001 and 2000, respectively. Old Republic's life and health benefit and claims
ratio, though reasonably stable in the periods reported upon, can vary widely
from period to period due to the relatively small size of this segment's book of
business and the material impact that even a slight change in frequency or
severity of death and health claims can have. The consolidated benefit and claim
ratio reflects the changing effect of period to period contributions of each
segment to consolidated results and this ratio's variances within each segment.
Consolidated benefit, claim, and related settlement costs for each of the
Company's business segments are affected by the adequacy of reserves established
for current and prior years' claim occurrences. Such reserves are recorded on a
case by case basis and by means of a large number of formulas and calculations
to cover known as well as incurred but not as yet reported claims at each
balance sheet date. In the aggregate, the Company's past record in establishing
such reserves has not indicated deficiencies for many years. However, the
reserves posted by insurers such as the Company are necessarily based on a wide
variety of estimates made by a large number of employees and third parties such
as independent claim adjusters and attorneys, can be affected by lagging claim
emergence or reporting delays, and their ultimate disposition is subject to a
multitude of economic, political, judicial and societal factors that cannot be
anticipated or quantified accurately. Accordingly, there can be no guaranty that
such reserves will always be on the mark.
The ratio of consolidated underwriting, acquisition and other operating expenses
to net premiums and fees earned was 47.0% and 46.3% in the first nine months of
2002 and 2001, respectively, and 46.7% and 46.3% for the third quarters of 2002
and 2001, respectively. Variations in these consolidated ratios reflect a
continually changing mix of coverages sold and attendant costs of producing
business by the Company's four business segments. The following table sets forth
the expense ratios recorded by each business segment for the periods shown:
Quarters Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
General......................................................... 25.6% 25.6% 25.9% 26.7%
Mortgage Guaranty............................................... 29.6 26.8 28.7 27.2
Title........................................................... 84.8 86.1 86.0 87.5
Life & Health................................................... 37.7 38.6 42.2 45.3
Consolidated................................................ 46.7% 46.3% 47.0% 46.3%
=========================== ===========================
14
Expense ratios for the Company as a whole have remained basically stable for the
periods reported upon. The slight 2002 year-to-date downtrend in the General
Insurance Group's expense ratio reflects the benefits of firm expense management
in the face of a greater revenue base. The same factor affects the expense
ratios for Old Republic's mortgage guaranty and title insurance segments, though
the former's ratio for 2002 was impacted adversely by a third quarter $4.8
million expense provision applicable to an outstanding class action lawsuit.
Pretax and Net Income:
Consolidated income before taxes increased by 18.4% in the third quarter of 2002
and 14.6% in the first nine months of 2002 when compared to the same periods one
year ago. The following table reflects each segment's contribution to pretax
operating results, which excludes realized investment gains or losses:
Quarters Ended Nine Months Ended
September 30, September 30,
------------------------------------------ ------------------------------------------
2002 2001 % 2002 2001 %
------------ ------------ ------------ ------------ ------------ ------------
General.................................. $ 46.8 $ 36.1 29.6% $ 132.1 $ 107.7 22.7%
Mortgage Guaranty........................ 70.8 65.9 7.5 212.7 193.1 10.2
Title.................................... 26.9 21.3 26.3 68.4 52.8 29.6
Life & Health............................ 1.3 1.2 6.1 4.7 4.0 16.4
Consolidated......................... $ 144.9 $ 122.1 18.7% $ 412.7 $ 348.9 18.3%
========================================== ==========================================
General Insurance Group earnings improved meaningfully in 2002 by virtue of
better underwriting experience. Further growth of Mortgage Guaranty Group income
from underwriting and investments, and accelerated growth in premiums and fees
from greater refinancing activity which benefitted the Title Insurance Group in
particular, also led to greater contributions to consolidated pretax operating
earnings in the current year.
The effective consolidated income tax rate was 31.9% and 29.3% in the third
quarter and first nine months of 2002, respectively, and 32.0% and 30.8% for the
same periods of 2001, respectively. The effective tax rate was reduced and net
earnings were enhanced by tax and related interest recoveries of $10.9 million,
or 9 cents per share in the second quarter of 2002 from the favorable resolution
of tax issues dating back to the Company's 1987 tax return. Otherwise, the rates
for each period reflect primarily the varying proportions of pretax operating
income derived from partially tax-sheltered investment income (principally
tax-exempt interest) on the one hand, and the combination of fully taxable
investment income, realized investments gains or losses, and
underwriting/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 performance, liquidity, and other
financial matters 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 claims can have a bearing on period-to-period
comparisons and future operating results.
Some of the statements made in this report, as well as oral statements or
commentaries made by the Company's official in conference calls following
earnings releases, can constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Any
forward-looking statements, commentaries or inferences contained in this report
involve, of necessity, 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 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 disability insurance
results can be impacted by the levels of employment and consumer spending, as
well as mortality and health trends. At the parent company level, operating
earnings or losses are generally affected by the amount of debt outstanding and
its cost, as well as interest income on temporary holdings of short-term
investments.
Any forward-looking statements or commentaries speak only as of their dates. Old
Republic undertakes no obligation to publicly update or revise all such
comments, whether as a result of new information, future events or otherwise,
and accordingly they may not be unduly relied upon.
15
OLD REPUBLIC INTERNATIONAL CORPORATION
ITEM 4 - CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Based on their review and evaluation, conducted within ninety days prior to the
date of this report, the Company's Chief Executive Officer and Chief Financial
Officer are of the opinion that the Company's disclosure controls and procedures
are effective, and that there have been no significant changes in internal
controls or other factors that could significantly affect these disclosure
controls and procedures subsequent to the date of their evaluation. Disclosure
controls and procedures means such controls and procedures as are designed to
ensure that information required to be disclosed by the Company in its reports
filed with the Securities and Exchange Commission is accumulated and
communicated to the aforementioned executives to allow timely decisions
regarding required disclosure.
16
OLD REPUBLIC INTERNATIONAL CORPORATION
FORM 10 - Q
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
1. On August 9, 2002, the Company filed a Current Report on Form 8-K to
file the Statement Under Oath of Principal Executive Officer
Regarding Facts and Circumstances Relating to Exchange Act Filings
and the Statement Under Oath of Principal Financial Officer
Regarding Facts and Circumstances Relating to Exchange Act Filings as
required by the Securities and Exchange Commission Order No. 4-460 of
June 27, 2002.
Items other than those listed are omitted because they are not required.
17
SIGNATURE
Pursuant to the requirements 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.
Old Republic International Corporation
--------------------------------------
(Registrant)
Date: November 7, 2002
------------------
/s/ John S. Adams
--------------------------------------
John S. Adams
Senior Vice President &
Chief Financial Officer
18
CERTIFICATION
I, Aldo C. Zucaro, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Old Republic
International Corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002 /s/ Aldo C. Zucaro
----------------------------------
Chief Executive Officer, President
and Director
19
CERTIFICATION
I, John S. Adams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Old Republic
International Corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002 /s/ John S. Adams
-------------------------------
Senior Vice President and
Chief Financial Officer