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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended: December 31, 1995
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________________ to _______________
Commission File Number: 0-4625
OLD REPUBLIC INTERNATIONAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 36-2678171
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
307 North Michigan Avenue, Chicago, Illinois 60601
- -------------------------------------------- ---------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 312-346-8100
Securities registered pursuant to Section 12(b) of the Act:
Share/Par Value
Outstanding Name of each exchange
Title of each class February 29, 1996 on which registered
- ------------------- ----------------- -----------------------
5 3/4% Convertible Subordinated
Debentures Due August 15, 2002 $99,077,000 ** New York Stock Exchange
8 3/4% Series H Cumulative
Preferred Stock 2,192,100 New York Stock Exchange
Common Stock/$1 par value 53,288,018 * New York Stock Exchange
(*) Excludes 4,439,267 common shares issued, outstanding and held by an
affiliate, which are classified as treasury stock for financial accounting
purposes only.
(**) On February 12, 1996, the Company called for the redemption of all of these
convertible subordinated debentures.
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 re-
quired to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes:_X_/ No:___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part Ill of this Form 10-K or any amendment to
this Form 10-K._X_
The aggregate market value of the Company's voting Common Stock held by
non-affiliates of the registrant computed by reference to the closing price at
which the stock was quoted as of February 29, 1996 was $1,825,114,617.
Documents incorporated by reference:
- -----------------------------------
The following documents are incorporated by reference into that part of this
Form 10-K designated to the right of the document title.
Title Part
Proxy statement for the 1996 Annual
Meeting of Shareholders III, Items 10, 11, 12 and 13
Exhibits as specified in exhibit index (page 52) IV, Item 14
____________________
There are 54 pages in this report
PART I
Item 1-Business
(a) General Development of Business. Old Republic International Corporation is
a Chicago-based insurance holding company with subsidiaries engaged in the
general (property & liability), mortgage guaranty, title, and life (life &
disability) insurance businesses. In this report, "Old Republic", "the
Corporation", or "the Company" refers to Old Republic International Corporation
and its subsidiaries as the context requires. The aforementioned insurance
segments are organized as the Old Republic General, Mortgage Guaranty, Title,
and Life Groups, and references herein to such groups apply to the Company's
subsidiaries engaged in the respective segments of business.
Financial Information Relating to Segments of Business (a)
The contributions to net revenues, and income (loss) before taxes and the
cumulative effect of accounting changes of each Old Republic segment are set
forth below for the years shown, together with their respective assets at the
end of each year. The information below should be read in conjunction with the
consolidated financial statements, the notes thereto, and the "Management
Analysis of Financial Position and Results of Operations" appearing elsewhere
herein.
($ in Millions)
-----------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------
Net Revenues (b) Income (Loss) Before Taxes
---------------------------- ----------------------------
1995 1994 1993 1995 1994 1993
-------- -------- -------- -------- -------- --------
General. . . . . . . . . . . . . . . . . . . . . . $1,056.1 $1,051.4 $1,058.5 $ 171.1 $ 154.2 $ 124.5
Mortgage Guaranty. . . . . . . . . . . . . . . . . 203.9 158.3 118.6 102.8 78.3 61.3
Title. . . . . . . . . . . . . . . . . . . . . . . 326.2 404.7 467.9 4.6 (.2) 32.1
Life . . . . . . . . . . . . . . . . . . . . . . . 58.0 55.7 49.5 7.9 6.4 6.5
Other Operations - Net . . . . . . . . . . . . . . 1.8 .9 1.3 (20.2) (20.6) (21.4)
-------- -------- -------- -------- -------- --------
Subtotal. . . . . . . . . . . . . . . . . . . . . 1,646.1 1,671.2 1,696.0 266.2 218.1 203.0
Realized Investment Gains. . . . . . . . . . . . . 49.7 7.7 40.2 49.7 7.7 40.2
-------- -------- -------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . $1,695.9 $1,679.0 $1,736.3 $ 316.0 $ 225.8 $ 243.3
======== ======== ======== ======== ======== ========
Assets at December 31,
----------------------------
1995 1994 1993
-------- -------- --------
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,356.8 $5,199.9 $5,075.1
Mortgage Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 634.0 487.8 408.3
Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415.8 402.4 402.7
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328.2 322.7 336.8
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,593.5 $6,262.9 $6,098.3
======== ======== ========
__________
(a) Reference is made to the table in Note 7 of the Notes to Consolidated Financial Statements, incorporated herein by reference,
which shows the contribution of each subcategory to consolidated net revenues and income or loss before income taxes of Old
Republic's insurance industry segments.
(b) Revenues consist of net premiums, fees, net investment and other income earned; realized investment gains are shown in total
for all groups combined.
General Insurance Group
Through its General Insurance Group subsidiaries, the Corporation assumes
risks and performs related risk management and marketing services pertaining to
a large variety of property and liability commercial insurance coverages. Old
Republic does not have a meaningful participation in personal lines of
insurance.
Liability Coverages: Workers' compensation, general liability (including
the general liability portion of commercial package policies), and commercial
automobile full coverage protection are the major classes of insurance
underwritten for businesses and public entities such as municipalities. Within
these classes of insurance, Old Republic specializes in a number of industries,
most prominently the transportation, coal and energy services, construction and
forest product industries. Such business is primarily produced through agency
and brokerage channels.
The rates charged for all workers' compensation insurance are generally
regulated by the various states. It is therefore possible that the rate
increases necessary to cover any expansion of benefits under state laws or
increases in claim frequency or severity may not always be granted soon
enough to enable insurers to fully recover the amount of the benefits they
must pay.
During the past ten years, the Corporation has steadily diversified its
General Insurance Group business. This diversification has been achieved through
a combination of internal growth, the establishment of new subsidiaries, and
through selective mergers with other companies. For 1995, production of direct
workers' compensation premiums accounted for 28.2% of consolidated direct
premiums written by the General Insurance Group. For the same year, general
liability and commercial automobile (principally trucking) direct insurance
premiums amounted to 12.0% and 39.1%, respectively, of consolidated direct
premiums written.
During the past decade, specialty programs have also been expanded or
initiated to insure corporations' exposures to directors' and officers' and
errors and omissions liability, to cover owners and operators of private
aircraft for hull and liability exposures, and to insure grain elevators and
liquid petroleum gas operations.
The Corporation assumes (on both treaty and facultative bases) a moderate
amount of reinsurance business produced by other insurance or reinsurance
companies. Most of this business encompasses workers' compensation, general and
automobile liability lines, as well as a moderate amount of property exposures.
Property and Other Coverages: Old Republic's property insurance business
includes physical damage insurance on commercial automobile and trucking risks.
A small volume of business is represented by fire and other physical perils for
houses and commercial properties. All such insurance is produced through agents
or financial intermediaries, such as finance companies, and on a reinsurance
assumed basis.
Fidelity and surety coverages are underwritten through agents by the Old
Republic Surety Group, Inc.
Old Republic Insured Credit Services, Inc., a wholly-owned subsidiary, has
marketed loan and retail installment sales credit guaranty insurance since 1955
through commercial banks and thrift institutions. This coverage provides lenders
with a guaranty against defaults on home equity and home improvement loans and
installment sales contracts.
Auto Warranty and Home Warranty, while still relatively small businesses,
are marketed directly by Old Republic through its own employees and selected
independent agents.
Mortgage Guaranty Group
Real estate mortgage loan insurance protects lending institutions against
certain losses, generally to the extent of 10% to 35% of the sum of the
outstanding amount of each insured mortgage loan, and allowable costs incurred
in the event of default by the borrower. The Corporation insures only first
mortgage loans, primarily on residential properties having one-to-four family
dwelling units.
Mortgage Guaranty Insurance premiums originate from savings and loan
associations, mortgage bankers and other lending institutions.The Corporation's
residential real estate loan insurance business is originated, approximately 21%
by savings and loan associations, 65% by commercial bankers and the remaining
14% through other lenders. Increased failures of savings and loan
associations and other types of lending institutions have not had and should
not have a bearing on the mortgage guaranty or other coverages in the
Corporation's business since the profitability of its insurance products is
not tied to any significant degree to the financial well-being of these
institutions. While it is possible that the failure of a large number of
such institutions could increase the competition for sales of certain
insurance products to the surviving institutions, it is also likely that
other institutions or providers of financial services would emerge to
take their place. The Corporation's mortgage guaranty insurance in force at
December 31, 1995, was originally produced by approximately 3,600 different
lending institutions and about 2,100 such institutions originated business in
1995.
Annual, monthly and single premium plans for residential real estate loan
insurance are offered. Annual plans provide coverage on a year to year basis
with first year premiums being dependent on the loan-to-value ratio and the
coverage offered. Annual renewal premiums are charged on the basis of the
outstanding loan balance on the anniversary date, or, if selected, on the
original loan balance. Monthly plans provide coverage on a month-to-month
basis with premiums being dependent on the loan-to-value ratio and the
coverage offered. In the case of monthly premium plans, the first month and
all renewal months are charged on the basis of the outstanding loan amount on
the anniversary date or, if selected, on the original loan balance. Single
premium plans provide coverage for a period of three to fifteen years, or the
number of years required to amortize a standard mortgage to an 80% loan-to-
value ratio, if selected. The premium charged similarly depends on the loan-
to-value ratio, the coverage offered, the type of loan instrument (whether
fixed rate/fixed payment or an adjustable mortgage loan) and whether the
property is to be owner occupied. Approximately 64% of the residential real
estate loan insurance in force at December 31, 1995, has been written under
annual premium plans. However, the monthly premium plan, a new product that
was introduced in 1993, accounted for approximately 88% of the new business
written in 1995.
The Corporation limits its residential real estate insurance to lenders
approved by it and supervised or regulated by federal or state authorities in
order to obtain reasonable assurance as to the effectiveness of such
institutions' lending practices. A master policy is issued to each approved
lender, but the master policy does not obligate the Corporation to issue
insurance on any particular loan. To obtain insurance on a specific mortgage
loan, an approved lender submits an application, supported by a copy of the
borrower's loan application, an appraisal report on the property by either
the lender or an independent appraiser, a written credit report on the
borrower,an affidavit of the borrower's equity and certain other information.
The underwriting department reviews this material and approves or rejects the
application, usually on the day it is received. The Corporation generally
adheres to the underwriting guidelines published by the Federal Home Loan
Mortgage Corporation. Upon approval of an application for insurance of a
loan, the Corporation issues a commitment to insure the loan; this is followed
by a certificate of insurance when the loan is consummated.
Title Insurance Group
The title insurance business consists primarily of the issuance of policies
to real estate purchasers and investors based upon searches of the public
records which contain information concerning interests in real property. The
policy insures against losses arising out of defects, liens and encumbrances
affecting the insured title and not excluded or excepted from the coverage of
the policy.
There are two basic types of title insurance policies: lenders' policies
and owners' policies. Both are issued for a onetime premium. Most mortgages
made in the United States are extended by savings and loan associations,
mortgage bankers, savings and commercial banks, state and federal agencies,
and life insurance companies. The financial institutions secure title
insurance policies to protect their mortgagees' interest in the real property.
This protection remains in effect for as long as the mortgagee has an interest
in the property. A separate title insurance policy is issued to the owner of
the real estate. An owner's policy of title insurance protects an owner's
interest in the title to the property. The premiums charged for the issuance of
title insurance policies vary with the policy amount and the type of policy
issued. The premium is collected in full when the real estate transaction is
closed, there being no recurring fee thereafter. In many areas, premiums charged
on subsequent policies on the same land may be reduced, depending generally upon
the time elapsed between issuance of the previous policies and the nature of the
transactions for which the policies are issued. Most of the charge to the
consumer relates to title services rendered in conjunction with the issuance of
a policy rather than to the possibility of loss due to risks insured against.
Accordingly, the service performed by a title insurer relates for the most part
to the prevention of loss rather than to the assumption of the risk of loss.
In connection with its title insurance operations, the Corporation also
provides escrow facilities, services for the disbursement of construction funds,
and other services pertaining to real estate transfers.
Life Insurance Group
Credit & Other Life and Disability: Old Republic markets and writes
consumer credit life and disability insurance primarily through consumer
finance companies, banks, savings and loan associations and automobile dealers.
Approximately one-half of the borrowers insured under consumer credit life
insurance are also covered by consumer credit disability protection. Credit life
insurance provides for the repayment of a loan, installment purchase, or other
debt obligation in the event of the death of the borrower, while credit
disability insurance provides for the payment of installments due on such debt
while the borrower is disabled.
Old Republic has written various conventional life, disability/accident and
health insurance coverages for many years, principally on a direct marketing
basis through banks and other financial services institutions. Ordinary term
life insurance is sold through independent agents and brokers for relatively
large face amounts, in both the United States and Canada. Marketing of term life
insurance products is aimed principally toward self-employed individuals,
professionals, owners of small businesses, and high net worth persons.
Annuities: In the past, Old Republic marketed annuity policies, some of
which remain outstanding, through securities dealers in New York State. These
policies provide for annuity benefits based on premiums paid and accumulating
with interest over time. Since 1985, the volume of annuity business has been
inconsequential because the Corporation has been unwilling to invest in lower
quality or illiquid investments to help assure higher, more competitive
guaranteed rates.
Consolidated Underwriting Statistics
The following table reflects underwriting statistics covering: 1) premiums
together with loss, expense, and policyholders' dividend ratios for the major
coverages underwritten solely in the General, Mortgage Guaranty and Title in-
surance groups, and disability/accident & health coverages underwritten directly
or through reinsurance in both the Life and General Insurance groups; 2) a
summary of net retained life insurance in force at the end of the years shown:
($ in Millions)
Years Ended December 31,
1995 1994 1993
---------- ---------- ----------
General Insurance Group:
Overall Experience:
Net Premiums Written. . . . . . . . . . . $ 876.1 $ 851.6 $ 876.7
Net Premiums Earned (a) . . . . . . . . . $ 847.7 $ 860.6 $ 866.3
Loss Ratio. . . . . . . . . . . . . . . . 75% 76% 81%
Policyholders' Dividend Ratio . . . . . . 1% 1% (1)%
Expense Ratio(a). . . . . . . . . . . . . 26% 26% 26%
---------- ---------- ----------
Composite Ratio . . . . . . . . . . . . . 102% 103% 106%
========== ========== ==========
Experience by Major Coverages:
Workers' Compensation:
Net Premiums Earned (a) . . . . . . . . . $ 187.2 $ 239.4 $ 271.1
Loss Ratio . . . . . . . . . . . . . . . 88% 81% 96%
Policyholders' Dividend Ratio . . . . . . 3% 4% (2)%
========== ========== ==========
Commercial Automobile (Principally trucking):
Net Premiums Earned (a) . . . . . . . . . $ 361.3 $ 321.2 $ 284.1
Loss Ratio . . . . . . . . . . . . . . . 79% 82% 77%
========== ========== ==========
General Liability:
Net Premiums Earned (a) . . . . . . . . . $ 53.7 $ 54.2 $ 54.0
Loss Ratio . . . . . . . . . . . . . . . 55% 84% 80%
========== ========== ==========
Property and Other Coverages:
Net Premiums Earned (a) . . . . . . . . . $ 245.5 $ 245.7 $ 257.3
Loss Ratio . . . . . . . . . . . . . . . 69% 62% 69%
========== ========== ==========
Mortgage Guaranty Group:
Net Premiums Earned (b) . . . . . . . . . $ 175.2 $ 134.5 $ 96.8
Loss Ratio (a) . . . . . . . . . . . . . 34% 28% 26%
========== ========== ==========
Title Insurance Group:(b)
Net Premiums Earned . . . . . . . . . . . $ 183.3 $ 244.4 $ 249.6
Combined Net Premiums & Fees Earned . . . $ 305.5 $ 384.7 $ 449.4
Loss Ratio:To Net Premiums Earned . . . . 14% 18% 26%
:To Net Premiums & Fees Earned. 8% 12% 15%
========== ========== ==========
Disability/Accident & Health (c):
Net Premiums Earned. . . . . . . . . . . $ 31.2 $ 28.5 $ 20.6
Loss Ratio . . . . . . . . . . . . . . . 44% 46% 59%
========== ========== ==========
Net Retained Life Insurance In Force:
Ordinary Life . . . . . . . . . . . . . $ 4,063.4 $ 4,230.0 $ 4,046.7
Credit and Other Life. . . . . . . . . . 173.6 193.3 239.8
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . $ 4,237.0 $ 4,423.4 $ 4,286.7
========== ========== ==========
__________
(a) Statutory net premiums earned and expense ratios may vary from amounts calculated pursuant to generally accepted accounting
principles due to differences in the calculation of unearned premium reserves and acquisition cost under each accounting method.
(b) Amounts and ratios reported are determined pursuant to generally accepted accounting principles.
(c) Disability/accident & health data reflect the composite experience of the Life and General Insurance segments of business.
Accordingly, the General Insurance Group composite experience includes premiums and related costs for disability/accident &
health coverages underwritten directly or through reinsurance in such group.
Variations in the loss (including related claim settlement expense) ratios
are caused by changes in the frequency and severity of claims incurred, changes
in premium rates and the level of premium refunds, and periodic changes in claim
and claim expense reserve estimates resulting from ongoing reevaluations of
reported and unreported claims and claim expenses. Loss, expense, policyholders'
dividends, and composite ratios have been rounded to the nearest percentage
point. The loss ratios include loss adjustment expenses where appropriate.
Policyholders' dividends are a reflection of changes in loss experience for
individual or groups of policies, rather than overall results, and should be
viewed in conjunction with loss ratio trends; policyholders' dividends apply
principally to workers' compensation insurance.
General Insurance Group loss ratios for workers' compensation and liability
insurance coverages in particular may fluctuate due to a variety of factors. The
inherent volatility of claims experience due to chance events in any one year,
greater loss costs emanating from involuntary business (i.e. from industry-wide
insurance pools and associations in which participation is basically mandatory),
and added provisions for loss costs not recoverable from assuming reinsurers
which have experienced financial difficulties are some of the major factors
influencing comparisons of loss ratios between years. The Company generally
underwrites concurrently workers' compensation, commercial automobile
(liability and physical damage), and general liability insurance coverages for
a large number of customers. Accordingly, an evaluation of trends in premiums,
loss and dividend ratios for these coverages should be considered in light of
such a concurrent underwriting approach.
The increase in the mortgage guaranty loss ratio is due to an increase in
claim frequency, mostly in the California market which has been affected by an
economic slowdown for the past several years. The Title Insurance Group loss
ratios for the years presented reflect improving loss severity and frequency
trends for business underwritten since 1992. In 1993, however, additional claim
provisions of $13.3 million covering various escrow losses in process of final
settlement increased the loss ratio (as a percentage of premiums and fees
earned) by 3 percentage points.
The increases in net ordinary life insurance in force in 1994 and 1993 are
attributed to the introduction beginning in 1990 of more favorably priced life
products that received greater market acceptance. The decrease in net ordinary
life insurance in force in 1995 is attributed to competitive market pressures
which served to reduce first year premium production.
General Insurance Claim Reserves
The Corporation's property and liability insurance subsidiaries establish
claim reserves which consist of estimates to settle: a) reported claims; b)
claims which have been incurred as of each balance sheet date but have not as
yet been reported ("IBNR") to the insurance subsidiaries; and c) the direct
costs, (such as attorneys' fees which are allocable to individual claims) and
indirect costs (such as salaries and rent applicable to the overall
administration of the claim department) to administer known and IBNR claims.
Such claim reserves, except as to classification in the Consolidated Balance
Sheets in terms of 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 property and liability insurers,
such as the Corporation's General Insurance Group, is a reasonably complex and
dynamic process influenced by a large variety of factors. These include past
experience applicable to the anticipated costs of various types of claims,
continually evolving and changing legal theories emanating from the judicial
system, actuarial studies, the professional experience and expertise of the
Company's claim departments' personnel or attorneys and independent adjusters
retained to handle individual claims, the effect of inflationary trends on
future claim settlement costs, and periodic changes in claim frequency patterns
such as those caused by natural disasters, illnesses, accidents, or work-related
injuries. Consequently, the reserve-setting process relies on the judgments and
opinions of a large number of persons, on historical precedent and trends, and
on expectations as to future developments. At any point in time, the Company and
the industry are exposed to possibly higher than anticipated claim costs due to
the aforementioned factors, and to the evolution, interpretation, and expansion
of tort law, as well as to the effects of unexpected jury verdicts.
In establishing claim reserves, the possible increase in future loss
settlement costs caused by inflation is considered implicitly, along with the
many other factors cited above. Reserves are generally set to provide for the
ultimate cost of all claims. With regard to workers' compensation reserves,
however, the ultimate cost of long-term disability or pension-type claims is
discounted to present value based on interest rates ranging from 3.5% to 4.0%.
The Company, where applicable, uses only such discounted reserves in evaluating
the results of its operations, in pricing its products and settling retro-
spective and reinsured accounts, in evaluating policy terms and experience, and
for other general business purposes. Solely to comply with reporting rules man-
dated by the Securities and Exchange Commission, however, Old Republic has
made statistical studies of applicable workers' compensation reserves to
obtain estimates of the amounts by which claim and claim adjustment expense
reserves, net of reinsurance, have been discounted.
These studies have resulted in estimates of such amounts at approximately
$162.8, $169.1 and $154.3 million, as of December 31, 1995, 1994, and 1993,
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, and for the
effect of retrospective rating and similar plans as discussed under "Reserves,
Reinsurance, and Retrospective Adjustments" elsewhere herein.
The Company believes that its overall reserving practices have been
consistently applied over many years, and that its aggregate net reserves have
resulted in reasonable approximations of the ultimate net costs of claims
incurred. However, no representation is made that ultimate net claim and related
costs will not be greater or lower than previously established reserves.
The following table shows the indicated deficiencies or redundancies for
the years 1985 to 1995. In reviewing this tabular data, it should be noted that
prior periods' loss payment and development trends may not be repeated in the
future due to the large variety of factors influencing the reserving process
outlined herein above. With respect to the 1985 and 1986 data in particular,
the indicated deficiency pertains largely to adverse claim development for
reinsurance assumed business which the Company has de-emphasized since 1986 due
to unacceptably high loss ratios. Further, the reserve redundancies or
deficiencies shown for all years are not necessarily indicative of the effect
on reported results of any one or series of years since retrospective premium
and commission adjustments employed in various parts of the Company's business
tend to partially or fully offset or negate such effects. (See "Consolidated
Underwriting Statistics" above, and "Reserves, Reinsurance, and Retrospective
Adjustments" elsewhere herein).
The subject of property and liability insurance claim reserves has been
written about and analyzed extensively by a large number of professionals and
regulators. Accordingly, the above discussion summary must, of necessity, be
regarded as a basic outline of the subject and not as a definitive presentation.
($ in Millions/Percentages to Nearest Whole Point)
- -----------------------------------------------------------------------------------------------------------------------------------
(a) As of December 31: 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ----- ---- ---- ---- ----
(b) Liability (1) for unpaid claims
and claim adjustment
expenses(2): $743 $974 $1,130 $1,271 $1,335 $1,435 $1,540 $1,573 $1,700 $1,768 $1,821
==============================================================================================
(c) Paid (cumulative) as of (3):
- -------------------------------
One year later 25% 17% 18% 21% 20% 22% 25% 20% 20% 20% -%
Two years later 33 33 33 34 34 37 37 33 33 - -
Three years later 42 45 42 44 45 45 45 42 - - -
Four years later 51 52 50 52 50 52 51 - - - -
Five years later 56 58 56 56 56 56 - - - - -
Six years later 61 63 60 60 60 - - - - - -
Seven years later 65 65 64 64 - - - - - - -
Eight years later 67 69 67 - - - - - - - -
Nine years later 70 72 - - - - - - - - -
Ten years later 73% -% -% -% -% -% -% -% -% -% -%
==============================================================================================
(d) Liability reestimated (i.e.,
cumulative payments plus
reestimated ending liability)
as of (4):
- --------------------------------
One year later 109% 103% 104% 101% 98% 100% 99% 97% 95% 95% -%
Two years later 120 111 104 97 99 100 97 94 91 - -
Three years later 117 110 100 98 98 99 96 93 - - -
Four years later 117 106 101 98 98 99 97 - - - -
Five years later 114 108 101 99 99 100 - - - - -
Six years later 116 108 102 99 100 - - - - - -
Seven years later 115 109 103 101 - - - - - - -
Eight years later 117 111 105 - - - - - - - -
Nine years later 118 112 - - - - - - - - -
Ten years later 120% -% -% -% -% -% -% -% -% -% -%
=============================================================================================
(e) Redundancy (deficiency)(5):
For each year-end at (a): -20% -12% -5% -1% -% -% 3% 7% 9% 5% -%
=============================================================================================
Average for all year-ends
at (a): 0.4%
====
_____
(1) Amounts are reported net of reinsurance recoverable. (2) Excluding unallocated loss adjustment expense reserves. (3) Percent
of most recent reestimated liability (line d). Decreases in paid loss percentages may at times reflect the reassumption by the
Company of certain previously ceded loss reserves. (4) Percent of beginning liability (line b) for unpaid claims and claim
adjustment expenses. (5) Most current liability reestimated (line d) as a percent of beginning liability (line b).
The following table shows an analysis of changes in aggregate reserves for
the Company's property and liability insurance claims and claim adjustment
expenses (1) for each of the years shown.
($ in Millions)
---------------------------------
Years Ended December 31,
---------------------------------
1995 1994 1993
--------- --------- ---------
Amount of reserves for unpaid claims and claim adjustment expenses
at the beginning of each year, net of reinsurance losses recoverable . $ 1,768.3 $ 1,700.8 $ 1,573.9
--------- --------- ---------
Incurred claims and claim adjustment expenses:
Provisions for insured events of the current year. . . . . . . . . . . 684.7 705.8 721.7
Change in provision for insured events of prior years. . . . . . . . . (92.6) (89.1) (51.6)
--------- --------- ---------
Total incurred claims and claim adjustment expenses. . . . . . . . 592.1 616.7 670.0
--------- --------- ---------
Payments:
Claims and claim adjustment expenses attributable to insured
events of the current year . . . . . . . . . . . . . . . . . . . . . 207.1 236.6 246.2
Claims and claim adjustment expenses attributable to insured
events of prior years . . . . . . . . . . . . . . . . . . . . . . . 332.4 312.4 296.9
--------- --------- ---------
Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . 539.5 549.0 543.1
--------- --------- ---------
Amount of reserves for unpaid claims and claim adjustment expenses
at the end of each year (2), net of reinsurance losses recoverable . . 1,820.9 1,768.3 1,700.8
Reinsurance losses recoverable (3) . . . . . . . . . . . . . . . . . . . 1,311.8 1,407.4 1,403.0
--------- --------- ---------
Amount of reserves for unpaid claims and claim adjustment expenses . . . $ 3,132.7 $ 3,175.7 $ 3,103.8
========= ========= =========
__________
(1) Excluding unallocated loss adjustment expense reserves.
(2) Reserves for incurred but not reported losses amounted to approximately 31.1%, 30.4% and 30.7% of the totals
shown as of December 31, 1995, 1994 and 1993, respectively.
(3) See Item 6 - Selected Financial Data, note (b).
The data in the two tables above, incorporates the Corporation's estimates
for various asbestosis and environmental impairment ("A&E") claims or related
costs that have been filed in the normal course of business against a number of
its insurance subsidiaries. Such claims relate primarily to policies issued
prior to 1985, many during a short period between 1981 and 1982 pursuant to an
agency agreement canceled in 1982. During all years and through the current
date, the Corporation's insurance subsidiaries have typically issued general
liability insurance policies with face amounts ranging between $1 million and $2
million and rarely exceeding $10 million. Such policies have, in turn, been
subject to reinsurance cessions which have typically reduced the Corporation's
retentions to $500,000 or less as to each claim.
The Corporation's reserving methods, particularly as they apply to formula-
based reserves, have been established to cover normal claim occurrences as well
as unusual exposures such as those pertaining to A&E claims and related costs.
At times, however, the Corporation's insurance subsidiaries also establish
specific formula and other reserves as part of their overall claim and claim
expense reserves. These are intended to cover additional litigation and other
costs that are likely to be incurred to protect the Company's interests in
litigated cases in particular. At December 31, 1995, the Corporation's aggregate
indemnity and loss adjustment expense reserves specifically identified with
these A&E exposures amounted to approximately $87.4 million gross, and $60.1
million net of reinsurance. Based on average annual claims payments during the
five most recent calendar years, such reserves represented 10.7 years (gross)
and 12.7 years (net) of average annual claims payments.
Old Republic disagrees with the allegations of liability on virtually all
A&E related claims of which it has knowledge on the grounds that exclusions in
the policies preclude coverage for nearly all such claims, and that the
Corporation never intended to assume such risks. Old Republic's exposure on
such claims cannot therefore be calculated by conventional insurance reserving
methods for this and a variety of reasons, including: a) the absence of
statistically valid data inasmuch as such claims typically involve long
reporting delays and very often uncertainty as to the number and identity of
insureds against whom such claims have arisen or will arise; and b) the
litigation history of such or similar claims for other insurance industry
members that has produced court decisions that have been inconsistent with
regard to such issues as when the alleged loss occurred, which policies
provide coverage, how a loss is to be allocated among potentially responsible
insureds and/or their insurance carriers, how policy coverage exclusions are
to be interpreted, what types of environmental impairment or toxic tort claims
are covered, when the insurer's duty to defend is triggered, how policy limits
are to be calculated, and whether clean-up costs constitute property damage.
Individual insurance companies and others who have evaluated the potential
costs of litigating and settling A&E claims have noted with increasing concern
the possibility that resolution of such claims, by applying liability retro-
actively in the context of the existing insurance system, could likely bank-
rupt or undermine seriously the financial condition of the property and
liability insurance industry. In light of this substantial public policy
issue, the Corporation is of the view that the courts will not resolve in the
near future the litigation gridlock stemming from the non-resolution to date of
many environmental claims in particular. In recent times, the Executive Branch
and/or the United States Congress have proposed changes in the legislation and
rules affecting environmental claims. As of December 31, 1995, however, there
is no solid evidence to suggest that forthcoming changes might mitigate or
reduce some or all of these claim exposures.
Because of the above issues and uncertainties, estimation of reserves for
losses and allocated loss adjustment expenses for the above noted types of
claims is extremely difficult or impossible. Accordingly, no representation
can be made that the Corporation's reserves for such claims and related costs
will not prove to be overstated or understated in the future.
(b) Investments. In common with other insurance organizations, Old Republic
invests most funds provided by operations in income-producing investment
securities and bank deposits.
All investments must comply with applicable insurance laws and regulations
which prescribe the nature, form, quality, and relative amounts of investments
which may be made by insurance companies. Generally, these laws and regulations
permit insurance companies to invest within varying limitations in state,
municipal and federal government obligations, corporate obligations, preferred
and common stocks, certain types of real estate, and first mortgage loans. Old
Republic's investment policies are also influenced by the terms of the insurance
coverages written, by its expectations as to the timing of claim and benefit
payments, and by income tax considerations. The following tables show invested
assets at the end of the last three years, together with investment income for
such years.
Consolidated Investments
($ in Millions)
December 31,
- ------------------------------------------------------------------------------------------
1995 1994 1993
---------- ---------- ----------
Held to Maturity
Fixed Maturity Securities:
Corporate. . . . . . . . . . . . . . . . . . . . . . $ - $ 1,356.2 $ 1,348.5
Utilities. . . . . . . . . . . . . . . . . . . . . . 995.5 919.3 883.0
Tax-Exempt . . . . . . . . . . . . . . . . . . . . . 717.8 450.7 276.9
Redeemable Preferred Stocks. . . . . . . . . . . . . .7 .8 1.2
---------- ---------- ----------
1,714.1 2,727.2 2,509.8
---------- ---------- ----------
Other Invested Assets:
Mortgage Loans . . . . . . . . . . . . . . . . . . . 11.8 14.0 17.0
Policy Loans . . . . . . . . . . . . . . . . . . . . 2.1 2.1 2.1
Collateral Loans . . . . . . . . . . . . . . . . . . .3 .4 .5
Sundry . . . . . . . . . . . . . . . . . . . . . . . 12.6 10.7 -
---------- ---------- ----------
26.9 27.3 19.8
---------- ---------- ----------
Total held to maturity . . . . . . . . . . . . . . . 1,741.1 2,754.6 2,529.6
---------- ---------- ----------
Available for Sale
Fixed Maturity Securities:
U.S. & Canadian Governments. . . . . . . . . . . . . 812.4 620.3 642.4
Corporate . . . . . . . . . . . . . . . . . . . . . 1,333.6 - -
---------- ---------- ----------
2,146.0 620.3 642.4
---------- ---------- ----------
Equity Securities:
Perpetual Preferred Stocks . . . . . . . . . . . . . 4.4 4.5 3.8
Common Stocks1 . . . . . . . . . . . . . . . . . . . 21.7 259.2 188.0
---------- ---------- ----------
126.1 263.8 191.9
---------- ---------- ----------
Short-term Investments . . . . . . . . . . . . . . . 312.7 172.1 254.3
---------- ---------- ----------
Total available for sale . . . . . . . . . . . . . . 2,584.9 1,056.2 1,088.7
---------- ---------- ----------
Total Investments . . . . . . . . . . . . . . . . . $ 4,326.0 $ 3,810.8 $ 3,618.4
========== ========== ==========
- ------------------------------------------------------------------------------------------
Sources of Consolidated Investment Income
($ in Millions)
Years Ended December 31,
- ------------------------------------------------------------------------------------------
1995 1994 1993
---------- ---------- ----------
Fixed Maturity Securities:
Taxable . . . . . . . . . . . . . . . . . . . $ 203.2 $ 189.6 $ 192.6
Tax-Exempt. . . . . . . . . . . . . . . . . . 27.1 18.6 12.5
Redeemable Preferred Stocks . . . . . . . . . - - -
---------- ---------- ----------
230.4 208.2 205.2
---------- ---------- ----------
Equity Securities:
Perpetual Preferred Stocks . . . . . . . . . .4 .5 .2
Common Stocks . . . . . . . . . . . . . . . . 5.8 7.0 4.7
---------- ---------- ----------
6.3 7.5 5.0
---------- ---------- ----------
Other Investment Income:
Interest on Short-term Investments. . . . . . 13.6 9.7 8.7
Sundry . . . . . . . . . . . . . . . . . . . 8.4 7.9 7.0
---------- ---------- ----------
22.0 17.7 15.7
---------- ---------- ----------
Gross Investment Income . . . . . . . . . . . 258.7 233.6 226.0
Less: Investment Expenses (a) . . . . . . . . 6.8 6.0 5.2
---------- ---------- ----------
Net Investment Income . . . . . . . . . . . . $ 251.9 $ 227.5 $ 220.7
========== ========== ==========
__________
(a) Investment expenses consist primarily of personnel costs and investment custody service fees.
For at least the past 25 years, Old Republic's investment policy has been
to acquire and retain primarily investment grade, publicly traded,fixed maturity
securities. Accordingly, the Corporation's exposure to so-called "junk bonds",
private placements, real estate, mortgage loans, and derivatives is immaterial
or non-existent. Management considers investment-grade securities to be those
rated by Standard & Poor's Corporation ("Standard & Poor's") or Moody's
Investors Service, Inc. ("Moody's") that fall within the top four rating
categories or securities which are not rated but have characteristics similar
to securities so rated. At December 31, 1995 and December 31, 1994, total
investments in default as to principal and/or interest amounted to less than
1% of consolidated assets.
The Company's investment policies are not designed to encourage trading of
its securities or to maximize the realization of investment gains. While the
amount of portfolio turnover varies from year to year, recent years'
dispositions of portfolio investments held to maturity are caused principally
by calls prior to maturity by issuers.
Effective January 1, 1993, the Company reevaluated the classification of its
invested assets as to those it (1) has the intent and ability to hold until
maturity (generally carried at amortized costs for fixed-maturity securities),
(2) has available for sale (carried at fair value with adjustments to equity)
or (3) has the intention of trading (carried at fair value with adjustments to
income). In November 1995, the Company again reevaluated the classification of
invested assets, as permitted by a Special Report issued by the Financial
Accounting Standards Board (FASB) in November 1995. As a result, additional
fixed maturity securities previously categorized as "held to maturity" were
reclassified to the "available for sale" category; the amortized cost of the
securities so reclassified was $1,365.7, their fair market value was $1,394.2,
and the related net of deferred tax unrealized gain of $18.5 was credited
directly to a separate account in shareholders equity at December 31, 1995.
Prior years' balance sheets and investment classifications have not been
restated nor reclassified to reflect these changes. The Company's invested
assets have been classified as either "held to maturity" or "available for
sale" as of December 31, 1995, 1994 and 1993.
The independent credit quality ratings and maturity distribution for Old
Republic's consolidated fixed maturity investments, excluding short-term
investments, at December 31, 1995 and December 31, 1994, are shown in the
following tables. These investments, $3.8 billion and $3.3 billion at December
31, 1995 and 1994, respectively, represented approximately 59% and 53%,
respectively, of consolidated assets, and 79% and 69%, respectively, of
consolidated liabilities as of such dates.
- ---------------------------------------------------------------------------------
Independent Ratings (a)
- ---------------------------------------------------------------------------------
December 31,
------------------------
1995 1994
------ ------
(% of total portfolio)
Aaa . . . . . . . . . . . . . . . . . . . . . . . . 30.9% 30.1%
Aa. . . . . . . . . . . . . . . . . . . . . . . . . 28.2 28.8
A . . . . . . . . . . . . . . . . . . . . . . . . . 34.1 33.1
Baa . . . . . . . . . . . . . . . . . . . . . . . . 6.0 6.9
------ ------
Total investment grade. . . . . . . . . . . . . . . 99.2 98.9
All others (b) . . . . . . . . . . . . . . . . . . .8 1.1
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
====== ======
__________
(a) Ratings are assigned primarily by Moody's with remaining ratings assigned by Standard & Poor's and converted to the equivalent
Moody's rating.
(b) "All others" include securities which when purchased were investment grade, non-investment grade or non-rated convertible
securities, and other non-rated securities such as small issues of tax exempt bonds.
- --------------------------------------------------------------------------------
Maturity Distribution
- --------------------------------------------------------------------------------
December 31,
------------------------
1995 1994
------ ------
(% of total portfolio)
Due in one year or less . . . . . . . . . . . . . . 7.7% 5.2%
Due after one year through five years . . . . . . . 43.1 42.0
Due after five years through ten years. . . . . . . 47.5 50.1
Due after ten years through fifteen years . . . . . .7 1.4
Due after fifteen years . . . . . . . . . . . . . . 1.0 1.3
------ ------
100.0% 100.0%
====== ======
Average life (years). . . . . . . . . . . . . . . . 4.7 5.1
====== ======
(c) Marketing-Workers' compensation, general liability and commercial automobile
insurance underwritten for larger commercial enterprises and public entities is
marketed primarily through independent insurance agents and brokers with the
assistance of Old Republic's trained sales, underwriting, actuarial, and loss
control personnel. The remaining property and liability commercial insurance
written by Old Republic is obtained through insurance agents or brokers who are
independent contractors and generally represent other insurance companies, by
direct sales, and through controlled marketing and underwriting joint ventures.
A small portion of Old Republic's consolidated insurance premium volume,
particularly in its General and Life Insurance Groups, is produced by the mass
marketing of specially designed insurance products through consumer-oriented
businesses such as consumer finance companies, banks, savings and loan
associations, mortgage bankers, automobile dealers, and consumer products
dealers. The Corporation has designed ancillary products, such as credit
disability, joint life, and loan credit guaranty insurance, for sale through
the same sources as its other products. Through the combination of these
marketing channels, Old Republic is afforded access to large volume markets
without having to invest large sums for mailing, advertising, and other
acquisition expenses, or for establishing and administering a large sales
organization. No single source accounted for over 10% of Old Republic's
premium volume in 1995.
Mortgage guaranty insurance is marketed primarily through a direct sales
force which calls on savings and loan associations, other lending institutions,
and mortgage bankers. No sales commissions or other forms of remuneration are
paid to the lending institutions and others for the procurement or development
of business.
A substantial portion of the Company's title insurance business is referred
to it by title insurance agents, builders, lending institutions, real estate
developers, realtors, and lawyers. Title insurance is sold through 231 Company
offices located in 29 states and through agencies and underwritten title
companies in the District of Columbia and all states except Iowa and Oregon.
The issuing agents are authorized to issue binders and title insurance policies
based on their own search and examination, or on the basis of abstracts and
opinions of approved attorneys. Policies are also issued through independent
abstract companies (not themselves title insurers) pursuant to underwriting
agreements. These agreements generally provide that the underwritten company
may cause title policies of the Company to be issued, and the latter is
responsible under such policies for any payments to the insured. Typically,
the agency or underwritten title company deducts the major portion of the
title insurance charge to the consumer as its commission and for services.
During 1995, approximately 50% of title insurance premiums and fees were
accounted for by policies issued by agents and underwritten title companies.
Existing differences in various parts of the country with respect to the
acceptance and use of title insurance in real estate sales and loan transactions
have a material effect on title insurance growth and operations in the areas
concerned. In the Western states and certain urban areas of the East and
Midwest, title insurance is widely accepted, with the result that the potential
volume of title insurance premium income is large in relation to the volume of
real estate activity in those areas. In some other parts of the country, title
insurance is not as generally used, particularly in transactions involving
residential real estate. Consequently, in those areas, the growth of title
insurance depends not only upon market share of the title insurance business
within the industry, but also upon the increased use of title insurance in
real estate transactions. The volume of real estate activity is also affected
by the availability and cost of financing, population growth, family movements
and other factors. Also, the title insurance business is seasonal. During the
winter months, new building activity is reduced and, accordingly, the Company
does less title insurance business relative to new construction during such
months than during the rest of the year. The most important factor, insofar
as Old Republic's title business is concerned, however, is the rate of
activity in the resale market for residential properties.
The personal contacts, relationships, and reputations of Old Republic's key
executives are a vital element in obtaining and retaining business. Many of the
Company's customers produce large amounts of premiums and therefore warrant
substantial levels of top executive attention and involvement. In this respect,
Old Republic's mode of operation is similar to that of professional reinsurers
and commercial insurance brokers, and relies on the marketing, underwriting, and
management skills of relatively few key people for large parts of its business.
Several types of insurance coverages underwritten by Old Republic, such as
credit life and disability, loan credit guaranty, title, and mortgage guaranty
insurance, are affected in varying degrees by changes in national economic
conditions. During periods of economic recession or rising interest rates,
operating and/or claim costs pertaining to such coverages tend to rise
disproportionately to revenues and generally result in reduced levels of
profitability.
At least one insurance subsidiary of Old Republic 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; title insurance operations, however,
are licensed to do business in 48 states and the District of Columbia,
while mortgage insurance subsidiaries are licensed in 50 states and the
District of Columbia. Consolidated direct premium volume distributed among
the various geographical regions shown was as follows for the past three years:
- --------------------------------------------------------------------------------
Geographical Distribution of Direct Premiums Written
- --------------------------------------------------------------------------------
1995 1994 1993
------ ------ ------
United States:
Northeast. . . . . . . . . . . . . . . . . . . . . 5.0% 5.3% 4.7%
Mid-Atlantic . . . . . . . . . . . . . . . . . . . 8.9 10.0 10.6
Southeast. . . . . . . . . . . . . . . . . . . . . 16.6 16.2 15.5
Southwest. . . . . . . . . . . . . . . . . . . . . 13.1 14.3 14.1
East North Central . . . . . . . . . . . . . . . . 17.7 16.2 14.7
West North Central . . . . . . . . . . . . . . . . 16.3 15.2 16.3
Mountain . . . . . . . . . . . . . . . . . . . . . 8.5 8.4 8.0
Western. . . . . . . . . . . . . . . . . . . . . . 11.0 12.5 14.6
Foreign (Principally Canada) . . . . . . . . . . . 2.9 1.9 1.5
------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
====== ====== ======
(d) Reserves, Reinsurance, and Retrospective Adjustments. Old Republic's
insurance subsidiaries establish reserves for future policy benefits, unearned
premiums, reported claims, claims incurred but not reported, and claim
adjustment expenses, as required in the circumstances. Such reserves are based
on regulatory accounting requirements and generally accepted accounting
principles. In accordance with insurance industry practices, claim reserves are
based on estimates of the amounts that will be paid over a period of time and
changes in such estimates are reflected in the financial statements when they
occur. See "General Insurance Claim Reserves" herein.
To maintain premium production within its capacity and limit maximum losses
and risks for which it might become liable under its policies, Old Republic, as
is the practice in the insurance industry, may cede a portion or all of its
premiums and liabilities on certain classes of insurance or blocks of business
to other insurers and reinsurers. Although the ceding of insurance does not
generally discharge an insurer from its direct liability to a policyholder, it
is industry practice to establish the reinsured part of risks as the liability
of the reinsurer. Old Republic also employs retrospective premium adjustments,
contingent commissions, agency profit and risk-sharing arrangements, and joint
underwriting ventures for parts of its business in order to minimize losses for
which it might become liable under its insurance policies, and to afford its
clients or producers a degree of participation in the risks and rewards
associated with such business. Under retrospective arrangements, Old Republic
collects additional premiums if losses are greater than originally anticipated
and refunds a portion of original premiums if loss costs are lower. Pursuant to
contingent commissions, agency profit and other risk-sharing arrangements, the
Company adjusts commissions or premiums retroactively to likewise reflect
deviations from originally expected loss costs. The amount of premium,
commission, or other retroactive adjustments which may be made is either limited
or unlimited depending on the Company's evaluation of risks and related
contractual arrangements. To the extent that any reinsurance companies,
retrospectively rated risks, or producers might be unable to meet their
obligations under existing reinsurance or retrospective insurance and
commission agreements, Old Republic would be liable for the defaulted amounts.
In these regards, however, the Company generally protects itself by withholding
funds, or by otherwise collateralizing reinsurance obligations through
irrevocable letters of credit, cash, and securities.
Old Republic's reinsurance practices with respect to portions of its
business also result from its desire to bring its sponsoring organizations and
clients into some degree of joint venture relationship. The Corporation may, in
exchange for a ceding commission, reinsure up to 100% of the underwriting risk,
and the premium applicable to such risk, to insurers owned by or affiliated with
lending institutions, sponsors whose customers are insured by Old Republic, or
individual clients who have formed "captive" insurance companies. The ceding
commissions received compensate Old Republic for performing the direct insurer's
functions of underwriting, actuarial, claim settlement, loss control, legal,
reinsurance, and administrative services to comply with local and federal
regulations, and for providing appropriate risk management services.
Remaining portions of Old Republic's business are reinsured with independent
insurance or reinsurance companies under various quota share and excess of loss
agreements.
Reinsurance protection on property and liability operations generally limits
the net loss on any one risk to a maximum of (in whole dollars): fire and other
physical perils-$300,000; accident and health-$15,000; workers'
compensation-$1,000,000; other liability coverages-$750,000; and loan credit
guaranty-$200,000. Substantially all the mortgage guaranty insurance business is
retained, with the exposure on any one risk currently averaging less than
$22,000. Title insurance risk assumptions, based on the title insurance
subsidiaries' financial resources, are limited to a maximum of $25,000,000 as to
any one policy. The maximum amount of ordinary life insurance retained on any
one life by the Life Insurance Group (without reinsurance) is $250,000.
(e) Competition. The insurance business is highly competitive and Old Republic
competes with many stock and mutual insurance companies. Many of these
competitors offer more insurance coverages and have substantially greater
financial resources than the Corporation. The rates charged for many of the
insurance coverages in which the Corporation specializes, such as credit life
and disability insurance, 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. For
certain types of coverages, including loan credit guaranty and mortgage guaranty
insurance, the Company also competes in varying degrees with the Federal Housing
Administration ("FHA") and the Veterans Administration ("VA"). In these regards,
the Corporation's insurance subsidiaries compete with the FHA and VA by offering
different coverages and by establishing different requirements relative to such
factors as interest rates, closing costs, and loan processing charges. The
Corporation believes its experience and expertise have enabled it to develop a
variety of specialized insurance programs for its customers and to secure state
insurance departments' approval of these programs.
(f) Government Regulation. In common with all insurance companies, the
Corporation's insurance subsidiaries are subject to the regulation and
supervision of the jurisdictions in which they do business. The method of
such regulation varies, but, generally, regulation has been delegated to state
insurance commissioners who are granted broad administrative powers relating
to: the licensing of insurers and their agents; the nature of and limitations on
investments; approval of policy forms; reserve requirements; and trade
practices. In addition to these types of regulation, many classes of insurance,
including most of the Corporation's insurance coverages, are subject to rate
regulations which require that rates be reasonable, adequate, and not unfairly
discriminatory.
The Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC") have various qualifying requirements for private
mortgage guaranty insurers which write mortgage insurance on loans acquired by
the FNMA and FHLMC from mortgage lenders. These requirements include a basic
standard calling for the maintenance of a ratio of aggregate insured risk to
policyholders' surplus (defined as total statutory capital and surplus plus
statutory contingency reserves) of not more than 25 to 1. Other qualifying
requirements are designed to insure the financial stability of a private
mortgage insurance company by limiting the geographic concentration of insurance
risks, by limiting risks on nonresidential real estate insurance to 10% of
policyholders' surplus, by maintaining 85% of total admitted assets in
marketable securities and other highly liquid investments, and by maintaining
a minimum policyholders' surplus of $5 million.
Most of the Company's savings and loan association customers for mortgage
guaranty insurance are governed by the regulations of the Federal Home Loan Bank
Board. A regulation of that Board prohibits savings and loan associations from
insuring any loan with a mortgage insurance company if certain relationships
exist between such mortgage insurance company and the savings and loan
association. Generally, a savings and loan association may not obtain insurance
from any mortgage insurance company if (1) any commission, fee or other
compensation is paid to the savings and loan association or any of its officers,
directors, employees or affiliates, (2) a savings account is maintained by the
mortgage insurance company with such savings and loan association, (3) any
officer or employee of the mortgage insurance company or its parent company
is a director, officer or controlling person of the savings and loan
association, or (4) either (a) the association or any director, officer,
controlling person or affiliate holds equity securities of the mortgage
insurance company or any parent company thereof having a cost in excess of
$50,000 or representing more than one percent of any class of equity securities
of the company, if its assets are less than $50 million, or one-half percent,
if the assets equal or exceed $50 million, or (b) the association and all of
its directors, officers, controlling persons or affiliates in the aggregate
own equity securities of the mortgage insurance company having a cost in
excess of $100,000, or two percent of a company the assets of which are less
than $50 million, or one percent, if the assets equal or exceed $50 million.
There have been various proposals from time to time with respect to
additional regulation of credit life and disability insurance which could have
an adverse effect on the consumer credit insurance business. The financial
institutions whose customers are insured by Old Republic are also regulated by
federal and state authorities whose regulations have a direct effect on certain
forms of credit life and disability insurance.
The majority of states have also enacted insurance holding company laws
which require registration and periodic reporting by insurance companies
controlled by other corporations licensed to transact business within their
respective jurisdictions. Old Republic's insurance subsidiaries are subject to
such legislation and are registered as controlled insurers in those
jurisdictions in which such registration is required. Such legislation varies
from state to state but typically requires periodic disclosure concerning the
corporation which controls the registered insurers, or ultimate holding company,
and all subsidiaries of the ultimate holding company, and prior approval of
certain intercorporate transfers of assets (including payments of dividends in
excess of specified amounts by the insurance subsidiary) within the holding
company system. Each state has established minimum capital and surplus
requirements to conduct an insurance business. All of the Company's subsidiaries
meet or exceed these requirements, which vary from state to state.
(g) Employees-As of December 31, 1995, Old Republic employed approximately 5,460
persons on a full time basis. Eligible full time employees participate in
various pension plans which provide annuity benefits payable upon retirement.
Eligible employees are also covered by hospitalization and major medical
insurance, group life insurance, and various profit sharing and deferred
compensation plans. The Company considers its employee relations to be good.
Item 2-Properties
The principal executive offices of the Company are located in the Old
Republic Building in Chicago, Illinois. This Company owned building contains
151,000 square feet of floor space of which approximately 50% is occupied by Old
Republic, and the remainder is leased to others. In addition to the Company-
owned principal executive offices, a subsidiary of the Title Insurance Group
partially occupies its headquarters building. This building contains 110,000
square feet of floor space of which approximately 66% 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 country and are primarily used for its
business. The carrying value of all buildings and related land at December 31,
1995 was approximately $12.8 million.
Certain other operations of the Company and its subsidiaries are directed
from leased premises. See Note 5(b) of the Notes to Consolidated Financial
Statements for a summary of all material lease obligations.
Item 3-Legal Proceedings
There are no material legal proceedings against the Company other than those
arising in the normal course of business and which generally pertain to claim
matters related to insurance policies and contracts issued by the Corporation's
insurance subsidiaries.
Item 4-Submission of Matters to a Vote of Security Holders
None
Item 4(a)-Executive Officers of the Registrant
Name Age Position
- -------------------- --- -------------------------------------
Paul D. Adams 50 Senior Vice President, Chief Financial Officer
since 1990 and Treasurer since 1993.
Anthony F. Colao 68 Senior Vice President, and Director since 1987.
Spencer LeRoy, III 49 Senior Vice President, General Counsel, and
Secretary since 1992.
William F. Schumann 56 Senior Vice President since 1989. President
since 1974 of Old Republic Insured Credit
Services, Inc., a wholly-owned subsidiary.
William A. Simpson 54 Senior Vice President/Mortgage Guaranty, and
Director since 1980. President since 1972 of
Republic Mortgage Insurance Company, a
wholly-owned subsidiary.
A. C. Zucaro 56 Chief Executive Officer, President, Director
and Chairman of the Board since 1990, 1981,
1976 and 1993, respectively.
The term of office of each officer of the Company expires on the date of the
annual meeting of the board of directors, which is generally held in May of each
year. There is no family relationship between any of the executive officers
named above. Each of these named officers, except Mr. LeRoy, has been employed
in executive capacities with the Company and/or its subsidiaries for the past
five years.
PART II
Item 5-Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock is traded on the New York Stock Exchange under
the symbol "ORI". The high and low closing prices as reported on the New York
Stock Exchange, and cash dividends declared for each quarterly period during the
past two years were as follows:
Closing Price
--------------------- Cash
High Low Dividends
------ ------ ---------
1st quarter 1994. . . . . . . . $24.38 $22.00 $ .11
2nd quarter 1994. . . . . . . . 23.38 21.88 .12
3rd quarter 1994. . . . . . . . 23.00 20.88 .12
4th quarter 1994. . . . . . . . $21.88 $18.88 $ .12
====== ====== =========
1st quarter 1995. . . . . . . . $25.13 $21.13 $ .12
2nd quarter 1995. . . . . . . . 26.38 24.25 .13
3rd quarter 1995. . . . . . . . 29.50 25.50 .13
4th quarter 1995. . . . . . . . $35.50 $27.13 $ .13
====== ====== =========
As of January 31, 1996, there were 3,895 registered holders of the Company's
Common Stock. See Notes 4(b) and 4(c) of the Notes to Consolidated Financial
Statements for a description of certain regulatory restrictions on the payment
of dividends by Old Republic's insurance subsidiaries and certain restrictions
under the terms of Old Republic's loan agreements. Closing prices have been
restated, as necessary, to reflect all stock dividends and splits declared
through December 31, 1995.
Item 6-Selected Financial Data
(All amounts, except common share data, are expressed in millions)
Years Ended December 31
- -----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
FINANCIAL POSITION:
Cash and Invested Assets (a) . . . $ 4,415.2 $ 3,906.4 $ 3,723.0 $ 3,332.5 $ 2,933.7
Other Assets (b) . . . . . . . . . 2,178.2 2,356.5 2,375.3 809.1 779.5
Total Assets . . . . . . . . . . . 6,593.5 6,262.9 6,098.3 4,141.6 3,713.2
Liabilities, Other than Debt (b) . 4,587.9 4,543.4 4,480.5 2,698.0 2,503.0
Debt and Debt Equivalents. . . . . 320.5 314.7 282.7 277.8 247.6
Total Liabilities. . . . . . . . . 4,908.4 4,858.1 4,763.3 2,975.8 2,750.6
Preferred Stock . . . . . . . . . 72.5 75.4 78.0 80.8 80.8
Common Shareholders' Equity. . . . 1,612.5 1,329.3 1,256.9 1,084.9 881.7
Total Capitalization (c) . . . . . $ 2,005.6 $ 1,719.5 $ 1,617.7 $ 1,443.6 $ 1,210.2
========== ========== ========== ========== ==========
---------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Net Premiums and Fees Earned . . . $ 1,374.0 $ 1,423.2 $ 1,445.7 $ 1,291.9 $ 1,113.4
Net Investment and Other Income. . 272.1 248.0 250.2 262.3 239.9
Realized Investment Gains. . . . . 49.7 7.7 40.2 62.8 21.1
Net Revenues . . . . . . . . . . . 1,695.9 1,679.0 1,736.3 1,617.0 1,374.5
Benefits, Claims, Settlement
Expenses and Dividends . . . . . . 747.9 761.2 811.3 752.1 691.8
Underwriting and Other Expenses. . 631.9 691.9 681.6 614.2 507.3
Income Taxes (d) . . . . . . . . . 103.6 73.4 78.0 75.0 45.2
Income Before Item Below . . . . . 212.7 151.0 166.4 174.7 131.0
Accounting Changes (e) . . . . . . - - 8.6 - -
---------- ---------- ---------- ---------- ----------
Net Income . . . . . . . . . . . . $ 212.7 $ 151.0 $ 175.1 $ 174.7 $ 131.0
========== ========== ========== ========== ==========
---------------------------------------------------------------------------------------------------
COMMON SHARE DATA (f):
Net Income:
Primary Earnings (g):
Income Before Item Below . . . . . $ 3.63 $ 2.55 $ 2.83 $ 3.09 $ 2.48
Accounting Changes . . . . . . . . - - .15 - -
---------- ---------- ---------- ---------- ----------
Net Income . . . . . . . . . . . . $ 3.63 $ 2.55 $ 2.98 $ 3.09 $ 2.48
========== ========== ========== ========== ==========
Fully Diluted Earnings (h):
Income Before Item Below . . . . . $ 3.42 $ 2.44 $ 2.69 $ 2.95 $ 2.36
Accounting Changes . . . . . . . . - - .14 - -
---------- ---------- ---------- ---------- ----------
Net Income . . . . . . . . . . . . $ 3.42 $ 2.44 $ 2.83 $ 2.95 $ 2.36
========== ========== ========== ========== ==========
Average Common and Equivalent
Shares Outstanding:Primary . . . . 57,273,854 57,207,702 57,077,542 54,516,581 52,408,404
Fully Diluted . 62,068,538 61,657,490 61,519,432 58,317,906 56,480,042
========== ========== ========== ========== ==========
Dividends:Cash . . . . . . . . . . $ .51 $ .47 $ .43 $ .39 $ .37
========== ========== ========== ========== ==========
Stock . . . . . . . . . -% -% -% 100% 10%
========== ========== ========== ========== ==========
Book Value . . . . . . . . . . . . $ 30.56 $ 25.79 $ 24.25 $ 21.40 $ 18.81
========== ========== ========== ========== ==========
Common Shares Outstanding. . . . . 52,762,769 51,536,412 51,844,001 50,692,562 46,896,184
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------
See Notes on Following Page
Notes to Item 6-Selected Financial Data
- -------------------------------------------------------------------------------
(a) Consists of cash, investments and investment income due and accrued;
(b) The Company adopted certain reporting changes mandated by accounting
regulatory authorities which served to increase assets and liabilities by
equal amounts of approximately $1.4 billion at December 31, 1995, and $1.5
billion at December 31, 1994 and 1993. As permitted, prior years' reports
have not been changed retroactively for these changes which became effective
in 1993;
(c) Total capitalization consists of debt and debt equivalents, preferred stock,
and common shareholders' equity;
(d) Income taxes were decreased, and net income correspondingly increased by
$1.9 ($.03 per share) in 1992 and $3.6 ($.07 per share) in 1991, as a
result of amortized fresh start deferred income tax credits all of which
resulted from changes in tax regulations effective January 1, 1987;
(e) See notes 1(h) and (l) of the Notes to Consolidated Financial Statements for
an explanation of accounting changes mandated by accounting regulatory
authorities. As permitted, prior year reports have not been changed
retroactively for these changes which became effective in 1993;
(f) Common share data has been retroactively adjusted for all stock dividends
and splits declared through December 31, 1995. Excludes 4,439,267 issued
and outstanding common shares, held by a consolidated affiliate, which are
eliminated in consolidation and in the calculation of outstanding shares for
financial accounting purposes only;
(g) Calculated after deduction of preferred stock dividend requirements of $4.9
in 1995, $5.1 in 1994, $5.2 in 1993, $6.0 in 1992 and $1.3 in 1991;
(h) Calculated after deduction of preferred stock dividend requirements and
after adjustment for post-tax convertible debentures interest of $.6 in
1995, $.9 in 1994, $1.0 in 1993, $2.6 in 1992 and $(1.9) in 1991.
Item 7-Management Analysis of Financial Position and Results of Operations
($ in Millions, Except Share Data)
- --------------------------------------------------------------------------------
OVERVIEW
This analysis pertains to the consolidated accounts of Old Republic
International Corporation. The Company conducts its business through four major
segments, namely its General (property and liability coverages), Mortgage
Guaranty, Title, and Life insurance groups.
CHANGES IN ACCOUNTING POLICIES
In 1993, the Company adopted several changes in accounting policies to
comply with Financial Accounting Standards Board (FASB) pronouncements. The
resulting adoption of the asset and liability method for calculating deferred
income taxes and the recognition of present value liabilities pertaining to post
- -retirement health benefits under retirement plans maintained by a few Old
Republic subsidiaries increased net income by $8.6 or 15 cents per share (14
cents fully diluted) in the first quarter of 1993. The Company also reexamined
the classification of its invested assets which led to reporting such assets as
either "held to maturity" or "available for sale"; the effect of these
classification changes was to increase assets and the liability for deferred
taxes by $25.2 and $8.7, respectively, and common shareholders' equity for the
net unrealized appreciation of securities newly reclassified at fair value by
$16.4 or 32 cents per common share as of December 31, 1993.
In November 1995, the Company reevaluated the classification of invested
assets, as permitted by a Special Report issued by the FASB in November 1995.
As a result, the Company reclassified from "held to maturity" to "available for
sale" certain fixed maturity securities with an amortized cost of $1,365.7, fair
value of $1,394.2 and an unrealized gain of $28.4. The unrealized gain, net of
deferred income taxes of $9.9, has been credited directly to a separate account
in the common shareholders' equity section of the balance sheet in the final
quarter of 1995.
See Note 1 of the Notes to Consolidated Financial Statements for further
details relating to these changes. As permitted by the pertinent FASB
pronouncements, prior years' financial statements have not been restated nor
reclassified to reflect these changes.
In the fourth quarter of 1995, the Company's Mortgage Guaranty Group
adopted the accrual method for recording past-due premium revenues and the
related premium receivable arising from new monthly premium policies. This new
payment mode has emerged as a significant factor for the mortgage guaranty
industry since mid-1994. Before adoption of this accrual method, past-due
premiums were recognized on receipt of cash. With the adoption of this accrual
method, a cumulative increase in net premiums written of $9.8 million, net
premiums earned of $6.3 million, and post-tax income of $3.9 million or 6 cents
per fully diluted share was reflected in the Company's final quarter and the
year of 1995.
FINANCIAL POSITION
Old Republic's financial position at December 31, 1995 reflected increases
in assets of 5.3%, liabilities of 1.0%, and common shareholders' equity of 21.3%
when compared to the immediately preceding year-end. At December 31, 1995 and
1994, cash and invested assets represented 67.0% and 62.4% of consolidated
assets, respectively. Relatively high short-term investment positions were
maintained as of the most recent year-ends to provide necessary liquidity for
specific operating needs, and flexibility in investment strategy. Changes in
short-term investments reflect a variety of seasonal and intermediate-term
factors including seasonal operating cash needs, investment strategy, and
expectations as to trends in interest yields. Accordingly, the future level of
short-term investments will vary and respond to the dynamics of these factors
and may, as a result, increase or decrease from current levels. During 1995 and
1994, the Corporation committed substantially all investable funds in short to
intermediate-term fixed maturity securities. In the latter regard, Old Republic
continues to adhere to its long-term policy of investing primarily in investment
grade, marketable securities; the Corporation has not directed its investable
funds to so-called "junk bonds" or derivative types of securities. During 1995,
Old Republic's commitment to equity securities decreased by 52.2% vis-a-vis the
related invested balance at year-end 1994. As of December 31, 1995, the
carrying value of fixed maturity securities in default as to principal or
interest was immaterial in relation to consolidated assets or shareholders'
equity.
Consolidated operations produced positive cash flows for the latest three
years. The decline in cash flow from operations in 1994 was due mainly to a
substantial drop in title segment revenues and profitability, and a small
decline in property and liability insurance premiums. The parent holding
company has met its liquidity and capital needs for the past three years
through dividends paid by its subsidiaries and through the issuance of debt.
The insurance subsidiaries' ability to pay cash dividends to the parent company
is generally restricted by law or subject to approval of the insurance
regulatory authorities of the states in which they are domiciled. Additionally,
the terms of guarantees by the Company of bank loans to the trustee of the
Company's Employees Savings and Stock Ownership Plan require the Company to
maintain a minimum consolidated tangible net worth and restrict the amount of
debt the Company may incur, both of which covenants are being met.
Old Republic's capitalization of $2,005.6 at December 31, 1995 consisted of
debt and debt equivalents of $320.5, redeemable convertible preferred stock of
$17.0 (excluding $11.7 of such stock classified as a debt
equivalent), convertible preferred stock of $.6 , cumulative preferred stock of
$54.8, and common shareholders' equity of $1,612.5. The rise in the common
shareholders' equity account during the past three years reflects primarily the
retention of earnings in excess of dividends declared on outstanding preferred
and common shares, the conversion of preferred stock to common stock and an
increase during 1995 in the carrying value of fixed maturity and equity
securities stated at fair value.
The Corporation acquired $.9 and $8.5 of common stock in 1995 and 1994,
respectively and $2.6 of cumulative preferred stock in 1994 in open market
transactions. As of year-end 1995, a standing authorization by the Company's
Board of Directors permits Old Republic to reacquire additional amounts of such
shares for a total of up to $38.0 through May 1996.
In February 1996, the Company called for redemption its 10% debentures of
2018 ($74.0 million principal amount) and its 5.75% convertible subordinated
debentures of 2002 ($110.0 million principal amount); redemption of the former
will be effected with available funds, while the latter are expected to be
converted into approximately 4.3 million Old Republic common shares. As a result
of these expected redemptions and conversions, the Company's debt will decline
by $184.0 million while its common shareholders equity account will rise by
$110.0 million. These transactions are not expected to have a material effect
on Old Republic's 1996 earnings. Later in 1996, the Company may, at its sole
option, redeem all or part of approximately $54.8 million of its Series "H"
cumulative preferred stock and $29.6 million principal amount of its 11.5%
debentures maturing in 2015.
RESULTS OF OPERATIONS
Revenues:
Net premiums and fees earned decreased by 3.5% and 1.6% in 1995 and 1994 and
increased by 11.9% in 1993. In 1993 property and liability insurance premium
increases were due to varying levels of growth in certain parts of the Company's
business, but principally among liability coverages. In 1994 and 1995, lower
property and liability premium growth was due to a continuation of a soft
premium rate environment for most insurance coverages and lower participation
in involuntary market pools. For the past three years, mortgage guaranty
premiums have increased due to a rise in the amount of renewal and new business,
and market expansion. Depressed conditions in the large California housing
market and much lower refinancing activity nationwide resulted in reduced title
insurance revenues in 1995 and 1994. Greater housing and mortgage refinancing
activity during 1993 had led to higher revenues in the title segment. Life and
disability premium volume increased moderately during the last three years as a
result of greater term life and accident insurance production.
Net investment income grew by 10.7% and 3.1% in 1995 and 1994 and was
relatively flat in 1993. For each of the past three years, this revenue source
was affected by positive consolidated operating cash flows and a concentration
of investable assets in interest-bearing, fixed maturity securities. The average
annual yield on investments was 6.2%, 6.1% and 6.4% for the years ended December
31, 1995, 1994 and 1993, respectively. This yield pattern reflects at once the
relatively short maturity of Old Republic's fixed maturity securities portfolio
and changes in interest rates at various times during the past three years.
While the Company's investment policies have not been designed to maximize
realized investment gains, such gains were higher in 1995 and 1993 than those
realized in 1994. Dispositions of securities have been
caused principally by calls prior to maturity by issuers and by sales of equity
securities. In 1995, approximately 59% of total fixed maturity securities
dispositions represented contractual maturities and early calls of existing
holdings; for the year 1994 these amounted to approximately 64%.
Expenses:
Consolidated benefit, claim, and related settlement costs, as a percentage
of net premiums and fees earned, were approximately 54% in 1995, 53% in 1994 and
56% in 1993. This consolidated ratio was affected principally by an improving
claim ratio for liability insurance coverages. Through 1993 the Corporation's
property and liability insurance subsidiaries, along with other companies in the
industry, sustained higher loss assessments for residual market (assigned risk)
business. In 1995 and 1994, provisions for such assessments declined as a result
of the aforementioned reduction in residual market participations by the
Company's subsidiaries and by moderately improving premium rates for workers
compensation insurance. Additionally, Old Republic's general insurance results
for 1994 benefitted from improved underwriting performance in its property and
other non-liability lines due to lower loss ratios. Policyholders' dividends
incurred mainly for the Corporation's workers compensation insurance coverages
for each year reflect changes in the loss ratio for individual experience-rated
policies. The loss ratio rose in 1995 and 1994 in the mortgage guaranty
insurance line due to a rise in frequency of claim occurrences, mostly in the
California market which has been affected by an economic slowdown for the past
several years. The title insurance loss ratio in 1995 and 1994 was affected by
favorable trends in claims frequency and severity for business underwritten
since 1992, while higher than normal claim provisions in 1993 added
approximately 3 percentage points to this group's loss ratio.
The ratio of consolidated underwriting, acquisition, and insurance expenses
to net premiums and fees earned was approximately 44% in 1995, 47% in 1994 and
45% in 1993. Variations in these ratios reflect a continually changing mix of
coverages sold and attendant costs of producing business. During the past three
years the property and liability expense ratio has remained relatively flat and
that of the mortgage guaranty segment has been declining moderately. The title
insurance expense ratio was higher in 1994 and 1995 as premiums and fees volume
in this segment declined at a faster rate than operating costs.
Pre-Tax and Net Income:
Income before taxes decreased by 7% and 3% in 1994 and 1993, respectively,
and increased by 40% in 1995. General insurance results have trended up during
the past five years and have continued as the largest contributor to
consolidated earnings, principally as a result of greater investment income; in
1995 and 1994, however, improved earnings in this segment were also affected
favorably by better underwriting results. The mortgage guaranty segment
reflected significantly improved earnings in each of the last three years due to
increased revenues, and, as noted above, a declining expense ratio. Title
insurance operating results were much reduced in 1995 and 1994 due to the
previously noted decline in revenues, while they increased in 1993 as a result
of much greater mortgage refinancing activity. Life and disability operations
have posted relatively flat earnings in the past three years. Consolidated
pre-tax income for 1995 and 1993 was also affected positively by greater than
normal realization of investment gains.
The effective consolidated income tax rates were 33% in 1995 and 1994 and
32% in 1993. The rates for each year reflect primarily the varying proportions
of pre-tax operating income derived from tax-exempt investment income, on the
one hand, and the combination of fully taxable investment income, realized
investment gains, and underwriting and service income, on the other hand. In
August 1993, the corporate federal income tax rate was increased from 34% to 35%
retroactive to January 1, 1993.
OTHER INFORMATION
Reference is here made to "Financial Information Relating to Segments of
Business" appearing elsewhere herein.
Historical data pertaining to the operating results, liquidity, and other
financial matters applicable to an insurance enterprise such as the Company are
not necessarily indicative of results to be achieved in succeeding years. 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 are some
of the factors which have a bearing on quarter-to-quarter and year-to-year
comparisons and future operating results.
Item 8-Financial Statements
Listed below are the financial statements included herein:
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES Page No.
--------
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Preferred Stock and
Common Shareholders' Equity. . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . 27
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 28
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 48
Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets ($ in Millions)
- -----------------------------------------------------------------------------------
December 31,
-----------------------
1995 1994
---------- ----------
Assets
Investments:
Held to maturity:
Fixed maturity securities (at amortized cost)
(fair value: $1,759.0 and $2,582.6) . . . . . . . . . . . $ 1,714.1 $ 2,727.2
Other long-term investments (at cost). . . . . . . . . . . 26.9 27.3
---------- ----------
1,741.1 2,754.6
---------- ----------
Available for sale:
Fixed maturity securities (at fair value)
(cost: $2,068.9 and $646.8) . . . . . . . . . . . . . . . 2,146.0 620.3
Equity securities (at fair value)
(cost: $95.7 and $254.7) . . . . . . . . . . . . . . . . 126.1 263.8
Short-term investments
(at fair value which approximates cost) . . . . . . . . . 312.7 172.1
---------- ----------
2,584.9 1,056.2
---------- ----------
4,326.0 3,810.8
---------- ----------
Other Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.4 31.1
Securities and indebtedness of related parties . . . . . . 40.0 41.1
Accrued investment income . . . . . . . . . . . . . . . . 69.7 64.3
Accounts and notes receivable. . . . . . . . . . . . . . . 273.6 244.0
Federal income tax recoverable:Current . . . . . . . . . . - 4.8
Deferred. . . . . . . . . . - 72.4
Reinsurance balances and funds held . . . . . . . . . . . 125.1 142.4
Reinsurance recoverable:Paid losses . . . . . . . . . . . 24.7 25.6
Policy and claim reserves . . . . . . . . . . . . . . . . 1,416.1 1,526.3
Deferred policy acquisition costs. . . . . . . . . . . . . 107.8 101.3
Sundry assets . . . . . . . . . . . . . . . . . . . . . . 190.6 198.1
2,267.4 2,452.0
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . $ 6,593.5 $ 6,262.9
========== ==========
See accompanying Notes to Consolidated Financial Statements.
Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets ($ in Millions) (Continued)
- ------------------------------------------------------------------------------------
December 31,
-----------------------
1995 1994
---------- ----------
Liabilities, Preferred Stock, and Common Shareholders' Equity
Liabilities:
Future policy benefits . . . . . . . . . . . . . . . . . . $ 186.0 $ 184.9
Losses, claims and settlement expenses . . . . . . . . . . 3,519.8 3,514.7
Unearned premiums . . . . . . . . . . . . . . . . . . . . 406.7 405.5
Other policyholders' benefits and funds. . . . . . . . . . 75.4 79.1
---------- ----------
Total policy liabilities and accruals4, . . . . . . . . . 188.0 4,184.3
Commissions, expenses, fees and taxes. . . . . . . . . . . 110.3 106.3
Reinsurance balances and funds . . . . . . . . . . . . . . 169.3 162.2
Federal income tax payable:Current . . . . . . . . . . . . 11.5 -
Deferred. . . . . . . . . . . . 10.1 -
Debt and debt equivalents . . . . . . . . . . . . . . . . 320.5 314.7
Sundry liabilities . . . . . . . . . . . . . . . . . . . . 98.4 90.4
Commitments and contingent liabilities . . . . . . . . . . - -
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . 4,908.4 4,858.1
---------- ----------
Preferred Stock:
Redeemable convertible preferred stock (*) . . . . . . . . 17.0 16.8
Convertible preferred stock (*) . . . . . . . . . . . . . .6 3.8
Cumulative preferred stock (*) . . . . . . . . . . . . . . 54.8 54.8
---------- ----------
Total Preferred Stock . . . . . . . . . . . . . . . . . . 72.5 75.4
---------- ----------
Common Shareholders' Equity:
Common stock(*) . . . . . . . . . . . . . . . . . . . . . . 58.8 57.6
Additional paid-in capital. . . . . . . . . . . . . . . . . 463.4 456.9
Net unrealized appreciation (depreciation) of securities. . 70.3 (10.4)
Retained earnings . . . . . . . . . . . . . . . . . . . . . 1,058.3 865.0
Treasury stock (at cost). . . . . . . . . . . . . . . . . . (38.4) (39.8)
---------- ----------
Total Common Shareholders' Equity . . . . . . . . . . . . . 1,612.5 1,329.3
---------- ----------
Total Liabilities, Preferred Stock and
Common Shareholders' Equity . . . . . . . . . . . . . . . $ 6,593.5 $ 6,262.9
========== ==========
__________
(*) At December 31, 1995 and 1994, there were 75,000,000 shares of $0.01 par value
preferred stock authorized, of which 25,152,712 in 1995 and 25,632,708 in 1994
were redeemable and/or convertible and cumulative preferred shares issued and
outstanding. As of the same dates, there were 250,000,000 shares of common
stock, $1.00 par value, authorized, of which 58,811,328 in 1995 and
57,661,291 in 1994 were issued. At December 31, 1995 and 1994 there were
50,000,000 shares of Class B Common Stock, $1.00 par value, authorized, of
which no shares were issued. Common shares classified as treasury stock were
6,048,559 and 6,124,879 as of December 31, 1995 and 1994, respectively.
See accompanying Notes to Consolidated Financial Statements.
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Income ($ in Millions, Except Share Data)
- ----------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
Revenues:
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . $ 1,251.7 $ 1,282.9 $ 1,246.0
Title, escrow, and other fees . . . . . . . . . . . . . . . . . . 122.2 140.3 199.7
Net investment income . . . . . . . . . . . . . . . . . . . . . . 251.9 227.5 220.7
Realized investment gains . . . . . . . . . . . . . . . . . . . . 49.7 7.7 40.2
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . 20.2 20.4 29.5
---------- ---------- ----------
1,695.9 1,679.0 1,736.3
---------- ---------- ----------
Benefits, Losses and Expenses:
Benefits, claims, and settlement expenses . . . . . . . . . . . . 740.3 753.5 817.8
Dividends to policyholders . . . . . . . . . . . . . . . . . . . 7.5 7.6 (6.4)
Underwriting, acquisition, and insurance expenses . . . . . . . . 605.0 668.5 656.7
Interest and other charges . . . . . . . . . . . . . . . . . . . 26.9 23.3 24.8
---------- ---------- ----------
1,379.9 1,453.1 1,492.9
---------- ---------- ----------
Income before income taxes and items below. . . . . . . . . . . . 316.0 225.8 243.3
---------- ---------- ----------
Income Taxes:Currently payable . . . . . . . . . . . . . . . . . 63.8 41.8 68.3
Deferred . . . . . . . . . . . . . . . . . . . . . . 39.7 31.5 9.6
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . 103.6 73.4 78.0
---------- ---------- ----------
Income before items below . . . . . . . . . . . . . . . . . . . . 212.4 152.4 165.3
Equity in earnings of unconsolidated subsidiaries
and minority interests . . . . . . . . . . . . . . . . . . . . . .2 (1.4) 1.1
---------- ---------- ----------
Income before cumulative effect of accounting changes . . . . . . 212.7 151.0 166.4
Cumulative effect of accounting changes . . . . . . . . . . . . . - - 8.6
---------- ---------- ----------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 212.7 $ 151.0 $ 175.1
========== ========== ==========
Net Income Per Share:
Primary:
Before cumulative effect of accounting changes. . . . . . . . . $ 3.63 $ 2.55 $ 2.83
Cumulative effect of accounting changes . . . . . . . . . . . . - - .15
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.63 $ 2.55 $ 2.98
========== ========== ==========
Fully Diluted:
Before cumulative effect of accounting changes . . . . . . . . . $ 3.42 $ 2.44 $ 2.69
Cumulative effect of accounting changes . . . . . . . . . . . . - - .14
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.42 $ 2.44 $ 2.83
========== ========== ==========
Average number of common and common
equivalent shares outstanding:Primary . . . . . . . . . . . . . . 57,273,854 57,207,702 57,077,542
========== ========== ==========
Fully Diluted . . . . . . . . . . . 62,068,538 61,657,490 61,519,432
========== ========== ==========
Dividends Per Common Share:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .51 $ .47 $ .43
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Preferred Stock
and Common Shareholders' Equity ($ in Millions)
- -----------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
Redeemable Convertible Preferred Stock:
Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ 16.8 $ 16.6 $ 18.7
Amortization to redemption value capitalized . . . . . . . . . . (1.1) (1.1) (1.0)
Converted into common stock. . . . . . . . . . . . . . . . . . . (0.6) - (6.3)
Reclassification from debt equivalent. . . . . . . . . . . . . . 2.1 1.3 5.2
---------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 17.0 $ 16.8 $ 16.6
========== ========== ==========
Convertible Preferred Stock:
Balance, beginning of year . . . . . . . . . . . . . . . . . . . $ 3.8 $ 3.9 $ 4.5
Exercise of stock options . . . . . . . . . . . . . . . . . . . .1 .2 -
Converted into common stock . . . . . . . . . . . . . . . . . . (3.2) (.3) (.6)
Redemption of convertible preferred stock. . . . . . . . . . . . - - -
---------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ .6 $ 3.8 $ 3.9
========== ========== ==========
Cumulative Preferred Stock:
Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ 54.8 $ 57.5 $ 57.5
Stock acquired during the year . . . . . . . . . . . . . . . . . - (2.6) -
---------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 54.8 $ 54.8 $ 57.5
========== ========== ==========
Common Stock:
Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ 57.6 $ 57.5 $ 56.3
Dividend reinvestment plan . . . . . . . . . . . . . . . . . . . - - -
Exercise of stock options. . . . . . . . . . . . . . . . . . . . .1 - .3
Acquisition of subsidiary. . . . . . . . . . . . . . . . . . . . .5 - -
Conversion of convertible preferred stock. . . . . . . . . . . . .4 - .8
---------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 58.8 $ 57.6 $ 57.5
========== ========== ==========
Additional Paid-in Capital:
Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ 456.9 $ 455.2 $ 444.6
Dividend reinvestment plan . . . . . . . . . . . . . . . . . . . .4 .4 .4
Exercise of stock options. . . . . . . . . . . . . . . . . . . . 2.4 .8 3.8
Acquisition of subsidiary. . . . . . . . . . . . . . . . . . . . .1 - -
Conversion of convertible preferred stock. . . . . . . . . . . . 3.5 .3 6.2
---------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 463.4 $ 456.9 $ 455.2
========== ========== ==========
Net Unrealized Appreciation (Depreciation) of Securities:
Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ (10.4) $ 25.2 $ 8.9
Change for the year, net of deferred tax if any. . . . . . . . . 80.7 (35.7) 16.3
---------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 70.3 $ (10.4) $ 25.2
========== ========== ==========
Retained Earnings:
Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ 865.0 $ 750.2 $ 606.3
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . 212.7 151.0 175.1
Dividends on common stock. . . . . . . . . . . . . . . . . . . . (26.7) (24.5) (21.6)
Dividends on preferred stock . . . . . . . . . . . . . . . . . . (6.7) (7.0) (7.2)
Acquisition of subsidiary . . . . . . . . . . . . . . . . . . . 10.6 - -
Currency translation adjustments . . . . . . . . . . . . . . . . 3.3 (4.6) (2.2)
---------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ 1,058.3 $ 865.0 $ 750.2
========== ========== ==========
Treasury Stock:
Balance, beginning of year. . . . . . . . . . . . . . . . . . . . $ (39.8) $ (31.3) $ (31.3)
Acquired during the year . . . . . . . . . . . . . . . . . . . . (0.9) (8.5) -
Acquisition of subsidiary. . . . . . . . . . . . . . . . . . . . 2.3 - -
---------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . $ (38.4) $ (39.8) $ (31.3)
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows ($ in Millions)
- -----------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 212.7 $ 151.0 $ 175.1
Change in non-cash items:
Deferred policy acquisition costs . . . . . . . . . . . . . . . . (6.8) (5.7) (16.5)
Premiums and other receivables . . . . . . . . . . . . . . . . . (29.8) (7.8) (58.1)
Unpaid claims and related items . . . . . . . . . . . . . . . . . 104.2 107.5 154.0
Future policy benefits and policyholders' funds . . . . . . . . . 15.3 (18.6) 47.5
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 56.3 9.2 (.7)
Reinsurance balances and funds. . . . . . . . . . . . . . . . . . 24.8 11.1 75.9
Accounts payable, accrued expenses and other. . . . . . . . . . . 18.9 13.7 16.7
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395.6 260.4 394.0
---------- ---------- ----------
Cash flows from investing activities:
Sales of fixed maturity securities:
Held to maturity:
Maturities and early calls . . . . . . . . . . . . . . . . . . . 123.8 159.3 366.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 23.4 133.6
Available for sale:
Maturities and early calls . . . . . . . . . . . . . . . . . . . 72.5 31.9 24.4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139.0 86.3 151.0
Sales of equity securities . . . . . . . . . . . . . . . . . . . . 201.9 30.2 69.3
Sales of other investments . . . . . . . . . . . . . . . . . . . . 4.1 4.7 6.3
Sales of fixed assets for company use. . . . . . . . . . . . . . . 6.8 3.7 2.0
Purchases of fixed maturity securities:
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . (236.9) (411.2) (828.3)
Available for sale . . . . . . . . . . . . . . . . . . . . . . . (515.8) (152.3) (140.1)
Purchases of equity securities . . . . . . . . . . . . . . . . . . (42.6) (100.8) (133.7)
Purchases of other investments . . . . . . . . . . . . . . . . . . (3.8) (12.2) (6.0)
Purchases of fixed assets for company use. . . . . . . . . . . . . (7.1) (11.4) (12.1)
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 1.2 (1.7)
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (254.3) (347.0) (369.1)
----------- ----------- ----------
Cash flows from financing activities:
Increase in term loans . . . . . . . . . . . . . . . . . . . . . . 12.7 34.0 17.4
Issuance of preferred and common stock . . . . . . . . . . . . . . 14.5 1.6 4.7
Issuance of treasury stock . . . . . . . . . . . . . . . . . . . . 2.3 - -
Repayments of term loans . . . . . . . . . . . . . . . . . . . . . (4.9) (.5) (6.9)
Dividends on common shares . . . . . . . . . . . . . . . . . . . . (26.7) (24.5) (21.6)
Dividends on preferred shares. . . . . . . . . . . . . . . . . . . (7.9) (8.2) (8.3)
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . (.9) (8.5) -
Purchases of cumulative preferred stock. . . . . . . . . . . . . . - (2.6) -
Redemption of cumulative preferred stock . . . . . . . . . . . . . - - -
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.4) .4 7.5
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12.3) (8.4) (7.3)
========== ========== ==========
Increase (decrease) in cash and short-term
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 128.8 (95.0) 17.5
Cash and short-term investments, beginning of year. . . . . . . . 203.3 298.3 280.7
---------- ---------- ----------
Cash and short-term investments, end of year . . . . . . . . . . $ 332.1 $ 203.3 $ 298.3
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
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 in the general (property & liability),
mortgage guaranty, title, and life (life & disability) insurance businesses. In
this report, "Old Republic", "the Corporation", or "the Company" refers to Old
Republic International Corporation and its subsidiaries as the context requires.
The aforementioned insurance segments are organized as the Old Republic General,
Mortgage Guaranty, Title, and Life Groups, and references herein to such groups
apply to the Company's subsidiaries engaged in the respective segments of
business. See Note 7 for a discussion of the Company's business segments.
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) Consolidation Practices-The consolidated financial statements include the
accounts of the Corporation and those of its major insurance underwriting and
service subsidiaries. Non-consolidated insurance marketing and service sub-
sidiaries are insignificant and are reflected on the equity basis of accounting.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
(b) Accounting Principles-The Corporation's insurance underwriting subsidiaries
maintain their records in conformity with accounting practices prescribed or
permitted by state insurance regulatory authorities. In consolidating such
subsidiaries, adjustments have been made to conform their accounts with
generally accepted accounting principles. The preparation of financial
statements in conformity with 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. Actual results could differ from those
estimates.
(c) Investments-The Company may classify its invested assets in terms of those
assets relative to which it either (1) has the intent and ability to hold until
maturity (generally carried at amortized costs for fixed maturity securities),
(2) has available for sale (carried at fair value with adjustments to equity,
net of deferred income taxes) or (3) has the intention of trading (carried at
fair value with adjustments to income); as of December 31, 1995, the Company's
invested assets were classified solely as "held to maturity" or "available for
sale."
In November 1995, the Company reevaluated the classification of invested
assets, as permitted by a Special Report issued by the Financial Accounting
Standards Board (FASB) in November 1995. As a result, the Company reclassified
from "held to maturity" to "available for sale", certain fixed maturity
securities with an amortized cost of $1,365.7, fair value of $1,394.2 and an
unrealized gain of $28.4. The unrealized gain, net of deferred income taxes of
$9.9, has been credited directly to a separate account in the common
shareholders' equity section of the balance sheet in the final quarter of 1995.
Fixed maturity securities and redeemable preferred stocks classified as
"held to maturity" are generally carried at amortized costs while fixed maturity
securities classified as "available for sale" in addition to other preferred and
common stocks (equity securities) are included at fair value. Fair values for
fixed maturity securities are based on quoted market prices or estimated using
values obtained from independent pricing services as applicable. Mortgage and
policy loans (other long-term investments) are carried on the basis of the lower
of unpaid principal balances or estimated realizable value. The aggregate fair
value of fixed maturity securities - "held to maturity" at December 31, 1995 was
above their carrying values.
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, 1995:
Held to maturity:
Utilities. . . . . . . . . . . . . . . $ 995.4 $ 30.7 $ 2.5 $ 1,023.7
Tax-exempt . . . . . . . . . . . . . . 717.8 18.1 1.6 734.4
Redeemable preferred stocks . . . . . .7 - - .7
---------- ---------- ---------- ----------
$ 1,714.1 $ 48.9 $ 4.1 $ 1,759.0
========== ========== ========== ==========
Available for sale:
U.S. & Canadian Governments . . . . . $ 776.7 $ 36.0 $ .4 $ 812.4
Corporate . . . . . . . . . . . . . . 1,292.1 44.7 3.3 1,333.6
---------- ---------- ---------- ----------
$ 2,068.9 $ 80.8 $ 3.7 $ 2,146.0
========== ========== ========== ==========
December 31, 1994:
Held to maturity:
Corporate . . . . . . . . . . . . . . . $ 1,350.5 $ 1.2 $ 68.5 $ 1,283.3
Utilities . . . . . . . . . . . . . . . 925.0 .8 57.8 868.0
Tax-exempt. . . . . . . . . . . . . . . 450.7 1.4 21.7 430.3
Redeemable preferred stocks . . . . . . .8 - - .7
---------- ---------- ---------- ----------
$ 2,727.2 $ 3.5 $ 148.1 $ 2,582.6
========== ========== ========== ==========
Available for sale:
U.S. & Canadian Governments . . . . . . $ 646.8 $ 1.6 $ 28.1 $ 620.3
========== ========== ========== ==========
The amortized cost and estimated fair value at December 31, 1995, 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:
Held to Maturity:
Due in one year or less . . . . . . . . . . . . . . . . . $ 77.6 $ 78.2
Due after one year through five years . . . . . . . . . . 712.4 725.3
Due after five years through ten years. . . . . . . . . . 903.6 933.4
Due after ten years . . . . . . . . . . . . . . . . . . . 20.4 21.9
--------- ---------
$ 1,714.1 $ 1,759.0
========= =========
Available for Sale:
Due in one year or less . . . . . . . . . . . . . . . . . $ 212.2 $ 214.7
Due after one year through five years . . . . . . . . . . 919.7 942.7
Due after five years through ten years. . . . . . . . . . 893.0 937.1
Due after ten years . . . . . . . . . . . . . . . . . . . 44.0 51.3
--------- ---------
$ 2,068.9 $ 2,146.0
========= =========
A summary of the Company's equity securities follows:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
Equity Securities:
December 31, 1995:
Common stocks . . . . . . . . . . . . . $ 91.3 $ 33.6 $ 3.2 $ 121.7
Non redeemable preferred stocks . . . . 4.4 - - 4.4
-------- -------- -------- --------
$ 95.7 $ 33.6 $ 3.2 $ 126.1
======== ======== ======== ========
December 31, 1994:
Common stocks . . . . . . . . . . . . . $ 250.0 $ 20.9 $ 11.7 $ 259.2
Non redeemable preferred stocks . . . . 4.6 - .1 4.5
-------- -------- -------- --------
$ 254.7 $ 20.9 $ 11.8 $ 263.8
======== ======== ======== ========
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 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 in a separate account of
shareholders' equity.
At December 31, 1995, the Corporation and its subsidiaries had non-income
producing investments aggregating $0.1.
The following table reflects the composition of net investment income and
net realized and unrealized investment gains or losses for each of the years
shown:
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
Investment income from:
Fixed maturity securities . . . . . . . . . . . $ 230.4 $ 208.2 $ 205.2
Equity securities . . . . . . . . . . . . . . . 6.3 7.5 5.0
Short-term investments. . . . . . . . . . . . . 13.6 9.7 8.7
Other sources . . . . . . . . . . . . . . . . . 8.4 7.9 7.0
---------- ---------- ----------
Gross investment income . . . . . . . . . . . . 258.7 233.6 226.0
Investment expenses (1) . . . . . . . . . . . . 6.8 6.0 5.2
---------- ---------- ----------
Net investment income . . . . . . . . . . . . . $ 251.9 $ 227.5 $ 220.7
========== ========== ==========
Realized gains (losses) on:
Fixed maturity securities:
Held to maturity . . . . . . . . . . . . . . . $ .1 $ 1.1 $ 11.3
---------- ---------- ----------
Available for sale:
Gains . . . . . . . . . . . . . . . . . . . . 4.9 2.0 19.5
Losses . . . . . . . . . . . . . . . . . . . (1.7) (.3) (4.1)
---------- ---------- ----------
Net . . . . . . . . . . . . . . . . . . . . 3.2 1.7 15.4
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . 3.3 2.8 26.7
---------- ---------- ----------
Equity securities . . . . . . . . . . . . . . 47.2 5.3 13.6
Other assets . . . . . . . . . . . . . . . . . (.8) (.5) (.1)
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . 49.7 7.7 40.2
Income taxes . . . . . . . . . . . . . . . . . 17.5 2.7 14.4
---------- ---------- ----------
Net realized gains . . . . . . . . . . . . . $ 32.2 $ 5.0 $ 25.7
========== ========== ==========
Unrealized investment gains (losses) on:
Fixed maturity securities:
Held to maturity (2) . . . . . . . . . . . . . $ 189.0 $ (234.0) $ 37.8
========== ========== ==========
Available for sale . . . . . . . . . . . . . . $ 101.9 $ (50.8) $ 25.2
Less: Deferred income taxes. . . . . . . . . . 35.3 (17.4) 8.7
---------- ---------- ----------
Net unrealized gains (losses) . . . . . . . . . $ 66.5 $ (33.3) $ 16.4
========== ========== ==========
Equity securities-available for sale. . . . . . $ 21.6 $ (3.2) $ (.7)
Less: Deferred income taxes (credits) . . . . . 7.4 (.8) (.6)
---------- ---------- ----------
Net unrealized gains (losses) . . . . . . . . . $ 14.2 $ (2.3) $ (.1)
========== ========== ==========
___________
(1) Investment expenses consist of personnel costs and investment custody service fees.
(2) Deferred income taxes do not apply since these securities are carried at amortized cost.
(d) Revenue Recognition-Pursuant to generally accepted accounting principles
applicable to the insurance industry, benefits, claims, and expenses are
associated with the related revenues by means of the provision for policy
benefits, the deferral and subsequent amortization of acquisition costs, and the
recognition of incurred benefits, claims and operating expenses.
General insurance (property and liability) and level-term credit life
insurance premiums are reflected in income on a pro-rata basis. Earned but
unbilled premiums are generally taken into income on the billing date, and
adjustments for retrospective premiums, commissions and similar charges are
accrued on the basis of periodic evaluations of current underwriting experience
and contractual obligations. Title insurance premiums are recognized as income
upon the substantial completion of the policy issuance process. Title abstract,
escrow, service, and other fees are taken into income at the time of closing of
the related escrow. First year and renewal mortgage guaranty premiums are
recognized as income on a straight-line basis except that a portion of first
year
premiums received for certain high risk policies is deferred and reported as
earned over the estimated policy life, including renewal periods.Single premiums
for mortgage guaranty policies covering more than one year are earned on an
accelerated basis over the policy term. Ordinary life and annuity premiums are
recognized as revenue when due. Decreasing term credit life and credit disabili-
ty/accident & health insurance premiums are generally earned on a
sum-of-the-years-digits or similar method.
(e) Deferred Policy Acquisition Costs-The Corporation'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 or underwriting and claim
services performed. The following table summarizes deferred policy acquisition
costs and related data for the years shown:
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
Deferred, beginning of year . . . . . . . . . . . . $ 101.3 $ 95.5 $ 78.9
---------- ---------- ---------
Acquisition costs deferred:
Commissions - net of reinsurance . . . . . . . . . 96.8 110.5 117.1
Premium taxes . . . . . . . . . . . . . . . . . . 33.8 33.8 22.2
Salaries and other marketing expenses. . . . . . . 52.4 52.2 46.9
---------- ---------- ----------
Sub-total . . . . . . . . . . . . . . . . . . . 183.1 196.8 186.2
Amortization charged to income . . . . . . . . . . (176.6) (191.0) (169.6)
---------- ---------- ----------
Change for the year . . . . . . . . . . . . . . 6.5 5.6 16.6
---------- ---------- ----------
Deferred, end of year . . . . . . . . . . . . . . . $ 107.8 $ 101.3 $ 95.5
========== ========== ==========
(f) Future Policy Benefits/Unearned Premiums-General insurance and level term
credit life insurance policy liabilities represent unearned premium reserves
developed by application of monthly pro-rata factors to premiums in force.
Disability/accident & health and decreasing term credit life insurance policy
liabilities are calculated primarily on a sum-of-the-years-digits method.
Mortgage guaranty unearned premium reserves are calculated primarily on a pro-
rata basis. Ordinary life policy liabilities are determined on a level premium
method and take into account mortality and withdrawal rates based principally on
anticipated company experience; assumed interest rates range from 3.0% to 6.0%.
With respect to annuity policies, the liabilities represent the surrender value
of such policies during deferral periods, without adjustment for surrender
charges; such values are deemed appropriate to provide for ultimate benefit
reserves in the event policyholders exercise an annuity benefit option at a
later date.
At December 31, 1995 and 1994, the Life Insurance Group had $4,237.0 and
$4,423.4, respectively, of net life insurance in force. Future policy
liabilities and unearned premiums, consisted of the following:
December 31,
-----------------------
1995 1994
---------- ----------
General Insurance Group . . . . . . . . . . . $ 333.0 $ 323.8
Mortgage Guaranty Group . . . . . . . . . . . 73.6 81.6
Life Insurance Group:
Life insurance . . . . . . . . . . . . . . 62.1 58.0
Annuities . . . . . . . . . . . . . . . . . 83.1 91.3
Disability/accident & health. . . . . . . . 40.7 35.6
---------- ----------
Sub-total . . . . . . . . . . . . . . . . . 186.0 184.9
---------- ----------
Consolidated . . . . . . . . . . . . . . . . $ 592.7 $ 590.4
========== ==========
The Company issues, directly or as a reinsurer, certain insurance policies
generally categorized as financial guarantees. The major types of guarantees
pertain to (a) state, municipal and other general or special revenue bonds, (b)
variable interest rate guarantees, and (c) insurance of the future residual
value of fixed assets. The types of risks involved include failure by the bond
issuer to make timely payment of principal and interest, changes in interest
rates, and changes in the future value of fixed assets. The degree of risk
pertaining to these insurance products is largely dependent on the effects of
general economic cycles and changes in the credit worthiness of issuers whose
obligations have been guaranteed. During the past three years, new commitments
have been limited to those identified at (a) immediately above.
Premiums received for financial guarantee policies are generally earned over
the terms of the contract (which may range between 5 and 30 years) or on the
basis of current exposure relative to maximum exposure in force; with respect to
residual value insurance, that portion of the premium in excess of certain
initial underwriting costs is deferred and taken into income when all events
leading to the determination of exposure, if any, have occurred. Since losses on
financial guarantee insurance products cannot be predicted reliably, the
Company's unearned premium reserves serve as the primary income recognition and
loss reserving mechanism. When losses become known and determinable, they are
paid or placed in reserve and the remaining directly-related unearned premiums
are taken into income.
No assurance can be given that unearned premiums will be greater or less
than ultimate incurred losses on these policies.
The following table reflects certain data pertaining to net insurance in
force for the Company's financial guarantee business at the dates shown:
Years Ended December 31,
------------------------
1995 1994
---------- ----------
Net Insurance in Force:
Bonds. . . . . . . . . . . . . . . . . . . . . $ 2,352.2 $ 2,342.8
Variable interest rate . . . . . . . . . . . . .8 1.0
Residual value . . . . . . . . . . . . . . . . .8 .8
Net Unearned Premiums:
Bonds . . . . . . . . . . . . . . . . . . . . 14.5 14.8
Variable interest rate . . . . . . . . . . . . .8 1.0
Residual value . . . . . . . . . . . . . . . . $ - $ -
========== ==========
With respect to mortgage guaranty insurance (net insurance in force of
$38,862.7 and $30,405.3, at December 31, 1995 and 1994, respectively) the
Company's reserving policies are set forth below in Note 1(g).
(g) Losses, Claims and Settlement Expenses-Reserves are estimates that provide
for the ultimate expected cost of settling unpaid losses and claims reported at
each balance sheet date. Losses and claims incurred but not reported, as well as
expenses required to settle losses and claims are established on the basis of
various criteria, including historical cost experience and anticipated costs of
servicing reinsured and other risks. Long-term disability-type workers' compen-
sation reserves, however, are discounted to present value based on interest
rates ranging from 3.5% to 4%.
The establishment of claim reserves is a reasonably complex and dynamic
process influenced by a large variety of factors. These include past experience
applicable to the anticipated costs of various types of claims, continually
evolving and changing legal theories emanating from the judicial system,
actuarial studies, the professional experience and expertise of the Company's
claim departments' personnel or attorneys and independent adjusters retained to
handle individual claims, the effect of inflationary trends on future claim
settlement costs, and periodic changes in claim frequency patterns such as those
caused by natural disasters, illnesses, accidents, or work-related injuries.
Consequently, the reserve-setting process relies on the judgments and opinions
of a large number of persons, on historical precedent and trends, and on
expectations as to future developments. At any point in time, the Company and
the industry are exposed to possibly higher than anticipated claim costs due to
the aforementioned factors, and to the evolution, interpretation, and expansion
of tort law, as well as to the effects of unexpected jury verdicts.
The Company believes that its overall reserving practices have been
consistently applied over many years, and that its aggregate net reserves have
resulted in reasonable approximations of the ultimate net costs of claims
incurred. However, no representation is made that ultimate net claim and related
costs will not be greater or lower than previously established reserves.
The following table shows 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,
------------------------------------
1995 1994 1993
---------- ---------- ----------
Amount of reserves for unpaid claims and claim adjustment
expenses at the beginning of each year, net of reinsurance
losses recoverable. . . . . . . . . . . . . . . . . . . . . . . . $ 2,096.5 $ 1,989.8 $ 1,836.4
---------- ---------- ----------
Incurred claims and claim adjustment expenses:
Provisions for insured events of the current year . . . . . . . . 864.6 857.3 871.9
Change in provision for insured events of prior years . . . . . . (118.9) (100.4) (54.5)
---------- ---------- ----------
Total incurred claims and claim adjustment expenses . . . . . 745.6 756.8 817.4
---------- ---------- ----------
Payments:
Claims and claim adjustment expenses attributable to insured
events of the current year . . . . . . . . . . . . . . . . . . . 251.7 279.9 295.4
Claims and claim adjustment expenses attributable to insured
events of prior years . . . . . . . . . . . . . . . . . . . . . . 390.5 370.1 368.6
---------- ---------- ----------
Total payments . . . . . . . . . . . . . . . . . . . . . . . 642.3 650.1 663.9
----------- ---------- ----------
Amount of reserves for unpaid claims and claim adjustment
expenses at the end of each year, net of reinsurance
losses recoverable . . . . . . . . . . . . . . . . . . . . . . . 2,200.2 2,096.5 1,989.8
Reinsurance losses recoverable . . . . . . . . . . . . . . . . . . 1,319.6 1,418.1 1,415.7
---------- ---------- ----------
Amount of reserves for unpaid claims and claim adjustment
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,519.8 $ 3,514.7 $ 3,405.6
========== ========== ==========
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.
The data in the table above, incorporates the Corporation's estimates for
various asbestosis and environmental impairment ("A&E") claims or related costs
that have been filed in the normal course of business against a number of its
insurance subsidiaries. Many such claims relate to policies issued prior to
1985, and during a short period between 1981 and 1982 pursuant to an agency
agreement canceled in 1982. During all years and through the current date, the
Corporation's insurance subsidiaries have typically issued general liability
insurance policies with face amounts ranging between $1 million and $2 million
and rarely exceeding $10 million. Such policies have, in turn, been subject to
reinsurance cessions which have typically reduced the Corporation's retentions
to $500,000 or less as to each claim.
The Corporation's reserving methods, particularly as they apply to formula-
based reserves, have been established to cover normal claim occurrences as well
as unusual exposures such as those pertaining to A&E claims and related costs.
At times, however, the Corporation's insurance subsidiaries also establish
specific formula and other reserves as part of their overall claim and claim
expense reserves. These are intended to cover additional litigation and other
costs that are likely to be incurred to protect the Company's interests in
litigated cases in particular. At December 31, 1995, the Corporation's
aggregate indemnity and loss adjustment expense reserves specifically identified
with these A&E exposures amounted to approximately $87.4 million gross, and
$60.1 million net of reinsurance. Based on average annual claims payments
during the five most recent calendar years, such reserves represented 10.7 years
(gross) and 12.7 years (net) of average annual claims payments.
Old Republic disagrees with the allegations of liability on virtually all A&E
related claims of which it has knowledge on the grounds that exclusions in the
policies preclude coverage for nearly all such claims, and that the Corporation
never intended to assume such risks. Old Republic's exposure on such claims
cannot therefore be calculated by conventional insurance reserving methods for
this and a variety of reasons, including: a) the absence of statistically valid
data inasmuch as such claims typically involve long reporting delays and very
often uncertainty as to the number and identity of insureds against whom such
claims have arisen or will arise; and b) the litigation history of such or
similar claims for other insurance industry members that has produced court
decisions that have been inconsistent with regard to such issues as when the
alleged loss occurred, which policies provide coverage, how a loss is to be
allocated among potentially responsible insureds and/or their insurance
carriers, how policy coverage exclusions are to be interpreted, what types of
environmental impairment or toxic tort claims are covered, when the insurer's
duty to defend is triggered, how policy limits are to be calculated, and
whether clean-up costs constitute property damage.
Individual insurance companies and others who have evaluated the potential
costs of litigating and settling A&E claims have noted with increasing concern
the possibility that resolution of such claims, by applying liability
retroactively in the context of the existing insurance system, could likely
bankrupt or undermine seriously the financial condition of the property and
liability insurance industry. In the light of this substantial public policy
issue, the Corporation is of the view that the courts will not resolve in the
near future the litigation gridlock stemming from the non-resolution to date of
many environmental claims in particular. In recent times, the Executive Branch
and/or the United States Congress have proposed changes in the legislation and
rules affecting environmental claims. As of December 31, 1995, however, there
is no solid evidence to suggest that forthcoming changes might mitigate or
reduce some or all of these claim exposures.
Because of the above issues and uncertainties, estimation of reserves for
losses and allocated loss adjustment expenses for the above noted types of
claims is extremely difficult or impossible. Accordingly, no representation can
be made that the Corporation's reserves for such claims and related costs will
not prove to be overstated or understated in the future.
(h) Income Taxes-The Corporation 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 pursuant to generally accepted accounting principles will not
necessarily become payable/recoverable in the future. Effective January 1, 1993,
the Company adopted Financial Accounting Standard (FAS) No. 109 "Accounting for
Income Taxes" that required a change to the asset and liability method of
calculating deferred income taxes. The cumulative effect of this change
resulted in an increase in net income of $13.3, or $.23 per share ($.22 fully
diluted) in 1993. This method calls for the establishment of a deferred tax,
calculated at currently effective tax rates, for 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
operating income before taxes as the result of permanent and other differences
between pre-tax 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:
Years Ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
Statutory tax rate . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%
Tax rate increases (decreases):
Tax-exempt interest . . . . . . . . . . . . . . . . . . . . (2.5) (2.4) (1.4)
Dividends received exclusion. . . . . . . . . . . . . . . . (.4) (.9) (.7)
Change in tax rate on beginning temporary differences . . . - - (1.2)
Other items - net . . . . . . . . . . . . . . . . . . . . . .6 .8 .4
-------- -------- --------
Effective tax rate . . . . . . . . . . . . . . . . . . . . 32.7% 32.5% 32.0%
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred tax recoverable (payable) are as follows
at the dates shown:
December 31,
----------------------------------
1995 1994 1993
-------- -------- --------
Deferred Tax Assets:
Future policy benefits. . . . . . . . . . . . . . . . . . . . $ 2.2 $ 3.1 $ 1.7
Losses, claims, and settlement expenses . . . . . . . . . . . 179.8 179.8 182.2
Unearned premium reserves . . . . . . . . . . . . . . . . . . (3.0) 1.0 6.2
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8 8.7 8.7
-------- -------- --------
Total gross deferred tax assets . . . . . . . . . . . . . . . 187.9 192.7 199.0
Less-valuation allowance. . . . . . . . . . . . . . . . . . . 2.5 1.4 3.9
-------- -------- --------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . 185.4 191.3 195.0
-------- -------- --------
Deferred Tax Liabilities:
Deferred policy acquisition costs . . . . . . . . . . . . . . 36.7 35.5 34.2
Mortgage guaranty insurers' contingency reserves. . . . . . . 97.2 67.2 43.2
Fixed maturity securities adjusted to cost. . . . . . . . . . 4.4 3.6 4.8
Unrealized investment gains (losses) . . . . . . . . . . . . 37.1 (5.5) 10.2
Title plants and records . . . . . . . . . . . . . . . . . . 3.5 3.4 3.4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.5 14.5 15.7
-------- -------- --------
Total deferred tax liabilities . . . . . . . . . . . . . . . $ 195.6 $ 118.8 $ 111.9
-------- -------- --------
Net deferred tax asset (liability). . . . . . . . . . . . . . $ (10.2) $ 72.4 $ 83.2
======== ======== ========
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. Government Tax and Loss Bond. For Federal
income tax purposes, the amounts deducted for the contingency reserve are taken
into gross statutory taxable income (a) when the contingency reserve is
permitted to be charged for losses under state law or regulation, (b) in the
event operating losses are incurred, or (c) in any event upon the expiration of
ten years.
Life Insurance companies domiciled in the United States and qualifying as
life insurers for tax purposes are taxed under special provisions of the
Internal Revenue Code. As a result of legislation, 1983 and prior years' tax
deferred earnings (cumulatively $20.4 at December 31, 1995) credited to the
former memorandum "policyholders' surplus account" will not be taxed unless they
are subsequently distributed to shareholders. The Company does not presently
anticipate any distribution or payment of taxes on such earnings in the future.
As a result of regular examinations of the tax returns for the Corporation
and its subsidiaries, the Internal Revenue Service ("IRS") has proposed certain
adjustments for additional taxes applicable to the years 1982 to 1993. The
proposed adjustments pertain to the timing of certain deductions, the IRS's
contention that contractually obligated premium refunds should be treated as
dividends, deductions for certain loss and related reserves, a reinsurance
transaction, and several other issues not involving material amounts.The Company
and its tax counsel believe that substantially all of the proposed material
adjustments are without merit, that the Company will be successful in vigorously
defending its positions, and that the ultimate adjustments, if any, will not
significantly affect its financial condition or results of operations. During
1995 and 1994, certain of the proposed adjustments were finally settled for
immaterial amounts.
(i) Property and Equipment-Property and equipment is generally depreciated or
amortized over the estimated useful lives of the assets, (2 to 45 years),
substantially by the straight-line method. Expenditures for maintenance and
repairs are charged to income as incurred, and expenditures for major renewals
and additions are capitalized.
(j) Title Plants and Records-Title plants and records are carried at original
cost or appraised value at 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 not being amortized
since they have an indefinite life and do not diminish in value.
(k) Goodwill-The costs of certain purchased subsidiaries in excess of related
book values (goodwill) at date of acquisition are being amortized against
operations principally over 40 years using the straight-line method.
Amortization of goodwill amounted to $3.2 in 1995, $3.1 in 1994 and $3.2 in
1993.
(l) Employee Benefit Plans- The Corporation has several pension plans covering a
portion of its work force. 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 Corporation's policy to fund the plans'
costs as they accrue. Plan assets are comprised principally of bonds, common
stocks and short-term investments.
The components of annual net periodic pension cost (credit) for the plans
consisted of the following:
Years Ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
Service cost. . . . . . . . . . . . . . . . . . . . $ 3.2 $ 3.4 $ 3.0
Interest cost . . . . . . . . . . . . . . . . . . . 7.6 7.1 6.7
Return on assets. . . . . . . . . . . . . . . . . . (15.5) (5.2) (8.0)
Net amortization and deferral . . . . . . . . . . . 5.6 (4.9) (1.7)
-------- -------- --------
Net cost (credit) . . . . . . . . . . . . . . . . . $ 1.0 $ .3 $ -
======== ======== ========
The reconciliation of the funded status of the plans is as follows:
December 31,
-------------------
1995 1994
-------- --------
Actuarial present value of benefit obligations:
Vested benefit obligations . . . . . . . . . . . . . . . . . $ 87.7 $ 83.4
Nonvested benefit obligations . . . . . . . . . . . . . . . . 2.4 2.1
-------- --------
Accumulated benefit obligations. . . . . . . . . . . . . . . . 90.2 85.5
Excess of projected benefit obligations over
accumulated benefit obligations . . . . . . . . . . . . . . . 15.5 15.0
-------- --------
Projected benefit obligations . . . . . . . . . . . . . . . . 105.7 100.5
Plans' assets at fair market value . . . . . . . . . . . . . . 112.6 106.7
-------- --------
Plan assets in excess of projected benefit obligations . . . . 6.9 6.2
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . 3.3 5.5
Prior service cost not yet recognized in net periodic pension cost .5 .6
Remaining unrecognized transition net assets from
December 31, 1985 . . . . . . . . . . . . . . . . . . . . . . (4.2) (5.8)
-------- --------
Unfunded accrued pension asset recognized in the consolidated
balance sheet . . . . . . . . . . . . . . . . . . . . . . . . $ 6.5 $ 6.5
======== ========
The projected benefit obligations for the plans were determined using the
following assumptions at the dates shown:
December 31,
-----------------------
1995 1994
---------- ----------
Settlement discount rates. . . . . . . . . . . . . . . . . . . 7.4 - 8.0% 7.0 - 8.5%
Rates of compensation increase . . . . . . . . . . . . . . . . 4.0 - 6.0% 4.0 - 5.5%
Long-term rates of return on assets. . . . . . . . . . . . . . 8.0 - 8.5% 7.5 - 8.5%
The Corporation 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,
------------------------------
1995 1994 1993
-------- -------- --------
Employees Savings and Stock Ownership Plan. . . . . $ 1.2 $ 5.2 $ 1.8
Other profit sharing . . . . . . . . . . . . . . . 3.4 3.2 3.0
Deferred and incentive compensation . . . . . . . . $ 5.2 $ 8.2 $ 12.9
======== ======== ========
The Company adopted Financial Accounting Standard (FAS) No. 106 "Employers'
Accounting for Post-retirement Benefits Other Than Pensions" for health care and
life insurance benefit plans as of January 1, 1993. A few Old Republic
subsidiaries make available post-retirement health benefits for employees that
retired prior to November 30, 1992. FAS No. 106 provides the option of either
recognizing the projected future costs of post-retirement benefits as a
liability, or amortizing such costs over the average remaining life expectancy
of plan participants. Previously such benefits were reported as costs in the
period during which they were provided. The Company recognized the accumulated
post-retirement benefit liability of $7.0 as of January 1, 1993; this resulted
in an after tax charge to net income of $4.6, or $.08 per share ($.08 fully
diluted).
The Company sponsors a leveraged Employee Savings and Stock Ownership Plan
(ESSOP) in which a majority of its employees participate. The ESSOP acquired
all of its stock of the Company in 1987 and prior years. Accordingly, it is not
required to adopt the American Institute of Certified Public Accountants' SOP
No. 93-6, "Employers' Accounting for Employee Stock Ownership Plans." Shares of
Company stock owned by the ESSOP are released to participants based on a formula
prescribed by the Employee Retirement Income Security Act of 1974, and dividends
on released shares are allocated to participants as earnings. The Company's
contributions are based on a formula considering growth in net income per share
over consecutive five year periods. As of December 31, 1995, there were
22,256,680 Series "D" Redeemable Convertible Preferred Shares and 447,248 Common
Shares owned by the ESSOP of which 4,929,467 Series "D" Redeemable Convertible
Preferred Shares and 23,050 Common Shares were unreleased and unallocated. There
are no repurchase obligations in existence. (See Note 3).
(m) 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 ($299.5 and $198.7 at December 31, 1995 and
1994, respectively) are not included as assets or liabilities in the
accompanying consolidated balance sheets as the escrow funds are not available
for regular operations.
(n) Earnings Per Share-Consolidated primary earnings per share are based upon
the weighted average number of shares outstanding during each year,
retroactively adjusted for all stock dividends and splits declared through
December 31, 1995. Dividend requirements of $4.9 in 1995, $5.1 in 1994 and $5.2
in 1993 on preferred stock have been considered in per share calculations.
The average number of common shares used in 1995, 1994 and 1993 earnings per
share calculations reflect the pro forma inclusion of 5,165,377, 5,323,170 and
5,476,047 incremental common shares, respectively, which would be issued upon
conversion and/or exercise of dilutive convertible preferred and stock option
shares. Fully diluted earnings per share are similarly calculated with the
inclusion of substantially all convertible securities and stock options
includable for each year; no such data is shown when the calculations are anti-
dilutive.
(o) Cash Flows-For purposes of the Consolidated Statements of Cash Flows, the
Company considers short-term investments, consisting of money market funds,
certificates of deposit, and commercial paper with maturities of less than 90
days to be cash equivalents. These securities are carried at cost which
approximates fair value.
Supplemental cash flow information: Years Ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . $ 23.1 $ 19.9 $ 20.0
Income taxes. . . . . . . . . . . . . . . 47.4 61.5 54.1
-------- -------- --------
$ 70.5 $ 81.4 $ 74.1
======== ======== ========
(p) Concentration of Credit Risk-Excluding U.S. government fixed maturity
securities, the Company is not exposed to any significant credit concentration
risk.
(q) 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
rounding. Necessary reclassifications are made in prior periods' financial
statements whenever appropriate to conform to the most current presentation.
Note 2-Investments -Bonds and other investments carried at $163.1 as of December
31, 1995 were on deposit with governmental authorities by the Corporation's
insurance subsidiaries to comply with insurance laws.
Note 3-Debt and Debt Equivalents-Consolidated debt of Old Republic and its
subsidiaries is summarized below:
December 31,
----------------------------------------
1995 1994
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Commercial paper due within 180 days with an
average yield of 5.81% and 6.29%. . . . . . . . . . $ 92.1 $ 92.1 $ 83.2 $ 83.2
Convertible subordinated debentures maturing in
2002 at 5.75% (b)(c). . . . . . . . . . . . . . . . 110.0 148.5 110.0 106.7
Debentures maturing in 2015 at 11.5% . . . . . . . . 29.6 31.8 29.5 32.0
Debentures maturing in 2018 at 10.0%(c). . . . . . . 74.0 79.5 74.0 78.9
Other miscellaneous debt . . . . . . . . . . . . . . 2.9 2.9 4.0 4.0
-------- -------- -------- --------
Total debt . . . . . . . . . . . . . . . . . . . . . 308.8 354.8 300.9 304.9
Redeemable convertible preferred stock classified
as a debt equivalent (See (a) below). . . . . . . . 11.7 11.7 13.8 13.8
-------- -------- -------- --------
Total debt and debt equivalents. . . . . . . . . . . $ 320.5 $ 366.5 $ 314.7 $ 318.7
======== ======== ======== ========
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 (including redeemable preferred stock
classified as a debt equivalent see (a)below) at December 31, 1995 are as
follows: 1996: $97.5; 1997: $4.3; 1998: $2.5; 1999: $6.9; 2000: $6.8; 2001 and
after $202.3. During 1995, 1994 and 1993, $23.0, $19.8 and $20.0, respectively,
of interest expense on debt was charged to consolidated operations.
__________
(a) The Company has guaranteed bank loans (balance at December 31, 1995 was
$11.7) to a Trust established by the Old Republic Employees Savings and
Stock Ownership Plan ("ESSOP").The loans have been used to fund the purchase
of Series "B" and Series "D" Redeemable Convertible Preferred Stock from the
Company by the trust for the original amount of the loans. The Trust's loan
principal repayments (currently scheduled at $2.8 in 1996, $2.7 in 1997,
$1.0 in 1998, $2.6 in 1999 and $2.5 in 2000) are expected to be met by
annual profit sharing contributions by the Corporation and its participating
subsidiaries, while interest payments are to be covered by Trust income,
including dividends on the Corporation's stock held by the ESSOP. The
interest rate on the Trust's loans of $11.7 is payable quarterly and at
rates ranging from 75% to 84% of the prime rate. See Notes 4a and 4b.
(b) Each one thousand dollar convertible debenture maturing in 2002, may be
converted at any time into 39.024 common shares. See note (c) below.
(c) In February 1996, the Company called for the redemption of its 10%
debentures maturing in 2018 and its 5.75% convertible subordinated
debentures of 2002; redemption of the former will be effected with available
funds, while the latter are expected to be converted into approximately 4.3
million Old Republic common shares.
Note 4-Shareholders' Equity - All common and preferred share data herein has
been retroactively adjusted as applicable for stock dividends or splits declared
through December 31, 1995.
(a) Preferred Stock-The following table shows certain information pertaining to
each of the Corporation's series of preferred shares issued and outstanding:
Redeemable convertible Convertible Cumulative
----------------------- ----------------------- ----------
Preferred Stock Series: "B" "D"(3) "E" "G"(1) "H"
---------- ---------- ---------- ---------- ----------
Annual cumulative dividend rate
per share. . . . . . . . . . . . . . $ .148 $ .130 $ 1.00 $ (1) 8 3/4%
Conversion ratio of preferred into
common shares(2) . . . . . . . . . . . 5 for 1 5 for 1 1 for 3.52 1 for .95 -
Conversion right begins. . . . . . . . 1994 Anytime Anytime Anytime -
Redemption and liquidation
value per share. . . . . . . . . . . $ - $ 1.30 $ - (1) $25.00
Redemption beginning in year . . . . . 1994 1987 1995 (1) (4)
Total redemption value (millions). . . $ - $ 29.73 $ - (1) 54.80
Vote per share . . . . . . . . . . . . one one one one -
Shares outstanding:
December 31, 1994. . . . . . . . . . . 386,075 22,874,402 107,278 72,852 2,192,100
December 31, 1995. . . . . . . . . . . - 22,874,402 - 86,210 2,192,100
========== ========== ========== =========== ==========
__________
(1) The Corporation has authorized up to 1,000,000 shares of Series G Convertible
Preferred Stock ("Series G") for issuance pursuant to the Corporation's Stock
Option Plan. Series G has been issued under two different designations; the
most recent designation being Series G-2 (except as otherwise stated, Series
"G" and Series "G-2" 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, 1995, the annual dividend rate for Series G and Series G-2 was
$.71 per share and $1.96 per share, respectively. Each share of Series G is
convertible at any time, after being held six months, into 0.95 shares of
Common Stock (See 4(d)). Unless previously converted, Series G shares may be
redeemed at the Corporation's sole option five years after their issuance.
(2) In the event of a merger in which the Corporation is not the survivor, each
series of Preferred Stock must be redeemed at the above redemption value per
share. In the event of certain defined Business Combinations or the
acquisition of 20% or more of a class of the Corporation's voting securities
in certain circumstances, the Series D preferred stock is convertible into
common shares at a ratio ranging from 5 for 1 to 2.5 for 1 unless previously
converted.
(3) Series "D" redeemable convertible preferred stock, substantially all of which
is held by the Corporation's employee benefit plans, is adjustable
proportionately as to redemption value, dividend rate, and number of shares
to reflect any stock dividends or splits declared on the Corporation's common
stock, and has a preference as to dividend payments and upon liquidation of
the Corporation.
(4) On or after December 13, 1996 redeemable at the option of the Corporation, in
whole or in part, at a redemption price of $25.00 per share.
(b) Cash Dividend Restrictions-The payment of cash dividends by the Corporation
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 Corporation 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 1995 data, the maximum amount of
dividends payable to the Corporation by its insurance and a small number of non-
insurance company subsidiaries during 1996 without the prior approval of
appropriate regulatory authorities is approximately $209.5. However,
management does not expect to distribute all such dividends since reinvested
earnings are the Corporation's major source of capital to promote its growth,
and support its obligations to policyholders.
(c) Debt Restrictions-Under the most restrictive covenants, the terms of Old
Republic's guaranties relative to loan agreements described in Note 3(a) provide
that while loans under such agreements are outstanding, Old Republic will
maintain a minimum consolidated tangible net worth (excluding goodwill and net
unrealized investment gains or losses, but including title plants and records)
of at least $400.0. Such agreements also, among other things, restrict Old
Republic from permitting "Debt" to exceed 25% of its consolidated tangible
net worth (as adjusted for goodwill and net unrealized investment gains or
losses on equity securities) without approval of the lenders.
(d) Stock Option Plans-The Corporation has had non-qualified, stock option plans
(the 1979, 1985 and 1992 plans) for its key employees and those of its eligible
subsidiaries since 1979. The plans provide for the issuance of options for up to
5% of the Old Republic common stock issued and outstanding at any one time. The
term of each option is generally 10 years from the date of grant. Under ordinary
circumstances, options 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
anniversaries of the date of grant. The Corporation may extend 15 year loans at
a prevailing market rate of interest for a portion of the exercise price.
Amendments to the plans also enable optionees to, alternatively, exercise their
options into Series "G" or Series "G-2" Convertible Preferred Stock. The
exercise of options into such Series "G" or Series "G-2" Convertible Preferred
stock reduces by 5% the number of equivalent common shares which would otherwise
be obtained from the exercise of options into common shares.
Under the 1985 and 1992 plans, in the event the market price of Old Republic
common stock reaches a preestablished value ("vesting acceleration price"),
optionees may exercise their options to the extent of 10% of the number of
shares covered by the option for each year that the optionee has been employed
by the Corporation or its subsidiaries.
Changes in stock options and related information are reflected in the
following table (See Note 4(a)(1)).
As of and for the Years Ended December 31,
--------------------------------------------------------------------------
1992 Plan 1985 Plan 1979 Plan
--------------------------- ------------------------- -----------------
1995 1994 1993 1995 1994 1993 1994 1993
--------- ------- ------- ------- ------- ------- ------- -------
Options outstanding . . . . . . . . . . . . . . . 1,213,460 626,925 633,575 591,145 718,710 774,506 - 16,610
Price range:
High. . . . . . . . . . . . . . . . . . . . . . $ 26.63 $ 26.13 $ 26.13 $ 12.62 $ 12.62 $ 12.62 $ - $ 5.14
Low . . . . . . . . . . . . . . . . . . . . . . $ 20.50 $ 20.50 $ 20.50 $ 8.74 $ 8.74 $ 8.74 $ - $ 5.14
Shares exercisable. . . . . . . . . . . . . . . . 243,662 127,805 65,858 502,696 628,433 651,644 - 16,610
Options granted . . . . . . . . . . . . . . . . . 624,000 - 610,775 - - - - -
Price of options granted:
High. . . . . . . . . . . . . . . . . . . . . . $ 26.63 $ - $ 26.13 $ - $ - $ - $ - $ -
Low . . . . . . . . . . . . . . . . . . . . . . $ 24.38 $ - $ 25.13 $ - $ - $ - $ - $ -
Vesting acceleration price:
High . . . . . . . . . . . . . . . . . . . . . $ 39.94 $ 39.19 $ 39.19 $ 18.93 $ 18.93 $ 18.93 $ N/A $ N/A
Low . . . . . . . . . . . . . . . . . . . . . . $ 30.75 $ 30.75 $ 30.75 $ 13.11 $ 13.11 $ 13.11 $ N/A $ N/A
Options cancelled or forfeited . . . . . . . . . 21,010 6,650 2,000 - 5,687 526 - 184
Options exercised . . . . . . . . . . . . . . . . 16,455 - 200 127,565 50,109 76,113 16,610 200,555
Average price of options
exercised . . . . . . . . . . . . . . . . . . . . $ 25.04 $ - $ 25.13 $ 11.44 $ 11.11 $ 11.42 $ 5.14 $ 7.13
========= ======= ======= ======= ======= ======= ====== =======
Option prices represent the per share market price on the date of grant. No
charge is made to earnings in connection with the granting or exercise of
nonqualified stock options.
In conjunction with the purchase or merger of various companies, the
Corporation has assumed the stock option obligations under various qualified and
nonqualified stock option plans previously adopted by such companies.These plans
were terminated as of the merger dates, and existing options at that date became
exercisable into Old Republic common shares at their original price adjusted for
the appropriate exchange ratios pertaining to each merger. At December 31, 1995,
there were no more options outstanding and exercisable. Options for 5,576;
18,246; and 24,568 were exercised for a total consideration of approximately
$0.1, $0.1 and $0.1 during 1995, 1994 and 1993, respectively.
In October 1995, the Financial Accounting Standards Boards issued FAS No. 123
"Accounting for Stock Based Compensation". This statement provides two
alternatives for accounting for stock based compensation (stock option grants).
The Company has elected the alternative to continue to report in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and will provide the disclosures as required by FAS No. 123.
(e) Common Stock-There were 250,000,000 shares of common stock authorized at
December 31, 1995. At the same date, there were 50,000,000 shares of Class "B"
common stock authorized but 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.
During 1995, the Corporation issued a total of 661,042 common shares valued
at $13.7 to effect two small acquisitions which were not material to Old
Republic's financial position or operating results.
(f) Undistributed Earnings-The equity of the Corporation in the undistributed
earnings, determined in accordance with generally accepted accounting
principles, and in the net unrealized investment gains (losses) of its
respective subsidiaries at December 31, 1995 amounted to $1,151.9 and $70.1,
respectively. Cash dividends declared during 1995, 1994 and 1993, to the
Corporation by its subsidiaries amounted to $106.8, $55.4 and $53.9,
respectively.
(g) Treasury Stock-A total of 5,540,360 common shares issued and outstanding are
held by consolidated affiliates. See "Related Party Transactions" herein.
(h) Statutory Data-The shareholders' equity and net income, determined in
accordance with statutory accounting practices, of the Corporation's insurance
subsidiaries was as follows at the dates and for the periods shown:
Shareholders' Equity Net Income
-------------------- ------------------------------
December 31, Years Ended December 31,
-------------------- ------------------------------
1995 1994 1995 1994 1993
-------- -------- -------- -------- --------
General Insurance Group. . . . . . $1,129.1 $1,016.2 $ 149.6 $ 116.2 $ 93.2
Mortgage Guaranty Group. . . . . . 133.8 107.6 95.9 74.7 56.3
Title Insurance Group. . . . . . . 125.6 123.5 15.2 6.0 19.2
Life Insurance Group . . . . . . . $ 81.2 $ 82.5 $ 6.9 $ 6.9 $ 3.6
======== ======== ======== ======== ========
Note 5-Commitments and Contingent Liabilities:
(a) Reinsurance-In order to maintain premium production within their capacity
and to limit maximum losses for which they might become liable under policies
underwritten, Old Republic's insurance subsidiaries, as is the common practice
in the insurance industry, cede all or a portion of their premiums and
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, contingent commission, and profit sharing arrangements
for parts of its business in order to minimize losses for which it might become
liable under insurance policies underwritten by it. To the extent that any
reinsurance companies or retrospectively rated risks or producers might be
unable to meet their obligations under existing reinsurance or retrospective
insurance and agency 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.
Reinsurance protection for General Insurance operations generally limits the
net loss on any one risk to the following maximums (in thousands):fire and other
physical perils-$300; accident and health-$15; workers' compensation-$1,000;
other liability-$750; and loan credit guaranty-$200. A substantial portion of
the mortgage guaranty insurance business is retained, with the exposure on any
one risk currently averaging less than $22. Title insurance risk assumptions,
based on the title insurance subsidiary's financial resources, are currently
limited to $25,000 as to any one policy. The maximum amount of ordinary life
insurance retained on any one life by the Life Insurance Group (without
reinsurance) is $250.
Most of the reinsurance ceded by the Corporation's insurance subsidiaries
in the ordinary course of business is placed on a quota share or excess of loss
basis. Under quota share reinsurance, the companies remit an agreed upon
percentage of their premiums written to assuming companies and are reimbursed
for a pro-rata share of claims and commissions incurred and for a ceding
commission to cover expenses and costs for underwriting and claim services
performed. Under excess of loss reinsurance agreements, the companies are
generally reimbursed for losses exceeding contractually agreed-upon levels.
The following information relates to reinsurance and related data for the
General Insurance, Mortgage Guaranty and Life Insurance Groups for the three
years ended December 31, 1995. For the years 1993 to 1995, reinsurance
transactions of the Title Insurance Group have not been material.
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
General Insurance Group
Written premiums:direct. . . . . . . . . . . . . . . . . . $ 1,118.0 $ 1,170.2 $ 1,160.7
assumed . . . . . . . . . . . . . . . . . 65.2 68.6 111.5
ceded . . . . . . . . . . . . . . . . . . $ 307.0 $ 387.3 $ 396.1
========== ========== ==========
Earned premiums:direct . . . . . . . . . . . . . . . . . . $ 1,099.7 $ 1,174.6 $ 1,170.4
assumed. . . . . . . . . . . . . . . . . . 74.3 78.1 107.6
ceded. . . . . . . . . . . . . . . . . . . $ 322.8 $ 388.6 $ 411.4
========== ========== ==========
Claims ceded . . . . . . . . . . . . . . . . . . . . . . . $ 210.0 $ 277.2 $ 390.9
========== ========== ==========
Mortgage Guaranty Group
Written premiums:direct. . . . . . . . . . . . . . . . . . $ 170.3 $ 138.4 $ 125.7
assumed . . . . . . . . . . . . . . . . . - - -
ceded . . . . . . . . . . . . . . . . . . $ 2.2 $ 3.2 $ 4.6
========== ========== ==========
Earned premiums:direct . . . . . . . . . . . . . . . . . . $ 178.2 $ 138.3 $ 102.5
assumed. . . . . . . . . . . . . . . . . . - - -
ceded. . . . . . . . . . . . . . . . . . . $ 3.0 $ 3.8 $ 5.7
========== ========== ==========
Claims ceded . . . . . . . . . . . . . . . . . . . . . . . $ 1.8 $ 2.3 $ 3.3
========== ========== ==========
Mortgage guaranty insurance in force as of
December 31:direct . . . . . . . . . . . . . . . . . . . . $ 39,201.2 $ 31,415.8 $ 25,372.5
assumed. . . . . . . . . . . . . . . . . . . . - .1 .4
ceded. . . . . . . . . . . . . . . . . . . . . $ 338.5 $ 1,010.5 $ 1,346.8
========== ========== ==========
Life Insurance Group
Written premiums:direct. . . . . . . . . . . . . . . . . . $ 88.0 $ 80.4 $ 64.5
assumed . . . . . . . . . . . . . . . . . .3 .3 .3
ceded . . . . . . . . . . . . . . . . . . $ 42.4 $ 43.3 $ 33.7
========== ========== ==========
Earned premiums:direct . . . . . . . . . . . . . . . . . . $ 82.5 $ 80.6 $ 71.0
assumed. . . . . . . . . . . . . . . . . . .3 .3 .3
ceded. . . . . . . . . . . . . . . . . . . $ 40.9 $ 41.0 $ 38.3
========== ========== ==========
Life insurance in force as of December 31:direct . . . . . $ 7,747.3 $ 8,742.4 $ 8,848.7
assumed. . . . . - - -
ceded . . . . . $ 3,510.2 $ 4,318.9 $ 4,561.9
========== ========== ==========
Disability/accident and health insurance premiums
ceded on a quota share basis:
To affiliated companies . . . . . . . . . . . . . . . . $ 3.4 $ 3.0 $ 1.1
To unaffiliated companies. . . . . . . . . . . . . . . . 24.7 24.5 18.1
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 28.1 $ 27.6 $ 19.3
========== ========== ==========
Percentage of direct and assumed premiums . . . . . . . 43.8% 49.9% 53.7%
========== ========== ==========
(b) Leases-Some of the Corporation's subsidiaries maintain their offices in
leased premises. Certain of these leases provide for the payment of real estate
taxes, insurance, and other operating expenses. At December 31, 1995, aggregate
minimum rental commitments (net of expected sub-lease receipts) under
noncancellable operating leases of $106.5 are summarized as follows: 1996:$26.8;
1997: $20.6; 1998: $14.5; 1999: $9.1; 2000: $5.7; 2001 and after: $29.5.
(c) General-In the normal course of business, the Corporation and its
subsidiaries are subject to various contingent liabilities, including possible
income tax assessments resulting from tax law interpretations or issues raised
by taxing authorities in their regular examinations. Management does not
anticipate any significant losses or costs to result from any known or existing
contingencies.
(d) Legal Proceedings-There are no material legal proceedings other than those
arising in the normal course of business and which generally pertain to claim
matters related to insurance policies and contracts issued by the Corporation's
insurance subsidiaries.
Note 6-Consolidated Quarterly Results-Unaudited - Old Republic's consolidated
quarterly operating data for the two years ended December 31, 1995 is presented
below. In the fourth quarter of 1995, the Company's Mortgage Guaranty Group
adopted the accrual method for recording past-due premium revenues and the
related premium receivable arising from new monthly premium policies. This new
payment mode has emerged as a significant factor for the mortgage guaranty
industry since mid-1994. Before adoption of this accrual method, past-due
premiums were recognized on receipt of cash. With the adoption this accrual
method, a cumulative increase in net premiums written of $9.8 million, net
premiums earned of $6.3 million, and post-tax income of $3.9 million or six
cents per fully diluted share was reflected in the Company's final quarter and
year of 1995.
In the opinion of management, all adjustments consisting of normal recurring
adjustments necessary to a fair presentation 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 is not indicative of
results to be achieved in succeeding quarters or years. The long-term nature of
the insurance business, seasonal patterns in premium production and incidence 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. 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, 1995:
Operating Summary:
Net premiums, fees, and other income. . . . . $ 320.9 $ 352.3 $ 350.7 $ 369.9
Net investment income and realized gains. . . 64.8 64.3 82.6 89.6
Total revenues . . . . . . . . . . . . . . . 385.8 416.9 433.5 459.6
Benefits, claims, and expenses. . . . . . . . 329.0 354.2 342.2 354.3
Net income. . . . . . . . . . . . . . . . . . $ 39.0 $ 42.0 $ 60.9 $ 70.6
========== ========== ========== ==========
Net income per share:Primary. . . . . . . . . $ .66 $ .72 $ 1.05 $ 1.20
Fully Diluted. . . . . . $ .63 $ .68 $ .99 $ 1.13
========== ========== ========== ==========
Average common and equivalent shares outstanding:
Primary . . . . . . . . . . . . . . . . . . 56,938,962 57,021,249 57,122,458 57,870,868
========== ========== ========== ==========
Fully Diluted . . . . . . . . . . . . . . . 61,397,387 61,524,206 61,676,312 62,486,240
========== ========== ========== ==========
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Year Ended December 31, 1994:
Operating Summary:
Net premiums, fees, and other income. . . . . $ 379.5 $ 368.9 $ 346.1 $ 348.6
Net investment income and realized gains. . . 58.3 57.7 57.6 61.2
Total revenues . . . . . . . . . . . . . . . 438.0 426.9 403.9 410.0
Benefits, claims, and expenses. . . . . . . . 387.7 373.1 347.2 345.0
Net income. . . . . . . . . . . . . . . . . . $ 34.0 $ 36.0 $ 37.8 $ 43.0
========== ========== ========== ==========
Net income per share:Primary. . . . . . . . . $ .57 $ .61 $ .64 $ .73
Fully Diluted. . . . . . $ .55 $ .58 $ .61 $ .70
========== ========== ========== ==========
Average common and equivalent shares outstanding:
Primary . . . . . . . . . . . . . . . . . . 57,264,289 57,264,182 57,219,840 57,124,416
========== ========== ========== ==========
Fully Diluted . . . . . . . . . . . . . . . 61,693,146 61,692,856 61,669,829 61,588,211
========== ========== ========== ==========
Note 7-Information About Segments of Business - 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 generally accepted accounting principles
("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, although disability/accident &
health coverages may be written directly or indirectly through reinsurance in
either the General or Life Insurance segments.
In computing the profit or loss before taxes for each segment, the following
items have not been added or deducted: general corporate revenues and expenses,
parent company interest expense, income taxes, and equity in operating results
of, or dividends from, unconsolidated subsidiaries and affiliates. To reconcile
the total assets shown for the General, Mortgage Guaranty, Title and Life Groups
with total consolidated assets at December 31, 1995 and 1994, adjustments must
be made for the parent company assets of $2,056.3 and $1,745.2, and
consolidating eliminations of $2,417.5 and $2,143.0, respectively.
Revenues and assets connected with foreign operations are not significant
in relation to consolidated totals.
Net Revenues
- ---------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------
1995 1994 1993
---------- ---------- ----------
General Insurance Group:
Net premiums earned:
Liability coverages. . . . . . . . . . . . $ 477.9 $ 509.8 $ 517.5
Property and other coverages . . . . . . . 373.2 354.2 349.0
Net investment (a) and other income. . . . 204.9 187.4 192.0
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . 1,056.1 1,051.4 1,058.5
---------- ---------- ----------
Mortgage Guaranty Group:
Net premiums earned. . . . . . . . . . . . 175.2 134.5 96.8
Net investment (a) and other income. . . . 28.6 23.8 21.8
---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . 203.9 158.3 118.6
---------- ---------- ----------
Title Insurance Group:
Net premiums earned . . . . . . . . . . . 183.3 244.4 249.6
Title, escrow and other fees. . . . . . . 122.2 140.2 199.7
---------- ---------- ----------
Sub-total . . . . . . . . . . . . . . . 305.5 384.7 449.4
Net investment (a) and other income . . . 20.6 20.0 18.5
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . 326.2 404.7 467.9
========== ========== ==========
Life Insurance Group:
Annuities:
Net premiums earned . . . . . . . . . . . - - .1
Net investment income . . . . . . . . . . 6.1 6.4 6.5
---------- ---------- ----------
Sub-total . . . . . . . . . . . . . . . 6.1 6.4 6.6
---------- ---------- ----------
Credit and other life and disability:
Net premiums earned. . . . . . . . . . . . 41.9 40.0 32.9
Net investment (a) and other income. . . . 9.9 9.2 9.9
---------- ---------- ----------
Sub-total . . . . . . . . . . . . . . . . 51.8 49.3 42.9
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . 58.0 55.7 49.5
---------- ---------- ----------
Other Operations - Net (b):. . . . . . . . 1.8 .9 1.3
---------- ---------- ----------
Consolidated sub-total . . . . . . . . . 1,646.1 1,671.2 1,696.0
Net Realized Gains . . . . . . . . . . . . 49.7 7.7 40.2
---------- ---------- ----------
Consolidated . . . . . . . . . . . . . . $ 1,695.9 $ 1,679.0 $ 1,736.3
========== ========== ==========
Income (Loss) Before Taxes (c)
- --------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
General Insurance Group:
Underwriting/service income (loss):
Liability coverages. . . . . . . . . . . . . . $ (58.6) $ (65.0) $ (67.4)
Property and other coverages . . . . . . . . . 38.6 45.4 21.9
Net investment income (a). . . . . . . . . . . 191.1 173.8 170.1
---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . 171.1 154.2 124.5
---------- ---------- ----------
Mortgage Guaranty Group:
Underwriting/service income. . . . . . . . . . 77.6 57.7 43.8
Net investment income (a). . . . . . . . . . . 25.2 20.6 17.5
---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . 102.8 78.3 61.3
---------- ---------- ----------
Title Insurance Group:
Underwriting/service income (loss) . . . . . . (13.4) (16.9) 16.2
Net investment income (a). . . . . . . . . . . 18.0 16.7 15.8
---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . 4.6 (.2) 32.1
---------- ---------- ----------
Life Insurance Group:
Annuities . . . . . . . . . . . . . . . . . . 2.7 2.4 (.2)
Other coverages and net investment income (a). 5.2 3.9 6.7
---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . 7.9 6.4 6.5
========== ========== ==========
Other Sources - Net (b): . . . . . . . . . . . (20.2) (20.6) (21.4)
---------- ---------- ----------
Consolidated sub-total . . . . . . . . . . . . 266.2 218.1 203.0
Net Realized Gains . . . . . . . . . . . . . . 49.7 7.7 40.2
---------- ---------- ----------
Consolidated . . . . . . . . . . . . . . . . . $ 316.0 $ 225.8 $ 243.3
========== ========== ==========
__________
In the above tables, net premiums earned on a GAAP basis differ from statutory
amounts as a result of differences in the 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./(c) Before
cumulative effect of accounting changes as indicated in notes 1(h) and (l).
Assets At Year End
- --------------------------------------------------------------------------------
December 31,
-------------------------
1995 1994
---------- ----------
General Insurance Group . . . . . . . . . . . . . . $ 5,356.8 $ 5,199.9
Mortgage Guaranty Group . . . . . . . . . . . . . . 634.0 487.8
Title Insurance Group . . . . . . . . . . . . . . . 415.8 402.4
Life Insurance Group. . . . . . . . . . . . . . . . 328.2 322.7
Consolidated . . . . . . . . . . . . . . . . . . . $ 6,593.5 $ 6,262.9
========== ==========
Note 8-Related Party Transactions - At December 31, 1995 and 1994, the
Corporation owned 98.85% of the non-voting common shares, and 40% of the voting
common and preferred shares of the American Business & Mercantile Insurance
Group, Inc., ("AB&M Group" or "Group"), an affiliated insurance holding company
engaged in the property and liability reinsurance business.As of the same dates,
the American Business & Personal Insurance Mutual, Inc. ("Mutual"), a property
& liability mutual insurer owned by its policyholders, held directly or through
a subsidiary .04% of the non-voting common shares and 60% of the Group's voting
common and preferred shares. At both dates, 1.11% of the Group's non-voting
common shares were held by public shareholders.
Pursuant to underwriting and investment management agreements, Old Republic
receives management fees for administering the affairs of the Group's
reinsurance subsidiary and those of the Mutual.Pursuant to reinsurance treaties,
the Group and the Mutual are quota share participants in various types of
primary or assumed reinsurance contracts produced through Old Republic
underwriting facilities. Fees received in the past three years by Old Republic
were immaterial. The following table shows reinsurance cessions, retrocessions,
and assumptions to or from the Group's reinsurance subsidiary and the Mutual for
the last three years.
Ceded to Group Assumed from Mutual Ceded to Mutual
---------------------- ---------------------- ----------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
------ ------ ------ ------ ------ ------ ------ ------ ------
Premiums written. . . . . . $ 12.6 $ 12.5 $ 11.2 $ - $ - $ - $ 3.6 $ 3.6 $ 3.6
Commissions and fees. . . . .8 .7 .6 - - - - - -
Losses and loss expenses. . 14.7 14.8 9.9 .1 (.1) (.3) 4.1 4.3 3.5
Loss and loss expense
reserves . . . . . . . . . 54.1 51.1 46.4 18.7 20.2 22.5 7.9 6.9 5.6
Unearned premiums . . . . . $ 1.1 $ .9 $ .7 $ - $ - $ - $ .3 $ .3 $ .2
====== ====== ====== ====== ====== ====== ====== ====== ======
Certain subsidiaries of the Company have sold various accounts receivable
to a finance company subsidiary of the Mutual. Total receivables sold as of
December 31, 1995 and 1994 amounted to approximately $6.0 and $6.6,respectively.
At December 31, 1995 and 1994, the Group held approximately 7.8% and 8.0%,
respectively, of Old Republic's issued and outstanding common shares. For
financial accounting purposes only, 4,439,267 of such shares have been treated
as treasury shares at each respective date in consolidating the Group's accounts
with those of the Corporation.
In the normal course of business, the Company cedes, on the same terms as
apply to unrelated reinsurers, certain parts of its outgoing reinsurance to a
foreign reinsurer in which it has an equity interest. Total premiums ceded to
this reinsurer amounted to approximately $6.0 in 1995, $6.1 in 1994 and $5.6 in
1993. As of December 31, 1995 and 1994, total premium and loss reserve credits
taken on account of cumulative cessions aggregated $65.6 and $67.1,
respectively, all of which credits were collateralized by cash, investments and
funds held amounting to $73.2 and $69.0, respectively.
At December 31, 1995, the Corporation owned 93% of the voting common stock
of Employers General Insurance Group, Inc. ("EGI") an affiliated insurance
holding company engaged in the property and liability insurance and reinsurance
business, primarily in Texas. At such date, 7% of EGI's voting common stock was
held by public shareholders.
Pursuant to a branch management agreement, EGI supervises the solicitation
and underwriting of all lines of insurance that two insurance subsidiaries of
Old Republic are authorized to write. EGI's Texas domiciled insurance
subsidiary has entered into a quota share reinsurance treaty with an insurance
subsidiary of Old Republic. Under the reinsurance treaty, EGI's insurance
subsidiary reinsures the net retained amount of business produced by EGI and its
subsidiaries.
EGI commenced operations in May, 1992, its insurance subsidiary received
its license in December, 1993. The following table is a summary of intercompany
transactions:
Ceded to EGI
-------------------------------
1995 1994 1993
------- ------- -------
Premiums written. . . . . . . . . . . . . . . $ 33.8 $ 29.7 $ 47.6
Losses and loss expenses. . . . . . . . . . . 26.4 22.6 30.4
Loss and loss expense reserves. . . . . . . . 42.4 33.3 22.9
Unearned premiums . . . . . . . . . . . . . . $ 12.6 $ 12.3 $ 13.1
======= ======= =======
EGI has also entered into an investment counsel agreement with Old Republic,
pursuant to which Old Republic provides investment advice, accounting services
and assistance to EGI in executing purchases and sales of investments. Fees
received by Old Republic were immaterial.
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Old Republic International Corporation
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of Old
Republic International Corporation and subsidiaries (the "Company") as of
December 31, 1995 and 1994, and the related consolidated statements of income,
preferred stock and common shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Old Republic
International Corporation and subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in footnote 1(h) and 1(l) to the consolidated financial
statements, the Company changed its method of accounting for income taxes and
post-retirement benefits other than pensions in 1993.
Coopers & Lybrand L.L.P.
Chicago, Illinois
March 13, 1996
Item 9-Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10-Directors and Executive Officers of the Registrant
Omitted pursuant to General Instruction G(3). The Company will file with
the Commission prior to April 1, 1996 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 24, 1996. See also Item 4(a) in Part I of this report. A list of
Directors appears on the "Signature" page of this report.
Item 11-Executive Compensation
Omitted pursuant to General Instruction G(3). The Company will file with
the Commission prior to April 1, 1996 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 24, 1996.
Item 12-Security Ownership of Certain Beneficial Owners and Management
Omitted pursuant to General Instruction G(3). The Company will file with
the Commission prior to April 1, 1996 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 24, 1996.
Item 13-Certain Relationships and Related Transactions
Omitted pursuant to General Instruction G(3). The Company will file with
the Commission prior to April 1, 1996 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 24, 1996.
PART IV
Item 14-Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 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 30, 1996
under cover of Form 10-K/A.
3. See exhibit index on page 52 of this report.
(b) Reports on Form 8-K:
1. No reports on Form 8-K were filed during the fourth quarter of 1995.
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/ A.C. Zucaro _______________ _____3/14/96_____
A. C. Zucaro, Chairman of the Board, Date
Chief Executive Officer, President and Director
By : ________________/s/ Paul D. Adams_______________ _____3/14/96_____
Paul D. Adams, Senior Vice President, Date
Chief Financial Officer and Treasurer
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).
__________________________________ _________________________________
Anthony F. Colao, Director* John W. Popp, Director*
Senior Vice President
__________________________________ _________________________________
John C. Collopy, Director* William A. Simpson, Director*
President of Republic Mortgage
Insurance Company
_________________________________ _________________________________
Jimmy A. Dew, Director* Arnold L. Steiner, Director*
Executive Vice President of Republic
Mortgage Insurance Company
________________________________ ________________________________
Kurt W. Kreyling, Director* William R. Stover, Director*
________________________________ ________________________________
Peter Lardner, Director* David Sursa, Director*
President of Bituminous
Casualty Corporation
________________________________ ________________________________
Wilbur S. Legg, Director William G. White, Jr., Director*
* By/S/A. C. Zucaro
Attorney-in-fact
Date: March 14, 1996
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, as amended.
(B) * By-laws, as amended (Exhibit 3(b) to Registrant's Annual Report on
Form 10-K for 1993).
(4) Instruments defining the rights of security holders, including indentures.
(A) * Certificates of Designations, as amended, with respect to Series B
Cumulative Convertible Preferred Stock, Series D Cumulative
Convertible Preferred Stock, Series E Cumulative Convertible Preferred
Stock, Series G Convertible Preferred Stock, Series G-2 Convertible
Preferred Stock and Series H Cumulative Preferred Stock.
(B) * Form of Indenture dated June 1, 1985 between Old Republic International
Corporation and Morgan Guaranty Trust Company of New York, as Trustee,
regarding the 11 1/2% Sinking Fund Debentures due 2015 (Exhibit 4.3 to
Form S-3 Registration Statement No. 2-98167).
(C) * Form of Indenture dated as of January 15, 1988 between Old Republic
International Corporation and Morgan Guaranty Trust Company of New York
as Trustee, regarding the 10% Sinking Fund Debentures due 2018 (Exhibit
4(D) to Registrant's Annual Report on Form 10-K for 1987).
(D) * 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).
(E) * Rights Agreement dated as of June 26, 1987 between Old Republic
International Corporation and Morgan Shareholder Services Trust Company
(Exhibit 4 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1987).
(F) * Form of Indenture dated as of August 15, 1992 between Old Republic
International Corporation and Wilmington Trust Company, as Trustee,
regarding the 5 3/4% Convertible Subordinated Debentures due August 15,
2002. (Exhibit 4(G) to Registrant's Annual Report on Form 10-K for
1993).
(10) Material contracts.
(A) Copy of the restated Old Republic International Corporation Employees
Savings and Stock Ownership Plan.
(B) Form 11 - K Annual Report of the Old Republic International Employees
Savings and Stock Ownership Plan for the year ended December 31, 1995
(To be filed by amendment on Form 10-K).
** (C) Copy of Old Republic International Corporation Key Employees
Performance Recognition Plan, as restated.
** (D) * Copy of Old Republic International Corporation Non-qualified Stock
Option Plan (Exhibit to Form S-8 Registration Statement No. 2-66302).
** (E) * Amendments to Old Republic International Corporation Non-qualified
Stock Option Plan (Exhibit 10(E) to Registrant's Annual Report on Form
10-K for 1991).
** (F) * 1985 Old Republic International Corporation Non-qualified Stock Option
Plan A (Exhibit 10.1 to Form S-3 Registration Statement No. 2-98166).
** (G) * Amendments to 1985 Old Republic International Corporation Non-qualified
Stock Option Plan A (Exhibit 10(G) to Registrant's Annual Report on
Form 10-K for 1991).
(Exhibit Index, Continued)
(10) Material contracts (Continued)
** (H) * 1985 Old Republic International Corporation Non-qualified Stock Option
Plan B (Exhibit 10.2 to Form S-3 Registration Statement No. 2-98166).
** (I) * 1990 Old Republic International Corporation Non-qualified Stock Option
Plan (Exhibit 10 to Form S-8 Registration Statement No. 33-37692).
** (J) * 1992 Old Republic International Corporation Non-qualified Stock Option
Plan (Exhibit 10 to Form S-8 Registration Statement No. 33-49646).
(K) * Old Republic International Corporation Employees Retirement Plan
(Exhibit 10(J) to Registrant's Annual Report on Form 10-K for 1991).
** (L) * Old Republic International Corporation Executives Excess Benefits
Pension Plan (Exhibit 10.16 to Registration Statement No. 2-95243).
** (M) * 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).
** (N) * Copy of directors and officers liability and company reimbursement
policy dated October 6, 1970 (Exhibit 12(A) to Form S-1 Registration
Statement No. 2-41089).
(O) * Copy of Bitco Savings Plan (Exhibit 4.3 to Form S-8 Registration
Statement No. 33-32439).
(P) Form 11-K Annual Report of the Bitco Savings Plan for the year ended
December 31, 1995 (To be filed by amendment on Form 10-K).
(Q) * Copy of RMIC Corporation Profit-Sharing Plan (Exhibit 10(M) to
Registrant's Annual Report on Form 10-K for 1980).
** (R) * Copy of a written description of the RMIC Key Employees Performance
Recognition Plan (Exhibit 10(Q) to Registrant's Annual Report on Form
10-K for 1991).
(S) * Copy of Great West Casualty Company Profit Sharing Plan (Exhibit 10 to
Form S-8 Registration Statement No. 33-52069).
(T) Form 11-K Annual Report of the Great West Casualty Company Profit
Sharing Plan for the year ended December 31, 1995 (To be filed by
amendment on Form 10-K).
** (U) * Copy of deferred compensation agreement dated November 4, 1976, as
amended, between RMIC Corporation and William A. Simpson (Exhibit 10(J)
to Registrant's Annual Report on Form 10-K for 1980).
** (V) * Copy of deferred compensation agreement dated November 4, 1976, as
amended, between RMIC Corporation and Jimmy A. Dew (Exhibit 10(K) to
Registrant's Annual Report on Form 10-K for 1980).
** (W) * Copy of Incentive Compensation Plan of The Founders Title Group, Inc.
(Exhibit 10(N) to Registrant's Annual Report on Form 10-K for 1980).
** (X) * Copy of part time employment agreement between Old Republic Title
Company and John C. Collopy. (Exhibit 10(W) to Registrant's Annual
Report on Form 10-K for 1993).
(Y) * Placement Agency Agreement dated November 16, 1987 among Old Republic
International Corporation, Old Republic Capital Corporation and Merrill
Lynch Money Markets Inc. (Exhibit 10.1 to Form S-3 Registration State
ment No. 33-16836).
(Exhibit Index, Continued)
(Z) * Issuing and Paying Agency Agreement dated November 16, 1987 among Old
Republic International Corporation, Old Republic Capital Corporation
and Morgan Guaranty Trust Company of New York (Exhibit 10.2 to Form S-3
Registration Statement No. 33-16836).
(11) Schedule showing computations of average number of common shares
outstanding, as used in the calculations of per share earnings for each
of the three years ended December 31, 1995, 1994 and 1993.
(21) Subsidiaries of the registrant.
(23) Consent of Coopers & Lybrand L.L.P.
(24) Powers of attorney
(28) Consolidated Schedule P (To be filed by amendment.)
__________
* 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.