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| 8-K - 8-K DATED JANUARY 6, 2021 - OLD REPUBLIC INTERNATIONAL CORP | ori-20210106.htm |
307 North Michigan Avenue, Chicago, Illinois 60601-5382 | T: 312.346.8100 January 6, 2021 Dear Shareholders: On January 15, 2021, all shareholders of record on January 5 will receive a one-time special cash dividend of $1.00 per share. As this year begins, it seems a good time to tell you more about why we decided to return this significant amount of capital to investors. Why the Board of Directors Declared this Special Dividend Near the end of each year, Directors evaluate Old Republic’s capital position in relation to the business’s long-term strategy. Nearly all of ORI’s capital is allocated and managed through 26 regulated insurance companies. Each focuses on offering many insurance and related products to core industries in the North American economy. State insurance regulations define the types of coverages our separately chartered companies may underwrite. We observe these regulatory distinctions and accounting conventions in our financial reports. However, we manage the business as a whole. This means we consider two key factors. First: each subsidiary’s underwriting disciplines and the balance sheet leverage that reflects its risk profile. Second: the risk management aspects of the entire enterprise. Here is some useful background and tables that describe how we do this. We Have Sound Capital Allocation Table A reflects the past several years’ capital allocation trends for each of the regulatory groupings of insurance underwriting subsidiaries. The Board and Senior Management use a number of Enterprise Risk Management tools and controls to evaluate our operations. These consider such important matters as maintaining high financial ratings, plus the financial and business expectations of each subsidiary’s customer base. As a result, we determined ORI has enough appropriately allocated capital in all regards, including a reasonable cushion. In addition, several years of favorable operating results for most subsidiaries enabled them to safely raise their dividend payments to the ORI holding company. The funds have been used principally to 1) pay regular cash dividends to our shareholders, and 2) add equity capital to several startups or long-operating subsidiaries in periodic need of capital support. These dividend receipts exceeded those outlays and generated excess funds. These favorable results and the current evaluation of capital levels enabled Directors to declare the additional special dividend. It’s worth noting the table shows a continuing commitment of capital to a previously active operation-the RMIC mortgage guaranty group of companies. This was placed in run-off mode in 2012, and the business remains highly capitalized, at $435 million. As we’ve reported in the past, our objective is to manage RMIC in an economically efficient and rewarding manner by: 1) selling the business to a cash buyer interested in its re-activation, or 2) holding it for a few years until nearly all of the insurance risk in force
dissipates. We’re confident that either scenario will allow us to recoup cash equal to any accumulated capital balance, plus more for a variety of meaningful intangible values. With necessary regulatory approvals, we expect to gradually extract and repurpose the capital it generates. We Specialize in Major Industries Table B shows an average 91% of consolidated premium and fee revenue comes from three industry groupings. These account for nearly 55% of the nation’s GDP. Most major subsidiaries in the regulatory reporting segments contribute to the largest of those three industry groups (see Tables C and D). Concentrating on industries we know well is at the core of our long-term strategy. Our primary goal is to achieve underwriting profitability over industry and economic cycles. Experience has shown that a greater possibility of long-term success rests on the following approaches to enterprise-wide, insurance risk management: ∑ Select insurance coverages that are more counter-cyclical in product demand and market-pricing sensitivity ∑ Select industries that tend to be counter-cyclical to achieve greater stability of revenue and profit ∑ Combine industry specialization with expertise in selecting and pricing insurance coverages in which we have strong competencies Our Approach to Underwriting Balances Profitability Over Cycles Table C shows the positive and steadying impact these underwriting approaches have on balancing our profitability over cycles. Together with the underlying strength of ORI’s balance sheet, our focused underwriting helped us weather many economic downturns, including the Great Recession. During those years and their aftermath (2008 to 2012), our balance sheet stood strong. This shows the necessity of a diversified book of business that advances ORI’s long-term objectives in the best interests of our shareholders and other stakeholders. Table D also shows the complementary and usually positive effects that the general economy and specific markets’ cyclical differences can have on overall underwriting profitability (see the first three columns in this table). ORI’s consolidated management of invested assets, corporate taxation, and capital resources is highly sensitive and responsive to those outcomes. They are primarily geared to individual underwriting subsidiaries’ needs and reliance on capital stability and growth to achieve their objectives in the interest of the entire enterprise. We maintain a certain amount of permanent or debt capital for acquiring or starting new businesses. Our deep and continually updated knowledge of the insurance landscape gives us an edge in this regard. Lately, we have not seen any opportunities to purchase businesses that fit our competencies and culture. This means we’re largely focused on organic growth. We believe there are very good opportunities to: 1) retain our currently balanced, diversified book of underwriting exposures, 2) gain market share, and 3) participate in the growth of the industries we serve. We Manage Our Business for the Long Run In our many years’ stewardship, we have steadfastly managed our business for the long run. This recognizes its nature as a long-term undertaking that sustains resources essential to our business. As a
publicly traded company, however, we are keenly aware of the common and varying interests of our investors: individuals and large to small fiduciary institutions. Throughout the years we have believed—and shown—that a meaningful measure of Old Republic’s stock performance is its total market return over five- to 10- year periods. This measure includes price appreciation, and intangible values that free markets may attribute at any point. We also measure our financial performance by calculating the total book return based on the actual, measurable results we can effect and achieve as business managers. The total book return calculation combines all cash dividends with the change in shareholders’ equity. Table E shows the 52 years since ORI became a publicly traded company. You can see the total market returns to shareholders exceeded those of generally accepted baseline indices most of the time. The returns have greatly benefitted all shareholders. These include ORI’s intellectual capital providers who— together and through the Company’s Employees Savings and Stock Ownership Plan and other benefit plans, and the direct holdings of our senior officers and Board members—represent 8.9% of outstanding shares. For the group as a whole, these aggregate holdings of 27 million shares place them as the second largest shareholder group. This follows Black Rock, Inc., the world’s biggest money management institution and our largest stockholder. We hope this letter provides timely and pertinent context to the thinking that led to the declaration of this latest special cash dividend. Sincerely, On behalf of Old Republic’s Board of Directors, Craig R. Smiddy Aldo C. Zucaro President and Chief Executive Officer Chairman of the Board
Life & RFIG Actual as of December 31,* General Title Subtotal Accident Other Run-off Consolidated 2006 59.5% 8.6% 68.1% 2.2% 0.1% 29.6% 100.0% 2007 61.3% 8.8% 70.1% 2.4% -0.1% 27.6% 100.0% 2008 62.7% 9.7% 72.4% 2.4% 0.3% 24.9% 100.0% 2009 68.3% 10.3% 78.6% 2.5% 1.3% 17.6% 100.0% 2010 71.0% 10.2% 81.2% 2.4% 3.0% 13.4% 100.0% 2011 80.0% 11.1% 91.1% 2.4% 2.0% 4.5% 100.0% 2012 83.7% 13.3% 97.0% 2.4% 2.0% -1.4% 100.0% 2013 82.2% 13.7% 95.9% 2.1% 2.3% -0.3% 100.0% 2014 78.0% 13.6% 91.6% 1.7% 2.3% 4.4% 100.0% 2015 78.2% 13.7% 91.9% 1.2% 1.6% 5.3% 100.0% 2016 78.0% 13.9% 91.9% 1.1% 0.5% 6.5% 100.0% 2017 76.5% 13.3% 89.8% 0.8% 1.8% 7.6% 100.0% 2018 76.5% 13.8% 90.3% 0.7% 0.9% 8.1% 100.0% 2019 75.5% 13.8% 89.3% 0.7% 2.4% 7.6% 100.0% 2020 - Nine Months 76.4% 14.8% 91.2% 0.8% 1.1% 6.9% 100.0% Current Long-Term Objectives 82.5% 15.0% N/A 1.0% 1.5% 0.0% 100.0% Capital Allocation Percentages by Regulatory Insurance Groups Capital Management: Trends and Objectives Old Republic’s blended capital allocation process is principally driven by enterprise risk management considerations based on the attained and prospective growth of regulated insurance underwriting subsidiaries and the ensuing balance sheet leverage. * Percentages are inclusive of all capital instruments. Table A
Insurance Underwriting Long-Focused on Industry Specialization In addition to its insurance coverage concentrations (see Table D), Old Republic’s long-term underwriting success in its single business of insurance is most significantly due to its long history of specialization in cyclically heterogeneous industries that are at the core of the North American economy. Table B General Natural Banking, Manufacturing Energy Construction, & Services, Resources Finance, Retail & Subtotal (Coal, Gas, Oil, Years Ended Housing & Air, Land & Sea Wholesale Top 3 Utlities, Wind Education & December 31, Real Estate Transportation Trade Industries & Turbines) Government Health Care All Other Total 2006 53.6% 27.6% 8.0% 89.2% 4.0% 2.2% 0.2% 4.4% 100.0% 2007 54.8% 24.9% 9.9% 89.6% 3.7% 2.0% 0.2% 4.5% 100.0% 2008 53.5% 24.7% 12.8% 91.0% 4.0% 0.3% 0.2% 4.5% 100.0% 2009 54.7% 23.9% 13.5% 92.1% 3.4% 0.4% 0.5% 3.6% 100.0% 2010 55.5% 24.6% 11.9% 92.0% 2.9% 0.4% 0.8% 3.9% 100.0% 2011 51.6% 22.4% 16.4% 90.4% 2.7% 1.2% 2.4% 3.3% 100.0% 2012 52.5% 22.8% 14.9% 90.2% 2.7% 1.8% 2.4% 2.9% 100.0% 2013 54.0% 22.0% 15.2% 91.2% 2.6% 1.4% 2.2% 2.6% 100.0% 2014 49.7% 23.3% 17.5% 90.5% 3.0% 1.3% 2.5% 2.7% 100.0% 2015 50.9% 23.6% 17.4% 91.9% 2.5% 1.0% 2.4% 2.2% 100.0% 2016 50.3% 24.2% 17.0% 91.5% 2.2% 1.1% 2.1% 3.1% 100.0% 2017 48.5% 24.4% 18.6% 91.5% 2.2% 0.8% 1.8% 3.7% 100.0% 2018 47.7% 24.8% 18.8% 91.3% 2.4% 1.0% 1.6% 3.7% 100.0% 2019 47.6% 25.3% 18.5% 91.4% 2.3% 1.5% 1.3% 3.5% 100.0% 2020 * Average 2006-2019 51.8% 24.2% 15.0% 91.0% 2.9% 1.2% 1.5% 3.5% 100.0% Most Recent GDP Industry Distributions** 23.9% 3.6% 27.3% 54.8% 2.9% 11.8% 6.9% 23.6% 100.0% * Full year 2020 data not available but is not expected to reflect any signif icant departure from that of 2019. ** Derived from data published by the U.S. Department of Commerce at https://apps.bea.gov/iTable/iTable.cfm?reqid=150&step=2&isuri=1&categories=ugdpxind. Percent of Premiums and Fees Volume by Industry Groupings Underlying Specialization
Specialized Balance of Business: Leads to Greater Stability of Long-Term Operating Margins* The long-term success of Old Republic’s single business of insurance underwriting has been due to the sale of insurance products delivered through four groups of state-regulated insurance underwriting subsidiaries (see Tables B and D for industry specialization and insurance coverages sold). RFIG Years Ended December 31, General (**) Title Subtotal Run-off (**) Consolidated 2006 19.9% 3.2% 14.0% 49.1% 19.4% 2007 21.1% -1.7% 14.2% -14.8% 8.6% 2008 20.3% -7.1% 13.0% -83.2% -10.0% 2009 18.7% 0.2% 12.3% -78.0% -8.3% 2010 18.7% 0.8% 11.2% -69.0% -2.3% 2011 16.8% 2.7% 11.2% -144.6% -8.7% 2012 11.2% 4.4% 8.4% -123.9% -3.9% 2013 11.5% 6.2% 9.1% 34.8% 10.7% 2014 8.1% 5.7% 7.1% 4.0% 7.0% 2015 11.6% 8.2% 10.2% 13.4% 10.4% 2016 10.9% 9.5% 10.3% 41.1% 11.5% 2017 10.9% 10.4% 10.7% -59.8% 9.3% 2018 11.1% 9.4% 10.4% 65.7% 11.8% 2019 10.8% 9.3% 10.1% 51.2% 11.4% 2020 - Nine Months 12.0% 10.2% 11.2% 22.8% 11.9% Latest 5 Years' Average 11.1% 9.3% 10.3% 22.3% 10.9% Latest 10 Years' Average 12.2% 6.6% 9.9% -18.7% 5.7% OBJECTIVES 2020 - 2024 11.0% - 13.0% 7.0% - 11.0% 10.0% - 12.0% N/A 10.0 - 12.0% * Pretax operating income (loss) as a percentage of net premiums and fees earned. ** Effective July 1, 2019, immaterial results of the Consumer Credit Indemnity (CCI) run-off business have been classified within the General Insurance Group for all future periods. Table C
Insurance Underwriting: Long-Focused on Selected Insurance Coverages Offered through 26 Regulated Insurers Assigned to Four Regulatory Defined Segments The long-term success of Old Republic’s single business of insurance underwriting has resulted from the blending of industry specialization (see Table B), types of insurance coverages (see Tables C and D), and a capital allocation process that maximizes utilization among regulated insurance underwriting subsidiaries to promote greater operating returns (see Table C). Table D RFIG Years Ended December 31, General Title Subtotal Run-off Consolidated 2006 92.4% 99.5% 95.5% 64.2% 90.0% 2007 91.3% 104.7% 95.4% 126.0% 101.5% 2008 93.1% 110.6% 97.8% 194.1% 120.9% 2009 95.6% 101.7% 97.7% 189.1% 118.5% 2010 94.7% 101.0% 97.5% 182.3% 111.4% 2011 94.4% 99.0% 96.2% 252.6% 115.8% 2012 98.7% 96.8% 97.9% 232.2% 110.4% 2013 97.3% 94.7% 96.1% 76.9% 95.0% 2014 100.8% 95.6% 98.8% 106.7% 99.4% 2015 97.6% 93.2% 95.7% 98.0% 96.0% 2016 97.8% 91.7% 95.2% 72.6% 94.6% 2017 97.3% 90.9% 94.6% 177.5% 96.7% 2018 97.2% 92.1% 95.1% 60.9% 94.7% 2019 97.5% 92.2% 95.3% 78.5% 95.1% 2020 - Nine Months 96.5% 91.2% 94.0% 110.7% 94.2% Average 2015 - 2020 97.3% 91.9% 95.0% 99.7% 95.2% Average 2006 - 2020 96.1% 97.0% 96.2% 134.8% 102.3% Long-Term Objectives 90.0% - 95.0% 90.0% - 95.0% 90.0% - 95.0% N/A 90.0% - 95.0% Combined Underwriting Ratios* * Represents the sum of the ratio of claims & claim expenses and the ratio of general expenses, both taken as percentages of premiums and fees revenues.
Table E Total Returns Compared to Nominal GDP & Selected S&P Indices’ Returns Note: (*) Includes special cash dividends of $1.000, $1.000, $0.800, and $0.534 per share at September 2019 and December 2017, 2005, and 2003, respectively. Sources: (1) Old Republic Database / (2) Nominal Gross Domestic Product from Federal Reserve Bank St. Louis. / (3) Standard & Poor’s Indices from S&P Global Market Intelligence LLC. Data for years 1989 and prior is not available for the S&P P&C Insurance Index. Nominal Gross Domestic Product (GDP)(2) S&P 500 Index (3) S&P P&C Insurance Index (3) Year Year End Book Value Year End Market Price Total Book Value Annual & Compounded Return Total Market Annual & Compounded Return Total Annual & Compounded Return Total Annual & Compounded Return Total Annual & Compounded Return 1968 $0.280 $0.472 $0.007 18.2% 41.8% 9.4% 11.0% 1969 0.312 0.336 0.010 15.1% -26.6% 8.2% -8.4% 1970 0.360 0.528 0.012 19.2% 60.7% 5.5% 3.9% 1971 0.472 0.840 0.014 34.9% 61.7% 8.5% 14.3% 1972 0.480 1.240 0.016 5.1% 49.5% 9.8% 19.0% 1973 0.472 0.456 0.018 2.2% -61.7% 11.4% -14.7% 1974 0.376 0.408 0.020 -16.1% -6.1% 8.4% -26.5% 1975 0.288 0.440 0.020 -18.1% 12.7% 9.0% 37.2% 1976 0.560 0.624 0.011 98.3% 44.4% 11.2% 23.9% 1977 0.792 0.792 0.022 45.3% 30.4% 11.1% -7.2% 1978 0.976 0.976 0.033 27.4% 27.4% 13.0% 6.6% 1979 1.080 1.112 0.052 16.0% 19.3% 11.7% 18.6% 10 Year Annual Compound Growth Rate 17.6% 16.2% 9.9% 5.9% 1980 1.224 0.888 0.054 18.3% -15.3% 8.8% 32.5% 1981 1.392 1.144 0.054 18.1% 34.9% 12.2% -4.9% 1982 1.648 1.456 0.056 22.4% 32.2% 4.3% 21.6% 1983 1.888 2.353 0.058 18.1% 65.6% 8.7% 22.6% 1984 2.208 2.039 0.059 20.1% -11.2% 11.1% 6.3% 1985 2.304 3.014 0.062 7.1% 51.4% 7.5% 31.7% 1986 2.528 2.316 0.065 12.5% -21.0% 5.5% 18.7% 1987 2.952 1.861 0.068 19.5% -16.7% 6.0% 5.3% 1988 3.152 2.345 0.071 9.2% 29.8% 7.9% 16.6% 1989 3.544 2.604 0.076 14.8% 14.3% 7.7% 31.7% 10 Year Annual Compound Growth Rate 15.9% 12.6% 7.9% 17.6% 1990 3.920 2.465 0.081 12.9% -2.2% 5.7% -3.1% -2.3% 1991 4.456 4.207 0.086 15.9% -74.2% 3.3% 30.5% 25.3% 1992 5.072 5.896 0.094 15.9% 42.7% 5.9% 7.6% 17.2% 1993 5.744 5.363 0.102 15.3% -7.3% 5.2% 10.1% -1.8% 1994 6.112 5.037 0.111 8.3% -4.0% 6.3% 1.3% 4.8% 1995 7.248 8.415 0.121 20.6% 70.1% 4.8% 37.6% 35.4% 1996 7.768 9.511 0.148 9.2% 15.1% 5.7% 23.0% 21.5% 1997 8.312 13.222 0.178 9.3% 41.2% 6.2% 33.4% 45.5% 1998 9.216 12.000 0.206 13.4% -7.8% 5.7% 28.6% -6.6% 1999 9.590 7.267 0.262 6.9% -37.5% 6.3% 21.0% -25.5% 10 Year Annual Compound Growth Rate 12.7% 13.1% 5.5% 18.2% 10.8% 2000 11.000 17.066 0.294 17.8% 142.1% 6.5% -9.1% 55.9% 2001 12.480 14.938 0.314 16.3% -10.6% 3.2% -11.9% -8.1% 2002 13.960 14.934 0.336 14.6% 2.0% 3.4% -22.1% -11.0% 2003 15.650 20.288 0.890 * 18.5% 42.4% 4.8% 28.7% 26.4% 2004 16.940 20.240 0.403 10.8% 1.9% 6.6% 10.9% 10.4% 2005 17.530 21.008 1.312 * 11.2% 10.5% 6.7% 4.9% 15.1% 2006 18.910 23.280 0.590 11.2% 13.9% 6.0% 15.8% 12.8% 2007 19.710 15.410 0.630 7.6% -31.5% 4.6% 5.6% -14.0% 2008 15.910 11.920 0.670 -15.9% -18.0% 1.8% -37.0% -29.4% 2009 16.490 10.040 0.680 7.9% -10.1% -1.8% 26.5% 12.4% 10 Year Annual Compound Growth Rate 9.5% 7.4% 4.1% -1.0% 4.7% 2010 16.160 13.630 0.690 2.2% 43.4% 3.8% 15.1% 8.9% 2011 14.760 8.920 0.700 -4.3% -27.2% 3.7% 2.1% -0.3% 2012 14.030 10.650 0.710 -0.1% 23.4% 4.2% 16.0% 20.1% 2013 14.640 17.270 0.720 9.5% 70.7% 3.6% 32.4% 38.3% 2014 15.150 14.630 0.730 8.5% -11.2% 4.4% 13.7% 15.7% 2015 14.980 18.630 0.740 3.8% 33.4% 4.0% 1.4% 9.5% 2016 17.160 19.000 0.750 19.6% 6.2% 2.7% 11.9% 15.7% 2017 17.720 21.380 1.760 * 13.5% 16.9% 4.3% 21.8% 22.4% 2018 17.230 20.570 0.780 1.6% 4.8% 5.4% -4.4% -4.7% 2019 $19.980 $22.370 $1.800 * 26.4% 17.8% 4.0% 31.5% 25.9% 10 Year Annual Compound Growth Rate 7.7% 14.8% 4.0% 13.6% 14.5% 52 Year Annual Compound Growth Rate 12.8% 12.4% 6.4% 10.2% 9.5% Old Republic International Corporation (1) Annual Cash Dividend Declared
Safe Harbor Statement Historical data pertaining to the operating results, liquidity, and other performance indicators applicable to an insurance enterprise such as Old Republic are not necessarily indicative of results to be achieved in succeeding years. In addition to the factors cited below, the long-term nature of the insurance business, seasonal and annual patterns in premium production and incidence of claims, changes in yields obtained on invested assets, changes in government policies and free markets affecting inflation rates and general economic conditions, and changes in legal precedents or the application of law affecting the settlement of disputed and other claims can have a bearing on period-to-period comparisons and future operating results. Furthermore, due to the financial market and economic disruptions caused by the COVID-19 pandemic and the associated governmental responses, it is therefore possible that Old Republic's operating results, business and financial condition could be adversely affected in subsequent periods depending on the length and severity of these disruptions. Some of the oral or written statements made in the Company's reports, press releases, and conference calls following earnings releases, can constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Of necessity, any such forward-looking statements involve assumptions, uncertainties, and risks that may affect the Company's future performance. With regard to Old Republic's General Insurance segment, its results can be particularly affected by the level of market competition, which is typically a function of available capital and expected returns on such capital among competitors, the levels of investment yields and inflation rates, and periodic changes in claim frequency and severity patterns caused by natural disasters, weather conditions, accidents, illnesses, work-related injuries, and unanticipated external events. Title Insurance and RFIG Run-off results can be affected by similar factors, and by changes in national and regional housing demand and values, the availability and cost of mortgage loans, employment trends, and default rates on mortgage loans. Life and accident insurance earnings can be affected by the levels of employment and consumer spending, changes in mortality and health trends, and alterations in policy lapsation rates. At the parent holding company level, operating earnings or losses are generally reflective of the amount of debt outstanding and its cost, interest income on temporary holdings of short- term investments, and period-to-period variations in the costs of administering the Company's widespread operations. The General Insurance, Title Insurance, Corporate and Other Segments, and the RFIG Run-off business maintain customer information and rely upon technology platforms to conduct their business. As a result, each of them and the Company are exposed to cyber risk. Many of the Company's operating subsidiaries maintain separate IT systems which are deemed to reduce enterprise-wide risks of potential cybersecurity incidents. However, given the potential magnitude of a significant breach, the Company continually evaluates on an enterprise-wide basis its IT hardware, security infrastructure and business practices to respond to these risks and to detect and remediate in a timely manner significant cybersecurity incidents or business process interruptions. A more detailed listing and discussion of the risks and other factors which affect the Company's risk-taking insurance business are included in Part I, Item 1A - Risk Factors, of the Company's 2019 Form 10-K Annual Report filing to the Securities and Exchange Commission, which is specifically incorporated herein by reference. Any forward-looking statements or commentaries speak only as of their dates. Old Republic undertakes no obligation to publicly update or revise any and all such comments, whether as a result of new information, future events or otherwise, and accordingly they may not be unduly relied upon.