SECURITIES AND EXCHANGE COMMISSION
OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10 - Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1998 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-4625
OLD REPUBLIC INTERNATIONAL CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 36-2678171
- -------------------------------- ----------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
307 North Michigan Avenue, Chicago, Illinois 60601
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 312-346-8100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Shares Outstanding
Class March 31, 1998
-------------------------- ---------------------------
Common Stock / $1 par value 138,107,506 *
* Excludes 6,182,879 common shares issued, outstanding and held by an
affiliate, which are classified as treasury stock for financial accounting
purposes only.
There are 11 pages contained in this report.
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2
OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / March 31, 1998
INDEX
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PAGE NO.
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PART I FINANCIAL INFORMATION:
CONSOLIDATED SUMMARY BALANCE SHEETS 3
CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 8 & 9
PART II OTHER INFORMATION 10 & 11
<PAGE>
3
<TABLE>
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited)
($ in Millions)
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March 31, December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Assets
Investments: Held to maturity:
Fixed maturity securities (at amortized cost) (fair value: $2,358.4
and $2,306.1) $2,304.2 $2,249.7
Other long-term investments (at cost) 24.8 15.4
---------------- ----------------
Total 2,329.1 2,265.1
---------------- ----------------
Available for sale:
Fixed maturity securities (at fair value) (cost: $1,973.4 and $1,954.5) 2,027.4 2,009.9
Equity securities (at fair value) (cost: $89.3 and $60.9) 140.4 117.1
Short-term investments (at fair value which approximates cost) 286.8 328.0
---------------- ----------------
Total 2,454.7 2,455.2
---------------- ----------------
Total investments 4,783.8 4,720.4
---------------- ----------------
Other Assets: Cash 22.6 26.9
Accrued investment income 72.9 72.5
Accounts and notes receivable 307.2 320.0
Reinsurance balances and funds held 86.5 88.5
Reinsurance recoverable: Paid losses 24.3 27.2
Policy and claim reserves 1,312.2 1,333.5
Deferred policy acquisition costs 126.3 126.2
Sundry assets 213.5 207.9
---------------- ----------------
2,165.9 2,203.0
---------------- ----------------
Total Assets $6,949.8 $6,923.4
================ ================
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities, Preferred Stock and
Common Shareholders' Equity
Liabilities: Future policy benefits $180.5 $183.3
Losses, claims and settlement expenses 3,501.8 3,529.7
Unearned premiums 364.1 375.8
Other policyholders' benefits and funds 58.6 61.1
---------------- ----------------
Total policy liabilities and accruals 4,105.0 4,150.0
Commissions, expenses, fees and taxes 111.0 124.0
Reinsurance balances and funds 143.1 148.2
Federal income tax payable: Current 14.8 4.3
Deferred 121.8 108.3
Debt and debt equivalents 147.4 142.9
Sundry liabilities 92.8 92.2
---------------- ----------------
Total liabilities 4,736.1 4,770.2
---------------- ----------------
Preferred Convertible preferred stock 1.0 1.0
---------------- ----------------
Stock: Total preferred stock 1.0 1.0
---------------- ----------------
Common Common stock 155.2 103.1
Shareholders' Additional paid-in capital 614.4 604.3
Equity: Unallocated shares - ESSOP (6.1) (6.1)
Retained earnings 1,504.6 1,486.8
Accumulated other comprehensive income 60.4 64.4
Treasury stock (at cost) (116.1) (100.5)
---------------- ----------------
Total Common Shareholders' Equity 2,212.5 2,152.1
---------------- ----------------
Total Liabilities, Preferred Stock
and Common Shareholders' Equity $6,949.8 $6,923.4
================ ================
</TABLE>
See accompanying notes.
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4
<TABLE>
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited)
($ in Millions, Except Common Share Data)
- -----------------------------------------------------------------------------------------------------------------------------------
Quarters Ended
March 31,
----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Revenues: Net premiums earned $359.6 $345.7
Title, escrow and other fees 49.8 31.8
Net investment income 68.5 67.7
Realized investment gains 20.0 10.8
Other income 8.4 5.7
---------------- ----------------
Net revenues 506.5 461.8
---------------- ----------------
Expenses: Benefits, claims and settlement expenses 185.7 193.5
Underwriting, acquisition and insurance expenses 198.2 170.7
Interest and other expenses 3.5 3.0
---------------- ----------------
Total expenses 387.5 367.2
---------------- ----------------
Income before income taxes and items below 118.9 94.5
---------------- ----------------
Income Taxes: Currently payable 23.6 19.5
Deferred 14.3 10.0
---------------- ----------------
Total income taxes 37.9 29.5
---------------- ----------------
81.0 64.9
Other items - net 0.5 0.2
---------------- ----------------
Net Income: $81.5 $65.2
================ ================
Net Income
Per Share: Basic $0.58 $0.49
================ ================
Diluted $0.58 $0.46
================ ================
Dividends Per
Common Share: Cash dividends $0.087 $0.073
================ ================
Stock dividends 50% --%
================ ================
Average number of common and common
equivalent shares outstanding:
Basic 138,541,904 130,513,487
================ ================
Diluted 140,824,777 142,266,700
================ ================
</TABLE>
See accompanying notes.
<PAGE>
5
<TABLE>
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
($ in Millions)
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Quarters Ended
March 31,
----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Net income as reported $81.5 $65.2
---------------- ----------------
Other comprehensive income, before tax:
Foreign currency translation adjustment 0.3 (0.3)
---------------- ----------------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period 13.3 (28.0)
Less: elimination of pre-tax realized gains included in net income 20.0 10.8
---------------- ----------------
Net unrealized losses on securities (6.6) (38.8)
---------------- ----------------
Income tax credits related to items of other
comprehensive income (2.3) (13.6)
---------------- ----------------
Comprehensive income $77.5 $39.6
================ ================
</TABLE>
See accompanying notes.
<PAGE>
6
<TABLE>
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in Millions)
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Quarters Ended
March 31,
----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $81.5 $65.2
Adjustment to reconcile net income to
net cash provided by operating activities:
Deferred policy acquisition costs 0.1 1.3
Premiums and other receivables 14.9 1.2
Unpaid claims and related items (9.6) 8.4
Future policy benefits and policyholders' funds (12.5) (17.3)
Income taxes 26.2 22.3
Reinsurance balances and funds (0.3) 4.1
Accounts payable, accrued expenses and other (12.1) (13.6)
---------------- ----------------
Total 88.1 71.8
---------------- ----------------
Cash flows from investing activities:
Sales of fixed maturity securities:
Held to maturity:
Maturities and early calls 34.3 39.7
Available for sale:
Maturities and early calls 33.2 36.1
Other 50.8 6.5
Sales of equity securities 7.0 11.4
Sales of other investments 1.3 0.8
Sales of fixed assets for company use 0.1 0.8
Purchases of fixed maturity securities:
Held to maturity (88.9) (89.6)
Available for sale (103.9) (88.0)
Purchases of equity securities (35.4) (1.4)
Purchases of other investments (10.6) (1.2)
Purchases of fixed assets for company use (8.0) (2.9)
Purchases of investment in subsidiaries (1.9) ---
Other-net 0.2 (0.5)
---------------- ----------------
Total (121.8) (88.2)
---------------- ----------------
Cash flows from financing activities:
Increase in term loans 4.0 10.0
Issuance of preferred and common stocks 10.5 1.7
Issuance of debentures and notes 1.1 ---
Redemption of debentures and notes (0.6) (0.3)
Dividends on common shares (12.0) (9.5)
Dividends on preferred shares --- (0.7)
Purchase of treasury stock (15.6) (15.2)
Other-net 0.7 ---
---------------- ----------------
Total (11.8) (14.1)
---------------- ----------------
Increase (decrease) in cash and short-term investments (45.5) (30.6)
Cash and short-term investments, beginning of period 355.0 301.0
---------------- ----------------
Cash and short-term investments, end of period $309.4 $270.4
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $0.5 $2.0
================ ================
Income taxes $13.1 $7.8
================ ================
</TABLE>
See accompanying notes.
<PAGE>
7
OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)
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1. Accounting Policies and Basis of Presentation:
The accompanying consolidated summary financial statements have been
prepared in conformity with generally accepted accounting principles as
described in the Corporation's latest annual report to shareholders or as
disclosed herein. The financial accounting and reporting process relies on
estimates and on the exercise of judgement, but in the opinion of management
all adjustments, consisting of normal recurring accruals, necessary to a
fair presentation of the accompanying statements have been reflected
therein. Realized gains or losses on dispositions of investment securities
have been reflected in the operating results for each period presented.
2. Common Share Data:
Common share data has been retroactively adjusted to reflect a 50% stock
dividend of the Company's common shares approved by the Board of Directors
on March 12, 1998. The following table provides a reconciliation of the
income before extraordinary items and number of shares used in basic and
diluted earnings per share calculations.
Quarters Ended
March 31,
----------------------------
1998 1997
------------ ------------
Numerator:
Income before extraordinary item .......... $ 81.5 $ 65.2
Less: Preferred stock dividends............ -- .7
------------ ------------
Numerator for basic earnings per share -
income available to common stockholders... 81.5 64.4
Effect of dilutive securities:
Convertible preferred stock dividends..... -- .7
------------ ------------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions.................. $ 81.5 $ 65.2
============ ============
Denominator:
Denominator for basic earnings per share -
weighted-average shares................... 138,541,904 130,513,487
Effect of dilutive securities:
Stock options............................. 2,044,854 1,437,485
Convertible preferred stock............... 238,019 10,315,728
------------ ------------
Dilutive potential common shares.......... 2,282,873 11,753,213
------------ ------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions........................ 140,824,777 142,266,700
============ ============
Basic earnings per share.................... $ .58 $ .49
============ ============
Diluted earnings per share.................. $ .58 $ .46
============ ============
3. Unrealized Appreciation of Investments:
Cumulative net unrealized gains on fixed maturity securities available for
sale and equity securities credited to a separate account in common
shareholders' equity amounted to $68.1 at March 31, 1998. Unrealized
appreciation of investments, before applicable income taxes of $37.2, at
March 31, 1998 included gross unrealized gains and (losses) of $109.6 and
$(4.2), respectively.
For the quarters ended March 31, 1998 and 1997, net unrealized depreciation
of investments, net of deferred income taxes, amounted to $4.3 and $25.2,
respectively.
<PAGE>
8
OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Quarters Ended March 31, 1998 and 1997
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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.
FINANCIAL POSITION
Old Republic's financial position at March 31, 1998 reflected an increase in
assets of 0.4%, a decrease in liabilities of 0.7%, and an increase in common
shareholders' equity of 2.8% when compared to the immediately preceding
year-end. Cash and invested assets represented 70.2% and 69.6% of consolidated
assets as of March 31, 1998 and December 31, 1997, respectively.
Relatively high short-term maturity investment positions continued to be
maintained as of March 31, 1998 to provide necessary liquidity for specific
operating needs and to enhance flexibility in investment strategy. Changes in
short-term investments reflect a large 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 the first
quarter of 1998, the Corporation committed substantially all investable funds in
short to intermediate-term fixed maturity securities. Old Republic continues to
adhere to its long-term policy of investing primarily in investment grade,
marketable securities; the Corporation has not directed its investable funds to
so-called "junk bonds" or derivative types of securities. During the first
quarter of 1998, Old Republic's commitment to equity securities increased by
19.9% vis-a-vis the related invested balance at year-end 1997. As of March 31,
1998, 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 in this year's first
quarter. The parent holding company has met its liquidity and capital needs
principally through dividends paid by its subsidiaries. The insurance
subsidiaries' ability to pay cash dividends to the parent company is generally
restricted by law or subject to approval of the insurance regulatory authorities
of the states in which they are domiciled. Additionally, the terms of guarantees
by the Company of bank loans to the trustee of the Company's Employees Savings
and Stock Ownership Plan restrict the amount of debt the Company may incur. This
covenant is being met.
Old Republic's capitalization of $2.36 billion at March 31, 1998 consisted of
debt and debt equivalents of $147.4 million, convertible preferred stock of $1.0
million, and common shareholders' equity of $2.21 billion. The increase in the
common shareholders' equity account during the quarter ended March 31, 1998
reflects primarily the retention of earnings in excess of dividends declared on
outstanding preferred and common shares offset to some degree by a decline in
the value of bonds and stocks carried at market value and the reacquisition of
$15.6 million worth of common shares pursuant to a previously announced plan.
Common share data has been retroactively adjusted to reflect a 50% stock
dividend of the Company's common shares approved by the Board of Directors on
March 12, 1998 and issuable on or about May 4, 1998 to shareholders of record on
April 10, 1998.
RESULTS OF OPERATIONS
Revenues:
Consolidated net premiums and fees earned in the first quarter of 1998 amounted
to $409.5 million and were 8.5% above the amount reported for the first quarter
of 1997. For the first three months of 1998, the Company's General Insurance
Group posted a 2.4% decrease in earned premiums to $208.9 million due to a soft
pricing environment. Premium growth in the Mortgage Guaranty Group was enhanced
by a rise in the amount of renewal business and market expansion; the year over
year increase in earned premiums was 10.2% to $71.3 million. Title Group premium
and fee revenues were $113.8 million in the first quarter of 1998, an increase
of 35.9% when compared to the same quarter of 1997. The Mortgage Guaranty Group
and the Title Group benefitted from low interest rates and high employment
trends, as well as moderately greater appreciation of home prices. The Life and
Health Group's premium volume increased moderately.
Consolidated net investment income was $68.5 million in the first quarter of
1998 compared to $67.7 million in the same quarter of 1997. This revenue source
was affected by positive consolidated operating cash flows and by a
concentration of investable assets in interest-bearing, fixed maturity
securities. The average annualized yield on investments was approximately 5.8%
and 6.1% at the end of March 31, 1998 and 1997, respectively. This yield pattern
reflects at once the relatively short maturity of Old Republic's fixed maturity
securities portfolio, changes in interest rates at various time and the
commitment of a larger percentage of investable funds to tax-exempt fixed
maturity securities that typically bear lower current yields.
<PAGE>
9
The Company's investment policies have not been designed to maximize realized
investment gains. Realized gains of $20.0 million in the first quarter of 1998
were mostly due to the sale of equity securities. In addition to scheduled
maturities, dispositions of securities have been caused principally by calls
prior to maturity by issuers of bonds and notes and by sales of equity
securities. For the first quarter of 1998, 57.1% of total dispositions
represented maturities and early calls of existing holdings; for the year 1997
these transactions amounted to 76.9% of the total dispositions.
Expenses:
Consolidated benefit, claim and settlement costs, as a percentage of net
premiums and fees earned, were approximately 45% and 51% in the first quarters
of 1998 and 1997, respectively. Claims experience for property and liability
coverages improved in both periods due to reduced costs from participation in
involuntary workers' compensation pool and by stable claim and benefit costs in
the Company's voluntary business. Mortgage Guaranty claim costs were lower
during the first quarter of 1998 compared to the same period in 1997 due to a
reduction in expected claims emergence. The Title Group and Life Group claim
costs were basically stable in both quarterly periods.
The ratio of consolidated underwriting, acquisition and insurance expenses to
net premiums and fees earned was 48% and 45% in the first quarters of 1998 and
1997, respectively. Variations in these percentages between comparative periods
typically reflect changing patterns in the mix of business and the varying
production costs pertaining thereto. In 1998's first quarter, title premiums
that typically bear greater production costs grew at a faster pace than other
segments' premiums.
The Company and its subsidiaries have been aware for several years of issues
associated with programming codes in existing computer systems as the year 2000
approaches. The Company's subsidiaries are scheduled to complete by December 31,
1998, the identification and implementation of changes, and the testing of
systems affected by this year 2000 issue. The costs of identifying,
implementing, and testing the required changes has not been material to
historical operating results. A significant portion of these costs was not
incremental as the Company and its subsidiaries have mostly utilized existing
resources.
Pre-Tax and Net Income:
Income before taxes increased by 18.1% in the first quarter of 1998 when
compared to the same period one year ago. The Corporation's Mortgage and Title
Guaranty insurance segments reflected higher pre-tax operating earnings; General
and Life insurance earnings were basically flat.
The effective consolidated income tax rate was 31.9% and 31.3% in the first
quarters of 1998 and 1997, respectively. The rates for each period reflect
primarily the varying proportions of pre-tax operating income derived from
tax-sheltered investment income (principally tax-exempt interest) on the one
hand, and fully taxable investment and underwriting/service income on the other
hand.
OTHER INFORMATION
Historical data pertaining to the operating results, liquidity, and other
financial matters applicable to an insurance enterprise such as Old Republic are
not necessarily indicative of results to be achieved in succeeding years. In
addition to the factors cited in the next paragraph, 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 all have a bearing on
period-to-period comparisons and future operating results.
Any forward-looking statements contained in this report, of necessity, involve
assumptions, uncertainties, and risks that may affect the Company's future
performance. With regard to Old Republic's General insurance segment, its
results can be affected in particular by the level of market competition which
is typically a function of available capital and expected returns on such
capital among competitors, the levels of interest and inflation rates, as well
as periodic changes in claim frequency and severity patterns caused by natural
disasters, weather conditions, accidents, illnesses and work-related injuries.
Mortgage Guaranty and Title insurance results can be affected by such factors as
changes in national and regional housing demand and values, the availability and
cost of mortgage loans, employment trends, and default rates on mortgage loans;
mortgage guaranty results may also be affected by various risk-sharing
arrangements with business producers. Life and disability insurance results can
be impacted by the levels of employment and consumer spending, as well as
mortality and health trends. At the holding company level, results are generally
affected by the amount of debt outstanding and its cost.
Any forward-looking statements speak only as of their dates. Old Republic
undertakes no obligation to publicly update or revise such statements, whether
as a result of new information, future events or otherwise, and accordingly they
may not be unduly relied upon.
<PAGE>
10
OLD REPUBLIC INTERNATIONAL CORPORATION
FORM 10 - Q
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 6 - Reports on Form 8-K
- ----------------------------
(a) Reports on Form 8-K
1. The registrant has not filed any reports on Form 8-K during the quarter
for which this report is filed.
Items other than those listed are omitted because they are not required.
<PAGE>
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Old Republic International Corporation
--------------------------------------
(Registrant)
Date: May 13, 1998
------------------
/s/ Paul D. Adams
-------------------------------------
P. D. Adams
Senior Vice President &
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
Old Republic International's consolidated balance sheet and consolidated
statement of income and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 2,027
<DEBT-CARRYING-VALUE> 2,304
<DEBT-MARKET-VALUE> 2,358
<EQUITIES> 140
<MORTGAGE> 7
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,783
<CASH> 22
<RECOVER-REINSURE> 24
<DEFERRED-ACQUISITION> 126
<TOTAL-ASSETS> 6,949
<POLICY-LOSSES> 3,682
<UNEARNED-PREMIUMS> 364
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 58
<NOTES-PAYABLE> 147
0
1
<COMMON> 155
<OTHER-SE> 2,057
<TOTAL-LIABILITY-AND-EQUITY> 6,949
359
<INVESTMENT-INCOME> 68
<INVESTMENT-GAINS> 20
<OTHER-INCOME> 58
<BENEFITS> 185
<UNDERWRITING-AMORTIZATION> 50
<UNDERWRITING-OTHER> 147
<INCOME-PRETAX> 118
<INCOME-TAX> 37
<INCOME-CONTINUING> 81
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
