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, 1998
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
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(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
Securities registered pursuant to Section 12(b) of the Act:
Share/Par Value Outstanding Name of each exchange
Title of each class February 26, 1999 on which registered
- -------------------------- --------------------------- -----------------------
7% Subordinated Debentures
Due June 15, 2007 $115,000,000 New York Stock Exchange
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Common Stock/$1 par value 131,868,948 New York Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes:_X_/ No:___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part 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 26, 1999 was $2,480,454,912.
Documents incorporated by reference:
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The following documents are incorporated by reference into that part of this
Form 10-K designated to the right of the document title.
Title Part
Proxy statement for the 1999
Annual Meeting of Shareholders III, Items 10, 11, 12 and 13
Exhibits as specified in exhibit index (page 57) IV, Item 14
There are 58 pages in this report
<PAGE>
PART I
Item 1-Business
(a) General Development of Business. Old Republic International Corporation is a
Chicago-based insurance holding company with subsidiaries engaged in the general
(property & liability), mortgage guaranty, title, and life (life & disability)
insurance businesses. In this report, "Old Republic", "the Corporation", or "the
Company" refers to Old Republic International Corporation and its subsidiaries
as the context requires. The aforementioned insurance segments are organized as
the Old Republic General, Mortgage Guaranty, Title, and Life Groups, and
references herein to such groups apply to the Company's subsidiaries engaged in
the respective segments of business.
Financial Information Relating to Segments of Business (a)
The contributions to net revenues, and income (loss) before taxes and
extraordinary item of each Old Republic segment are set forth below for the
years shown, together with their respective assets at the end of each year. The
information below should be read in conjunction with the consolidated financial
statements, the notes thereto, and the "Management Analysis of Financial
Position and Results of Operations" appearing elsewhere herein.
<TABLE>
($ in Millions)
-------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------------------------------
Net Revenues (b) Income (Loss) Before Taxes
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
General ............................... $ 1,111.3 $ 1,119.5 $ 1,074.9 $ 192.0 $ 208.3 $ 188.8
Mortgage Guaranty...................... 348.3 313.3 262.6 155.3 141.5 120.2
Title.................................. 578.8 423.4 387.9 64.6 36.5 24.6
Life................................... 72.7 75.4(c) 60.5 6.6 19.9(c) 7.0
Other Operations - Net................. 7.4 4.5 2.6 (4.9) (6.1) (13.5)
---------- ----------- ---------- ---------- ---------- ----------
Subtotal............................. 2,118.7 1,936.4 1,788.7 413.7 400.3 327.2
Realized Investment Gains.............. 53.0 26.3 15.1 53.0 26.3 15.1
---------- ----------- ---------- ---------- ---------- ----------
Total................................ $ 2,171.7 $ 1,962.8 $ 1,803.9 $ 466.7 $ 426.7 $ 342.4
========== =========== ========== ========== ========== ==========
</TABLE>
<TABLE>
Assets at December 31,
-------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
General............................................................................. $ 5,160.2 $ 5,300.6 $ 5,350.5
Mortgage Guaranty................................................................... 1,092.2 922.9 760.5
Title............................................................................... 460.9 419.4 408.2
Life................................................................................ 329.5(d) 309.4 310.3
Consolidated...................................................................... $ 7,019.7 $ 6,923.4 $ 6,656.2
========== ========== ==========
</TABLE>
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(a) Reference is made to the table in Note 6 of the Notes to Consolidated
Financial Statements, incorporated herein by reference, which shows the
contribution of each subcategory to 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.
(c) Includes $12.6 of interest income from settlement of prior years' tax
issues.
(d) The Company has entered into an agreement to sell its small annuity book
of business; this will have no material effect on Old Republic's
consolidated results or financial position (see Note 1(f) of the Notes to
Consolidated Financial Statements).
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.
2
<PAGE>
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.
The Corporation has over the past several years 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 1998, production of
commercial automobile (principally trucking) direct insurance premiums accounted
for 48.3% of consolidated direct premiums written by the General Insurance
Group. For the same year, workers' compensation and general liability direct
insurance premiums amounted to 16.3% and 9.8%, respectively, of consolidated
direct premiums written.
Specialty programs have 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 (primarily on a facultative basis) 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
primarily includes commercial physical damage insurance on 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 16%
by savings and loan associations, 69% by mortgage bankers and 15% by other
lenders. The Corporation's mortgage guaranty insurance in force at December 31,
1998, was originally produced by approximately 4,100 different lending
institutions and about 2,200 such institutions originated business in 1998. The
profitability of the Corporation's insurance products is not tied in 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.
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 23% and 76%, respectively of the residential real estate
loan insurance in force at December 31, 1998, has been written under annual and
monthly premium plans. Monthly premium plans, a product that was introduced in
1993, accounted for approximately 98% of the new business written in 1998.
3
<PAGE>
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 generally 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 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, Old Republic 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 automobile
dealers. Borrowers insured under consumer credit life insurance are also
generally 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 also 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 as the Company has been unwilling to compete in this part of the
insurance business. The Company has entered into an agreement to sell its small
annuity book of business; this will have no material effect on Old Republic's
consolidated results or financial position (see Note 1(f) of the Notes to
Consolidated Financial Statements).
4
<PAGE>
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
insurance 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:
<TABLE>
($ in Millions)
-----------------------------------------------------
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
General Insurance Group:
Overall Experience:
Net Premiums Written............................................... $ 892.1 $ 908.4 $ 866.3
Net Premiums Earned (a)............................................ $ 903.1 $ 907.7 $ 868.2
Loss Ratio......................................................... 72% 72% 73%
Policyholders' Dividend Ratio...................................... -% -% -%
Expense Ratio(a)................................................... 28% 27% 27%
-------------- ------------- -------------
Composite Ratio.................................................... 100% 99% 100%
============== ============= =============
Experience by Major Coverages:
Commercial Automobile (Principally trucking):
Net Premiums Earned (a)............................................ $ 476.0 $ 455.3 $ 397.4
Loss Ratio......................................................... 83% 81% 79%
============== ============= =============
Workers' Compensation:
Net Premiums Earned (a)............................................ $ 148.9 $ 156.9 $ 151.6
Loss Ratio......................................................... 56% 64% 71%
Policyholders' Dividend Ratio...................................... -% -% 1%
============== ============= =============
General Liability:
Net Premiums Earned (a)............................................ $ 49.8 $ 49.5 $ 46.9
Loss Ratio......................................................... 33% 51% 76%
============== ============= =============
Property and Other Coverages:
Net Premiums Earned (a)............................................ $ 228.4 $ 246.0 $ 272.3
Loss Ratio......................................................... 67% 63% 63%
============== ============= =============
Mortgage Guaranty Group:
Net Premiums Earned (b) ........................................... $ 290.7 $ 271.0 $ 226.6
Loss Ratio (b) .................................................... 27% 35% 36%
============== ============= =============
Title Insurance Group:(b)
Net Premiums Earned................................................ $ 315.8 $ 238.6 $ 220.2
Combined Net Premiums & Fees Earned................................ $ 558.2 $ 402.0 $ 367.4
Loss Ratio: To Net Premiums Earned.............................. 9% 8% 8%
To Net Premiums & Fees Earned....................... 5% 5% 5%
============== ============= =============
Disability/Accident & Health (c):
Net Premiums Earned................................................ $ 36.8 $ 35.2 $ 33.9
Loss Ratio......................................................... 40% 40% 42%
============== ============= =============
Net Retained Life Insurance In Force:
Ordinary Life...................................................... $ 6,414.0 $ 4,695.5 $ 3,833.9
Credit and Other Life.............................................. 326.5 217.4 135.7
-------------- ------------- -------------
Total........................................................... $ 6,740.5 $ 4,912.9 $ 3,969.6
============== ============= =============
</TABLE>
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(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.
5
<PAGE>
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 reflect greater variability due to a
number of factors. The variability of claims experience is due in part to chance
events in any one year, changes in loss costs emanating from participation in
involuntary markets (i.e. industry-wide insurance pools and associations in
which participation is basically mandatory), and added provisions for loss costs
not recoverable from assuming reinsurers which may experience financial
difficulties from time to time. The Company generally underwrites concurrently
workers' compensation, commercial automobile (liability and physical damage),
and general liability insurance coverages for a large number of customers.
Accordingly, an evaluation of trends in premiums, loss and dividend ratios for
these individual coverages should be considered in the light of such a
concurrent underwriting approach. Improved loss experience for workers'
compensation insurance in 1998 and 1997 reflects lower claim costs from
involuntary market participations as well as generally improving industry-wide
loss trends.
The loss ratio for mortgage guaranty insurance decreased in 1998 compared
to 1997; the improvement was mostly attributed to the stable economic conditions
of the past several years which have led to reduced mortgage defaults,
particularly in the California market. The Title Insurance Group loss ratios for
the years presented reflect favorable trends in claims severity and frequency
for business underwritten since 1992.
The increase in net ordinary life insurance in force is attributed to the
introduction of more favorably priced term life products that received greater
market acceptance.
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, (fees and costs which are allocable to individual claims) and indirect
costs (such as salaries and rent applicable to the overall administration of
claim departments) to administer known and IBNR claims. Such claim reserves,
except as to classification in the Consolidated Balance Sheets as to gross and
reinsured portions, are reported for financial and regulatory reporting purposes
at amounts that are substantially the same.
The establishment of claim reserves by the Corporation's insurance
subsidiaries 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, recurring accounting and 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
retrospective and reinsured accounts, in evaluating policy terms and experience,
and for other general business purposes. Solely to comply with reporting rules
mandated by the Securities and Exchange Commission, however, Old Republic has
made statistical studies of applicable workers' compensation reserves to obtain
estimates of the amounts by which claim and claim adjustment expense reserves,
net of reinsurance, have been discounted. These studies have resulted in
estimates of such amounts at approximately $169.5, $167.7 and $163.2 million, as
of December 31, 1998, 1997, and 1996, respectively. It should be noted, however,
that these differences between
6
<PAGE>
discounted and non-discounted (terminal) reserves are, fundamentally, of an
informational nature, and are not indicative of an effect on operating results
for any one or series of years for the above-noted reasons.
The Company believes that its overall reserving practices have been
consistently applied over many years, and that its aggregate net reserves have
resulted in reasonable approximations of the ultimate net costs of claims
incurred. However, no representation is made that ultimate net claim and related
costs will not be greater or lower than previously established reserves.
The following table shows the indicated deficiencies or redundancies for
the years 1988 to 1998. In reviewing this tabular data, it should be noted that
prior periods' loss payment and development trends may not be repeated in the
future due to the large variety of factors influencing the reserving process
outlined herein above. The reserve redundancies or deficiencies shown for all
years are not necessarily indicative of the effect on reported results of any
one or series of years since retrospective premium and commission adjustments
employed in various parts of the Company's business tend to partially or fully
offset or negate such effects. (See "Consolidated Underwriting Statistics"
above, and "Reserves, Reinsurance, and Retrospective Adjustments" elsewhere
herein).
The subject of property and liability insurance claim reserves has been
written about and analyzed extensively by a large number of professionals and
regulators. Accordingly, the above discussion summary should, of necessity, be
regarded as a basic outline of the subject and not as a definitive presentation.
<TABLE>
($ in Millions/Percentages to Nearest Whole Point)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) As of December 31: 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(b) Liability (1) for unpaid
claims and claim adjustment
expenses(2): $1,271 $1,335 $1,435 $1,540 $1,573 $1,700 $1,768 $1,821 $1,829 $1,846 $1,742
================================================================================================
(c) Paid (cumulative) as of (3):
One year later 21% 20% 22% 24% 20% 21% 22% 22% 20% 22% -%
Two years later 33 34 36 36 33 34 35 33 33 - -
Three years later 43 44 44 45 42 43 42 42 - - -
Four years later 50 49 51 51 49 48 49 - - - -
Five years later 55 55 56 56 52 53 - - - - -
Six years later 59 58 60 58 56 - - - - - -
Seven years later 62 62 61 61 - - - - - - -
Eight years later 65 63 64 - - - - - - - -
Nine years later 66 66 - - - - - - - - -
Ten years later 68% -% -% -% -% -% -% -% -% -% -%
=================================================================================================
(d) Liability reestimated (i.e.,
cumulative payments plus
reestimated ending liability)
as of (4):
One year later 101% 98% 100% 99% 97% 95% 95% 96% 94% 93% -%
Two years later 97 99 100 97 94 91 93 92 88 - -
Three years later 98 98 99 96 93 93 90 87 - - -
Four years later 98 98 99 97 96 91 87 - - - -
Five years later 99 99 100 100 95 89 - - - - -
Six years later 99 100 103 99 93 - - - - - -
Seven years later 101 104 103 98 - - - - - - -
Eight years later 104 103 102 - - - - - - - -
Nine years later 104 102 - - - - - - - - -
Ten years later 104% -% -% -% -% -% -% -% -% -% -%
=================================================================================================
(e) Redundancy (deficiency)(5):
For each year-end at (a): -4% -2% -2% 2% 7% 11% 13% 13% 12% 7% -%
=================================================================================================
Average for all year-ends
at (a): 6.4%
====
</TABLE>
(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).
7
<PAGE>
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.
<TABLE>
($ in Millions)
---------------------------------------
Years Ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Amount of reserves for unpaid claims and claim adjustment expenses
at the beginning of each year, net of reinsurance losses recoverable............ $ 1,845.9 $ 1,829.5 $ 1,820.9
----------- ----------- -----------
Incurred claims and claim adjustment expenses:
Provisions for insured events of the current year............................... 728.0 713.8 668.0
Change in provision for insured events of prior years........................... (123.8) (105.5) (74.4)
----------- ----------- -----------
Total incurred claims and claim adjustment expenses...................... 604.2 608.3 593.6
----------- ----------- -----------
Payments:
Claims and claim adjustment expenses attributable to insured
events of the current year................................................. 322.4 275.3 243.0
Claims and claim adjustment expenses attributable to insured
events of prior years...................................................... 385.8 316.6 342.0
----------- ----------- -----------
Total payments........................................................... 708.2 591.9 585.0
----------- ----------- -----------
Amount of reserves for unpaid claims and claim adjustment expenses
at the end of each year (2), net of reinsurance losses recoverable.............. 1,741.9 1,845.9 1,829.5
Reinsurance losses recoverable.................................................... 1,190.8 1,232.6 1,296.5
----------- ----------- -----------
Amount of reserves for unpaid claims and claim adjustment expenses................ $ 2,932.7 $ 3,078.5 $ 3,126.0
=========== =========== ===========
</TABLE>
- ------------
(1) Excluding unallocated loss adjustment expense reserves.
(2) Reserves for incurred but not reported losses amounted to approximately
29.9%, 32.3% and 32.6% of the totals shown as of December 31, 1998, 1997
and 1996, respectively.
The data in the two tables above, incorporates Old Republic'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 provide for 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 to cover certain claims such as those emanating
from A&E exposures. 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, 1998, the Corporation's aggregate
indemnity and loss adjustment expense reserves specifically identified with A&E
exposures amounted to approximately $66.6 million gross, and $33.7 million, net
of reinsurance. Based on average annual claims payments during the five most
recent calendar years, such reserves represented 8.0 years (gross) and 12.3
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 questions 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.
8
<PAGE>
Individual insurance companies and others who have evaluated the potential
costs of litigating and settling A&E claims have noted with serious concern the
possibility that resolution of such claims, by applying liability retroactively
in the context of the existing insurance system, could likely undermine
materially the financial condition of major participants in 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
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 the determination of liability for environmental claims. As of
December 31, 1998, 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 much more 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.
<TABLE>
Consolidated Investments
($ in Millions)
December 31,
--------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Held to Maturity
Fixed Maturity Securities:
Utilities.............................................................. $ 926.1 $ 1,001.8 $ 984.3
Tax-Exempt............................................................. 1,405.4 1,247.0 1,038.3
Redeemable Preferred Stocks............................................ .8 .8 .2
------------ ------------ ------------
2,332.3 2,249.7 2,022.9
------------ ------------ ------------
Other Invested Assets:
Mortgage Loans......................................................... 7.8 7.6 8.7
Policy Loans........................................................... 2.0 2.2 2.0
Collateral Loans....................................................... .4 .4 .2
Sundry................................................................. 14.8 5.1 14.2
------------ ------------ ------------
25.1 15.4 25.1
------------ ------------ ------------
Total held to maturity................................................ 2,357.5 2,265.1 2,048.1
------------ ------------ ------------
Available for Sale
Fixed Maturity Securities:
U.S. & Canadian Governments............................................ 619.1 684.4 758.0
Corporate.............................................................. 1,335.3 1,325.4 1,226.1
------------ ------------ ------------
1,954.4 2,009.9 1,984.2
------------ ------------ ------------
Equity Securities:
Non-redeemable Preferred Stocks........................................ 2.7 3.2 5.0
Common Stocks.......................................................... 162.1 113.8 111.1
------------ ------------ ------------
164.8 117.1 116.1
------------ ------------ ------------
Short-term Investments 377.6 328.0 265.7
------------ ------------ ------------
Total available for sale............................................ 2,497.0 2,455.2 2,366.0
------------ ------------ ------------
Total Investments......................................................... $ 4,854.5 $ 4,720.4 $ 4,414.2
============ ============ ============
</TABLE>
9
<PAGE>
<TABLE>
--------------------------------------------------------------------------------------------------------------------------
Sources of Consolidated Investment Income
($ in Millions)
Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Fixed Maturity Securities:
Taxable................................................................ $ 186.5 $ 194.1 $ 199.1
Tax-Exempt............................................................. 64.6 55.4 41.4
Redeemable Preferred Stocks............................................ - - -
------------ ------------ ------------
251.2 249.5 240.6
------------ ------------ ------------
Equity Securities:
Non-redeemable Preferred Stocks........................................ .2 .2 .3
Common Stocks.......................................................... 2.6 1.7 2.2
------------ ------------ ------------
2.8 1.9 2.6
------------ ------------ ------------
Other Investment Income:
Interest on Short-term Investments..................................... 17.1 16.4 16.0
Sundry................................................................. 8.5 9.0 8.4
------------ ------------ ------------
25.7 25.5 24.5
------------ ------------ ------------
Gross Investment Income................................................... 279.7 277.0 267.7
Less: Investment Expenses (a).......................................... 6.5 6.2 7.2
------------ ------------ ------------
Net Investment Income..................................................... $ 273.1 $ 270.8 $ 260.5
============ ============ ============
</TABLE>
- ------------
(a) Investment expenses consist primarily of personnel costs, investment
management and custody service fees and includes interest incurred on
funds held of $1.5, $1.7 and $1.7 for the years ended December 31, 1998,
1997 and 1996, respectively.
For many 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, 1998 and 1997, the Company had no investments in default
as to principal and/or interest.
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
issuers' calls prior to maturity. The Company's invested assets as of December
31, 1998 have been classified solely as "held to maturity" or "available for
sale" pursuant to the existing investment policy.
The independent credit quality ratings and maturity distribution for Old
Republic's consolidated fixed maturity investments, excluding short-term
investments, at December 31, 1998 and 1997, are shown in the following tables.
These investments, $4.2 billion at December 31, 1998 and 1997, respectively,
represented approximately 61% and 62%, respectively, of consolidated assets, and
91% and 89%, respectively, of consolidated liabilities as of such dates.
10
<PAGE>
<TABLE>
-------------------------------------------------------------------------------------------------------------------------
Independent Ratings (a)
-------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------
1998 1997
------ ------
(% of total portfolio)
<S> <C> <C>
Aaa.................................................................................... 28.8% 30.1%
Aa..................................................................................... 33.3 31.2
A...................................................................................... 30.8 32.2
Baa.................................................................................... 6.3 5.9
------ ------
Total investment grade.............................................................. 99.2 99.4
All others (b)......................................................................... .8 .6
------ ------
Total............................................................................... 100.0% 100.0%
====== ======
</TABLE>
- ------------
(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.
<TABLE>
-------------------------------------------------------------------------------------------------------------------------
Maturity Distribution
-------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------
1998 1997
------ ------
(% of total portfolio)
<S> <C> <C>
Due in one year or less................................................................ 9.1% 6.5%
Due after one year through five years.................................................. 49.9 44.9
Due after five years through ten years................................................. 40.0 46.0
Due after ten years through fifteen years.............................................. .1 1.3
Due after fifteen years................................................................ .9 1.3
------ ------
100.0% 100.0%
====== ======
Average life, including short-term investments (years)................................. 4.2 4.7
====== ======
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) Marketing. Commercial automobile, workers' compensation and general
liability 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. No single source accounted for over 10% of Old Republic's
premium volume in 1998.
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.
11
<PAGE>
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 259 Company
offices located in 32 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 1998,
approximately 46% 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 much of its business.
Many of the Company's customers produce large amounts of premiums and therefore
warrant substantial levels of top executive attention and involvement. In this
respect, Old Republic's mode of operation is similar to that of professional
reinsurers and commercial insurance brokers, and relies on the marketing,
underwriting, and management skills of relatively few key people for large parts
of its business.
Several types of insurance coverages underwritten by Old Republic, such as
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 Old Republic insurance subsidiary is licensed to do business in
each of the 50 states, the District of Columbia, Puerto Rico, Virgin Islands,
Guam, and each of the Canadian provinces; mortgage insurance subsidiaries are
licensed in 50 states and the District of Columbia; title insurance operations,
however, are licensed to do business in 48 states, the District of Columbia and
Puerto Rico. Consolidated direct premium volume distributed among the various
geographical regions shown was as follows for the past three years:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
Geographical Distribution of Direct Premiums Written
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
United States:
Northeast................................................................. 6.4% 5.8% 5.1%
Mid-Atlantic.............................................................. 7.2 7.6 8.1
Southeast................................................................. 16.3 16.3 16.3
Southwest................................................................. 11.8 13.2 14.0
East North Central........................................................ 16.3 16.9 17.2
West North Central........................................................ 15.0 14.9 16.1
Mountain.................................................................. 8.3 8.7 8.3
Western................................................................... 15.7 13.6 11.9
Foreign (Principally Canada)................................................. 3.0 3.0 2.9
------ ------ ------
Total................................................................. 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
12
<PAGE>
(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, individual policies,
or blocks of business to other insurers and reinsurers. Although the ceding of
insurance does not generally discharge an insurer from its direct liability to a
policyholder, it is industry practice to establish the reinsured part of risks
as the liability of the reinsurer. Old Republic also employs retrospective
premium adjustments, 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, by securing indemnity agreements, or by otherwise
collateralizing reinsurance obligations through irrevocable letters of credit,
cash, or securities.
Old Republic's reinsurance practices with respect to portions of its
business also result from its desire to bring its sponsoring organizations and
customers into some degree of joint venture or risk sharing relationship. The
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 customers who have formed "captive" insurance
companies. The ceding commissions received compensate Old Republic for
performing the direct insurer's functions of underwriting, actuarial, claim
settlement, loss control, legal, reinsurance, and administrative services to
comply with local and federal regulations, and for providing appropriate risk
management services.
Remaining portions of Old Republic's business are reinsured 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): workers'
compensation-$1,000,000; auto liability-$600,000; general liability-$600,000;
and property coverages-$300,000. Substantially all the mortgage guaranty
insurance business is retained, with the exposure on any one risk currently
averaging approximately $26,000. 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 is $300,000.
(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 workers'
compensation insurance, other property and liability insurance, title insurance,
and credit life and disability 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.
13
<PAGE>
(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; maintaining the
contingency reserve in accordance with state statutes and maintaining 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, 1998, Old Republic employed approximately
6,570 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.
14
<PAGE>
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 65% is occupied by the
Old Republic National Title Insurance Company. The remainder of the building is
leased to others. Eleven 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,
1998 was approximately $18.3 million.
Certain other operations of the Company and its subsidiaries are directed
from leased premises. See Note 4(b) of the Notes to Consolidated Financial
Statements for a summary of all material lease obligations.
Item 3-Legal Proceedings
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 arising from insurance policies and contracts issued by the
Corporation's insurance subsidiaries.
However, various governmental entities have filed suit against or performed
examinations of the records of an underwritten title agency subsidiary operating
in the State of California, which is consolidated in these financial statements.
These actions allege that 1) the subsidiary failed to escheat unclaimed escrow
funds; 2) charged for services not necessarily provided; and 3) collected
illegal interest payments or fees from banks on the basis of funds held for
escrow customers. Additional suits seeking class action status have been filed
on the basis of the same allegations.
Between July 1998, when the Company learned of these actions and February
1999 when a draft examination report was received from a regulatory authority,
the subsidiary conducted an internal review of its records and concluded that it
had certain liabilities for the issues denoted as (1) and (2) in the preceding
paragraph. Through December 31, 1998 it had paid or otherwise provided reserves
aggregating $19.5 million to cover its best estimate of litigation and related
costs associated with these issues. Management believes that the alleged
practices denoted in (3) in the preceding paragraph, are common within the
industry, are not in conflict with various laws and regulations, and that it has
meritorious defenses, which will ultimately lead to a successful resolution of
these matters.
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 53 Senior Vice President, Chief Financial Officer
since 1990 and Treasurer since 1993.
Spencer LeRoy, III 52 Senior Vice President, General Counsel, and
Secretary since 1992.
William A. Simpson 57 Senior Vice President/ Mortgage Guaranty, and
Director since 1980. President since 1972 of
Republic Mortgage Insurance Company, a wholly-
owned subsidiary.
A. C. Zucaro 59 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 has been employed in executive
capacities with the Company and/or its subsidiaries for the past five years.
15
<PAGE>
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:
<TABLE>
Closing Price
------------------------ Cash
High Low Dividends
-------- -------- ---------
<S> <C> <C> <C>
1st quarter 1997............................................................ $ 18.25 $ 16.75 $ .073
2nd quarter 1997............................................................ 20.75 16.42 .087
3rd quarter 1997............................................................ 26.54 20.25 .087
4th quarter 1997............................................................ $ 26.59 $ 23.17 $ .087
======== ======== =========
1st quarter 1998............................................................ $ 30.09 $ 23.79 $ .087
2nd quarter 1998............................................................ 31.88 27.38 .100
3rd quarter 1998............................................................ 30.88 22.06 .100
4th quarter 1998............................................................ $ 23.69 $ 18.00 $ .100
======== ======== =========
</TABLE>
As of January 29, 1999, there were 3,651 registered holders of the Company's
Common Stock. See Notes 3(b) and 3(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, 1998.
16
<PAGE>
Item 6-Selected Financial Data
Years Ended December 31,
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION ($ millions):
Cash and Invested Assets (a)........... $ 4,948.6 $ 4,819.9 $ 4,521.8 $ 4,415.2 $ 3,906.4
Other Assets........................... 2,071.1 2,103.5 2,134.3 2,178.2 2,356.5
Total Assets.................... 7,019.7 6,923.4 6,656.2 6,593.5 6,262.9
Liabilities, Other than Debt........... 4,569.1 4,627.2 4,581.5 4,587.9 4,543.4
Debt and Debt Equivalents.............. 145.1 142.9 154.0 320.5 314.7
Total Liabilities............... 4,714.2 4,770.2 4,735.6 4,908.4 4,858.1
Preferred Stock........................ 1.2 1.0 20.6 72.5 75.4
Common Shareholders' Equity............ 2,304.2 2,152.1 1,900.0 1,612.5 1,329.3
Total Capitalization (b)........ $ 2,450.6 $ 2,296.1 $ 2,074.6 $ 2,005.6 $ 1,719.5
============= ============= ============= ============= =============
- ----------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS ($ millions):
Net Premiums and Fees Earned........... $ 1,810.6 $ 1,628.0 $ 1,507.7 $ 1,374.0 $ 1,423.2
Net Investment and Other Income 308.1 308.4 281.0 272.1 248.0
Realized Investment Gains.............. 53.0 26.3 15.1 49.7 7.7
Net Revenues.................... 2,171.7 1,962.8 1,803.9 1,695.9 1,679.0
Benefits, Claims, Settlement
Expenses and Dividends............... 782.1 787.6 752.0 747.9 761.2
Underwriting and Other Expenses 922.8 748.5 709.4 631.9 691.9
Income Taxes.................... 145.8 129.2 108.5 103.6 73.4
Income Before Items Below.............. 323.7 298.1 234.8 212.7 151.0
Extraordinary Item (c)................. - - (4.4) - -
------------- ------------- ------------- ------------- -------------
Net Income...................... $ 323.7 $ 298.1 $ 230.3 $ 212.7 $ 151.0
============= ============= ============= ============= =============
- ----------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA (d):
Net Income:
Basic Earnings (e):
Income Before Items Below............ $ 2.35 $ 2.22 $ 1.76 $ 1.76 $ 1.23
Extraordinary Item (c)............... - - (.03) - -
------------- ------------- ------------- ------------- -------------
Net Income...................... $ 2.35 $ 2.22 $ 1.73 $ 1.76 $ 1.23
============= ============= ============= ============= =============
Diluted Earnings (f):
Income Before Items Below............ $ 2.33 $ 2.10 $ 1.62 $ 1.52 $ 1.08
Extraordinary Item (c)............... - - (.03) - -
------------- ------------- ------------- ------------- -------------
Net Income...................... $ 2.33 $ 2.10 $ 1.59 $ 1.52 $ 1.08
============= ============= ============= ============= =============
Dividends: Cash..................... $ .387 $ .333 $ .278 $ .227 $ .209
============= ============= ============= ============= =============
Stock.................... 50% -% 50% -% -%
============= ============= ============= ============= =============
Book Value............................. $ 17.27 $ 15.59 $ 14.57 $ 13.58 $ 11.46
============= ============= ============= ============= =============
Common Shares (thousands):
Outstanding.......................... 133,402 138,069 130,408 118,716 115,956
============= ============= ============= ============= =============
Average and Equivalent Shares:
Basic.................... 137,347 133,659 129,030 117,243 116,740
============= ============= ============= ============= =============
Diluted.................. 139,150 141,768 141,967 138,926 138,729
============= ============= ============= ============= =============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes on Following Page
17
<PAGE>
Notes to Item 6-Selected Financial Data
- --------------------------------------------------------------------------------
(a) Consists of cash, investments and investment income due and accrued.
(b) Total capitalization consists of debt and debt equivalents, preferred
stock, and common shareholders' equity.
(c) In February 1996, the Company called for the redemption of its 10%
debentures maturing in 2018 ($75.0 principal amount), and its 5.75%
convertible subordinated debentures maturing in 2002 ($110.0 principal
amount). In April 1996, the Company called for redemption its 11.5%
debentures maturing in 2015 ($30.0 principal amount). Redemption of the
debentures was effected with internally available funds, while the
subordinated debentures were converted by their terms into approximately
9.6 million Old Republic common shares. The early retirement of the
Company's debentures produced a net of tax charge of $4.4 or $.03 per share
that has been reflected as an extraordinary item in 1996.
(d) Effective in 1997, the Company adopted Financial Accounting Statement (FAS)
No. 128 "Earnings Per Share" which establishes a new methodology for
computing earnings per share. It replaces Primary Earnings Per Share with
Basic Earnings Per Share. Basic Earnings Per Share excludes the dilutive
effect of common stock equivalents and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares actually outstanding for the period. Diluted Earnings Per Share per
FAS-128 is computed in a fashion similar to the former Fully Diluted
Earnings Per Share as required by prior authoritative FASB pronouncements.
Prior year data has been retroactively restated.
(e) Calculated after deduction of preferred stock dividend requirements of $.2
in 1998, $1.7 in 1997, $7.5 in 1996, $6.7 in 1995 and $7.0 in 1994.
(f) Calculated after deduction of preferred stock dividend requirements and, as
applicable, after adjustment for post-tax convertible debentures interest
of $4.0 in 1996, $.6 in 1995 and $.9 in 1994.
18
<PAGE>
Item 7-Management Analysis of Financial Position and Results of Operations
($ 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.
NON-RECURRING ITEMS
In the second quarter of 1997, several life insurance subsidiaries
recovered income taxes and related accumulated interest due to favorable
resolution with the Internal Revenue Service of various outstanding issues
pertaining to income tax returns for the years 1979 through 1982. These cash
recoveries, net of miscellaneous charges, increased other income by $12.6,
reduced income tax expense by $5.9 and increased after-tax consolidated earnings
by $14.2 ($0.10 per diluted common share) for the year ended December 31, 1997.
FINANCIAL POSITION
Old Republic's financial position at December 31, 1998 reflected increases
in assets and common shareholders' equity of 1.4% and 7.1%, respectively, and a
decrease in liabilities of 1.2% when compared to the immediately preceding
year-end. Cash and invested assets represented 70.5% and 69.6% of consolidated
assets as of December 31, 1998 and 1997, respectively.
Relatively high short-term maturity investment positions are generally
maintained 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 1998 and 1997, the
Corporation committed substantially all investable funds in short to
intermediate-term fixed maturity securities with an emphasis on tax-exempt
bonds. Old Republic continues to adhere to its long-term policy of investing
primarily in investment grade, marketable securities; investable funds have not
been directed to so-called "junk bonds" or types of securities categorized as
derivatives. Old Republic's commitment to equity securities during 1998
increased by 40.7% vis-a-vis the related invested balance at year-end 1997. At
December 31, 1998, the Company had no investments in default as to principal
and/or interest.
The Company does not own or utilize derivative financial instruments for
the purpose of hedging, enhancing the overall return of its investment
portfolio, or reducing the cost of its debt obligations. Old Republic employs
traditional investment management tools and techniques to address the yield and
valuation exposures of its invested assets. The long term fixed maturity
investment portfolio is managed so as to limit various risks inherent in the
bond market. Credit risk is addressed through adequate diversification and the
purchase of investment grade securities. Reinvestment rate risk is controlled by
concentrating on non-callable issues, and through asset-liability matching
practices. Purchases of mortgage and asset backed securities, which have
variable principal prepayment options, are generally avoided. Market value risk
is limited through the purchase of bonds of intermediate maturity. The
combination of these investment management tenets generally provides a more
stable long term fixed maturity investment portfolio that is not subject to
extreme interest rate sensitivity and principal deterioration. The market value
of the Company's long term fixed maturity investment portfolio is sensitive,
however, to fluctuations in the level of interest rates, but not materially
affected by changes in anticipated cash flows caused by any prepayments. The
impact of interest rate movements on the long term fixed maturity investment
portfolio generally affects net realized gains or losses when securities are
sold. With a market value of approximately $4,376.7, the long term fixed
maturity investment portfolio has an average maturity of 4.6 years and an
indicated duration of 3.9. This implies that a 100 basis point parallel increase
in interest rates from current levels would result in a possible decline in the
market value of the long term fixed maturity investment portfolio of
approximately 3.9%, or $173. With regard to its $162.1 common stock portfolio,
the Company does not own nor engage in any type of option writing. A 10%
decrease in the U.S. equity market prices could result in a decrease of $16.2 in
the market value of the Company's common stock portfolio. These possible
declines in values for Old Republic's bond and stock portfolios would affect
negatively the common shareholders' equity at any point in time, but would not
necessarily result in the recognition of realized investment losses as long as
operating cash flow and the ongoing emergence of bond
19
<PAGE>
maturities continued to provide sufficient funds to meet obligations to
policyholders and claimants, as well as debt service and cash dividend
requirements at the holding company level.
Consolidated operations produced positive cash flows for the latest three
years. Higher cash flow in 1997 vis-a-vis 1996 and 1998 was due mainly to higher
operating cash flow in Old Republic's general insurance segment. The Company's
mortgage, title and life segments' cash flow from operations have been greater
in each of the last three years.
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 $2,450.6 at December 31, 1998 consisted of
debt and debt equivalents of $145.1, convertible preferred stock of $1.2, and
common shareholders' equity of $2,304.2. The increase 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 redeemable convertible preferred stock in
1997, the issuance of additional shares to effect a debt conversion in 1996, and
an increase during 1998 and 1997 compared to a decrease during 1996 in the value
of bonds and stocks carried at market value. Common shareholders' equity
increases in 1998 and 1997 were partially offset by the acquisition of $151.1
and $62.1, respectively, of common stock in open market transactions. At its
March 12, 1998 meeting, the Company's Board of Directors authorized the
reacquisition of up to $150.0 of common shares as market conditions would
warrant during the twenty-four month period from that date; as of December 31,
1998, a total of $31.9 of this authorization remained unutilized.
In February 1996, the Company called for the redemption of its 10%
debentures maturing in 2018 ($75.0 principal amount) and its 5.75% convertible
subordinated debentures maturing in 2002 ($110.0 principal amount). In April
1996, the Company called for the redemption of its 11.5% debentures maturing in
2015 ($30.0 principal amount); redemption of these debentures was financed with
internally available funds, while the subordinated debentures were converted by
their terms into approximately 9.6 million Old Republic common shares. As a
result of these redemptions and conversions, the Company's debt declined by
$215.0 while its common shareholders' equity account rose by $108.6 during 1996.
The early retirement of the debentures produced a net of tax charge of $4.4
($0.03 per diluted common share) that has been reflected as an extraordinary
item in 1996. In December 1996, the Company redeemed all ($54.8) of its Series
"H" cumulative preferred stock with available funds. During the second quarter
of 1997, the Company issued $115.0 of 7% debentures maturing June 15, 2007;
proceeds from this offering were used principally to redeem commercial paper
debt.
RESULTS OF OPERATIONS
Revenues:
Consolidated net premiums and fees earned increased by 11.2%, 8.0% and 9.7%
in 1998, 1997 and 1996, respectively. Property and liability earned premiums
decreased 0.4% in 1998 and increased 4.5% in 1997 and 1.9% in 1996; premium
production trends in this segment in the past three years were generally
affected by the continuation of a soft pricing environment for most insurance
coverages. Growth in mortgage guaranty premiums for the past three years was
enhanced principally by a rise in the amount of renewal business, by territorial
expansion, and by relatively strong mortgage lending activity, though 1998
premium revenue growth was hindered by higher loan refinancings. Title Group
premiums and fee revenues increased 38.9% in 1998, 9.4% in 1997 and 20.3% in
1996. Greater housing and mortgage finance activity were the main reasons for
the rise in revenues in these years. Life and disability premium volume
increased during the last three years as a result of greater term life and
accident insurance production.
Net investment income grew by 0.9%, 3.9% and 3.4% in 1998, 1997 and 1996,
respectively. For each of the past three years, 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 Company,
as previously mentioned, used internal funds in 1998 and 1997 for open market
purchases of its common stock and in 1996 to redeem certain debt and preferred
stock, thus reducing the size and earning power of its invested asset base. The
average annual yield on investments was 5.7%, 5.9% and 6.0% for the years ended
December 31, 1998, 1997 and 1996, respectively. This yield pattern reflects at
once the relatively short
20
<PAGE>
maturity of Old Republic's fixed maturity securities portfolio, a generally
declining interest rate climate during the past three years, and the commitment
of a larger percentage of investable funds to tax-exempt fixed maturity
securities that typically bear lower pre-tax yields.
While the Company's investment policies have not been designed to maximize
realized investment gains, such gains were higher in 1998 than those registered
in 1997 and 1996. Dispositions of securities have been caused principally by
calls prior to maturity by issuers of bonds and notes, and by sales of equity
securities. In 1998, 58.3% of total fixed maturity securities dispositions
represented contractual maturities and early calls of existing holdings; for the
year 1997 and 1996 these amounted to 76.9% and 72.5%, respectively.
Expenses:
Consolidated benefit, claim, and related settlement costs, as a percentage
of net premiums and fees earned, were approximately 43.2% in 1998, 48.4% in 1997
and 49.9% in 1996. Variations in these ratios, particularly in 1998, are
partially due to the growth in revenue of the mortgage guaranty and title
segments which have lower loss ratios than the general insurance segment. The
general insurance portion of the claim ratio was affected positively by
improving claims experience for liability insurance coverages and reduced costs
associated with involuntary workers compensation pools; this was in part offset
by higher loss ratios for physical damage coverages and a moderate amount of
catastrophe claims in 1996 and 1998. The loss ratio for mortgage guaranty
insurance decreased in 1998 compared to 1997 which itself had decreased slightly
compared to that of 1996; the improvement was mostly attributable to the stable
economic conditions of the past several years which have led to reduced mortgage
defaults particularly in the California market. The title insurance loss ratio
has been relatively flat in low single digits in each of the past three years
due in part to favorable trends in claims frequency and severity for business
underwritten since 1992.
The ratio of consolidated underwriting, acquisition, and insurance expenses
to net premiums and fees earned was approximately 50.2% in 1998, 45.2% in 1997
and 46.0% in 1996. Variations in these ratios reflect a continually changing mix
of coverages sold and attendant costs of producing business. The property and
liability segment's expense ratios increased in 1998 compared to 1997 and 1996
due in part to the previously mentioned premium production trends. During the
past three years, the mortgage guaranty segment, particularly in 1998,
experienced higher operating expenses due to greater costs associated with
contract underwriting operations. The title insurance expense ratio has trended
lower, especially in 1998, due in part to an increase in premium and fees volume
without a proportional increase in expenses, though higher litigation and
related costs in the second half of 1998 increased this segment's expense ratio
by approximately 3.5% for the year as a whole. Consolidated interest and other
charges, were approximately the same in 1998 and 1997 compared to 1996, due
principally to the aforementioned reduction in outstanding debt.
Pre-Tax and Net Income:
Consolidated income before taxes increased by 9.4%, 24.6% and 8.3% in 1998,
1997 and 1996, respectively. General insurance results declined in 1998 compared
to 1997, due to poorer underwriting experience and a slight decrease in
investment income; 1997 results increased compared to 1996 due to improved
underwriting results in Old Republic's three largest segments and a slight
increase in investment income. The general insurance segment continued as the
largest contributor to consolidated earnings for each of the periods reported
upon. The mortgage guaranty segment reflected rising earnings in each of the
last three years due to increased revenues generating higher income from
underwriting operations and a greater invested assets base. Increases in title
insurance earnings during the past three years resulted from growth in premiums
and fees, a stable loss ratio and a reduction in expense ratios. Life and
disability operations, excluding the aforementioned non-recurring tax recovery
item in 1997, have posted relatively flat earnings in the past three years.
The effective consolidated income tax rates were 31.2% in 1998, 30.3% in
1997 and 31.6% in 1996. 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. The lower rate in 1997 was also affected positively by the above noted
income tax recoveries for prior years.
See last paragraph under "Financial Position" above for extraordinary
charge recorded in 1996.
21
<PAGE>
Year 2000 Issues:
The Company and its subsidiaries have been aware for several years of the
issues associated with programming codes in existing computer systems as the
Year 2000 approaches. Most Old Republic subsidiaries are operated with
reasonable autonomy, and, accordingly, Year 2000 issues are independently
managed at each of the operating entities. Simply stated, Year 2000 issues stem
from computer programs that were written in earlier years with only two digits
to specify a year, as opposed to four digits; such programs may therefore be
unable to interpret dates beyond 1999, which could cause a system failure or
other computer errors that could lead to a disruption of operations.
Year 2000 issues could adversely affect the Old Republic subsidiaries'
computer systems, and such other systems as communications, facilities
management, service-related equipment and systems of customers, vendors and
other important third party service providers. Possible adverse consequences
include, but are not limited to, the inability to transact business, inability
to execute transactions through financial institutions and the occurrence of
Year 2000-related losses under certain insurance contracts. Accordingly, the
Company could suffer material adverse financial effects if failure by major
subsidiaries, significant vendors, important third parties or various
governmental bodies to properly correct Year 2000 issues were to occur. The
possible financial impact of all such effects cannot currently be estimated
since the Company and its subsidiaries do not operate in a vacuum and cannot
control the situations or actions of the various outside entities with which
they deal.
Old Republic's subsidiaries are scheduled to complete by March 31, 1999,
the identification and implementation of changes, and the testing of systems
affected by Year 2000 issues. Confirmations of Year 2000 compliance from
principal customers, vendors and other important third party relationships are
in process of being circulated. While this process is not completed, the Company
is not currently aware of any principal customer, vendor, or other important
third party whose Year 2000 projects will not be completed in a timely manner.
The costs of identifying, implementing and testing the required changes has
not been material to operating results. A significant portion of these costs
were not incremental as the Company and its subsidiaries have mostly utilized
existing resources.
The Company's subsidiaries have commenced consideration of contingency
plans in the event remediation efforts of Year 2000 issues are unsuccessful.
Such plans should be more fully developed in 1999, to the extent deemed
applicable and practicable.
OTHER INFORMATION
Reference is here made to "Financial Information Relating to Segments of
Business" appearing elsewhere herein.
Historical data pertaining to the operating performance, liquidity, and
other financial matters applicable to an insurance enterprise such as Old
Republic are not necessarily indicative of results to be achieved in succeeding
years. In addition to the factors cited below, the long-term nature of the
insurance business, seasonal and annual patterns in premium production and
incidence of claims, changes in yields obtained on invested assets, changes in
government policies and free markets affecting inflation rates and general
economic conditions, and changes in legal precedents or the application of law
affecting the settlement of disputed claims can have a bearing on
period-to-period comparisons and future operating results.
Any forward-looking commentary or inferences contained in this report
involve, of necessity, assumptions, uncertainties, and risks that may affect the
Company's future performance. With regard to Old Republic's General insurance
segment, its results can be affected in particular by the level of market
competition which is typically a function of available capital and expected
returns on such capital among competitors, the levels of interest and inflation
rates, 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 as well as the risk
management and pricing policies of government sponsored enterprises. Life and
disability insurance results can be impacted by the levels of employment and
consumer spending, as well as mortality
22
<PAGE>
and health trends. At the holding company level, results are affected mostly by
the amount of debt outstanding and its cost.
Any forward-looking commentaries speak only as of their dates. Old Republic
undertakes no obligation to publicly update or revise such comments, whether as
a result of new information, future events or otherwise, and accordingly they
may not be unduly relied upon.
23
<PAGE>
Item 8-Financial Statements
Listed below are the financial statements included herein:
OLD REPUBLIC INTERNATIONAL CORPORATION AND SUBSIDIARIES
Page No.
--------
Consolidated Balance Sheets........................................ 25-26
Consolidated Statements of Income................................... 27
Consolidated Statements of Comprehensive Income..................... 28
Consolidated Statements of Preferred Stock and
Common Shareholders' Equity..................................... 29-30
Consolidated Statements of Cash Flows............................... 31
Notes to Consolidated Financial Statements......................... 32-52
Report of Independent Accountants................................... 53
24
<PAGE>
<TABLE>
Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets ($ in Millions)
- ---------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Assets
Investments:
Held to maturity:
Fixed maturity securities (at amortized cost) (fair value: $2,422.2
and $2,306.1)........................................................................... $ 2,332.3 $ 2,249.7
Other long-term investments (at cost)..................................................... 25.1 15.4
------------ ------------
2,357.5 2,265.1
------------ ------------
Available for sale:
Fixed maturity securities (at fair value) (cost: $1,877.8 and $1,954.5).................. 1,954.4 2,009.9
Equity securities (at fair value) (cost: $117.0 and $60.9)................................ 164.8 117.1
Short-term investments (at fair value which approximates cost)............................ 377.6 328.0
------------ ------------
2,497.0 2,455.2
------------ ------------
4,854.5 4,720.4
------------ ------------
Other Assets:
Cash...................................................................................... 22.9 26.9
Securities and indebtedness of related parties............................................ 41.9 46.4
Accrued investment income................................................................. 71.1 72.5
Accounts and notes receivable............................................................. 248.1 273.6
Reinsurance balances and funds held....................................................... 86.3 88.5
Reinsurance recoverable: Paid losses................................................. 31.2 27.2
Policy and claim reserves................................... 1,292.9 1,333.5
Deferred policy acquisition costs......................................................... 143.9 126.2
Sundry assets............................................................................. 226.4 207.9
------------ ------------
2,165.2 2,203.0
------------ ------------
Total Assets............................................................................ $ 7,019.7 $ 6,923.4
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
25
<PAGE>
<TABLE>
Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets ($ in Millions) (Continued)
- ---------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Liabilities, Preferred Stock, and Common Shareholders' Equity
Liabilities:
Future policy benefits.................................................................... $ 187.6 $ 183.3
Losses, claims and settlement expenses.................................................... 3,406.5 3,529.7
Unearned premiums......................................................................... 360.1 375.8
Other policyholders' benefits and funds................................................... 52.5 61.1
------------ ------------
Total policy liabilities and accruals................................................... 4,006.9 4,150.0
Commissions, expenses, fees and taxes..................................................... 138.8 124.0
Reinsurance balances and funds............................................................ 130.5 148.2
Federal income tax: Current........................................................... 6.9 4.3
Deferred.......................................................... 179.8 108.3
Debt and debt equivalents................................................................. 145.1 142.9
Sundry liabilities........................................................................ 105.9 92.2
Commitments and contingent liabilities.................................................... - -
------------ ------------
Total Liabilities...................................................................... 4,714.2 4,770.2
------------ ------------
Preferred Stock:
Convertible preferred stock (*)........................................................... 1.2 1.0
------------ ------------
Common Shareholders' Equity:
Common stock(*)........................................................................... 156.3 103.1
Additional paid-in capital................................................................ 624.5 604.3
Unallocated shares - ESSOP................................................................ (5.1) (6.1)
Retained earnings......................................................................... 1,709.9 1,486.8
Accumulated other comprehensive income.................................................... 70.2 64.4
Treasury stock (at cost).................................................................. (251.6) (100.5)
------------ ------------
Total Common Shareholders' Equity...................................................... 2,304.2 2,152.1
------------ ------------
Total Liabilities, Preferred Stock and Common Shareholders' Equity..................... $ 7,019.7 $ 6,923.4
============ ============
</TABLE>
- ------------
(*) At December 31, 1998 and 1997, there were 75,000,000 shares of $0.01 par
value preferred stock authorized, of which 270,858 in 1998 and 237,551 in
1997 were convertible preferred shares issued and outstanding. As of the
same dates, there were 500,000,000 and 250,000,000 shares, respectively of
common stock, $1.00 par value, authorized, of which 156,335,928 in 1998 and
154,699,842 in 1997 were issued and outstanding. At December 31, 1998 and
1997 there were 100,000,000 and 50,000,000 shares, respectively of Class B
Common Stock, $1.00 par value, authorized, of which no shares were issued.
Common shares classified as treasury stock were 22,933,321 and 16,630,075
as of December 31, 1998 and 1997, respectively.
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
26
<PAGE>
<TABLE>
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Income ($ in Millions, Except Share Data)
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenues:
Net premiums earned................................................... $ 1,568.1 $ 1,464.6 $ 1,360.4
Title, escrow, and other fees......................................... 242.4 163.3 147.2
Net investment income................................................. 273.1 270.8 260.5
Realized investment gains............................................. 53.0 26.3 15.1
Other income.......................................................... 34.9 37.6 20.4
-------------- -------------- ---------------
2,171.7 1,962.8 1,803.9
-------------- -------------- ---------------
Benefits, Losses and Expenses:
Benefits, claims, and settlement expenses............................. 781.7 787.9 752.1
Dividends to policyholders............................................ .3 (.2) -
Underwriting, acquisition, and insurance expenses..................... 908.4 735.0 693.3
Interest and other charges............................................ 14.3 13.4 16.0
-------------- -------------- ---------------
1,704.9 1,536.1 1,461.5
-------------- -------------- ---------------
Income before income taxes and items below............................ 466.7 426.7 342.4
-------------- -------------- ---------------
Income Taxes: Currently payable................................... 80.8 75.4 65.7
Deferred............................................ 64.9 53.7 42.8
-------------- -------------- ---------------
Total............................................... 145.9 129.2 108.5
-------------- -------------- ---------------
Income before items below............................................. 320.9 297.4 233.8
Equity in earnings of unconsolidated subsidiaries
and minority interests.............................................. 2.7 .6 .9
-------------- -------------- ---------------
Income before extraordinary item...................................... 323.7 298.1 234.8
Extraordinary item, net of income tax credits of $2.4................. - - (4.4)
-------------- -------------- ---------------
Net Income............................................................ $ 323.7 $ 298.1 $ 230.3
============== ============== ===============
Net Income Per Share:
Basic:
Before extraordinary item......................................... $ 2.35 $ 2.22 $ 1.76
Extraordinary item................................................ - - (.03)
-------------- -------------- ---------------
Net income........................................................ $ 2.35 $ 2.22 $ 1.73
============== ============== ===============
Diluted:
Before extraordinary item......................................... $ 2.33 $ 2.10 $ 1.62
Extraordinary item................................................ - - (.03)
-------------- -------------- ---------------
Net income........................................................ $ 2.33 $ 2.10 $ 1.59
============== ============== ===============
Average number of common and common
equivalent shares outstanding: Basic........................... 137,347,772 133,659,413 129,030,492
============== ============== ===============
Diluted......................... 139,150,372 141,768,361 141,967,729
============== ============== ===============
Dividends Per Common Share:
Cash................................................................ $ .387 $ .333 $ .278
============== ============== ===============
Stock............................................................... 50% -% 50%
============== ============== ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
27
<PAGE>
<TABLE>
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income ($ in Millions)
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Net income as reported................................................ $ 323.7 $ 298.1 $ 230.3
-------------- -------------- ---------------
Other comprehensive income (loss):
Foreign currency translation adjustment............................. (1.9) 4.0 1.5
-------------- -------------- ---------------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period................... 64.9 70.8 (24.9)
Less: elimination of pretax realized gains included
in income as reported........................................... 53.0 26.3 15.1
-------------- -------------- ---------------
Pretax unrealized gains (losses) on securities.................... 11.9 44.4 (40.1)
Deferred income taxes (credits)................................... 4.1 15.4 (13.1)
-------------- -------------- ---------------
Net unrealized gains (losses) on securities....................... 7.8 29.0 (26.9)
-------------- -------------- ---------------
Net additions (deletions)........................................... 5.9 33.0 (25.4)
-------------- -------------- ---------------
Comprehensive income.................................................. $ 329.5 $ 331.2 $ 204.9
============== ============== ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
28
<PAGE>
<TABLE>
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Preferred Stock
and Common Shareholders' Equity ($ in Millions)
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Redeemable Convertible Preferred Stock:
Balance, beginning of year.......................................... $ - $ 19.3 $ 17.0
Amortization to redemption value capitalized...................... - - (.1)
Converted into common stock....................................... - (22.1) (.4)
Reclassification from debt equivalent............................. - 2.7 2.8
-------------- -------------- ---------------
Balance, end of year................................................ $ - $ - $ 19.3
============== ============== ===============
Convertible Preferred Stock:
Balance, beginning of year.......................................... $ 1.0 $ 1.2 $ .6
Exercise of stock options......................................... .2 - .5
Converted into common stock....................................... - (.2) -
-------------- -------------- ---------------
Balance, end of year................................................ $ 1.2 $ 1.0 $ 1.2
============== ============== ===============
Cumulative Preferred Stock:
Balance, beginning of year.......................................... $ - $ - $ 54.8
Redemption of cumulative preferred stock.......................... - - (54.8)
-------------- -------------- ---------------
Balance, end of year................................................ $ - $ - $ -
============== ============== ===============
Common Stock:
Balance, beginning of year.......................................... $ 103.1 $ 96.0 $ 58.8
Stock dividend.................................................... 51.7 - 31.8
Dividend reinvestment plan........................................ - - -
Exercise of stock options......................................... .9 .3 .3
Acquisition of subsidiary......................................... .5 - .4
Conversion of convertible debentures.............................. - - 4.2
Conversion of convertible preferred stock......................... - 6.7 .1
-------------- -------------- ---------------
Balance, end of year................................................ $ 156.3 $ 103.1 $ 96.0
============== ============== ===============
Additional Paid-in Capital:
Balance, beginning of year.......................................... $ 604.3 $ 575.6 $ 463.4
Dividend reinvestment plan........................................ .6 .5 .5
Exercise of stock options......................................... 17.2 6.4 6.8
Conversion of convertible debentures.............................. - - 104.4
Conversion of convertible preferred stock......................... - 21.7 .2
Reclassification from debt equivalent............................. 2.2 - -
-------------- -------------- ---------------
Balance, end of year................................................ $ 624.5 $ 604.3 $ 575.6
============== ============== ===============
Unallocated Shares - ESSOP:
Balance, beginning of year.......................................... $ (6.1) $ - $ -
Change for the year............................................... 1.0 (6.1) -
-------------- -------------- ---------------
Balance, end of year................................................ $ (5.1) $ (6.1) $ -
============== ============== ===============
Retained Earnings:
Balance, beginning of year.......................................... $ 1,486.8 $ 1,235.3 $ 1,071.8
Net income........................................................ 323.7 298.1 230.3
Dividends on common: Cash......................................... (52.8) (44.9) (35.9)
: Stock........................................ (51.7) - (31.8)
Dividends on preferred stock...................................... (.2) (1.7) (7.5)
Acquisition of subsidiary......................................... 4.1 - 8.5
-------------- -------------- ---------------
Balance, end of year................................................ $ 1,709.9 $ 1,486.8 $ 1,235.3
============== ============== ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
29
<PAGE>
<TABLE>
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Preferred Stock
and Common Shareholders' Equity ($ in Millions) (Continued)
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Accumulated Other Comprehensive Income:
Balance, beginning of year.......................................... $ 64.4 $ 31.4 $ 56.8
Foreign currency translation adjustments.......................... (1.9) 4.0 1.5
Net unrealized gains (losses) on securities....................... 7.8 29.0 (26.9)
-------------- -------------- ---------------
Balance, end of year................................................ $ 70.2 $ 64.4 $ 31.4
============== ============== ===============
Treasury Stock:
Balance, beginning of year.......................................... $ (100.5) $ (38.4) $ (38.4)
Acquired during the year.......................................... (151.1) (62.1) -
-------------- -------------- ---------------
Balance, end of year................................................ $ (251.6) $ (100.5) $ (38.4)
============== ============== ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
30
<PAGE>
<TABLE>
Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows ($ in Millions)
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 323.7 $ 298.1 $ 230.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred policy acquisition costs................................. (17.9) (11.6) (6.7)
Premiums and other receivables.................................... 25.4 (18.2) 18.6
Unpaid claims and related items................................... (80.4) 51.2 37.4
Future policy benefits and policyholders' funds................... (10.6) (10.8) (19.8)
Income taxes...................................................... 69.8 56.1 32.1
Reinsurance balances and funds.................................... (18.9) (1.9) 15.6
Accounts payable, accrued expenses and other...................... 42.7 24.6 3.9
-------------- -------------- --------------
Total............................................................... 333.6 387.5 311.6
-------------- -------------- --------------
Cash flows from investing activities:
Sales of fixed maturity securities:
Held to maturity:
Maturities and early calls....................................... 171.4 173.3 91.9
Available for sale:
Maturities and early calls....................................... 132.2 280.6 200.6
Other............................................................ 217.5 136.2 111.1
Sales of equity securities.......................................... 36.5 29.0 45.9
Sales of other investments.......................................... 4.0 15.2 4.4
Sales of fixed assets for company use............................... 1.7 3.0 3.4
Purchases of fixed maturity securities:
Held to maturity.................................................. (255.7) (399.9) (400.1)
Available for sale................................................ (280.3) (419.1) (206.1)
Purchases of equity securities...................................... (92.6) (15.4) (24.4)
Purchases of other investments...................................... (13.7) (5.5) (2.7)
Purchases of fixed assets for company use........................... (25.6) (10.5) (12.4)
Other-net........................................................... 1.1 (8.7) (7.7)
-------------- -------------- --------------
Total............................................................... (103.4) (221.7) (196.0)
-------------- -------------- --------------
Cash flows from financing activities:
Increase in term loans.............................................. 30.0 10.0 88.0
Issuance of debentures and notes.................................... 5.1 116.8 -
Issuance of preferred and common shares............................. 19.0 7.3 17.4
Repayments of term loans............................................ (30.0) (135.0) (47.9)
Redemption of debentures and notes.................................. (2.0) (1.6) (105.0)
Dividends on common shares.......................................... (52.8) (44.9) (35.9)
Dividends on preferred shares....................................... (.2) (1.7) (7.6)
Purchases of treasury shares........................................ (151.1) (62.1) -
Redemption of cumulative preferred shares........................... - - (54.8)
Other-net........................................................... (2.7) (.4) (.6)
-------------- -------------- --------------
Total............................................................... (184.7) (111.7) (146.6)
-------------- -------------- --------------
Increase (decrease) in cash and short-term
investments.......................................................... 45.5 54.0 (31.1)
Cash and short-term investments, beginning of year.................. 355.0 301.0 332.1
-------------- -------------- --------------
Cash and short-term investments, end of year........................ $ 400.5 $ 355.0 $ 301.0
============== ============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
31
<PAGE>
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 Insurance, Mortgage Guaranty, Title Insurance, and Life
Insurance Groups, and references herein to such groups apply to the Company's
subsidiaries engaged in the respective segments of business. See Note 6 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
subsidiaries 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 confor mity 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 positive 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, 1998, the
Company's invested assets were classified solely as "held to maturity" or
"available for sale."
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, 1998 was
above their carrying values.
32
<PAGE>
The amortized cost and estimated fair values of fixed maturity securities
are as follows:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Fixed Maturity Securities:
December 31, 1998:
Held to maturity:
Utilities....................................... $ 926.1 $ 36.6 $ .3 $ 962.4
Tax-exempt...................................... 1,405.4 53.5 - 1,458.9
Redeemable preferred stocks..................... .8 - - .8
----------- ---------- ---------- -----------
$ 2,332.3 $ 90.2 $ .3 $ 2,422.2
=========== ========== ========== ===========
Available for sale:
U.S. & Canadian Governments..................... $ 589.8 $ 29.3 $ - $ 619.1
Corporate....................................... 1,287.9 48.8 1.4 1,335.3
----------- ---------- ---------- -----------
$ 1,877.8 $ 78.2 $ 1.5 $ 1,954.4
=========== ========== ========== ===========
Fixed Maturity Securities:
December 31, 1997:
Held to maturity:
Utilities....................................... $ 1,001.8 $ 21.2 $ 2.1 $ 1,020.9
Tax-exempt...................................... 1,247.0 37.6 .2 1,284.4
Redeemable preferred stocks..................... .8 - - .8
----------- ---------- ---------- -----------
$ 2,249.7 $ 58.9 $ 2.4 $ 2,306.1
=========== ========== ========== ===========
Available for sale:
U.S. & Canadian Governments..................... $ 658.5 $ 26.2 $ .3 $ 684.4
Corporate....................................... 1,295.9 32.1 2.6 1,325.4
----------- ---------- ---------- -----------
$ 1,954.5 $ 58.4 $ 3.0 $ 2,009.9
=========== ========== ========== ===========
</TABLE>
33
<PAGE>
The amortized cost and estimated fair value at December 31, 1998, 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.
<TABLE>
Estimated
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Fixed Maturity Securities:
Held to Maturity:
Due in one year or less.......................................................... $ 182.9 $ 184.7
Due after one year through five years............................................ 1,176.8 1,211.7
Due after five years through ten years........................................... 969.2 1,021.9
Due after ten years.............................................................. 3.3 3.8
----------- -----------
$ 2,332.3 $ 2,422.2
=========== ===========
Available for Sale:
Due in one year or less.......................................................... $ 202.2 $ 203.7
Due after one year through five years............................................ 922.3 950.7
Due after five years through ten years........................................... 713.5 750.8
Due after ten years.............................................................. 39.5 49.1
----------- -----------
$ 1,877.8 $ 1,954.4
=========== ===========
</TABLE>
Bonds and other investments carried at $165.1 as of December 31, 1998 were
on deposit with governmental authorities by the Corporation's insurance
subsidiaries to comply with insurance laws.
A summary of the Company's equity securities follows:
<TABLE>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Equity Securities:
December 31, 1998:
Common stocks................................... $ 114.4 $ 58.2 $ 10.6 $ 162.1
Non-redeemable preferred stocks................. 2.5 .1 - 2.7
----------- ---------- ---------- -----------
$ 117.0 $ 58.4 $ 10.6 $ 164.8
=========== ========== ========== ===========
December 31, 1997:
Common stocks................................... $ 57.9 $ 57.7 $ 1.8 $ 113.8
Non-redeemable preferred stocks................. 2.9 .3 - 3.2
----------- ---------- ---------- -----------
$ 60.9 $ 58.0 $ 1.8 $ 117.1
=========== ========== ========== ===========
</TABLE>
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, 1998, the Corporation and its subsidiaries had no non-income
producing fixed maturity securities.
34
<PAGE>
The following table reflects the composition of net investment income, net
realized gains or losses, and the net change in unrealized investment gains or
losses for each of the years shown:
<TABLE>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Investment income from:
Fixed maturity securities........................................ $ 251.2 $ 249.5 $ 240.6
Equity securities................................................ 2.8 1.9 2.6
Short-term investments........................................... 17.1 16.4 16.0
Other sources.................................................... 8.5 9.0 8.4
----------- ----------- -----------
Gross investment income....................................... 279.7 277.0 267.7
Investment expenses (1).......................................... 6.5 6.2 7.2
----------- ----------- -----------
Net investment income......................................... $ 273.1 $ 270.8 $ 260.5
=========== =========== ===========
Realized gains (losses) on:
Fixed maturity securities:
Held to maturity.............................................. $ .8 $ .2 $ .3
----------- ----------- -----------
Available for sale:
Gains....................................................... 11.1 2.5 2.6
Losses...................................................... - (.1) (.1)
----------- ----------- -----------
Net......................................................... 11.0 2.4 2.5
----------- ----------- -----------
Total....................................................... 11.8 2.7 2.9
----------- ----------- -----------
Equity securities............................................. 41.6 24.3 12.9
Other assets.................................................. (.5) (.6) (.7)
----------- ----------- -----------
Total....................................................... 53.0 26.3 15.1
Income taxes..................................................... 18.5 9.3 5.3
----------- ----------- -----------
Net realized gains............................................ $ 34.4 $ 17.0 $ 9.8
=========== =========== ===========
Changes in unrealized investment gains (losses) on:
Fixed maturity securities:
Held to maturity (2).......................................... $ 33.3 $ 33.8 $ (22.1)
=========== =========== ===========
Available for sale............................................ $ 21.1 $ 28.6 $ (50.3)
Less: Deferred income taxes (credits)........................ 7.3 9.8 (17.1)
----------- ----------- -----------
Net unrealized investment gains (losses).................... $ 13.7 $ 18.7 $ (33.2)
=========== =========== ===========
Equity securities-available for sale............................. $ (9.1) $ 15.7 $ 10.1
Less: Deferred income taxes (credits)............................ (3.2) 5.4 3.8
----------- ----------- -----------
Net unrealized investment gains (losses)...................... $ (5.9) $ 10.3 $ 6.2
=========== =========== ===========
</TABLE>
- ------------
(1) Investment expenses consist of personnel costs and investment management
and custody service fees, and includes interest incurred on funds held of
$1.5, $1.7 and $1.7 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(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. 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. Title insurance premiums are
recognized as income
35
<PAGE>
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. Ordinary life and annuity premiums are recognized as revenue
when due. Decreasing term credit life and credit disability/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:
<TABLE>
Years Ended December 31,
------------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Deferred, beginning of year........................................ $ 126.2 $ 114.6 $ 107.8
---------- ----------- -----------
Acquisition costs deferred:
Commissions - net of reinsurance................................. 132.6 131.7 116.6
Premium taxes.................................................... 31.8 32.5 30.6
Salaries and other marketing expenses............................ 84.7 62.0 65.8
---------- ----------- -----------
Sub-total..................................................... 249.2 226.3 213.1
Amortization charged to income..................................... (231.4) (214.7) (206.4)
---------- ----------- -----------
Change for the year........................................... 17.7 11.5 6.7
---------- ----------- -----------
Deferred, end of year.............................................. $ 143.9 $ 126.2 $ 114.6
========== =========== ===========
</TABLE>
(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, 1998 and 1997, the Life Insurance Group had $6,740.5 and
$4,912.9, respectively, of net life insurance in force. Future policy benefits
and unearned premiums, consisted of the following:
<TABLE>
December 31,
----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Future Policy Benefits:
Life Insurance Group:
Life insurance.......................................................... $ 75.7 $ 69.3
Annuities(1)............................................................ 64.7 69.4
Disability/accident & health............................................ 47.1 44.6
----------- -----------
Total................................................................ $ 187.6 $ 183.3
=========== ===========
Unearned Premium:
General Insurance Group................................................. $ 320.6 $ 329.0
Mortgage Guaranty Group................................................. 39.4 46.7
----------- -----------
Total................................................................ $ 360.1 $ 375.8
=========== ===========
</TABLE>
- ------------
(1) The Company has entered into an agreement to sell its small annuity book
of business; this will have no material effect on Old Republic's
consolidated results or financial position.
36
<PAGE>
The Company has previously issued directly or assumed 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 reinsuring the risks 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:
<TABLE>
Years Ended December 31,
----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net Insurance in Force:
Bonds..................................................................... $ 2,482.6 $ 2,298.8
Other..................................................................... .4 .5
Net Unearned Premiums:
Bonds..................................................................... 12.5 13.4
Other..................................................................... $ .4 $ .5
=========== ===========
</TABLE>
With respect to mortgage guaranty insurance (net insurance in force of
$57,401.1 and $50,362.3, at December 31, 1998 and 1997, 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'
compensation reserves, however, are discounted to present value based on
interest rates ranging from 3.5% to 4%.
The establishment of claim reserves by the Company's insurance subsidiaries
is a reasonably complex and dynamic process influenced by a large variety of
factors. These include past experience applicable to the anticipated costs of
various types of claims, continually evolving and changing legal theories
emanating from the judicial system, recurring accounting and 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.
37
<PAGE>
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.
<TABLE>
Years Ended December 31,
------------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Amount of reserves for unpaid claims and claim adjustment
expenses at the beginning of each year, net of reinsurance
losses recoverable................................................... $ 2,289.6 $ 2,238.7 $ 2,200.2
----------- ------------ -----------
Incurred claims and claim adjustment expenses:
Provisions for insured events of the current year.................... 950.5 933.5 865.9
Change in provision for insured events of prior years................ (170.1) (141.8) (110.3)
----------- ------------ -----------
Total incurred claims and claim adjustment expenses............. 780.4 791.6 755.6
----------- ------------ -----------
Payments:
Claims and claim adjustment expenses attributable to
insured events of the current year................................. 377.5 334.9 297.4
Claims and claim adjustment expenses attributable to
insured events of prior years...................................... 484.1 405.8 419.6
----------- ------------ -----------
Total payments.................................................. 861.6 740.8 717.0
----------- ------------ -----------
Amount of reserves for unpaid claims and claim adjustment
expenses at the end of each year, net of reinsurance
losses recoverable................................................... 2,208.4 2,289.6 2,238.7
Reinsurance losses recoverable......................................... 1,198.0 1,240.0 1,303.0
----------- ------------ -----------
Amount of reserves for unpaid claims and claim adjustment
expenses............................................................. $ 3,406.5 $ 3,529.7 $ 3,541.8
=========== ============ ===========
</TABLE>
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 Old Republic'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 $1.0 and $2.0 and rarely
exceeding $10.0. Such policies have, in turn, been subject to reinsurance
cessions which have typically reduced the Corporation's retentions to $.5 or
less as to each claim.
The Corporation's reserving methods, particularly as they apply to
formula-based reserves, have been established to provide for 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 to cover claims such as those emanating from
A&E exposures. 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, 1998, the Corporation's aggregate indemnity
and loss adjustment expense reserves specifically identified with A&E exposures
amounted to approximately $66.6 gross, and $33.7 net of reinsurance. Based on
average annual claims payments during the five most recent calendar years, such
reserves represented 8.0 years (gross) and 12.3 years (net) of average annual
claims payments.
38
<PAGE>
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 questions 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 the determination of liability for environmental claims. As of
December 31, 1998, 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 much more 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. The Company uses the asset and liability
method of calculating deferred income taxes. This method calls for the
establishment of a deferred tax, calculated at currently 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:
<TABLE>
Years Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory tax rate....................................................... 35.0% 35.0% 35.0%
Tax rate increases (decreases):
Tax-exempt interest................................................. (4.1) (3.7) (3.5)
Dividends received exclusion........................................ (.1) (.1) (.1)
Tax settlement...................................................... - (1.4) -
Other items - net................................................... .4 .5 .3
-------- -------- --------
Effective tax rate....................................................... 31.2% 30.3% 31.6%
======== ======== ========
</TABLE>
39
<PAGE>
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:
<TABLE>
December 31,
--------------------------------------------
1998 1997 1996
--------- ----------- ----------
<S> <C> <C> <C>
Deferred Tax Assets:
Future policy benefits........................................ $ 3.5 $ 3.3 $ 2.3
Losses, claims, and settlement expenses....................... 166.3 182.4 182.8
Other......................................................... 15.9 12.4 10.0
---------- ----------- ----------
Total gross deferred tax assets............................. 185.7 198.1 195.2
Less-valuation allowance.................................... - - .7
---------- ----------- ----------
Net deferred tax assets..................................... 185.7 198.1 194.4
---------- ----------- ----------
Deferred Tax Liabilities:
Unearned premium reserves..................................... 21.4 15.2 8.9
Deferred policy acquisition costs............................. 47.9 42.5 38.7
Mortgage guaranty insurers' contingency reserves.............. 228.4 181.3 135.3
Fixed maturity securities adjusted to cost.................... 6.8 6.9 5.9
Unrealized investment gains................................... 42.9 38.2 22.8
Title plants and records...................................... 4.4 4.3 4.1
Other......................................................... 13.5 17.8 17.6
---------- ----------- ----------
Total deferred tax liabilities.............................. 365.6 306.4 233.5
---------- ----------- ----------
Net deferred tax liability.................................. $ (179.8) $ (108.3) $ (39.1)
========== =========== ==========
</TABLE>
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 $18.1 at December 31, 1998) credited to the
former memorandum "policyholders' surplus account" will generally 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 1983 to 1995. 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.
In 1997, several life insurance subsidiaries recovered income taxes and
related accumulated interest due to favorable resolution with the Internal
Revenue Services of various outstanding issues pertaining to income tax returns
for the years 1979 through 1982. These cash recoveries, net of miscellaneous
charges, increased other income by $12.6, reduced income tax expense by $5.9 and
increased net income by $14.2.
(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.
40
<PAGE>
(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 ordinarily not
amortized unless events or circumstances indicate that the carrying amount of
the capitalized costs may not be recoverable.
(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 $3.6 in 1998, $3.2 in 1997 and $4.6 in
1996.
(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 Financial Accounting Standards Board (FASB) issued, in January, 1998,
Statement of Financial Accounting Standards No. 132 (FAS-132) "Employers'
Disclosures About Pensions and Other Postretirement Benefits". FAS-132 revises
disclosures about pension and other postretirement benefit plans. The Statement
did not change the measurements or recognition of pension or other
postretirement costs of the plans.
The changes in the projected benefit obligation are as follows:
<TABLE>
Years Ended December 31,
------------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Projected benefit obligation at beginning of year..................... $ 125.4 $ 117.3 $ 105.7
Increases (decreases) during the year attributable to:
Service cost....................................................... 4.0 4.1 3.8
Interest cost...................................................... 8.5 8.2 7.8
Actuarial (gains) losses........................................... (1.9) 1.6 4.8
Benefits paid...................................................... (6.5) (5.9) (5.4)
Business combinations, divestitures, curtailments
or settlements.................................................. - - (.3)
Special termination benefits....................................... - - .6
---------- ----------- -----------
Net increase for year................................................. 4.1 8.1 11.5
---------- ----------- -----------
Projected benefit obligation at end of year........................... $ 129.5 $ 125.4 $ 117.3
========== =========== ===========
</TABLE>
The changes in the fair value of net assets available for plan benefits are
as follows:
<TABLE>
Years Ended December 31,
------------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Fair value of net assets available for plan benefits
at beginning of the year........................................... $ 135.2 $ 124.4 $ 112.6
Increases (decreases) during the year attributable to:
Actual return on plan assets....................................... 7.7 16.2 15.3
Sponsor contributions.............................................. 1.1 .7 2.2
Benefits paid...................................................... (6.5) (5.9) (5.4)
Administrative expenses............................................ (.2) (.2) (.3)
---------- ----------- -----------
Net increase for year................................................. 2.0 10.7 11.8
---------- ----------- -----------
Fair value of net assets available for plan
benefits at the end of the year.................................... $ 137.3 $ 135.2 $ 124.4
========== =========== ===========
</TABLE>
41
<PAGE>
A reconciliation of the funded status of the plans is as follows:
<TABLE>
December 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Plan assets in excess of projected benefit obligations.......................... $ 7.7 $ 9.8
Prior service cost not yet recognized in net periodic
pension cost.................................................................. .2 .3
Unrecognized net gain (loss).................................................... .3 (1.0)
Remaining unrecognized transition net assets from
December 31, 1985............................................................ (1.0) (1.6)
----------- -----------
Unfunded accrued pension asset recognized
in the consolidated balance sheet........................................... $ 7.2 $ 7.4
=========== ===========
</TABLE>
The components of annual net periodic pension cost (credit) for the plans
consisted of the following:
<TABLE>
Years Ended December 31,
------------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Service cost...................................................... $ 4.0 $ 4.1 $ 3.8
Interest cost..................................................... 8.5 8.2 7.8
Expected return on plan assets.................................... (9.2) (10.1) (12.2)
Amortization of unrecognized transition liability................. (.5) (1.0) (1.5)
Recognized (gain) loss............................................ (1.5) - 2.5
Prior service cost recognized..................................... - .1 .1
Loss on business settlement or curtailment........................ - - .3
---------- ----------- -----------
Net cost.......................................................... $ 1.2 $ 1.2 $ .9
========== =========== ===========
</TABLE>
The projected benefit obligations for the plans were determined using the
following weighted-average assumptions at the dates shown:
<TABLE>
December 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Settlement discount rates....................................................... 7.03% 7.30%
Rates of compensation increase.................................................. 3.67% 4.00%
Long-term rates of return on assets............................................. 8.18% 8.25%
</TABLE>
Included in the plans' assets are Common Shares of the Company valued at
$11.2 and $12.7 as of December 31, 1998 and 1997, respectively.
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:
<TABLE>
Years Ended December 31,
------------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Employees Savings and Stock Ownership Plan........................ $ 7.4 $ 4.0 $ 4.0
Other profit sharing.............................................. 5.4 4.1 4.0
Deferred and incentive compensation............................... $ 18.0 $ 12.8 $ 10.0
========== =========== ===========
</TABLE>
42
<PAGE>
The Company sponsors a leveraged Employees 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,
1998, there were 7,102,553 Common Shares owned by the ESSOP of which 764,515
were unreleased and unallocated. There are no repurchase obligations in
existence. (See Note 2).
(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 ($681.7 and $541.7 at December 31, 1998 and
1997, 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-In 1997, the Company adopted Statement of Financial
Accounting Standard No. 128 "Earnings Per Share" which established a new
methodology for computing earnings per share. Consolidated basic earnings per
share excludes the dilutive effect of common stock equivalents and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares actually outstanding for the year. Diluted earnings per
share are similarly calculated with the inclusion of common stock equivalents.
The following tables provide a reconciliation of the income before extraordinary
items and number of shares used in basic and diluted earnings per share
calculations.
<TABLE>
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Numerator:
Income before extraordinary item....................... $ 323.7 $ 298.1 $ 234.8
Less: Preferred stock dividends........................ .2 1.7 7.5
--------------- --------------- ---------------
Numerator for basic earnings per share -
income available to common stockholders.............. 323.5 296.3 227.3
Effect of dilutive securities:
Convertible preferred stock dividends................ .2 1.7 3.0
Convertible debentures interest...................... - - .4
--------------- --------------- ---------------
.2 1.7 3.4
--------------- --------------- ---------------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions............................ $ 323.7 $ 298.1 $ 230.7
=============== =============== ===============
Denominator:
Denominator for basic earnings per share -
weighted-average shares.............................. 137,347,772 133,659,413 129,030,492
Effect of dilutive securities:
Stock options........................................ 1,558,133 1,763,123 1,237,181
Convertible preferred stock.......................... 244,467 6,345,825 10,512,543
Convertible debentures............................... - - 1,187,513
--------------- --------------- ---------------
Dilutive potential common shares....................... 1,802,600 8,108,948 12,937,237
--------------- --------------- ---------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions............................... 139,150,372 141,768,361 141,967,729
=============== =============== ===============
Basic earnings per share............................... $ 2.35 $ 2.22 $ 1.76
=============== =============== ===============
Diluted earnings per share............................. $ 2.33 $ 2.10 $ 1.62
=============== =============== ===============
</TABLE>
43
<PAGE>
(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.
<TABLE>
Supplemental cash flow information: Years Ended December 31,
-----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest...................................................... $ 9.8 $ 9.3 $ 14.0
Income taxes.................................................. 70.3 73.0 75.2
---------- ---------- ----------
$ 80.2 $ 82.3 $ 89.2
========== ========== ==========
</TABLE>
(p) Concentration of Credit Risk-Excluding U.S. government fixed maturity
securities, the Company is not exposed to any significant concentration of
credit 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-Debt and Debt Equivalents-Consolidated debt of Old Republic and its
subsidiaries is summarized below:
<TABLE>
December 31,
---------------------------------------------------
1998 1997
---------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial paper due within 180 days with an
average yield of 5.40% and 5.92%, respectively................. $ 9.8 $ 9.8 $ 9.8 $ 9.8
Debentures maturing in 2007 at 7.0%................................. 114.9 124.8 114.9 119.2
Other miscellaneous debt............................................ 15.1 15.1 12.0 12.0
---------- --------- ---------- ----------
Total debt.......................................................... 140.0 149.9 136.8 141.2
Common stock classified as a debt
equivalent (See (a) below)..................................... 5.1 5.1 6.1 6.1
---------- --------- ---------- ----------
Total debt and debt equivalents..................................... $ 145.1 $ 155.0 $ 142.9 $ 147.3
========== ========= ========== ==========
</TABLE>
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 common stock classified
as a debt equivalent see (a)below) at December 31, 1998 are as follows: 1999:
$14.6; 2000: $4.2; 2001: $1.0; 2002: $.4; 2003: $.6; 2004 and after: $123.9.
During 1998, 1997 and 1996, $10.0, $9.6, and $10.8, respectively, of interest
expense on debt was charged to consolidated operations.
- ------------
(a) The Company has guaranteed bank loans (balance at December 31, 1998 was
$5.1) 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 D Redeemable Convertible Preferred Stock from the
Company by the Trust for the original amount of the loans. All remaining
Series D Preferred Stock shares were fully converted into common shares as
of August 22, 1997. The Trust's loan principal repayments (currently
scheduled at $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 on the Trust's loans is payable quarterly and at rates
ranging from 75% to 80% of the prime rate. See Notes 3a and 3c.
44
<PAGE>
Note 3-Shareholders' Equity - All common and preferred share data herein has
been retroactively adjusted as applicable for stock dividends or splits declared
through December 31, 1998.
(a) Preferred Stock-The following table shows certain information pertaining to
the Corporation's preferred shares issued and outstanding:
<TABLE>
Convertible
-------------
Preferred Stock Series: G(1)
-------------
<S> <C>
Annual cumulative dividend rate per share............. $ (1)
Conversion ratio of preferred into common shares ..... 1 for .95
Conversion right begins............................... Anytime
Redemption and liquidation value per share............ (1)
Redemption beginning in year........................... (1)
Total redemption value (millions)...................... (1)
Vote per share......................................... one
Shares outstanding:
December 31, 1997...................................... 237,551
December 31, 1998...................................... 270,858
=============
</TABLE>
- ------------
(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, 1998, the
annual dividend rate for Series G was $.82 per share. Each share of Series
G is convertible at any time, after being held six months, into 0.95
shares of Common Stock (See 3(d)). Unless previously converted, Series G
shares may be redeemed at the Corporation's sole option five years after
their issuance.
(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 1998 data, the maximum amount of
dividends payable to the Corporation by its insurance and a small number of
non-insurance company subsidiaries during 1999 without the prior approval of
appropriate regulatory authorities is approximately $207.2. 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 2(a) provide
that while loans under such agreements are outstanding, Old Republic is
restricted from, among other things, permitting "Debt" to exceed 25% of its
consolidated tangible net worth (as adjusted for goodwill and net unrealized
investment gains or losses, but including title plants and records) without
approval of the lenders.
(d) Stock Option Plan-The Corporation has a stock option plan for certain
eligible key employees. Outstanding options at any one time may not exceed 5% of
the Old Republic common stock then issued and outstanding. The exercise price of
options is equal to the market price of the Corporation's stock on the date of
grant; the term of each option is generally ten years from such date. 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 the
grant. In the event the market closing price of the Old Republic common stock
reaches a pre-established value ("the vesting acceleration price"), however,
optionees may exercise their options to the extent of 10% of the number of
shares covered by the option for each year of employment by the optionee. The
Corporation may extend 15 year loans at a prevailing market rate of interest for
a portion of the exercise price. The option plan also enables optionees to,
alternatively, exercise their options into Series "G" Convertible Preferred
Stock. The exercise of options into such Preferred Stock reduces by 5% the
number of equivalent common shares which would otherwise be obtained from the
exercise of options into common shares.
45
<PAGE>
For financial reporting purposes, Old Republic records the exercise of stock
options directly in its capital accounts as permitted under existing accounting
pronouncements. The following table shows a comparison of net income and related
per share information as reported, and on a pro-forma basis on the assumption
that the estimated value of stock options was treated as compensation costs. In
estimating the compensation cost of options, the fair value of options at date
of grant has been calculated using a Black-Scholes options pricing model that
takes the assumptions shown below into account.
<TABLE>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Option pricing/weighted average assumptions:
Risk-free interest rates.................................... 5.62% 6.63% 6.74%
Dividend yield.............................................. 2.11% 3.05% 2.49%
Common stock market
price volatility factors.................................. .22 .22 .22
Expected option life........................................ 10 years 10 years 10 years
Comparative data:
Net income:
As reported............................................... $ 323.7 $ 298.1 $ 230.3
Pro forma basis........................................... 319.8 297.3 228.4
Basic earnings per share:
As reported............................................... 2.35 2.22 1.73
Pro forma basis........................................... 2.32 2.21 1.71
Diluted earnings per share:
As reported............................................... 2.33 2.10 1.59
Pro forma basis........................................... $ 2.30 $ 2.10 $ 1.58
=========== =========== ===========
</TABLE>
A summary of the status of the Corporation's stock options as of December
31, 1998, 1997 and 1996, and changes in outstanding options during the years
then ended follows:
<TABLE>
As of and for the Years Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ... 4,438,760 $ 12.83 3,237,204 $ 9.55 4,060,362 $ 8.99
Granted............................. 1,067,402 29.24 1,734,750 17.83 7,500 14.75
Exercised........................... 1,126,548 10.83 510,334 9.12 789,746 6.64
Canceled and forfeited.............. 71,172 18.23 22,860 10.45 40,912 10.75
--------- --------- ---------
Outstanding at end of year.......... 4,308,442 17.34 4,438,760 12.83 3,237,204 9.55
========= ========= =========
Exercisable at end of year.......... 2,669,167 13.81 2,385,821 10.12 2,578,437 9.41
========= ========= =========
Weighted average fair value of
options granted during the year.. $ 9.44 $ 5.29 $5.01
====== ====== =====
</TABLE>
A summary of stock options outstanding and exercisable at December 31, 1998
follows:
<TABLE>
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted - Average
------------------------
Remaining Weighted-
Number Con- Number Average
Out- tractual Exercise Exercis- Exercise
Ranges of Exercise Prices Standing Life Price able Price
-------------------------------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 4.65 to $ 5.61.......................... 258,952 2.00 yrs. $ 5.53 235,943 $ 5.54
$ 9.11 to $11.83.......................... 1,577,706 5.38 yrs. 10.93 1,306,328 10.94
$ 14.75 to $17.83.......................... 1,423,979 7.99 yrs. 17.82 1,022,115 17.83
$ 29.04 to $29.08.......................... 1,047,805 9.00 yrs. $ 29.04 104,781 $ 29.04
--------- ======== --------- =========
Total................................... 4,308,442 2,669,167
========= =========
</TABLE>
46
<PAGE>
(e) Common Stock-There were 500,000,000 shares of common stock authorized at
December 31, 1998. At the same date, there were 100,000,000 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.
The Corporation issued a total of 514,626 common shares valued at $4.6 and
1,112,400 common shares valued at $8.9 in 1998 and 1996, respectively to effect
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, 1998 amounted to $1,481.3 and $81.0,
respectively. Dividends declared during 1998, 1997 and 1996, to the Corporation
by its subsidiaries amounted to $158.2, $226.6 and $152.8, respectively.
(g) Statutory Data-The policyholders' surplus 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:
<TABLE>
Policyholders' Surplus Net Income
------------------------- ---------------------------------------
December 31, Years Ended December 31,
------------------------- ---------------------------------------
1998 1997 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
General Insurance Group...................... $ 1,236.9 $ 1,222.9 $ 163.6 $ 171.1 $ 182.6
Mortgage Guaranty Group...................... 113.2 123.8 146.8 141.3 111.6
Title Insurance Group........................ 112.5 114.2 18.9 14.9 14.1
Life Insurance Group......................... $ 63.9 $ 71.2 $ .1 $ 16.5 $ 5.6
=========== =========== =========== =========== ===========
</TABLE>
Note 4-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): workers'
compensation-$1,000; auto liability-$600; general liability-$600; and property
coverages-$300. A substantial portion of the mortgage guaranty insurance
business is retained, with the exposure on any one risk currently averaging
approximately $26. 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 is $300.
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.
47
<PAGE>
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, 1998. For the years 1996 to 1998, reinsurance
transactions of the Title Insurance Group have not been material.
<TABLE>
Years Ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
General Insurance Group
Written premiums: direct.................................. $ 1,071.6 $ 1,103.9 $ 1,095.6
assumed................................. 25.3 32.7 48.4
ceded................................... $ 204.9 $ 229.1 $ 278.9
============== ============= ==============
Earned premiums: direct.................................. $ 1,078.1 $ 1,100.6 $ 1,096.8
assumed................................. 28.3 34.6 52.1
ceded................................... $ 203.9 $ 228.9 $ 281.3
============== ============= ==============
Claims ceded................................................... $ 160.3 $ 245.7 $ 215.1
============== ============= ==============
Mortgage Guaranty Group
Written premiums: direct.................................. $ 286.1 $ 259.6 $ 213.0
assumed................................. .7 .2 -
ceded................................... $ 3.4 $ .8 $ 1.1
============== ============= ==============
Earned premiums: direct.................................. $ 294.0 $ 271.9 $ 227.9
assumed................................. .5 - -
ceded................................... $ 3.8 $ .9 $ 1.2
============== ============= ==============
Claims ceded................................................... $ .1 $ .2 $ .8
============== ============= ==============
Mortgage guaranty insurance in force as of
December 31: direct....................................... $ 53,837.8 $ 49,925.2 $ 45,922.3
assumed...................................... 3,963.1 658.4 -
ceded........................................ $ 399.8 $ 221.3 $ 270.7
============== ============= ==============
Life Insurance Group
Written premiums: direct.................................. $ 90.0 $ 84.9 $ 80.8
assumed................................. .1 .3 .2
ceded................................... $ 25.4 $ 32.5 $ 32.8
============== ============= ==============
Earned premiums: direct.................................. $ 85.1 $ 81.3 $ 78.8
assumed................................. .1 .3 .2
ceded................................... $ 26.2 $ 32.9 $ 33.1
============== ============= ==============
Life insurance in force as of December 31: direct....... $ 11,422.3 $ 8,708.6 $ 6,775.8
assumed...... - - -
ceded........ $ 4,681.7 $ 3,795.6 $ 2,806.2
============== ============= ==============
Disability/accident and health insurance premiums ceded on a quota share basis:
To affiliated companies.................................... $ 1.5 $ 1.5 $ 3.1
To unaffiliated companies.................................. 15.0 18.2 18.9
-------------- ------------- --------------
Total..................................................... $ 16.6 $ 19.8 $ 22.0
============== ============= ==============
Percentage of direct and assumed premiums.................. 28.4% 34.8% 37.7%
============== ============= ==============
</TABLE>
(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, 1998, aggregate
minimum rental commitments (net of expected sub-lease receipts) under
noncancellable operating leases of $128.2 are summarized as follows: 1999:
$30.3; 2000: $24.4; 2001: $18.5; 2002: $13.4 2003: $10.9; 2004 and after: $30.3.
48
<PAGE>
(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.
However, various governmental entities have filed suit against or performed
examinations of the records of an underwritten title agency subsidiary operating
in the State of California, which is consolidated in these financial statements.
These actions allege that 1) the subsidiary failed to escheat unclaimed escrow
funds; 2) charged for services not necessarily provided; and 3) collected
illegal interest payments or fees from banks on the basis of funds held for
escrow customers. Additional suits seeking class action status have been filed
on the basis of the same allegations.
Between July 1998, when the Company learned of these actions and February
1999 when a draft examination report was received from a regulatory authority,
the subsidiary conducted an internal review of its records and concluded that it
had certain liabilities for the issues denoted as (1) and (2) in the preceding
paragraph. Through December 31, 1998 it had paid or otherwise provided reserves
aggregating $19.5 to cover its best estimate of litigation and related costs
associated with these issues. Management believes that the alleged practices
denoted in (3) in the preceding paragraph, are common within the industry, are
not in conflict with various laws and regulations, and that it has meritorious
defenses, which will ultimately lead to a successful resolution of these
matters.
Note 5-Consolidated Quarterly Results-Unaudited - Old Republic's consolidated
quarterly operating data for the two years ended December 31, 1998 is presented
below. In the second quarter 1997, several life insurance subsidiaries recovered
income taxes and related accumulated interest due to favorable resolutions with
the Internal Revenue Service of various outstanding issues pertaining to income
tax returns for the years 1979 through 1982. These cash recoveries, net of
miscellaneous charges, increased other income by $12.6, reduced income tax
expense by $5.9 and increased net income by $14.2 (10 cents per share).
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":
<TABLE>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Year Ended December 31, 1998: -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating Summary:
Net premiums, fees, and other income.............. $ 417.9 $ 462.9 $ 480.8 $ 483.5
Net investment income and realized gains.......... 88.5 73.4 74.6 89.3
Total revenues.................................... 506.5 536.6 555.6 573.0
Benefits, claims, and expenses.................... 387.5 420.3 449.0 448.0
Net income........................................ $ 81.5 $ 80.4 $ 74.6 $ 87.1
============== ============== ============== ==============
Net income per share: Basic.................... $ .58 $ .58 $ .54 $ .64
Diluted.................. $ .58 $ .57 $ .54 $ .64
============== ============== ============== ==============
Average common and equivalent shares outstanding:
Basic........................................... 138,541,904 137,756,505 136,914,815 135,164,446
============== ============== ============== ==============
Diluted......................................... 140,824,777 139,993,613 138,870,948 136,551,439
============== ============== ============== ==============
</TABLE>
49
<PAGE>
<TABLE>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Year Ended December 31, 1997: -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating Summary:
Net premiums, fees, and other income.............. $ 383.2 $ 421.2 $ 422.6 $ 438.2
Net investment income and realized gains.......... 78.5 71.2 70.4 76.7
Total revenues.................................... 461.8 492.6 493.2 515.1
Benefits, claims, and expenses.................... 367.2 371.8 392.1 404.8
Net income........................................ $ 65.2 $ 88.3 $ 69.1 $ 75.4
============== ============== ============== ==============
Net income per share: Basic.................... $ .49 $ .67 $ .51 $ .54
Diluted.................. $ .46 $ .62 $ .49 $ .53
============== ============== ============== ==============
Average common and equivalent shares outstanding:
Basic........................................... 130,513,487 130,383,032 134,509,503 138,718,711
============== ============== ============== ==============
Diluted......................................... 142,266,700 141,494,007 141,999,192 141,080,148
============== ============== ============== ==============
</TABLE>
Note 6-Information About Segments of Business - The Corporation's business
segments are organized as the General Insurance (property and liability
insurance), Mortgage Guaranty, Title Insurance and Life Insurance Groups. The
contributions of Old Republic's insurance industry segments to consolidated
revenues and operating results, and certain balance sheet data pertaining
thereto are shown in the following tables on the basis of 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.
The Corporation does not derive over 10% of its revenue from any one
customer. Revenues and assets connected with foreign operations are not
significant in relation to consolidated totals.
The General Insurance Group provides property and liability insurance to
commercial clients and is the major contributor to consolidated operating
income. Old Republic does not have a meaningful participation in personal lines
of insurance. Commercial automobile (principally trucking) insurance is the
largest type of coverage underwritten by the General Insurance Group accounting
for 48.3% of the Group's direct premiums written in 1998. The remaining premiums
written by the General Insurance Group are derived largely from a wide variety
of coverages, including workers' compensation and general liability insurance,
loan credit guaranty insurance, and surety bonds. The General Insurance Group's
operations have been expanded, over the years, to insure certain specialty lines
such as directors' and officers' liability and errors and omissions liability
insurance, to cover owners and operators of private aircraft for hull and
liability exposures, and to insure grain elevators and liquid petroleum gas
operations.
Real estate mortgage loan insurance produced by the Mortgage Guaranty Group
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 16% by savings and loan
associations, 69% by mortgage bankers and 15% by other lenders. The
Corporation's mortgage guaranty insurance in force at December 31, 1998, was
originally produced by approximately 4,100 different lending institutions and
about 2,200 such institutions originated business in 1998.
The title insurance business consists primarily of the issuance of policies
to real estate purchasers and investors based upon searches of the public
records which contain information concerning interests in real property. The
policy insures against losses arising out of defects, loans and encumbrances
affecting the insured title and not excluded or excepted from the coverage of
the policy.
The Life Insurance Group markets and writes consumer credit life and
disability insurance primarily through automobile dealers. Old Republic has also
written various conventional life and disability/accident and health insurance
coverages for many years, principally on a direct marketing basis through banks
and other financial services institutions. Old Republic also sells ordinary term
life insurance through independent agents and brokers for relatively large face
amounts, in both the United States and Canada.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
50
<PAGE>
<TABLE>
Segment Reporting
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
General Insurance Group:
Net premiums earned........................................ $ 902.5 $ 906.3 $ 867.6
Net investment income and other income(a).................. 208.7 213.2 207.3
------------- ------------- --------------
Total................................................... $ 1,111.3 $ 1,119.5 $ 1,074.9
============= ============= ==============
Income before taxes........................................ $ 192.0 $ 208.3 $ 188.8
============= ============= ==============
Income tax expense......................................... $ 60.2 $ 60.7 $ 55.1
============= ============= ==============
Segment assets - at year end............................... $ 5,160.2 $ 5,300.6 $ 5,350.5
============= ============= ==============
Mortgage Guaranty Group:
Net premiums earned........................................ $ 290.7 $ 271.0 $ 226.5
Net investment income and other income(a).................. 57.5 42.3 36.0
------------- ------------- --------------
Total................................................... $ 348.3 $ 313.3 $ 262.6
============= ============= ==============
Income before taxes........................................ $ 155.3 $ 141.5 $ 120.2
============= ============= ==============
Income tax expense......................................... $ 52.6 $ 47.6 $ 41.4
============= ============= ==============
Segment assets - at year end............................... $ 1,092.2 $ 922.9 $ 760.5
============= ============= ==============
Title Insurance Group:
Net premiums earned........................................ $ 315.8 $ 238.6 $ 220.2
Title, escrow and other fees ............................. 242.4 163.3 147.2
------------- ------------- --------------
Sub-total............................................... 558.2 402.0 367.4
Net investment income and other income(a).................. 20.6 21.4 20.4
------------- ------------- --------------
Total................................................... $ 578.8 $ 423.4 $ 387.9
============= ============= ==============
Income before taxes........................................ $ 64.6 $ 36.5 $ 24.6
============= ============= ==============
Income tax expense......................................... $ 21.9 $ 12.4 $ 8.1
============= ============= ==============
Segment assets - at year end............................... $ 460.9 $ 419.4 $ 408.2
============= ============= ==============
Life Insurance Group:
Net premiums earned........................................ $ 59.0 $ 48.6 $ 46.0
Net investment income and other income(a)(c)............... 13.7 26.8 14.5
------------- ------------- --------------
Total................................................... $ 72.7 $ 75.4 $ 60.5
============= ============= ==============
Income before taxes........................................ $ 6.6 $ 19.9 $ 7.0
============= ============= ==============
Income tax expense (credits)............................... $ (6.6) $ 1.1 $ 2.6
============= ============= ==============
Segment assets - at year end(d)............................ $ 329.5 $ 309.4 $ 310.3
============= ============= ==============
</TABLE>
51
<PAGE>
<TABLE>
Reconciliations of Segments to Consolidated
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Total revenues for reportable segments..................... $ 2,111.3 $ 1,931.8 $ 1,786.1
Net realized investment gains.............................. 53.0 26.3 15.1
Other revenues............................................. 11.7 15.4 15.8
Elimination of intersegment revenues(b).................... (4.3) (10.8) (13.2)
------------- ------------- --------------
Total consolidated revenues............................. $ 2,171.7 $ 1,962.8 $ 1,803.9
============= ============= ==============
Income before taxes:
Total income before taxes of reportable segments........... $ 418.7 $ 406.4 $ 340.8
Net realized investment gains.............................. 53.0 26.3 15.1
Other sources - net........................................ (4.0) (4.4) (11.7)
Elimination of intersegment profits(b)..................... (.8) (1.6) (1.7)
------------- ------------- --------------
Income before income taxes and
extraordinary items..................................... $ 466.7 $ 426.7 $ 342.4
============= ============= ==============
Assets
Total assets for reportable segments....................... $ 7,043.1 $ 6,952.5 $ 6,829.6
Other assets............................................... 114.1 138.2 50.6
Elimination of intersegment investment(b).................. (137.5) (167.3) (224.1)
------------- ------------- --------------
Consolidated total...................................... $ 7,019.7 $ 6,923.4 $ 6,656.2
============= ============= ==============
</TABLE>
- ---------
In the above tables, net premiums earned on a GAAP basis differ slightly from
statutory amounts due to certain differences in calculations of unearned premium
reserves under each accounting method. (a) Including unallocated investment
income derived from invested capital and surplus funds./(b) Represents results
of holding company parent, consolidation eliminating adjustments, and general
corporate expenses, as applicable./(c) 1997 includes $12.6 of interest income
from settlement of prior years' tax issues./(d) The Company has entered into an
agreement to sell its small annuity book of business; this will have no material
effect on Old Republic's consolidated results or financial position. (see Note
1(f))
52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Old Republic International Corporation
Chicago, Illinois
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, preferred stock and
common shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Old Republic International Corporation and
its subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 10, 1999
53
<PAGE>
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, 1999 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 21, 1999. 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, 1999 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 21, 1999.
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, 1999 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 21, 1999.
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, 1999 a definitive proxy statement pursuant to
Regulation 14A in connection with its Annual Meeting of shareholders to be held
on May 21, 1999.
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, 1999
under cover of Form 10-K/A.
3. See exhibit index on page 57 of this report.
(b) Reports on Form 8-K:
1. No reports on Form 8-K were filed during the fourth quarter of 1998.
54
<PAGE>
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
---------------------------------------- -------------------
A. C. Zucaro, Chairman of the Board, Date
Chief Executive Officer, President and Director
By : /s/ Paul D. Adams
---------------------------------------- -------------------
Paul D. Adams, Senior Vice President, Date
Chief Financial Officer and Treasurer
55
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated (Name, Title or
Principal Capacity, and Date).
/s/ Harritngton Bischof /s/ John W. Popp
- -------------------------------- -----------------------------------
Harrington Bischof, Director* John W. Popp, Director*
/s/ Anthony F. Colao /s/ William A. Simpson
- -------------------------------- -----------------------------------
Anthony F. Colao, Director* William A. Simpson, Director*
Senior Vice President President of Republic Mortgage
Insurance Company
/s/ Jimmy A. Dew /s/ Arnold L. Steiner
- -------------------------------- -----------------------------------
Jimmy A. Dew, Director* Arnold L. Steiner, Director*
Sales Group Manager of Republic
Mortgage Insurance Company
/s/ Kurt W. Kreyling /s/ David Sursa
- -------------------------------- -----------------------------------
Kurt W. Kreyling, Director* David Sursa, Director*
/s/ Peter Lardner /s/ William F. White, Jr.
- -------------------------------- -----------------------------------
Peter Lardner, Director* William G. White, Jr., Director*
Chief Executive Officer of
Bituminous Casualty Corporation
/s/ Wilbur S. Legg
- --------------------------------
Wilbur S. Legg, Director*
* By/S/A. C. Zucaro
Attorney-in-fact
Date: March 11, 1999
56
<PAGE>
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 3.2 to Form S-3 Registration Statement
No. 333-43311).
(4) Instruments defining the rights of security holders, including indentures.
(A) * Certificate of Designation with respect to Series A Junior
Participating Preferred Stock (Exhibit 4.1 to Form 8-K filed May
30, 1997).
(B) * Certificate of Designation with respect to Series G-2 Convertible
Preferred Stock (Exhibit 4(A) to Registrant's Annual Report on Form
10-K for 1995).
(C) * Amended and Restated Rights Agreement dated as of May 15, 1997
between Old Republic International Corporation and First Chicago
Trust Company of New York (Exhibit 4.1 to Registrant's Form 8-K
filed May 30, 1997).
(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) * Form of Indenture dated as of August 15, 1992 between Old
Republic International Corporation and Wilmington Trust Company, as
Trustee (Exhibit 4(G) to Registrant's Annual Report on Form 10-K
for 1993.)
(F) * Supplemental Indenture No.1 dated as of June 16, 1997 supplementing
the Indenture (Exhibit 4.3 to Registrant's Form 8-A filed June 16,
1997).
(G) * Supplemental Indenture No. 2 dated as of December 31, 1997
supplementing the Indenture. (Exhibit 4(G) to Registrant's Annual
Report on Form 10-K for 1997)
(10) Material contracts.
** (A) Copy of the Amended and Restated Old Republic International
Corporation Key Employees Performance Recognition Plan.
** (B) * 1985 Old Republic International Corporation Non-qualified Stock
Option Plan A (Exhibit 10.1 to Form S-3 Registration Statement
No. 2-98166).
** (C) * 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).
** (D) * Amended and Restated 1992 Old Republic International Corporation
Non -qualified Stock Option Plan. (Exhibit 10(D) to Registrant's
Annual Report on Form 10-K for 1997)
** (E) * Amended and Restated Old Republic International Corporation
Executives Excess Benefits Pension Plan. (Exhibit 10(E) to
Registrant's Annual Report on Form 10-K for 1997)
** (F) * 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).
** (G) * 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).
** (H) * Copy of Bitco Key Employees Performance Recognition Plan. (Exhibit
10(H) to Registrant's Annual Report on Form 10-K 1997)
57
<PAGE>
(Exhibit Index, Continued)
** (I) * Copy of a written description of the RMIC Key Employee Performance
Recognition Plan (Exhibit 10(Q) to Registrant's Annual Report on
Form 10-K for 1991.)
(21) Subsidiaries of the registrant.
(23) Consent of PricewaterhouseCoopers LLP
(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.
58
RESTATED
CERTIFICATE OF INCORPORATION
OF
OLD REPUBLIC INTERNATIONAL CORPORATION
The Board of Directors, in a procedure authorized by Section 245 of the
General Corporation Law of Delaware, approved and adopted at a meeting held on
December 2, 1998 the following Restated Certificate of Incorporation. This
document only restates and integrates and does not further amend the provisions
of the corporation's Certificate of Incorporation duly filed with the Secretary
of State of Delaware on March 6, 1969 as heretofore amended or supplemented, and
there is no discrepancy between those provisions and the provisions of this
restated certificate.
FIRST: The name of the corporation is Old Republic International Corporation.
SECOND: The address of its registered office in the State of Delaware is 1013
Centre Road, in the City of Wilmington 19805, County of New Castle. The
name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
THIRD: The nature of the business or purposes to be conducted or promoted are:
To acquire, own and dispose of the whole or any part of the capital
stock, securities, assets, or obligations of other corporations; and
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is Six Hundred Seventy-Five
Million (675,000,000) shares, divided into three classes as follows:
Seventy Five Million (75,000,000) shares of Preferred Stock of the par
value of one cent ($.01) per share (Preferred Stock).
Five Hundred Million (500,000,000) shares of Common Stock of the par
value of $1.00 per share (Common Stock).
One Hundred Million (100,000,000) shares of Class B Common Stock of the
par value of $1.00 per share (Class B Common Stock).
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The designations, powers, preferences and rights, and the
qualifications, limitations or restrictions of the above classes of stock are as
follows:
DIVISION I
Preferred Stock
1. The Board of Directors is expressly authorized at any time, and from
time to time, to issue shares of Preferred Stock in one or more series, and for
such consideration as the Board may determine, with such voting powers, full or
limited but not to exceed one vote per share, or without voting powers, and with
such designations, preferences and relative, participating optional or other
special rights, and qualifications, limitation or restrictions thereof, as shall
be stated in the resolution or resolutions providing for the issue thereof, and
as are not stated in this Certificate of Incorporation, or any amendment
thereto. All shares of any one series shall be of equal rank and identical in
all respects.
2. No dividend shall be paid or declared on any particular series of
Preferred Stock unless dividends shall be paid or declared pro rata on all
shares of Preferred Stock at the time outstanding of each other series which
ranks equally as to dividends with such particular series.
3. Unless and except to the extent otherwise required by law or
provided in the resolution or resolutions of the Board of Directors creating any
series of Preferred Stock pursuant to this Division I, the holders of the
Preferred Stock shall have no voting power with respect to any matter
whatsoever. In no event shall the Preferred Stock be entitled to more than one
vote in respect of each share of stock. Subject to the protective conditions or
restrictions of any outstanding series of Preferred Stock, any amendment to this
Certificate of Incorporation which shall increase or decrease the authorized
capital stock of any class or classes may be adopted by the affirmative vote of
the holders of a majority of the outstanding shares of the voting stock of the
Corporation.
4. Shares of Preferred Stock redeemed, converted, exchanged, purchased,
retired or surrendered to the Corporation, or which have been issued and
reacquired in any manner, shall, upon compliance with any applicable provisions
of The General Corporation Law of the State of Delaware, have the status of
authorized and unissued shares of Preferred Stock and may be reissued by the
Board of Directors as part of the series of which they were originally a part or
may be reclassified into and reissued as part of a new series or as a part of
any other series, all subject to the protective conditions or restrictions of
any outstanding series of Preferred Stock.
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DIVISION II
Common Stock and Class B Common Stock
1. Dividends. Subject to the preferential dividend rights, if any,
applicable to shares of the Preferred Stock and subject to applicable
requirements, if any, with respect to the setting aside of sums for purchase,
retirement or sinking funds for the Preferred Stock, the holders of the Common
Stock and the Class B Common Stock shall be entitled to receive to the extent
permitted by law, such dividends as may be declared from time to time by the
Board of Directors; provided that whenever a cash dividend is paid to the
holders of Class B Common Stock, the Corporation shall also pay to the holders
of the Common Stock a cash dividend per share at least equal to the cash
dividend per share at least equal to the cash dividend per share paid to the
holders of the Class B Common Stock and further provided that the Corporation
may pay cash dividends to the holders of the Common Stock in excess of cash
dividends paid, or without paying cash dividends, to holders of the Class B
Common Stock.
2. Liquidation. In the event of the voluntary or involuntary
liquidation, dissolution, distribution of assets or winding up of the
Corporation, after distribution in full of the preferential amounts, if any, to
be distributed to the holders of shares of the Preferred Stock, holders of the
Common Stock and the Class B Common Stock shall be entitled to receive all the
remaining assets of the Corporation of whatever kind available for distribution
to stockholders ratably in proportion to the number of shares of Common Stock
and the Class B Common Stock held by them, respectively.
3. Voting Rights. Except as may be otherwise required by law or this
Certificate of Incorporation, each holder of the Common Stock shall have one
vote in respect of each share of Common Stock held by him of record on the books
of the Corporation on all matters voted upon by the stockholders and each holder
of the Class B Common Stock shall have one-tenth (1/10) of one vote in respect
of each share of Class B Common Stock held by him of record on the books of the
Corporation on all matters voted upon by the stockholders; provided that the
holders of the Common Stock and the Class B Common Stock shall vote together as
a single class.
4. Definition. Notwithstanding the provisions of the Designations,
Preferences and Rights of Series A Junior Participating Preferred Stock, and the
Designations, Preferences and Rights of Series G-2 Convertible Preferred Stock,
for the purposes of the Corporation's Restated Certificate of Incorporation, as
amended, the term "Common Stock" shall mean Common Stock as defined in the first
paragraph of this Article FOURTH and shall not include the Class B Common Stock
of the Corporation, provided, however, that for the purposes of the section
titled "Voting", the term "Common Stock" shall mean both the Common Stock as
defined in the first paragraph of this Article FOURTH and the Class B Common
Stock of the Corporation."
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DIVISION III
Elimination of Preemptive Rights
No holder of stock of any class of the Corporation shall be entitled as
a matter of right to purchase or subscribe for any part of any unissued stock of
any class, or of any additional stock of any class of capital stock of the
Corporation, or of any bonds, certificates of indebtedness, debentures, or other
securities convertible into stock of the Corporation, now or hereafter
authorized, but any such stock of other securities convertible into stock may be
issued and disposed of pursuant to resolution by the Board of Directors to such
persons, firms, corporations or associations and upon such terms and for such
consideration (not less than the par value or stated value thereof) as the Board
of Directors in the exercise of its discretion may determine and as may be
permitted by law without action by the stockholders.
DESIGNATIONS, PREFERENCES AND RIGHTS OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. Designation.
The shares of such series shall be designated as "Series A Junior
Participating Preferred Stock" (the "Series A Preferred Stock") and the number
of shares constituting the Series A Preferred Stock shall be 10,000,000; such
number of shares may be increased or decreased by resolution of the Board of
Directors; provided, that no decrease shall reduce the number of shares of
Series A Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon conversion of any outstanding
securities issued by the Corporation convertible into Series A Preferred Stock.
2. Dividends and Distributions.
(a) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of Common Stock, par value $1.00
per share (the "Common Stock"), of the Corporation, and of any other junior
stock, shall be entitled to receive, when, and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the first day of March, June, September and December in each
year (each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series A Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or
(b) subject to the provision for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times the aggregate
per share amount (payable in kind) of all non-cash
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<PAGE>
dividends or other distributions, other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Preferred Stock. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Commons Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the
Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than 60 days prior to the date fixed for the payment thereof.
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<PAGE>
3. Voting Rights.
The holders of shares of Series A Preferred Stock shall have the
following voting rights:
(a) Except as provided in paragraph (c) of this Section 3 and subject
to the provision for adjustment hereinafter set forth, each share of Series A
Preferred Stock shall entitle the holder thereof to 100 votes on all matters
submitted to a vote of the stockholders of the Corporation.
(b) Except as otherwise provided herein or by law, the holders of
shares of Series A Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(c) (i) If, on the date used to determine stockholders of record for
any meeting of stockholders for the election of directors, a default in
preference dividends (as defined in subparagraph (v) below) on the Series A
Preferred Stock shall exist, the holders of the Series A Preferred Stock shall
have the right, voting as a class as described in subparagraph (ii) below, to
elect two directors (in addition to the directors elected by holders of Common
Stock of the Corporation). Such right may be exercised (a) at any meeting of
stockholders for the election of directors or (b) at a meeting of the holders of
shares of Voting Preferred Stock (as hereinafter defined), called for the
purpose in accordance with the By-laws of the Corporation, until all such
cumulative dividends (referred to above) shall have been paid in full or until
non-cumulative dividends have been paid regularly for at least one year.
(ii) The right of the holders of Series A Preferred Stock to elect
two directors, as described above, shall be exercised as a class concurrently
with the rights of holders of any other series of Preferred Stock upon which
voting rights to elect such directors have been conferred and are then
exercisable. The Series A Preferred Stock and any additional series of Preferred
Stock which the Corporation may issue and which may provide for the right to
vote with the foregoing series of Preferred Stock are collectively referred to
herein as "Voting Preferred Stock."
(iii) Each director elected by the holders of shares of Voting
Preferred Stock shall be referred to herein as a "Preferred Director." A
Preferred Director so elected shall continue to serve as such director for a
term of one year, except that upon any termination of the right of all such
holders to vote as a class for Preferred Directors, the term of office of such
directors shall terminate. Any Preferred Director may be removed by, and shall
not be removed except by, the vote of the holders of record of a majority of the
outstanding shares of Voting Preferred Stock then entitled to vote for the
election of directors, present (in person or by proxy) and voting together as a
single class (a) at a meeting of the stockholders, or (b) at a meeting of the
holders of shares of such Voting Preferred Stock, called for the purpose in
accordance with the By-laws of the Corporation, or (c) by written consent signed
by the holders of a majority of the then outstanding shares of Voting Preferred
Stock then entitled to vote for the election of directors, taken together as a
single class.
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<PAGE>
(iv) So long as a default in any preference dividends on the Series
A Preferred Stock shall exist or the holders of any other series of Voting
Preferred Stock shall be entitled to elect Preferred Directors, (a) any vacancy
in the office of a Preferred Director may be filled (except as provided in the
following clause (b)) by an instrument in writing signed by the remaining
Preferred Director and filed with the Corporation and (b) in the case of the
removal of any Preferred Director, the vacancy may be filled by the vote or
written consent of the holders of a majority of the outstanding shares of Voting
Preferred Stock then entitled to vote for the election of directors, present (in
person or by proxy) and voting together as a single class, at such time as the
removal shall be effected. Each director appointed as aforesaid by the remaining
Preferred Director shall be deemed, for all purposes hereof, to be a Preferred
Director. Whenever (x) no default in preference dividends on the Series A
Preferred Stock shall exist and (y) the holders of other series of Voting
Preferred Stock shall no longer be entitled to elect such Preferred Directors,
then the number of directors constituting the Board of Directors of the
Corporation shall be reduced by two.
(v) For purposes hereof, a "default in preference dividends" on the
Series A Preferred Stock shall be deemed to have occurred whenever the amount of
cumulative and unpaid dividends on the Series A Preferred Stock shall be
equivalent to six full quarterly dividends or more (whether or not consecutive),
and, having so occurred, such default shall be deemed to exist thereafter until,
but only until, all cumulative dividends on all shares of the Series A Preferred
Stock then outstanding shall have been paid through the last Quarterly Dividend
Payment Date or until, but only until, non-cumulative dividends have been paid
regularly for at least one year.
(d) Except as set forth herein (or as otherwise required by applicable
law), holders of Series A Preferred Stock shall have no general or special
voting rights and their consent shall not be required for taking any corporate
action.
4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably in the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled;
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(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
5. Reacquired Shares.
Any shares of Series A Preferred Stock purchased or otherwise acquired
by the Corporation in any manner whatsoever shall be retired and cancelled
promptly after the acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred Stock and may be
reissued as part of a new series of Preferred Stock subject to the conditions
and restrictions on issuance set forth herein, in the Certificate of
Incorporation, or in any other Certificate of Designations creating a series of
Preferred Stock or any similar stock or as otherwise required by law.
6. Liquidation, Dissolution or Winding Up.
(a) Subject to the prior and superior rights of holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series A Preferred Stock with respect to rights upon liquidation, dissolution or
winding up (voluntary or otherwise), no distribution shall be made to the
holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock unless,
prior thereto, the holders of shares of Series A Preferred Stock shall have
received $100 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment
(the "Series Liquidation Preference"). Following the payment of the full amount
of the Series A Liquidation Preference, no additional distributions shall be
made to the holders of shares of Series A Preferred Stock unless, prior thereto,
the holders of shares of
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Common Stock shall have received an amount per share (the "Capital Adjustment")
equal to the quotient obtained by dividing (i) the Series A Liquidation
Preference by (ii) 100 (such number in clause (ii), the "Adjustment Number").
Following the payment of the full amount of the Series A Liquidation Preference
and the Capital Adjustment in respect of all outstanding shares of Series A
Preferred Stock and Common Stock, respectively, holders of Series A Preferred
Stock and holders of Common Stock shall receive their ratable and proportionate
share of the remaining assets to be distributed in the ratio of the Adjustment
Number to 1 with respect to such Preferred Stock and Common Stock, on a per
share basis, respectively.
(b) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of preferred stock, if any,
which rank on a parity with the Series A Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of Series A Preferred Stock
and the holders of such parity shares in proportion in their respective
liquidation preferences. In the event, however, that there are not sufficient
assets available to permit payment in full of the Capital Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common Stock.
7. Consolidation, Merger, etc.
In case the Corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case each share of Series A Preferred Stock shall at
the same time be similarly exchanged or changed into an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of
Common Stock is changed or exchanged. In the event the Corporation shall at any
time declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Series A
Preferred Stock shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of Shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
8. No Redemption.
The shares of Series A Preferred Stock shall not be redeemable.
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9. Ranking.
The Series A Preferred Stock shall rank, with respect to payment of
dividends and the distribution of assets, junior to all series of any other
class of the Corporation's Preferred Stock.
10. Amendment.
The Certificate of Incorporation of the Corporation shall not be
amended in any manner which would materially alter or change the powers,
preferences or special rights of the Series A Preferred Stock so as to affect
them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
DESIGNATIONS, PREFERENCES AND RIGHTS OF
SERIES G-2 CONVERTIBLE
PREFERRED STOCK
1. Designation.
1,000,000 shares of Preferred Stock of the Corporation, no par value,
are hereby constituted as a series of Preferred Stock designated as "Series G-2
Convertible Preferred Stock" (hereinafter called "Series G-2 Preferred Stock").
2. Transferability.
The shares of Series G-2 Preferred Stock shall not be transferable by
the holder thereof otherwise than by will or under the laws of descent and
distribution. In the event that any shares of Series G-2 Preferred Stock are
transferred by will or under the laws of descent and distribution and such
shares of Series G-2 Preferred Stock are not thereafter converted into Common
Stock pursuant to the provisions of paragraphs 5 and 6, the Corporation shall
have the right to redeem such shares of Series G-2 Preferred Stock so
transferred pursuant to the following provisions:
(a) At any time after six months from the date of death of the holder
which gave rise to such transfer, the Corporation shall have the right, at its
sole option and election, to redeem all of such shares of Series G-2 Preferred
Stock so transferred by will or under the laws of descent and distribution at a
redemption price per share equal to 95% of the audited book value per share of
the Common Stock as of the last day of the latest full fiscal year of the
Corporation, plus an amount equal to all accrued and unpaid dividends and
distributions thereon (the sum being hereinafter referred to as the "Redemption
Price"), whether or not declared, to the date fixed by the Board for redemption
(the "Redemption Date").
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<PAGE>
(b) The Corporation shall not redeem pursuant to this paragraph 2 any
of the Series G-2 Preferred Stock at any time outstanding until all dividends
accrued and in arrears upon all Series G-2 Preferred Stock then outstanding
shall have been paid for all past dividend periods, and until full dividends for
the then current dividend period on all Series G-2 Preferred Stock then
outstanding, other than the shares to be redeemed, shall have been paid or
declared and the full amount thereof set apart for payment.
(c) Notice of any redemption of shares of Series G-2 Preferred Stock
pursuant to this paragraph 2 shall be mailed at least 30, but not more than 60,
days prior to the redemption date to each holder of shares of Series G-2
Preferred Stock to be redeemed, at such holder's address as it appears on the
transfer agent's books. Any notice which is mailed as herein provided shall be
conclusively presumed to have been duly given, whether or not the stockholder
receives such notice; and failure to give such notice by mail, or any defect in
such notice, to the holders of any shares designated for redemption shall not
affect the validity of the proceedings for the redemption of any other shares of
Series G-2 Preferred Stock. On or after the date fixed for redemption as stated
in such notice, each holder of the shares called for redemption shall surrender
the certificate or certificates evidencing such shares to the Corporation at the
place designated in such notice and shall thereupon be entitled to receive
payment of the Redemption Price.
(d) Shares of the Series G-2 Preferred Stock shall be deemed to have
been redeemed immediately prior to the close of business on the Redemption Date,
the right to receive dividends and distributions shall cease to accrue from and
after the Redemption Date, and the rights of the holder thereof, except for the
right to receive the Redemption Price in accordance herewith, shall cease and
terminate on the Redemption Date. As promptly as practicable after surrender of
such shares as aforesaid, the Corporation shall pay to the holder the Redemption
Price for each share of Series G-2 Preferred Stock surrendered for redemption.
3. Voting Rights.
In addition to any special voting rights provided to the holders of the
Series G-2 Preferred Stock as or part of a separate series or class pursuant to
paragraph 8, any provision of the Certificate of Incorporation of the
Corporation and any other voting rights provided by law, each holder of Series
G-2 Preferred Stock shall be entitled to one vote in respect of each share of
stock held by him of record on the books of the Corporation on all matters voted
upon by the stockholders, such votes to be counted together with those for any
other shares of capital stock having the right to vote on all such matters and
not separately as a class or group.
4. Dividends.
(a) The holders of shares of Series G-2 Preferred Stock shall be
entitled to receive cumulative cash dividends, when and as declared by the Board
of Directors out of funds legally available therefor, at an annual rate, based
upon $21.79 per share, which amount shall be
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<PAGE>
proportionately adjusted in the event of any stock dividend or distribution in
shares of Series G-2 Preferred Stock, any subdivision, combination or
reclassification of the outstanding shares of Series G-2 Preferred Stock, or any
similar action, equal to the prime rate to commercial borrowers posted by The
Northern Trust Company of Chicago on the January 1 or July 1 immediately
preceding the next dividend payment date and no more, before any dividend or
distribution in cash or other property (other than dividends payable in stock
ranking junior to the Series G-2 Preferred Stock as to dividends and upon
liquidation) on any class or series of stock of the Corporation ranking junior
to the Series G-2 Preferred Stock as to dividends or on liquidation shall be
declared or paid or set apart for payment.
(b) Dividends on the Series G-2 Preferred Stock shall be payable
semi-annually, when and as declared by the Board of Directors, on June 30 and
December 31 of each year, commencing the first June 30 or December 31 after the
date of the initial issuance of shares of the Series G-2 Preferred Stock, except
that if such date is a Saturday, Sunday or legal holiday then such dividends
shall be payable on the first immediately succeeding calendar day which is not a
Saturday, Sunday, or legal holiday, to holders of record on the respective
record dates not exceeding sixty days preceding such dividend payments dates as
may be determined by the Board of Directors in advance of the payment of each
particular dividend.
(c) Dividends on the Series G-2 Preferred Stock shall be cumulative and
accrue from and after the date of original issuance thereof, whether or not
declared by the Board of Directors. Accruals or dividends shall not bear
interest.
(d) No dividend may be declared on any other class or series of stock
ranking junior or on a parity with the Series G-2 Preferred Stock as to
dividends in respect of any dividend period unless there shall also be or have
been declared on the Series G-2 Preferred Stock like dividends for all
semi-annual periods coinciding with or ending before such semi-annual period,
ratably in proportion to the respective annual dividend rates fixed therefor.
5. Liquidation Rights.
(a) In the event of any dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, the holders of outstanding shares
of the Series G-2 Preferred Stock shall be entitled to receive, before any
payment or distribution of assets of the Corporation or proceeds thereof
(whether capital or surplus) shall be made to or set apart for the holders of
any class of common stock of the Corporation or any other class or series of
stock ranking junior to the Series G-2 Preferred Stock upon liquidation, cash,
per share, in an amount equal to 95% of the book value per share of the Common
Stock on the date of liquidation plus a sum equal to all dividends on such
shares accrued and unpaid thereon to the date of final distribution, but they
shall be entitled to no further payment. If, upon any liquidation, dissolution
or winding up of the Corporation, the assets of the Corporation, or proceeds
thereof, distributable among the holders of the Series G-2 Preferred Stock or
any other class of Preferred Stock ranking on a parity with the Series G-2
Preferred Stock as to payments upon liquidation, dissolution or winding up shall
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be insufficient to pay in full the preferential amount aforesaid, then such
assets, or the proceeds thereof, shall be distributed among such holders ratably
in accordance with the respective amounts which would be payable on such shares
if all amounts payable thereon were paid in full. For the purposes of this
paragraph 4(a), the voluntary sale, lease, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or substantially all
of the property or assets of the Corporation to, or a merger or consolidation of
the Corporation with one or more corporations in which the Corporation is the
corporation surviving such consolidation of merger shall not be deemed to be a
liquidation dissolution or winding up, voluntary or involuntary.
(b) If there is a merger of the Corporation into or the consolidation
of the Corporation with another corporation in which the Corporation is not the
survivor, the holders of Series G-2 Preferred Stock shall retain the same rights
in the surviving corporation as outlined herein.
6. Conversion at Option of the Holder.
Each share of Series G-2 Preferred Stock (other than those shares which
have been surrendered for redemption pursuant to paragraph 2) may be converted
at any time after six months from the date of issuance of such share of Series
G-2 Preferred Stock, at the option of the holder thereof, into shares of Common
Stock of the Corporation, on the terms and conditions set forth in this
paragraph 5.
(a) Each share of Series G-2 Preferred Stock shall be convertible at
the option of the holder thereof, in the manner hereinafter set forth, into .95
fully paid and nonassessable shares of Common Stock of the Corporation.
(b) In order to effect the conversion of shares of the Series G-2
Preferred Stock into Common Stock in accordance with these provisions, the
holder thereof shall surrender at the Corporation's principal office or such
other office or agency as the Board of Directors of the Corporation may
designate the certificate or certificates therefor, duly endorsed to the
Corporation or in blank, accompanied by a written notice to the Corporation at
said office stating that such holder elects to convert all or a specified whole
number of such shares in accordance with the provisions of this paragraph 5 and
specifying the name or names in which the certificate or certificates for shares
of Common Stock are to be issued. No payment or adjustment shall be made upon
any conversion on account of any dividends accrued on the shares of the Series
G-2 Preferred Stock surrendered for conversion or on account of any dividends on
the Common Stock issued upon such conversion. Shares of the Series G-2 Preferred
Stock shall be deemed to have been converted immediately prior to the close of
business on the date (the "Conversion Date") of receipt by the Corporation of
such notice and the surrender of the certificate or certificates representing
the shares of Series G-2 Preferred Stock to be converted (together with any
required instruments or transfer), and the rights of the holder thereof, except
for the right to receive Common Stock of the Corporation in accordance herewith,
shall cease on the Conversion Date, and the person or persons entitled to
receive the Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such Common Stock on the
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Conversion Date. As promptly as practicable after the receipt of such notice and
the surrender of such shares as aforesaid, the Corporation shall issue and
deliver at said office to the person or persons entitled to receive the same (i)
a certificate or certificates for the number of validly issued, fully-paid and
nonassessable shares of Common Stock issuable upon such conversion, together
with a cash payment in lieu of any fraction of any share, as hereinafter
provided, and (ii) if less than the full number of shares of Series G-2
Preferred Stock evidenced by the surrendered certificate or certificates are
being converted, a new certificate or certificates, of like tenor, for the
number of shares evidenced by such surrendered certificate or certificates less
the number of shares converted.
(c) No fractional shares of Common Stock shall be issued upon
conversion of shares of the Series G-2 Preferred Stock but, in lieu of any
fraction of a share of Common Stock which would otherwise be issuable in respect
of the aggregate number of shares of the Series G-2 Preferred Stock surrendered
for conversion at one time by the same holder, the Corporation shall pay in cash
as an adjustment of such fraction an amount equal to the same fraction of the
Market Price (as defined herein) of the Common Stock, on the Conversion Date,
or, if such date is not a Trading Day (as defined herein), on the next preceding
date which was a Trading Day.
(d) The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares the full number of shares of Common Stock
into which all shares of the Series G-2 Preferred Stock from time to time
outstanding are convertible.
(e) The Corporation will pay any and all issue and other taxes that may
be payable in respect of any issue or delivery of shares on conversion of shares
of the Series G-2 Preferred Stock pursuant hereto. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in such issue and delivery of shares in a name other than that
in which the shares so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
(f) Shares of Series G-2 Preferred Stock may not be converted after the
close of business on the third business day preceding the date fixed for
redemption or conversion by the Corporation of such shares pursuant to
paragraphs 2 and 6.
7. Redemption or Conversion at Option of the Corporation.
The Corporation shall have the right either to redeem or to convert
shares of Series G-2 Preferred Stock pursuant to the following provisions:
(a) Each share of Series G-2 Preferred Stock, at any time after five
years following the date of issuance of such share, shall be redeemable by the
Corporation, at its sole option and discretion, at a redemption price of $21.79
per share, plus an amount equal to all accrued and unpaid dividends and
distributions thereon (hereinafter the "Redemption Price"), whether or not
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declared, to the date fixed by the Board of Directors for redemption
(hereinafter the "Redemption Date"), or convertible by the Corporation, at its
sole option and discretion, into .95 fully paid and nonassessable share of
Common Stock of the Corporation.
(b) If less than all of the shares of Series G-2 Preferred Stock at the
time outstanding are to be redeemed or converted, the shares so to be redeemed
or converted shall be selected by lot, pro rata (as nearly as may be) or in such
other manner as the Board of Directors may determine in its sole discretion to
be fair and proper, except that in any redemption or conversion of fewer than
all of the outstanding shares of Series G-2 Preferred Stock, the Corporation may
redeem or convert all shares held by holders of less than 100 shares of Series
G-2 Preferred Stock. Notwithstanding the foregoing provisions, the Corporation
shall not redeem or convert less than all of the Series G-2 Preferred Stock at
any time outstanding until all dividends accrued and in arrears upon all Series
G-2 Preferred Stock then outstanding shall have been paid for all past dividend
periods, and until full dividends for the then current dividend period on all
Series G-2 Preferred Stock then outstanding, other than the shares to be
redeemed or converted, shall have been paid or declared and the full amount
thereof set apart for payment.
(c) Notice of any redemption or conversion of shares of Series G-2
Preferred Stock pursuant to this paragraph 6 shall be mailed at least 30, but
not more than 60, days prior to the Redemption Date or the date fixed by the
Board for conversion (the "Corporation Conversion Date") to each holder of
shares of Series G-2 Preferred Stock to be redeemed or converted, at such
holder's address as it appears on the books of the Corporation. In order to
facilitate the redemption or conversion of shares of Series G-2 Preferred Stock,
the Board of Directors may fix a record date for the determination of holders of
shares of Series G-2 Preferred Stock to be redeemed or converted not more than
60 days prior to the date fixed for such redemption or conversion.
(d) Any notice which is mailed as herein provided shall be conclusively
presumed to have been duly given, whether or not the stockholder receives such
notice; and failure to give such notice by mail, or any defect in such notice,
to the holders of any shares designated for redemption or conversion shall not
affect the validity of the proceedings for the redemption or conversion of any
other shares of Series G-2 Preferred Stock. On or after the Redemption or
Corporate Conversion Date as stated in such notice, each holder of the shares
called for redemption or conversion shall surrender the certificate or
certificates evidencing such shares to the Corporation at the place designated
in such notice and shall thereupon be entitled to receive either the redemption
price, in the case of a redemption, or a certificate or certificates for the
number of validly issued, fully-paid and nonassessable shares of Common Stock
issuable in the case of a conversion, together with a cash payment in lieu of
any fraction of any share, as hereinafter provided. If less than all the shares
represented by any such surrendered certificate are redeemed or converted, a new
certificate shall be issued representing the unredeemed or unconverted shares.
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(e) No payment or adjustment shall be made upon any redemption or
conversion on account of any dividends accrued on the shares of the Series G-2
Preferred Stock surrendered for redemption or conversion or on account of any
dividends on the Common Stock issued upon such redemption or conversion. Shares
of the Series G-2 Preferred Stock shall be deemed to have been redeemed or
converted immediately prior to the close of business on the Redemption Date or
Corporation Conversion Date, and the rights of the holder thereof, except for
the right to receive the Redemption Price or Common Stock of the Corporation in
accordance herewith, shall cease on the Redemption Date or Corporation
Conversion Date, and the person or persons entitled to receive the Common Stock
issuable in the case of conversion shall be treated for all purposes as the
record holder or holders of such Common Stock on the Corporation Conversion
Date.
(f) No fractional shares of Common Stock shall be issued upon
conversion of shares of the Series G-2 Preferred Stock but, in lieu of any
fraction of a share of Common Stock which would otherwise be issuable in respect
of the aggregate number of shares of the Series G-2 Preferred Stock surrendered
for conversion at one time by the same holder, the Corporation shall pay in cash
as an adjustment of such fraction an amount equal to the same fraction of the
Market Price (as defined herein), of the Common Stock, on the Corporation
Conversion Date, or, if such date is not a Trading Day (as defined herein), on
the next preceding date which was a Trading Day.
(g) The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares the full number of shares of Common Stock
into which all shares of the Series G-2 Preferred Stock from time to time
outstanding are convertible.
(h) The Corporation will pay any and all issue and other taxes that may
be payable in respect of any issue or delivery of shares on conversion of shares
of the Series G-2 Preferred Stock pursuant hereto. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in such issue and delivery of shares in a name other than that
in which the shares so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
(i) In the case of a redemption, the Corporation may, on or prior to
the Redemption Date, but not earlier than 45 days prior to the Redemption Date,
deposit with its transfer agent or other redemption agent selected by the Board
of Directors of the Corporation, as a trust fund, a sum sufficient to redeem the
shares of Series G-2 Preferred Stock called for redemption, with irrevocable
instructions and authority to such transfer agent or other redemption agent to
give or complete the notice of redemption thereof and to pay to the respective
holders of such shares of Series G-2 Preferred Stock, as evidenced by a list of
such holders certified by an officer of the Corporation, the Redemption Price
upon surrender of their respective share certificates. Such deposit shall be
deemed to constitute full payment of such shares of Series G-2 Preferred Stock
to their holders; and from and after the date of such deposit, notwithstanding
that any certificates for such shares of Series G-2 Preferred Stock shall not
have been surrendered for cancellation, the shares represented thereby shall no
longer be deemed outstanding, the rights to receive dividends
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and distributions shall cease to accrue from and after the Redemption Date, and
all rights of the holders of the shares of Series G-2 Preferred Stock called for
redemption, as stockholders of the Corporation with respect to such shares,
shall cease and terminate, except the right to receive the Redemption Price,
without interest, upon the surrender of their respective certificates, and
except the right to convert their shares into Common Stock as provided in
paragraph 5 hereof, until the close of business on the Redemption Date. In case
the holders of any shares shall not, within six years after such deposit, claim
the amount deposited for redemption thereof, such transfer agent or other
redemption agent shall, upon demand, pay over to the Corporation the balance of
such amount so deposited. Thereupon, such transfer agent or other redemption
agent shall be relieved of all responsibility to the holders thereof and the
sole right of such holders shall be as general creditors of the Corporation. To
the extent that shares of Series G-2 Preferred Stock called for redemption are
converted into Common Stock prior to the Redemption Date, the amount deposited
by the Corporation to redeem such shares shall immediately be returned to the
Corporation. Any interest accrued on any funds so deposited shall belong to the
Corporation, and shall be paid to it from time to time on demand.
8. Distribution of Reclassification of Series G-2 Preferred Stock In the
Event of Distribution or Reclassification of Common Stock or Class B
Common Stock; Adjustment of Conversion Ratio.
(a) In the event the Corporation shall at any time after the issuance
of Series G-2 Preferred Stock pay a dividend or make a distribution in shares of
Common Stock or Class B Common Stock or subdivide or reclassify its outstanding
shares of Common Stock or Class B Common Stock into a greater number of shares
of Common Stock or Class B Common Stock, respectively, then a proportionate
dividend, distribution, subdivision or reclassification of the outstanding
Series G-2 Preferred Stock shall also be effected, as of the effective date of
the applicable distribution or adjustment with respect to the Common Stock or
Class B Common Stock. In such event, the Redemption Price per share specified in
these provisions shall be reduced proportionately as to all shares of Series G-2
Preferred Stock outstanding or thereafter issued and the annual dividend per
share specified in these provisions shall be adjusted as provided in paragraph4.
(b) In the event the outstanding Common Stock or Class B Common Stock
of the Corporation is hereafter combined into a smaller number of shares, then
the rate of conversion only, specified herein, shall be adjusted
proportionately.
9. Relative Rights of Preferred Stock.
So long as any of the Series G-2 Preferred Stock is outstanding the
Corporation will not:
(i) Declare, or pay, or set apart for payment, any dividends (other
than dividends payable in stock ranking junior to the Series G-2 Preferred Stock
as to dividends and upon
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liquidation) or make any distribution in cash or other property on any other
class or series of stock of the Corporation ranking junior to the Series G-2
Preferred Stock either as to dividends or upon liquidation and will not redeem,
purchase or otherwise acquire, any shares of any such junior class or series if
at the time of making such declaration, payment, distribution, redemption,
purchase or acquisition the Corporation shall be in default with respect to any
dividend payable on, or any obligation to retire shares of, Series G-2 Preferred
Stock, provided that, notwithstanding the foregoing, the Corporation may at any
time redeem, purchase or otherwise acquire shares of stock of any such junior
class in exchange for, or out of the net cash proceeds from the sale of, other
shares of stock of any junior class or series; or
(ii) Without the affirmative vote or of the holders of two-thirds of
all the Series G-2 Preferred Stock at the time outstanding, given in person or
by proxy, by resolution adopted at an annual or special meeting called for the
purpose, at which the holders of the shares of this series shall vote separately
as a class, (A) authorize, create or issue, or increase the authorized or issued
amount, of any class or series of stock ranking prior to the Series G-2
Preferred Stock either as to dividends or upon liquidation; or (B) amend, alter
or repeal any of the provisions of the Corporation's Certificate of
Incorporation, Bylaws or Certificate of Designations, Preferences and Rights of
the Series G-2 Preferred Stock, so as to materially and adversely affect the
preferences, rights, privileges or powers of the Series G-2 Preferred Stock;
provided, however, that any increase in the authorized Preferred Stock or in the
creation and issuance of other series of Preferred Stock ranking on a parity
with the Series G-2 Preferred Stock shall not be deemed to materially and
adversely affect such preferences, rights, privileges or powers.
10 Status.
Shares of this series which have been converted into Common Stock or
which have been issued and acquired in any manner by the Corporation (excluding,
until the Corporation elects to retire them, shares which are held as treasury
shares but including shares redeemed and shares purchased and retired) shall,
upon compliance with any applicable provisions of the laws of the State of
Delaware, have the status of authorized and unissued shares of Preferred Stock
and may be reclassified and reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors or as part
of any series of Preferred Stock other than this series, all subject to the
conditions and restrictions on issuances set forth in any resolution or
resolutions adopted by the Board of Directors providing for the issue of any
series of Preferred Stock.
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11. Priority.
The Preferred Stock of the Corporation heretofore authorized by the
Board of Directors of the Corporation shall rank on a parity with, and the
Common Stock and Class B Common Stock of the Corporation shall rank junior to,
the Series G-2 Preferred Stock as to dividends and upon liquidation.
12. Certain Definitions.
(a) For the purposes of these provisions the terms "Common Stock" and
"Class B Common Stock" mean the Common Stock of the Corporation, $1.00 par
value, and the Class B Common Stock of the Corporation, $1.00 par value, as the
same exist as of the original date of issue of the Series G Preferred Stock or
as such stock may be reconstituted from time to time.
(b) As used in these provisions, the term "Market Price" on any day
shall mean the reported last sales price on such day or, in case no such sale
takes place on such day, the average of the reported closing bid and asked
prices, in each case on the New York Stock Exchange, or, if the Common Stock is
not listed or admitted to trading on such Exchange, on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
or, if not listed or admitted to trading on any national securities exchange,
then the average of the closing bid and asked prices of the Common Stock in the
over-the-counter market as reported on NASDAQ or a similar reporting service;
and the term "Trading Day" shall mean a date on which the New York Stock
Exchange (or any Successor to such Exchange) is open for the transaction of
business.
FIFTH: The number of directors of the Corporation shall be fixed from time to
time by, or in the manner provided in,its by-laws and may be increased
or decreased as therein provided, but in no event shall the number of
directors of the Corporation be less than five nor more than eighteen.
The directors shall be classified with respect to the time for which
they shall severally hold office by dividing them as equally as the
total number of directors will permit into three classes, and all
directors shall hold office until their successors are elected and
qualified. The term of service of each class of directors shall be
three years or until the third annual meeting of the shareholders
following the election of the class. The terms of service of each
class of directors shall expire in successive years. At each annual
meeting of the shareholders,successors to the class of directors whose
terms then expire shall be elected to serve for the full term of three
years or until the third annual meeting of shareholders following
their election. For purposes of the annual meeting of shareholders to
be held in 1978,the current classification of directors shall continue
and only that class of directors whose term expires at that meeting
shall be elected. At each succeeding annual meeting of shareholders,
the shareholders shall elect directors only of the class whose terms
then expire.
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SIXTH: The Corporation is to have perpetual existence.
SEVENTH: The private property of the stockholders shall not be subject to the
payment of corporate debts to any extent whatsoever.
EIGHTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized, subject to
the protective conditions or restrictions of any outstanding series of
Preferred Stock fixed by the Board of Directors pursuant to the
authority conferred upon the Board of Directors by Article Fourth of
this Certificate of Incorporation and Section 151 of Title 8 of the
Delaware Code:
1. To make, alter or repeal the By-laws of the Corporation.
2. To authorize and cause to be executed mortgages and liens on the
real and personal property of the Corporation.
3. To set apart out of any of the funds of the Corporation available
for dividends a reserve or reserves for any proper purpose and to
abolish any such reserve in the manner in which it was created.
4. By a majority of the whole Board, to designate one or more
committees, each committee to consist of two or more of the
Directors of the Corporation. The Board may designate one or more
Directors as alternate members of any committee, who may replace
any absent or disqualified member at any meeting of the committee.
Any such committee, to the extent provided in the resolution or in
the By-laws of the Corporation, shall have and may exercise the
powers of the Board of Directors in the management of the business
and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it;
provided, however, the By-laws may provide that in the absence or
disqualification of any member of such committee or committees the
member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or
disqualified member.
5. Subject to the provisions of Article Fourteenth of this
Certificate of Incorporation, when and as authorized by the
affirmative vote of the holders of a majority of the stock issued
and outstanding having voting power given at a stockholders
meeting duly called upon such notice as is required by statute,
or when authorized by the written consent of the holders of a
majority of the voting stock issued and outstanding, to sell,
lease or exchange all or substantially all of the property and
assets of the Corporation, including its goodwill and its
corporate franchises, upon such terms and conditions and for such
consideration, which may consist in whole or in part of money or
property including
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shares of stock in, and/or other securities of any other
corporation or corporations, as its Board of Directors shall deem
expedient and for the best interests of the Corporation.
NINTH: Whenever a compromise or arrangement is proposed between this Corp-
oration and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may on the
application in a summary way of this Corporation or of any creditor or
stockholder thereof or on the application of any receiver or receivers
appointed for this Corporation under the provisions of Section 291 of
Title 8 of the Delaware Code or on the application of trustees in dis-
solution or of any receiver or receivers appointed for this Corpora-
tion under the provisions of Section 279 of Title 8 of the Delaware
Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs.
If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class
of stockholders of this Corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this Corpora-
tion as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if
sanctioned by the court to which the said application has been made,
the binding on all the creditors or class of creditors, and/or on all
the stockholders or class of stockholders, of this Corporation, as
the case may be, and also on this Corporation.
TENTH: Meetings of stockholders and of the Board of Directors may be held
within or without the State of Delaware, as the By-laws may provide.
The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such
place or places as may be designated from time to time by the Board
of Directors or in the By-laws of the Corporation. Elections of
Directors need not be by written ballot unless the By-laws of the
Corporation shall so provide.
ELEVENTH: The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights
conferred upon stockholders herein are granted subject to this
reservation.
TWELFTH: 1. No contract or transaction between the Corporation and one or
more of its Directors or officers, or between the Corporation and
any other corporation, partnership, association or other
organization in which one or more of its Directors or officers are
directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the Director
or office is present at or participates in the
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meeting of the Board or committee thereof which authorizes the
contract or transaction, or solely because his or their votes are
counted for such purpose, if:
(a) The material facts as to his interest and as to the
contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board or
committee in good faith authorizes the contract or
transaction by a vote sufficient for such purpose without
counting the vote of the interested Director or Directors;
or
(b) The material facts as to his interest and as to the
contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote
of the stockholders; or
(c) The contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by
the Board of Directors, a committee thereof, or the
stockholders.
Common or interested Directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
THIRTEENTH: 1. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that
he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests
of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe this conduct was
unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful.
2. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the
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fact that he is or was a Director, officer, employee or agent of
the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) and
amounts paid in settlement actually and reasonably incurred by
him/her in connection with the defense or settlement of such
action or suit if he/she acted in good faith and in a manner
he/she reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no such
indemnification shall be made in respect to any claim, issue or
matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the
Court of Chancery of Delaware or the court in which such action
or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
3. To the extent that any person referred to in paragraphs 1 and 2
of this Article Thirteenth has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred
to therein or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection
therewith.
4. Any indemnification under paragraphs 1 and 2 of this Article
Thirteenth, (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a
determination that indemnification of the Director, officer,
employee or agent is proper in the circumstances because he has
met the applicable standard of conduct set forth in paragraphs 1
and 2 of this Article Thirteenth. Such determination shall be
made (a) by the Board of Directors by a majority vote of a quorum
(as defined in the By-laws of the Corporation) consisting of
Directors who were not parties to such action, suit or
proceeding, or (b) if such quorum is not obtainable, or, even if
obtainable a quorum of disinterested Directors so directs, by
independent legal counsel in a written opinion, or (c) by the
stockholders.
5. Expenses incurred in defending a civil or criminal action, suit
or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding in the
manner provided in paragraph 4 of this Article Thirteenth upon
receipt of an undertaking by or on behalf of the Director,
officer, employee or agent to repay such amount if it shall
ultimately be determined that he/she is not entitled to be
indemnified by the Corporation as authorized in this Article
Thirteenth.
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<PAGE>
6. The indemnification and advancement of expenses provided by, or
granted pursuant to other section of this Article Thirteenth
shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be
entitled under any statute, by-law, agreement, vote of
stockholders or disinterested Directors or otherwise, both as to
action in his official capacity and as to action in another
capacity while holding such office.
7. The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability
under the provisions of this Article Thirteenth.
8. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article Thirteenth shall, unless
otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and
administrators of such a person. Any repeal or modification of
this Article Thirteenth shall not adversely affect any right to
indemnification or advancement of expenses of any present or
former director, officer, employee or agent of the Corporation
existing at the time of such repeal or modification.
9. For purposes of this Article Thirteenth, references to the
"Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have
had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is
or was serving at the request of such constituent corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of this Article
Thirteenth, with respect to the resulting or surviving
corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
10. For purposes of this Article Thirteenth, references to "other
enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to "serving
at the request of the Corporation" shall include any service as a
director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director,
officer, employee or agent with respect
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<PAGE>
to an employee benefit plan, its participants or beneficiaries;
and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have
acted in a manner "not opposed to the best interests of the
Corporation" as referred to in this Article Thirteenth.
11. If this Article Thirteenth or any portion hereof is invalidated
by any court of competent jurisdiction, then the corporation
shall nevertheless provide such indemnification and advancement
of expenses as would otherwise be permitted under any portion of
this Article Thirteenth that shall not have been invalidated.
FOURTEENTH: A. Except as set forth in paragraph B. of this Article Fourteenth,
the affirmative vote or consent of the holders of 80% of the
outstanding shares of all classes of stock of the Corporation
entitled to vote in elections of directors, considered for the
purposes of this Article Fourteenth as one class, shall be
required:
(i) for the adoption of any agreement for the merger or
consolidation of the Corporation with or into any Other
Corporation (as hereinafter defined), or
(ii) to authorize any sale, lease, exchange, mortgage, pledge or
other disposition of all, or substantially all, or any
Substantial Part (as hereinafter defined) of the assets of
the Corporation or any Subsidiary (as hereinafter defined)
to any Other Corporation, or
(iii) to authorize the issuance or transfer by the Corporation of
any Substantial Amount(as hereinafter defined)of securities
of the Corporation in exchange for the securities or assets
of any Other Corporation
if, in any such case, as of the record date for the determination
of stockholders entitled to notice thereof and to vote thereon or
consent thereto such Other Corporation is the Beneficial Owner
(as hereinafter defined) of more than 10% of the outstanding
shares of stock of the Corporation entitled to vote in elections
of directors considered for the purposes of this Article
Fourteenth as one class. Such affirmative vote or consent shall
be in addition to the vote or consent of the holders of the stock
of the Corporation otherwise required by law, this Certificate of
Incorporation or any agreement or contract to which the
Corporation is a party.
B. The provisions of paragraph A. of this Article Fourteenth shall
not be applicable to any transaction described therein if such
transaction is approved by resolution of the Board of Directors
of the Corporation, provided that (a) a majority of the members
of the Board of Directors voting for the approval of such
transaction were duly elected and acting members of the Board of
Directors prior to the time
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<PAGE>
such Other Corporation shall have become a Beneficial Owner of
more than 10% of the shares of stock of the Corporation entitled
to vote in elections of directors; or (b) such transaction is
approved by resolution unanimously adopted by the whole Board of
Directors of the Corporation at any time prior to the
consummation thereof.
C. The Board of Directors shall have the power and duty to determine
for the purposes of this Article Fourteenth, on the basis of
information known to such Board, if and when any Other
Corporation is the Beneficial Owner of more than 10% of the
outstanding shares of stock of the Corporation entitled to vote
in elections of directors, and any such determination shall be
conclusive and binding for all purposes of this Article
Fourteenth.
D. As used in Article Fourteenth, the following terms have the
meanings as set forth below:
"Other Corporation" means any person, firm, corporation or other
entity, other than a subsidiary of the Corporation.
"Substantial Part" means any assets having a then fair market
value, in the aggregate, of more than $5,000,000.
"Subsidiary" means any corporation in which the Corporation owns,
directly or indirectly, more than 50% of the voting securities.
"Substantial Amount" means any securities of the Corporation
having a then fair market value of more than $5,000,000.
"Beneficial Owner" of stock means a person, or an affiliate or
"associate" of such person (as such terms are defined in Rule
12b-2 of the General Rules and Regulations under the Securities
Exchange Act of 1934 as in effect on February 1, 1978), who
directly or indirectly controls the voting of such stock, or who
has any option, warrants, conversion or other rights to acquire
such stock.
FIFTEENTH: In addition to any separate class vote, if any, which may be
required by law, the affirmative vote of the holders of 80% of
the outstanding shares of all classes of stock of the Corporation
entitled to vote in the election of directors, such outstanding
shares of stock to be considered as one class, shall be required
in order to amend or repeal any of the provisions of Article
Fourteenth or subsection 5 of Article Eighth of the Certificate
of Incorporation. The affirmative vote of the holders of 66-2/3%
of the outstanding shares of all classes of stock of the
Corporation entitled to vote in the election of directors, such
outstanding shares of stock to be considered as one class, shall
be required in order to amend or repeal any of the provisions of
Article Fifth of the Certificate of Incorporation.
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<PAGE>
The same respective stockholder vote requirements prescribed by
the foregoing provisions of this Article Fifteenth shall also be
required, respectively, in order to amend or repeal the
respective foregoing provisions of this Article Fifteenth
prescribing such stockholder vote requirement.
SIXTEENTH: (a) The provisions of this Article Sixteenth shall apply
independently of any other provision of this Certificate of
Incorporation if any Other Corporation (as hereinafter defined)
seeks to accomplish a Business Combination (as hereinafter
defined) within the ten year period following the date the Other
Corporation became an Acquiring Entity (as hereinafter defined).
(b) (1) As used in Article Sixteenth,the following terms
shall have the meanings as set forth below:
"Acquiring Entity" means any Other Corporation which
is, and for fewer than ten years has been, the
Beneficial Owner of more than 10% of the outstanding
shares of stock of the Corporation entitled to vote in
elections of directors, considered for the purposes of
this paragraph as one class.
"Affiliate" or "Associate" of a person have the same
meaning as is assigned to such terms under Rule 12b-2
of the General Rules and Regulations (the
"Regulations") under the Securities Exchange Act of
1934 as in effect on March 1, 1983.
"Beneficial Owner" of stock means a person, or an
Affiliate or Associate of such person, who is a
"beneficial owner" of stock, as such term is defined
under Rule 13d-3 of the Regulations as in effect on
March 1, 1983, except that, without limitation, any
shares of voting stock of the Corporation that any
Acquiring Entity, or any Affiliate or Associate of such
Acquiring Entity, has the right to acquire pursuant to
any agreement, or upon exercise of conversion rights,
warrants or options, or otherwise, shall be deemed
beneficially owned by the Acquiring Entity.
"Business Combination" means any transaction described
in part A. of Article Fourteenth.
"Continuing Director" means a director duly elected to
the Board of Directors prior to the time the Other
Corporation became an Acquiring Entity, and the term
"Outside Director" shall mean a director who is not (a)
an officer or employee of the Corporation or any
relative of an officer or employer or (b) an Acquiring
Entity, or an officer, director, employee, Affiliate or
Associate of an Acquiring Entity, or a relative of any
of the foregoing.
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<PAGE>
"Other Corporation" shall have the same meaning as set
forth in part D. of Article Fourteenth.
(2) For the purposes of this Article Sixteenth, the Board
of Directors shall have the power and duty to
determine, on the basis of information known to such
Board, if and when any Other Corporation is or has
become an Acquiring Entity. Any such determination
shall be conclusive and binding for all purposes of
this Article Sixteenth.
(c) Except as set forth in part (d) of this Article
Sixteenth, the affirmative vote of the holders of
66-2/3% of all classes of stock of the Corporation
entitled to vote in elections of directors, considered
for this purpose as one class, excluding stock of which
the Acquiring Entity is the Beneficial Owner, shall be
required for approval of any Business Combination with
an Other Corporation unless all of the following
conditions are fulfilled.
(1) The cash or fair market value or other consideration to
be received per share by common stockholders of the
Corporation in such Business Combination will not, at
the time the Business Combination is effected, be less
than the greater of:
(A) the highest per share price (including brokerage
commissions and/or soliciting dealers' fees) paid
by the Acquiring Entity in acquiring any of it
holdings of the Corporation's Common Stock; or
(B) an amount bearing a percentage relationship to the
market price of the Corporation's Common Stock
immediately prior to the public announcement of
such Business Combination equal to the highest
percentage relationship that any per share price
(including brokerage commissions and/or soliciting
dealers' fees) theretofore paid by the Acquiring
Entity for any of its holdings of the
Corporation's Common Stock bore to the market
price of such Common Stock immediately prior to
the transaction resulting in the acquisition of
such Common Stock; or
(C) the book value of the Corporation's Common Stock
as of the end of the most recent calendar quarter
determined in accordance with generally accepted
accounting principles; or
(D) an amount calculated by multiplying the earnings
per share of the Corporation's Common Stock for
the four fiscal quarters immediately preceding the
record date for determination of stockholders
entitled to vote on such Business Combination by
the then price earnings multiple of the Acquiring
Entity as customarily computed and reported in the
financial press.
c
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<PAGE>
Appropriate adjustments shall be made with respect
to (A), (B), (C) and (D) above for
recapitalization and for stock splits, stock
dividends, and like distributions. For purposes of
subparagraph (c)(1) of this Article Sixteenth, the
term "other consideration to be received" shall
include, without limitation, capital stock of this
Corporation retained by its existing public
stockholders in the event of a Business
Combination in which this Corporation is the
surviving corporation.
(2) After the Other Corporation has become an Acquiring
Entity:
(A) the Corporation's Board of Directors shall have
included at all times representation by one or
more Continuing Directors unless the lack of such
representation results entirely from either death
or normal retirement under retirement policies in
effect prior to the time the Other Corporation
became an Acquiring Entity; and
(B) there shall have been no reduction in the rate of
dividends payable on the Corporation's Common
Stock except as required by law or as may be
necessary to insure that the Corporation is not in
breach of any covenant in any of its agreements
for borrowed money, or except as may have been
approved by a majority vote of the Continuing
Directors; and
(C) such Acquiring Entity shall not have acquired any
newly issued shares of stock, directly or
indirectly, from the Corporation (except upon
conversion of convertible securities acquired by
it prior to becoming an Acquiring Entity or as a
result of a pro rate stock dividend or stock
split, or except with the approval of a majority
vote of the Continuing Directors).
(3) Without the approval of a majority vote of the
Continuing Directors, such Acquiring Entity shall not
have (i) received the benefit directly or indirectly
(except proportionately as a stockholder) of any loans,
advances, guarantees, pledges or other financial
assistance provided by the Corporation, or (ii) made
any major change in the Corporation's business or
equity capital structure.
(4) A timely mailing shall have been made to the
stockholders of this Corporation containing in a
prominent place (i) any recommendations as to the
advisability (or inadvisability) of the Business
Combination that the Continuing Directors or Outside
Directors may choose to state, if there are at the time
any such directors, and (ii) the opinion of a reputable
nationally recognized investment banking or financial
services firm as to the fairness (or not) of the terms
of the Business Combination, from the point of view of
the stockholders of this Corporation other than the
Acquiring Entity (such firm to be engaged solely on
behalf of such other stockholders, to be paid a
reasonable fee for its services by this Corporation
upon receipt of such opinion, to be a firm that has not
previously been significantly
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<PAGE>
associated with the Acquiring Entity and, if there are
at the time any such directors, to be selected by a
majority of the Continuing Directors and Outside
Directors).
(d) The provisions of part (c) of this Article Sixteenth
shall not be applicable to any Business Combination if:
(i) such transaction is approved by resolution
unanimously adopted by the whole Board of Directors of
the Corporation at any time prior to the consummation
thereof; or (ii) the Business Combination is solely
between this Corporation and another corporation, 50%
or more of the voting stock of which is owned by this
Corporation and none of which is owned by the Acquiring
Entity; provided that if this Corporation is not the
surviving entity, each stockholder of this Corporation
receives the same type of consideration in such
transaction in proportion to his stock holdings and the
provisions of this Article Sixteenth of the
Corporation's Certificate of Incorporation are
continued in effect or adopted by such surviving
corporation as part of its articles of incorporation or
certificate of incorporation, as the case may be,
without any charge.
(e) In connection with a proposed Business Combination, the
Continuing Directors may retain special outside legal
counsel, an investment banking firm, an accounting
firm, and such other experts that they, in their
discretion, may deem necessary or appropriate to assist
them in their evaluation of the transaction, all at the
expense of the Corporation.
(f) In addition to any other provision of this Certificate
of Incorporation, there shall be required to amend,
alter, change or repeal any of the provisions of this
Article Sixteenth the affirmative vote of the holders
of 66-2/3% of all classes of stock of the Corporation
entitled to vote in elections of directors, considered
for this purpose as one class, excluding stock of which
an Acquiring entity, if any, is the Beneficial Owner.
(g) Nothing contained in this Article Sixteenth shall be
construed to relieve an Acquiring Entity from any
fiduciary obligation imposed by law. The conditions and
voting requirements of this Article Sixteenth shall be
in addition to the conditions and voting requirements
imposed by law or other provisions of this Certificate
of Incorporation, including, without limitation,
Article Fourteenth.
SEVENTEENTH: No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for any
breach of fiduciary duty as a director; provided, however, that
this Article Seventeenth shall not eliminate or limit the
liability of a director (1) for any breach of the director's duty
of loyalty to the Corporation or its shareholders, (2) for acts
or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (3) under Section 174
of the General
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<PAGE>
Corporation Law of the State of Delaware, or (4) for any
transaction from which the director derived an improper personal
benefit. If the General Corporation Law of the State of Delaware
is amended after approval by the shareholders of the Corporation
of this provision to authorize corporate action further
eliminating or limiting the personal liability of directors, then
the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the
General Corporation Law of the State of Delaware, as so amended.
Any repeal or modification of the foregoing paragraph by the
shareholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at
the time of such repeal or modification.
IN WITNESS WHEREOF, said Old Republic International Corporation has
caused this Restated Certificate of Incorporation to be signed and executed by
its President and attested by its Secretary.
OLD REPUBLIC INTERNATIONAL CORPORATION
By: /s/ A. C. Zucaro
----------------------------------
A. C. Zucaro, President
ATTEST:
/s/ Spencer LeRoy, III
- ----------------------------
Spencer LeRoy III, Secretary
[Corporate Seal]
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OLD REPUBLIC INTERNATIONAL CORPORATION
AMENDED AND RESTATED
KEY EMPLOYEES PERFORMANCE RECOGNITION PLAN
ARTICLE ONE
PURPOSE AND EFFECTIVE DATE
1.1 The purpose of this Plan is to further the long term growth in
earnings of Old Republic International Corporation by offering long term
incentives in addition to current compensation to those officers and key
employees of Old Republic International Corporation and its subsidiaries who
have been or are expected to be largely responsible for such growth.
1.2 This Plan is effective as of March 1, 1998 and shall apply as
to calculations and awards made in 1999 and subsequent years.
ARTICLE TWO
2.1 "Plan" shall mean this Old Republic International Corporation
Key Employees Performance Recognition Plan.
2.2 "Company" shall mean Old Republic International Corporation, a
corporation organized under the laws of the State of Delaware.
2.3 "Employer" and "Employers" shall mean the Company and each
other corporation or organization which is wholly or partially owned by the
Company, either directly or indirectly, and is designated by the Committee as an
Employer under this Plan. As of the effective date of this Plan the Employers
other than the Company are:
Actuarial Risk Services, Inc.
American Treaty Management Corporation
Brummel Brothers, Inc.
J. Huell Briscoe & Associates, Inc.
Old Republic Asset Management Corporation
Old Republic General Services, Inc.
Old Republic Insurance Company
Old Republic Insured Credit Services, Inc.
Old Republic International Corporation
Old Republic Life Insurance Company
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<PAGE>
Old Republic Life Insurance Company of New York
Old Republic Marketing, Inc.
Old Republic RE, Inc.
Old Republic Title Holding Company, Inc.
Old Republic Union Insurance Company
Republic Mortgage Insurance Company
Sierra Reinsurance Services, Inc.
2.4 "Chief Executive Officer" shall mean the chief executive
officer of the Company.
2.5 "Committee" shall mean the Compensation Committee of the Board
of Directors of the Company.
2.6 "Employee" shall mean any person who is employed by an Employer
on a full-time basis and who is compensated for such employment by a regular
salary. "Employee" shall include officers of an Employer but shall not include
directors who are not otherwise officers or employees.
2.7 "Eligible Employee" shall mean an Employee who pursuant to
Section 5.1 hereof has been selected to share in the allocation of the
Performance Recognition Pool for any given year.
2.8 "Year of Service" shall mean each year of continuous employment
with an Employer after first being designated as a Eligible Employee pursuant to
Section 5.1 hereof.
2.9 "Account" shall mean with respect to any Employee, the record
of:
(a) credits in connection with the allocations, if any, credited
to such account pursuant to Article Five of the Plan,
(b) payments to him or her under the Plan pursuant to Article Six
of the Plan,
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(c) forfeitures, if any, pursuant to Article Seven of the Plan,
and
(d) credits transferred from the Plan to a comparable plan of any
subsidiary or affiliate of the Employer by agreement between
such subsidiary or affiliate and the Employer.
2.10 "Calculation Year" shall mean the Company's fiscal year
immediately preceding the year for which the Performance Recognition Pool is
being calculated.
If there is an operating loss in the year prior to the Calculation
Year, the "prior year" to be used in the following definitions and for Section
4.1 calculations is the first year prior to the Calculation Year in which there
was an operating profit.
2.11 "Minimum Return on Equity" shall mean a percentage applied to
the Company's average shareholders' equity (i.e., mean of beginning and ending
balances, adjusted for unrealized investment gains or losses net of applicable
income taxes, if any) for the Calculation Year. The percentage shall be that
percentage, obtained from public information, equal to two times the mean of the
five year average post-tax yield on 10 year and 30 year U.S. Treasury
Securities. The Committee shall annually compute and announce this value as it
pertains to a Calculation Year.
2.12 "Excess Return on Equity" shall mean the Calculation Year's
consolidated net operating income in excess of the Minimum Return on Equity all
calculated in accordance with generally accepted accounting principles, (GAAP).
Net operating income shall exclude realized gains or losses on sales of
investment securities or any other assets (irrespective of the treatment of such
amounts under GAAP) and extraordinary credits or charges.
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2.13 "Minimum Annual Income" shall mean 112% of the prior year's
Consolidated Net Operating Income adjusted for dividend requirements on
preferred stock issued and outstanding during each year.
2.14 "Excess Earnings Growth" shall mean the Calculation Year's
Consolidated Net Operating Income adjusted for dividend requirements on
preferred stock issued and outstanding during such year in excess of the Minimum
Annual Income.
2.15 "Base Salary" shall mean the Employee's basic salary at the
rate in effect at the end of the Calculation Year excluding bonuses, overtime,
extraordinary compensation and contributions to the Old Republic International
Corporation Employees Savings and Stock Ownership Plan.
2.16 "Consolidated Net Operating Income" shall mean the Company's
income determined in accordance with generally accepted accounting principles
and adjusted for payment of income taxes and for the income of subsidiaries and
affiliates carried on an equity basis. Net operating income shall exclude
realized gains or losses on sales of investment securities or any other assets
(irrespective of the treatment of such amounts under GAAP) and extraordinary
credits or charges.
2.17 If in any Calculation Year the Company acquires any other
business accounted for as a purchase whose earnings contribute 5% or more to
such Year's consolidated net operating income, the earnings of the acquired
Company for the year of acquisition and the next succeeding year shall be
eliminated (together with related purchase accounting adjustments) in order to
calculate the performance data described in Sections 2.11 through 2.22 herein.
No elimination from any year shall be made when the acquired company has been
owned by the Company for two consecutive calendar years. Net operating income
shall exclude realized gains or losses on sales of investment securities or any
other assets (irrespective of the treatment of such amounts under GAAP) and
extraordinary credits or charges.
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<PAGE>
2.18 "Earnings Per Share" shall mean fully diluted earnings per
share (net of any paid or accrued dividends on preferred stock) calculated in
accordance with AICPA Accounting Principles Board Opinion No. 15 or any later
superseding opinions.
2.19 "Performance Multiplier" shall mean the number of percentage
points by which the Earnings Per Share for the Calculation Year exceeds 112% of
the Earnings Per Share for the prior year.
2.20 "Profit Sharing Base" shall mean the sum of:
(a) Earnings Growth multiplied by the Earnings Per
Share Multiplier; and
(b) 1.5% of Excess Return on Equity.
2.21 "Earnings Per Share Multiplier" shall mean a percentage of the
increase in the fully diluted Earnings Per Share in the Calculation Year over
the preceding year as set forth in the following schedule:
Percentage Increase Earnings
In Earnings Per Share Per Share Multiplier
--------------------- --------------------
0 - 6% = 0%
6.01 to 10.00% = 2.5%
10.01 to 15.00% = 5.0%
15.01 to 20.00% = 7.5%
Over 20% = 10.0%
2.22 "Earnings Growth" shall mean the Calculation Year's
Consolidated Net Operating Income adjusted for dividend requirements on
preferred stock issued and outstanding during such year in excess of the prior
year's Consolidated Net Operating Income.
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2.23 "Change of Control" shall mean any one of the following:
(I) the date the Board of Directors of the Company votes to
approve and recommends a stockholder vote to approve:
(a) Any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation
or pursuant to which shares of the Company's Common
Stock would be converted into cash, securities or other
property, other than any consolidation or merger of the
Company in which the holders of the Company's Common
Stock immediately prior to the consolidation or merger
have the same proportionate ownership of common stock
of the surviving corporation immediately after the
consolidation or merger; or
(b) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of
all, or substantially all, of the assets of the
Company, other than any sale, lease, exchange or other
transfer to any corporation where the Company owns,
directly or indirectly, at least 80% of the outstanding
voting securities of such corporation after any such
transfer; or
(c) Any plan or proposal for the liquidation or dissolution
of the Company; or
(II) the date any person (as such term is used in Section 13(d) of
the Securities Exchange Act of 1934, hereinafter the "1934
Act"), other
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than the Old Republic International Corporation Employees
Savings and Stock Ownership Trust or any other trust
established by or contributed to by the Company or any of its
subsidiaries for the benefit of employees of the Company or
its subsidiaries, shall become the beneficial owner (within
the meaning of Rule 13d-3 under the 1934 Act) of 20% or more
of the Company's outstanding Common Stock; or
(III) the date the Board of Directors of the Company or any
affiliate of the Company (within the meaning of Rule 12b-2
under the 1934 Act) authorizes and approves any transaction
which has either a reasonable likelihood or a purpose of
causing, whether directly or indirectly;
(a) The Company's Common Stock to be held of record by
fewer than 300 persons; or
(b) The Company's Common Stock to be neither listed on any
national securities exchange nor authorized to be
quoted on an inter-dealer quotation system of any
registered national securities association; or
(IV) the date, during any period of 24 consecutive months, on which
individuals who at the beginning of such period constitute the
entire Board of Directors of the Company shall cease for any
reason to constitute a majority thereof unless the election,
or the nomination for election by the Company's stockholders,
of each new director comprising the majority was approved by a
vote of at
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least a majority of the Continuing Directors, as hereinafter
defined, in office on the date of such election or nomination
for election of the new director. For purposes hereof, a
"Continuing Director" shall mean:
(a) any member of the Board of Directors of the Company at
the close of business on December 15, 1996;
(b) any member of the Board of Directors of the Company who
succeeded any Continuing Director described in
subparagraph a. above if such successor was elected, or
nominated for election by the Company's stockholders,
by a majority of the Continuing Directors then still in
office; or
(c) any director elected, or nominated for election by the
Company's stockholders, to fill any vacancy or
newly-created directorship on the Board of Directors of
the Company by a majority of the Continuing Directors
then still in office.
A Change of Control shall not be deemed to be a Change of Control for purposes
of this Plan if the Board of Directors of the Company has approved such Change
of Control prior to either (A) the occurrence of any of the events described in
the foregoing clauses (I) - (III), or (B) the commencement by any person other
than the Company of a tender offer for the Common Stock.
-8-
<PAGE>
ARTICLE THREE
ADMINISTRATION
3.1 The Plan shall be administered by the Compensation Committee of
the Board of Directors of the Company (hereinafter the "Committee") which shall
be appointed by the Board of Directors of the Company from its own members. The
membership of the Committee may be reduced, changed, or increased from time to
time in the absolute discretion of the Board of Directors of the Company. The
Committee shall not include any Eligible Employee under this plan.
3.2 The Committee shall have the authority to interpret the Plan,
to establish and revise rules and regulations relating to the Plan, and to make
the determinations which it believes necessary or advisable for the
administration of the Plan.
ARTICLE FOUR
CALCULATION OF THE PERFORMANCE RECOGNITION POOL
4.1 Prior to each May 31 the Compensation Committee shall calculate
the amount of the Performance Recognition Pool for that Calculation Year. The
Performance Recognition Pool for any Calculation Year shall be equal to the
lesser of:
(a) the Profit Sharing Base for the Calculation Year;
or
(b) 0.75% of the Company's consolidated operating earnings (after
deductions of preferred stock dividends, if any) for the
Calculation Year, or;
(c) a percentage of the Eligible Employees' Base Salaries, ranging
from 10% to 150%, inclusive, determined on the basis of the
following scale:
-9-
<PAGE>
Column A Column B
Percent by Which Current Year's
Return on Equity Exceeds ROE
Target for the Year Salary Cap/Spread
- ------------------------------- -------------------------------------
0 - 10% 10% + 0.5% for each full
1% exceeding 5% (Max. 12.5%)
10 - 20 15% + 0.5% for each full
1% exceeding 10% (Max. 20%)
20 - 30 20% + 1% for each full 1%
exceeding 20% (Max. 30%)
30 - 40 30% +1% for each full 1%
exceeding 30% (Max. 40%)
40 - 50 40% + 1% for each full 1%
exceeding 40% (Max. 50%)
50 - 60 55% + 1% for each full 1%
exceeding 50% (Max. 65%)
60 - 75 70% + 1% for each full 1%
exceeding 60% (Max. 85%)
75 - 100% 90% + 1% for each full 1%
exceeding 75% (Max. 115%)
100.1% and Over 120% + 1% for each full
1% exceeding 100%
(Subject to Max. of 150%)
-10-
<PAGE>
4.2 Notwithstanding any provisions herein to the contrary, the
Performance Recognition Pool shall be zero for any year if the Company incurred
a net operating loss or a net loss in the Calculation Year.
ARTICLE FIVE
ALLOCATION OF THE PERFORMANCE RECOGNITION POOL
5.1 Prior to each May 1, the CEO shall, in consultation with the
Committee, designate the Employees employed by the Employers during any part of
such Calculation Year who will be eligible to share in the Performance
Recognition Pool for that Calculation Year.
5.2 On or before June 30 the Performance Recognition Pool for that
Calculation Year shall be allocated among and credited to the accounts of the
Employees on the following basis, provided, however, that no member of the
Committee shall be able to share in the performance Recognition Pool for any
year:
(a) First, amounts shall be allocated among and credited to all or
such Accounts of those Employees who have Accounts in the Plan on
the allocation date and who are eligible and actively employed by
an eligible Employer during that year. The amount credited to each
such Account shall equal the balance in each such Account at the
beginning of the Year multiplied by the Performance Multiplier. In
no event, however, shall the aggregate amount so credited exceed
the lesser of 15% of the aggregate Account balances on the
allocation date or 20% of the Performance Recognition Pool for that
year.
(b) Secondly, the remaining portion, if any, of the Performance
Recognition Pool shall be allocated among and credited to the
Accounts of Eligible Employees for the year as the Committee in
consultation with the CEO deems appropriate in its sole discretion,
provided, however, the
-11-
<PAGE>
Committee may, in its discretion, reserve up to 50% of any one
year's Pool which will not be allocated currently. The Committee
may carry forward the unallocated portion of the Performance
Recognition Pool and allocate all or a portion of it pursuant to
this subparagraph (c) during one or more of the next succeeding
three years; provided however, that the total amount of any one
year's carry forward must be allocated by the end of the third
year.
5.3 With respect to the amounts to be allocated in the current
year, the Committee shall make such allocation to the CEO and to such other
senior Eligible Employees selected in consultation with the CEO as it deems
appropriate. Remaining amounts allocable for the year to less senior Eligible
Employees shall be distributed by the CEO based on total allocations approved by
the Committee. In designating Eligible Employees and allocating the Performance
Recognition Pool among the Accounts of the Eligible Employees for any Year
pursuant to this Article, the CEO and the Committee shall consider the positions
and responsibilities of Employees, their accomplishments during the year, the
value of such accomplishments to the Company, the CEO's expectations as to the
future contributions of individual Employees to the continued success of the
Company and such other factors as the CEO and the Committee shall, in their
discretion and judgment, deem appropriate.
ARTICLE SIX
DISTRIBUTIONS
6.1 The entire amount of the credit in the Account of a deceased
Eligible Employee or an Eligible Employee who attains age 55 or actually retires
for disability prior thereto, shall be paid to the person or persons entitled
thereto at the time and in the manner provided in Sections 6.4, 6.5, 6.6, and
6.8 thereof.
6.2 Effective January 1, 1990, an Eligible Employee shall
automatically withdraw and receive in cash 50% of any award
-12-
<PAGE>
granted to him or her in 1990 and subsequent years pursuant to Sections 5.2(a),
5.2(b), and 5.2(c). Effective January 1, 1995, an Eligible Employee shall also
automatically withdraw and receive in cash 50% of any Performance Multiplier
granted to him or her in 1995 and subsequent years pursuant to Section 5.2(a).
The remaining 50% of each such award and each such Performance Multiplier shall
be credited to his or her Account as of such year and shall become vested in
accordance with the vesting schedule set forth in Section 6.3(b). The amounts so
withdrawn each year shall be paid to the Eligible Employees within ninety (90)
days of the date the Committee and/or CEO make such awards or determine such
Performance Multipliers.
6.3 A portion of the amount of the credit in the Account of an
Eligible Employee as of the date he or she terminates his or her service for any
reason other than his or her death or retirement for age or disability shall be
paid to the person or persons entitled thereto at the times in the manner
provided by Section 6.5 hereof. The amount to be paid shall be known as a
"vested interest", and shall be equal to (a) the amounts which have been vested
in him or her because he or she did not make a withdrawal in a prior year plus
(b) the following percentage of the balance of his or her credit in his Account:
Completed Years To Be Paid
of Service (Vested Interest)
--------------- -----------------
Less than One 0%
One 10%
Two 20%
Three 30%
Four 40%
Five 50%
Six 60%
Seven 70%
Eight 80%
Nine 90%
Ten 100%
-13-
<PAGE>
Any amount not vested in an Employee shall be forfeited.
Forfeitures created during any year shall be allocated at the end of said year
to Employees actively employed by an Employer on December 31 of that year in the
ratio that the Account balance of each such Employee on January 1 of that year
bears to the total Account Balance of all such Employees.
6.4 Amounts payable to an Eligible Employee who retires for age,
after attaining age 55, shall be paid to the Employee in substantially equal
quarterly installments over a number of years (not to exceed 7 years) selected
by the Committee, in its sole discretion, beginning on the first day of the
calendar quarter following the later of the Employee's attaining age 55 or
termination of employment. In determining the number of installments the
Committee may consult with the Eligible Employee and may also consider as a
guideline that the retirement programs sponsored by Employers hereunder should
equal approximately 80% of the Eligible Employee's average compensation over the
last three years of employment.
6.5 If an Employee's employment with an Employer is terminated for
reasons other than death, disability, or retirement after attaining age 55, his
or her vested Account balance shall be paid to him or her in substantially equal
quarterly installments over a number of years (not to exceed 20 years) selected
by the Committee beginning on the first day of the calendar quarter following
the later of (a) his or her attaining age 55 or (b) the 12th month after his or
her termination of employment.
6.6 If an Employee becomes disabled while employed by an Employer
but prior to receiving his or her Account, his or her Account balance shall be
paid to him or her in 40 substantially equal quarterly installments beginning on
the first day of the calendar quarter following the month during which he or she
becomes disabled. For purposes of this Article, an Employee shall be deemed to
be disabled if he or she is totally and permanently disabled within the meaning
of the Employer's group
-14-
<PAGE>
employee disability policy or eligible for disability benefits under the Social
Security Act.
6.7 An employee's entire Account balance shall become fully vested
and nonforfeitable and shall be paid to him or her in a lump sum on the first
day of the calendar quarter following the date on which any Change of Control
occurs. If there is a carry forward balance not allocated pursuant to Section
5.2 (c) when a Change of Control occurs, such carry forward balance shall be
immediately allocated among the Accounts of all Employees in the ratio that each
such Employee's Account balance bears to the total of all such Account balances.
Said additional amounts shall be 100% vested and paid in accordance with the
provisions of this Article. Any subsequent contributions allocated to an
Employee's Account during the two years following the occurrence of a Change of
Control because the Plan is continued in accordance with Section 8.2 hereof
shall be non-forfeitable and shall be distributed immediately after such
allocation.
6.8 An Employee may designate in writing, on forms prescribed by
and filed with the Committee, a beneficiary or beneficiaries to receive any
payments payable after his or her death. If an Employee dies while employed by
an Employer or after he or she has begun to receive his or her benefits under
this Plan, the Account balance (or the remainder of his or her Account balance
if his benefits had already commenced) shall be paid to the beneficiary or
beneficiaries designated by the Employee (or, in the absence of such
designation, to his or her legal representative). Such payments shall be made in
one of the following forms as determined by the Committee: (i) substantially
equal quarterly installments over a number of years (not to exceed 10 years),
(ii) a lump sum payment, or (iii) any combination of the above options.
6.9 If an Employee is adjudged incompetent or if the Committee
deems him or her unqualified to handle his or her own affairs, the Committee may
direct that any payments which would otherwise be payable to the Employee shall
be paid (in the same
-15-
<PAGE>
amounts and on the same dates as such payments would have been paid to the
Employee) to the guardian or conservator of such Employee or, if none has been
appointed, the Committee may, in its discretion, direct that such payments be
made to the Employee's spouse or adult child or any other person or institution
who is caring for such Employee and any payments so made shall to the extent
thereof fully release and discharge the Committee and the Employers from any
further liability to the Employee.
6.10 Notwithstanding any other provisions of this Plan to the
contrary, the Committee may upon an Employee's death, disability, or termination
of employment distribute his or her Account balance to the Employee (or his or
her beneficiary in the case of death, or his or her guardian or to the person or
institution caring for him or her in the event that he or she is adjudged
incompetent or considered by the Committee to be unable to manage his or her own
affairs) more quickly than that called for in Section 6.2 through 6.8 if the
Committee in its sole discretion deems it is desirable to do so.
6.11 Notwithstanding any other provisions of this Plan to the
contrary, the Committee may deduct from any payments under the Plan any taxes
required to be withheld by the Federal or any state or local government for the
account of such Employee.
ARTICLE SEVEN
FORFEITURE
7.1 As a condition to the continued receipt of benefits hereunder
each Employee:
(a) shall be required for a period of three years after his or her
termination of employment with an Employer hereunder to hold
himself or herself available to the Company and his Employer for
reasonable consultation inasfar as his or her health permits;
-16-
<PAGE>
(b) shall not for a period of three years after his or her
termination of employment with an Employer hereunder, either as an
individual on his or her own account, as a partner, joint venturer,
employee, agent, salesman for any person; as an officer, director
or stockholder (other than a beneficial holder of not more than 1%
of the outstanding voting stock of a company having at least 500
holders of voting stock) of a corporation, or otherwise directly or
indirectly,
(i) enter into or engage in any business competitive with that
carried on by the Company or his or her Employer within any
area of the United States in which his or her Employer or the
Company is then doing business, providing Employee has had
access to any of the Company's or his or her Employer's trade
secrets, secret underwriting or business information,
programs, plans, data, processes, techniques, or customer
information; or
(ii) solicit or attempt to solicit any of his or her
Employer's or the Company's customers with whom Employee has
had contact as an Employee in the exercise of his or her
duties and responsibilities hereunder with the intent or
purpose to perform for such customer the same or similar
services or to sell to such customer the same or similar
products or policies which Employee performed for or sold to
such customer during the term of his or her employment.
If the Committee determines that an Employee has refused to make himself or
herself available for consultation or violated his or her agreement, the
Committee may, by written notice to such Employee, cause his or her benefits to
be immediately suspended for the duration of such refusal or competition or if
payment of benefits had not yet commenced, notify the Employee that such
continued conduct will cause a forfeiture of his or her Account balance. If
after the sending of such notice the Committee finds
-17-
<PAGE>
that the Employee has continued to refuse to consult or continue to compete with
the Company or his or her Employer for a period of thirty (30) days following
such notice, the Committee may permanently cancel the Employee's Account
hereunder, and thereupon all rights of such Employee under this Plan shall
terminate. The foregoing forfeiture provisions shall be inoperative if an event
described in Section 6.5 (a), (b) or (c) occurs.
7.2 Any amounts forfeited pursuant to Section 7.1 hereof shall be
allocated as a forfeiture in accordance with Section 6.3 hereof.
ARTICLE EIGHT
AMENDMENT AND TERMINATION
8.1 The Company shall have the power at any time and from time to
time, to amend this Plan by resolution of its Board of Directors' provided,
however, that no amendment under any circumstances may be adopted the effect of
which would be to deprive any Participant of his or her then vested interest, if
any, in this Plan.
8.2 The Company reserves the right to terminate this Plan by
resolution of its Board of Directors. Upon termination of this Plan, the credits
in the Accounts of Employees shall become 100% vested and non-forfeitable.
Distribution of the balances in said Accounts shall be made in accordance with
Section 6.4 hereof upon the Employee's subsequent retirement or termination of
service. There shall be no increase in an Account balance of an Employee between
the date the Plan is terminated and the date the Account balance is distributed.
If an event described in Section 6.7(b) or (c) occurs, the Plan as it then
exists must be continued and contributions made for two years before it can be
terminated. Any unallocated balance carried forward shall be similarly allocated
prior to the expiration of
-18-
<PAGE>
this two-year period. All Accounts shall be fully vested and distribution shall
be made in accordance with Section 6.4 hereof.
ARTICLE NINE
MISCELLANEOUS
9.1 No Employee or any other person shall have any interest in any
fund or reserve account or in any specific asset or assets of the Company or any
Employer by reason of any credit to his Account under this Plan, nor have the
right to receive any distribution under this Plan except as and to the extent
expressly provided for in the Plan.
9.2 Nothing in the Plan shall be construed to:
(a) give any Employee any right to participate in the Plan, except
in accordance with the provisions of the Plan;
(b) limit in any way the right of an Employer to terminate an
Employee's employment; or
(c) be evidence of any agreement or understanding, express or
implied, that an Employer will employ an Employee in any
particular position or at any particular rate of remuneration.
9.3 No benefits under this Plan shall be pledged, assigned,
transferred, sold, or in any manner whatsoever anticipated, charged, or
encumbered by an Employee, former Employee, or their beneficiaries, or in any
manner be liable for the debts, contracts, obligations or engagements of any
person having a possible interest in the Plan, voluntary or involuntary, or for
any claims, legal or equitable, against any such person, including claims for
alimony or the support of any spouse. Notwithstanding the foregoing, benefits
under this Plan may be assigned to or made the subject of a valid living trust.
-19-
<PAGE>
9.4 This Plan shall be construed in accordance with the laws of the
State of Illinois in every respect including without limitation, validity in its
interpretation and performance.
9.5 Article headings and numbers herein are included for
convenience of reference only, and this Plan is to be construed without any
reference thereto. If there be any conflict between such numbers and headings
and the text hereof, the text shall control.
9.6 Wherever appropriate, words used in this Plan in the singular
include the plural, and the masculine include the feminine.
IN WITNESS HEREOF, the Company has caused this Plan, as amended and
restated, to be signed by its duly qualified officers and caused its corporate
seal to be hereunto affixed on this 17th day of July, 1998.
OLD REPUBLIC INTERNATIONAL CORPORATION
By: /s/ A.C. Zucaro
-----------------------------------
President
Attest:
/s/ Spencer LeRoy, III
- ---------------------------
Secretary
-20-
<TABLE>
Exhibit 21
--------------
Subsidiaries of the registrant (As of December 31, 1998)
- -------------------------------------------------------------------------------
Percentage
of Voting
Securities
Owned by
State of Immediate
Name Organization Parent
- ---------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
OLD REPUBLIC INTERNATIONAL CORPORATION Delaware ---
- ----------------------------------------------------------------------
Old Republic Capital Corporation Delaware 100%
------------------------------------------------------------------
Old Republic General Insurance Group, Inc. Delaware 100%
------------------------------------------------------------------
Bitco Corporation Delaware 100%
Bituminous Casualty Corporation Illinois 100%
Bituminous Fire and Marine Insurance Corporation Illinois 100%
Brummel Brothers, Inc. Illinois 100%
Chicago Underwriting Group, Inc. Delaware 100%
Upper Peninsula Insurance Company Arizona 100%
Employers General Insurance Group, Inc. Delaware 97%
Employers General Insurance Company Texas 100%
Employers National Risk Management Services, Inc. Texas 100%
Employers Claims Adjustment Services, Inc. Texas 100%
National General Agency, Inc. Texas 100%
ORI Great West Holding, Inc. Delaware 100%
Central Data Services, Inc. Delaware 100%
Great West Casualty Company Nebraska 100%
Great West Insurance Agencies, Inc. Delaware 100%
International Business & Mercantile Insurance Managers, Inc. Delaware 100%
Old Republic Home Protection Company, Inc. California 100%
Old Republic Insurance Company Pennsylvania 100%
Old Republic Insured Credit Services, Inc. Delaware 100%
Old Republic Lloyds of Texas Texas 100%
Old Republic Risk Management, Inc. Delaware 100%
Old Republic Mercantile Insurance Company Wisconsin 100%
Remington General Assurance Ltd. Bermuda 100%
Old Republic Security Holdings, Inc. Delaware 100%
Old Republic Minnehoma Insurance Company Arizona 100%
ORDESCO, Inc. Oklahoma 100%
Old Republic Standard Underwriters, Inc. Delaware 86%
Old Republic Standard Insurance Company Arizona 100%
Old Republic Surety Group, Inc. Delaware 100%
Old Republic Surety Company Wisconsin 100%
Old Republic Union Insurance Company Illinois 100%
Old Republic Union Insurance Managers, Inc. Alabama 100%
Phoenix Aviation Managers, Inc. Delaware 100%
Aerie REassurance Company, Ltd. Bermuda 100%
Reliable Canadian Holdings, Ltd. Ontario(Canada) 100%
D.I.S.C.C. Enterprise, Ltd. British Columbia(Canada) 100%
Old Republic Canadian Holdings, Ltd. Ontario(Canada) 100%
Reliable Life Insurance Company Ontario(Canada) 100%
Old Republic Insurance Company of Canada Ontario(Canada) 100%
Old Republic International Reinsurance Group, Inc. Delaware 100%
International Business & Mercantile REassurance Company Illinois 100%
Old Republic RE, Inc. Delaware 100%
</TABLE>
1
<PAGE>
<TABLE>
Exhibit 21
--------------
Subsidiaries of the registrant (As of December 31, 1998)
- -------------------------------------------------------------------------------
Percentage
of Voting
Securities
Owned by
State of Immediate
Name Organization Parent
- ---------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Old Republic Mortgage Guaranty Group, Inc. Delaware 100%
------------------------------------------------------------------
Republic Mortgage Insurance Company North Carolina 100%
Republic Mortgage Insurance Company of Florida Florida 100%
Republic Mortgage Insurance Company of North Carolina North Carolina 100%
RMIC Corporation North Carolina 100%
Old Republic Title Insurance Group, Inc. Delaware 100%
------------------------------------------------------------------
Old Republic National Title Holding Company Delaware 100%
American Guaranty Holding Corp. Oklahoma 100%
American First Title & Trust Company Oklahoma 100%
American Guaranty Title Company Oklahoma 100%
Canadian Valley Abstract Company Oklahoma 100%
El Reno Abstract Company Oklahoma 100%
Lenders Inspection Company Oklahoma 50%
Asset Discovery, Inc. Massachusetts 100%
Badger Abstract & Title Corporation Wisconsin 100%
Central Florida Title Company Florida 100%
Houston Title Company Texas 100%
Old Republic Title Agency of Columbus, Inc. Ohio 90%
Core Title Agency, Ltd. Ohio 51%
Old Republic Title Company of Bell County Texas 100%
Old Republic Title Company of Cleburne Texas 100%
Old Republic Title Company of Conroe Texas 57%
Old Republic Title Company of Fort Worth Texas 100%
Old Republic Title Company of Indiana Indiana 100%
Old Republic Title Company of Kansas City, Inc. Missouri 100%
Old Republic Title Company of St. Louis, Inc. Missouri 100%
Old Republic Title Company of Tennessee Tennessee 100%
Old Republic Title Company of Utah Utah 100%
The Title Company of North Carolina, Inc. North Carolina 100%
Old Republic National Title Insurance Company Minnesota 100%
Mississippi Valley Title Insurance Company Mississippi 100%
Old Republic General Title Insurance Corporation Ohio 100%
Old Republic Title Holding Company, Inc. California 100%
Old Republic Exchange Facilitator Company California 100%
Old Republic Title Company California 100%
Old Republic Title Company of Nevada Nevada 100%
Old Republic Title Corporation of Hawaii, Ltd. Hawaii 100%
Old Republic Escrow Corporation Hawaii 100%
Old Republic Title Insurance Agency, Inc. Arizona 100%
Old Republic Title, Ltd. Delaware 100%
Professional Real Estate Coordinators, Inc. California 100%
</TABLE>
2
<PAGE>
<TABLE>
Exhibit 21
--------------
Subsidiaries of the registrant (As of December 31, 1998)
- -------------------------------------------------------------------------------
Percentage
of Voting
Securities
Owned by
State of Immediate
Name Organization Parent
- ---------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Old Republic Life Insurance Group, Inc. Delaware 100%
------------------------------------------------------------------
Old Republic Dealer Service Corporation Delaware 100%
Old Republic Life Insurance Company Illinois 100%
Old Republic Life Insurance Company of New York New York 100%
Old Republic Life Reinsurance Group, Inc. Delaware 100%
Home Owners Life Insurance Company Illinois 100%
Old Republic Marketing, Inc. Illinois 100%
------------------------------------------------------------------
Owns minor non-consolidated subsidiaries & affiliates Various Various
American Business & Personal Insurance Mutual, Inc. Delaware *
------------------------------------------------------------------
Inter Capital Group, Inc. Delaware 100%
Inter Capital Company of Chicago Delaware 100%
Inter Capital Leasing and Finance Corporation Delaware 100%
Inter Capital Realty Corporation Delaware 100%
Inter West Assurance Company, Ltd. Bermuda 100%
* Owned by its policyholders
</TABLE>
3
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Old Republic International Corporation on Form S-8 (File Nos. 33-38528,
33-49646, 33-32439, 2-80883 and 33-52069) and on Form S-3 (File Nos. 33-49864,
33-54104 and 333-43311) of our report dated March 10, 1999 on our audits of the
consolidated financial statements of Old Republic International Corporation as
of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997
and 1996, which report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
March 10, 1999
Exhibit (24)
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned,
being a member of the Board of Directors of Old Republic International
Corporation, a corporation duly organized under the laws of the State of
Delaware and having its principal place of business in Chicago, Illinois, does
hereby make, constitute, and appoint A.C. Zucaro, President of the said
corporation, as his true and lawful attorney, for him, and in his name, place,
and stead to execute, sign, acknowledge, confirm or ratify all documents,
papers, forms, statements, certificates and filings of any kind whatsoever
required to be filed by the said corporation with the Securities and Exchange
Commission, giving and granting to said attorney full power and authority to do
and perform all and every act whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as he might or
could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that said attorney or his substitute shall
lawfully do or cause to be done by virtue hereof. The power of attorney
aforesaid shall expire as of the anniversary of the date shown below.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 11th day of March, 1999.
/s/ Harrington Bischof
---------------------------------------
Harrington Bischof
WITNESS:
/s/ Spencer LeRoy, III
- ------------------------------------
/s/ Paul D. Adams
- ------------------------------------
<PAGE>
Exhibit (24)
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned,
being a member of the Board of Directors of Old Republic International
Corporation, a corporation duly organized under the laws of the State of
Delaware and having its principal place of business in Chicago, Illinois, does
hereby make, constitute, and appoint A.C. Zucaro, President of the said
corporation, as his true and lawful attorney, for him, and in his name, place,
and stead to execute, sign, acknowledge, confirm or ratify all documents,
papers, forms, statements, certificates and filings of any kind whatsoever
required to be filed by the said corporation with the Securities and Exchange
Commission, giving and granting to said attorney full power and authority to do
and perform all and every act whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as he might or
could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that said attorney or his substitute shall
lawfully do or cause to be done by virtue hereof. The power of attorney
aforesaid shall expire as of the anniversary of the date shown below.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 11th day of March, 1999.
/s/ Anthony F. Colao
--------------------------------------
Anthony F. Colao
WITNESS:
/s/ Spencer LeRoy, III
- ------------------------------------
/s/ Paul D. Adams
- ------------------------------------
<PAGE>
Exhibit (24)
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned,
being a member of the Board of Directors of Old Republic International
Corporation, a corporation duly organized under the laws of the State of
Delaware and having its principal place of business in Chicago, Illinois, does
hereby make, constitute, and appoint A.C. Zucaro, President of the said
corporation, as his true and lawful attorney, for him, and in his name, place,
and stead to execute, sign, acknowledge, confirm or ratify all documents,
papers, forms, statements, certificates and filings of any kind whatsoever
required to be filed by the said corporation with the Securities and Exchange
Commission, giving and granting to said attorney full power and authority to do
and perform all and every act whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as he might or
could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that said attorney or his substitute shall
lawfully do or cause to be done by virtue hereof. The power of attorney
aforesaid shall expire as of the anniversary of the date shown below.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 11th day of March, 1999.
/s/ Jimmy A. Dew
--------------------------------------
Jimmy A. Dew
WITNESS:
/s/ Spencer LeRoy, III
- ------------------------------------
/s/ Paul D. Adams
- ------------------------------------
<PAGE>
Exhibit (24)
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned,
being a member of the Board of Directors of Old Republic International
Corporation, a corporation duly organized under the laws of the State of
Delaware and having its principal place of business in Chicago, Illinois, does
hereby make, constitute, and appoint A.C. Zucaro, President of the said
corporation, as his true and lawful attorney, for him, and in his name, place,
and stead to execute, sign, acknowledge, confirm or ratify all documents,
papers, forms, statements, certificates and filings of any kind whatsoever
required to be filed by the said corporation with the Securities and Exchange
Commission, giving and granting to said attorney full power and authority to do
and perform all and every act whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as he might or
could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that said attorney or his substitute shall
lawfully do or cause to be done by virtue hereof. The power of attorney
aforesaid shall expire as of the anniversary of the date shown below.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 11th day of March, 1999.
/s/ Kurt W. Kreyling
--------------------------------------
Kurt W. Kreyling
WITNESS:
/s/ Spencer LeRoy, III
- ------------------------------------
/s/ Paul D. Adams
- ------------------------------------
<PAGE>
Exhibit (24)
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned,
being a member of the Board of Directors of Old Republic International
Corporation, a corporation duly organized under the laws of the State of
Delaware and having its principal place of business in Chicago, Illinois, does
hereby make, constitute, and appoint A.C. Zucaro, President of the said
corporation, as his true and lawful attorney, for him, and in his name, place,
and stead to execute, sign, acknowledge, confirm or ratify all documents,
papers, forms, statements, certificates and filings of any kind whatsoever
required to be filed by the said corporation with the Securities and Exchange
Commission, giving and granting to said attorney full power and authority to do
and perform all and every act whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as he might or
could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that said attorney or his substitute shall
lawfully do or cause to be done by virtue hereof. The power of attorney
aforesaid shall expire as of the anniversary of the date shown below.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 11th day of March, 1999.
/s/ Peter Lardner
--------------------------------------
Peter Lardner
WITNESS:
/s/ Spencer LeRoy, III
- ------------------------------------
/s/ Paul D. Adams
- ------------------------------------
<PAGE>
Exhibit (24)
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned,
being a member of the Board of Directors of Old Republic International
Corporation, a corporation duly organized under the laws of the State of
Delaware and having its principal place of business in Chicago, Illinois, does
hereby make, constitute, and appoint A.C. Zucaro, President of the said
corporation, as his true and lawful attorney, for him, and in his name, place,
and stead to execute, sign, acknowledge, confirm or ratify all documents,
papers, forms, statements, certificates and filings of any kind whatsoever
required to be filed by the said corporation with the Securities and Exchange
Commission, giving and granting to said attorney full power and authority to do
and perform all and every act whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as he might or
could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that said attorney or his substitute shall
lawfully do or cause to be done by virtue hereof. The power of attorney
aforesaid shall expire as of the anniversary of the date shown below.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 11th day of March, 1999.
/s/ Wilbur S. Legg
--------------------------------------
Wilbur S. Legg
WITNESS:
/s/ Spencer LeRoy, III
- ------------------------------------
/s/ Paul D. Adams
- ------------------------------------
<PAGE>
Exhibit (24)
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned,
being a member of the Board of Directors of Old Republic International
Corporation, a corporation duly organized under the laws of the State of
Delaware and having its principal place of business in Chicago, Illinois, does
hereby make, constitute, and appoint A.C. Zucaro, President of the said
corporation, as his true and lawful attorney, for him, and in his name, place,
and stead to execute, sign, acknowledge, confirm or ratify all documents,
papers, forms, statements, certificates and filings of any kind whatsoever
required to be filed by the said corporation with the Securities and Exchange
Commission, giving and granting to said attorney full power and authority to do
and perform all and every act whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as he might or
could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that said attorney or his substitute shall
lawfully do or cause to be done by virtue hereof. The power of attorney
aforesaid shall expire as of the anniversary of the date shown below.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 11th day of March, 1999.
/s/ John W. Popp
--------------------------------------
John W. Popp
WITNESS:
/s/ Spencer LeRoy, III
- ------------------------------------
/s/ Paul D. Adams
- ------------------------------------
<PAGE>
Exhibit (24)
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned,
being a member of the Board of Directors of Old Republic International
Corporation, a corporation duly organized under the laws of the State of
Delaware and having its principal place of business in Chicago, Illinois, does
hereby make, constitute, and appoint A.C. Zucaro, President of the said
corporation, as his true and lawful attorney, for him, and in his name, place,
and stead to execute, sign, acknowledge, confirm or ratify all documents,
papers, forms, statements, certificates and filings of any kind whatsoever
required to be filed by the said corporation with the Securities and Exchange
Commission, giving and granting to said attorney full power and authority to do
and perform all and every act whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as he might or
could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that said attorney or his substitute shall
lawfully do or cause to be done by virtue hereof. The power of attorney
aforesaid shall expire as of the anniversary of the date shown below.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 11th day of March, 1999.
/s/ William A. Simpson
--------------------------------------
William A. Simpson
WITNESS:
/s/ Spencer LeRoy, III
- ------------------------------------
/s/ Paul D. Adams
- ------------------------------------
<PAGE>
Exhibit (24)
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned,
being a member of the Board of Directors of Old Republic International
Corporation, a corporation duly organized under the laws of the State of
Delaware and having its principal place of business in Chicago, Illinois, does
hereby make, constitute, and appoint A.C. Zucaro, President of the said
corporation, as his true and lawful attorney, for him, and in his name, place,
and stead to execute, sign, acknowledge, confirm or ratify all documents,
papers, forms, statements, certificates and filings of any kind whatsoever
required to be filed by the said corporation with the Securities and Exchange
Commission, giving and granting to said attorney full power and authority to do
and perform all and every act whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as he might or
could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that said attorney or his substitute shall
lawfully do or cause to be done by virtue hereof. The power of attorney
aforesaid shall expire as of the anniversary of the date shown below.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 11th day of March, 1999.
/s/ Arnold L. Steiner
--------------------------------------
Arnold L. Steiner
WITNESS:
/s/ Spencer LeRoy, III
- ------------------------------------
/s/ Paul D. Adams
- ------------------------------------
<PAGE>
Exhibit (24)
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned,
being a member of the Board of Directors of Old Republic International
Corporation, a corporation duly organized under the laws of the State of
Delaware and having its principal place of business in Chicago, Illinois, does
hereby make, constitute, and appoint A.C. Zucaro, President of the said
corporation, as his true and lawful attorney, for him, and in his name, place,
and stead to execute, sign, acknowledge, confirm or ratify all documents,
papers, forms, statements, certificates and filings of any kind whatsoever
required to be filed by the said corporation with the Securities and Exchange
Commission, giving and granting to said attorney full power and authority to do
and perform all and every act whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as he might or
could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that said attorney or his substitute shall
lawfully do or cause to be done by virtue hereof. The power of attorney
aforesaid shall expire as of the anniversary of the date shown below.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 11th day of March, 1999.
/s/ David Sursa
--------------------------------------
David Sursa
WITNESS:
/s/ Spencer LeRoy, III
- ------------------------------------
/s/ Paul D. Adams
- ------------------------------------
<PAGE>
Exhibit (24)
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned,
being a member of the Board of Directors of Old Republic International
Corporation, a corporation duly organized under the laws of the State of
Delaware and having its principal place of business in Chicago, Illinois, does
hereby make, constitute, and appoint A.C. Zucaro, President of the said
corporation, as his true and lawful attorney, for him, and in his name, place,
and stead to execute, sign, acknowledge, confirm or ratify all documents,
papers, forms, statements, certificates and filings of any kind whatsoever
required to be filed by the said corporation with the Securities and Exchange
Commission, giving and granting to said attorney full power and authority to do
and perform all and every act whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as he might or
could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that said attorney or his substitute shall
lawfully do or cause to be done by virtue hereof. The power of attorney
aforesaid shall expire as of the anniversary of the date shown below.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 11th day of March, 1999.
/s/ William G. White, Jr.
--------------------------------------
William G. White, Jr.
WITNESS:
/s/ Spencer LeRoy, III
- ------------------------------------
/s/ Paul D. Adams
- ------------------------------------
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Old Republic
International Corporation's consolidated balance sheet and consolidated state-
ment of income and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 1,954
<DEBT-CARRYING-VALUE> 2,332
<DEBT-MARKET-VALUE> 2,422
<EQUITIES> 164
<MORTGAGE> 7
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,854
<CASH> 22
<RECOVER-REINSURE> 31
<DEFERRED-ACQUISITION> 143
<TOTAL-ASSETS> 7,019
<POLICY-LOSSES> 3,594
<UNEARNED-PREMIUMS> 360
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 52
<NOTES-PAYABLE> 145
0
1
<COMMON> 156
<OTHER-SE> 2,147
<TOTAL-LIABILITY-AND-EQUITY> 7,019
1,568
<INVESTMENT-INCOME> 273
<INVESTMENT-GAINS> 53
<OTHER-INCOME> 307
<BENEFITS> 782
<UNDERWRITING-AMORTIZATION> 231
<UNDERWRITING-OTHER> 691
<INCOME-PRETAX> 466
<INCOME-TAX> 145
<INCOME-CONTINUING> 323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 323
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.33
<RESERVE-OPEN> 1,845
<PROVISION-CURRENT> 728
<PROVISION-PRIOR> (123)
<PAYMENTS-CURRENT> 322
<PAYMENTS-PRIOR> 385
<RESERVE-CLOSE> 1,741
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
