SECURITIES AND EXCHANGE COMMISSION
OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10 - Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2000 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 0-4625
OLD REPUBLIC INTERNATIONAL CORPORATION
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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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.Yes _X_ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Shares Outstanding
Class June 30, 2000
--------------------------- ----------------------
Common Stock / $1 par value 117,298,901
There are 14 pages contained in this report.
<PAGE>
2
OLD REPUBLIC INTERNATIONAL CORPORATION
Report on Form 10-Q / June 30, 2000
INDEX
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PAGE NO.
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PART I FINANCIAL INFORMATION:
CONSOLIDATED SUMMARY BALANCE SHEETS 3
CONSOLIDATED SUMMARY STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS 7 - 9
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS 10 - 12
PART II OTHER INFORMATION 13 & 14
<PAGE>
3
<TABLE>
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY BALANCE SHEETS (Unaudited)
($ in Millions)
------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Assets
Investments: Held to maturity:
Fixed maturity securities (at amortized cost)
(fair value: $2,083.6 and $2,229.7) $2,099.9 $2,248.8
Other long-term investments (at cost) 54.0 41.7
------------- -------------
Total 2,153.9 2,290.5
------------- -------------
Available for sale:
Fixed maturity securities (at fair value) (cost: $2,153.0 and $2,045.5) 2,121.7 2,012.3
Equity securities (at fair value) (cost: $172.7 and $141.9) 188.5 160.1
Short-term investments (at fair value which approximates cost) 298.2 276.5
------------- -------------
Total 2,608.5 2,449.0
------------- -------------
Total investments 4,762.5 4,739.6
------------- -------------
Other Assets: Cash 39.1 17.5
Accrued investment income 71.8 71.3
Accounts and notes receivable 273.5 281.0
Federal income tax recoverable: Current -- 1.4
Reinsurance balances and funds held 66.2 74.8
Reinsurance recoverable: Paid losses 26.2 24.6
Policy and claim reserves 1,336.0 1,350.2
Deferred policy acquisition costs 145.9 151.1
Sundry assets 229.5 226.4
------------- -------------
2,188.5 2,198.8
------------- -------------
Total Assets $6,951.1 $6,938.4
============= =============
------------------------------------------------------------------------------------------------------------------------------------
Liabilities, Preferred Stock and
Common Shareholders' Equity
Liabilities: Future policy benefits $116.3 $127.2
Losses, claims and settlement expenses 3,389.3 3,433.7
Unearned premiums 371.6 364.7
Other policyholders' benefits and funds 46.9 52.0
------------- -------------
Total policy liabilities and accruals 3,924.2 3,977.8
Commissions, expenses, fees and taxes 128.3 147.3
Reinsurance balances and funds 125.8 120.0
Federal income tax payable: Current 12.8 --
Deferred 232.5 203.0
Debt 220.7 208.3
Sundry liabilities 77.8 82.6
------------- -------------
Total liabilities 4,722.4 4,739.2
------------- -------------
Preferred
Stock: Convertible preferred stock 0.7 0.7
------------- -------------
Common Common stock 120.4 156.6
Shareholders' Additional paid-in capital 192.5 627.8
Equity: Unallocated shares - ESSOP -- (2.5)
Retained earnings 1,966.6 1,873.9
Accumulated other comprehensive loss (19.0) (17.6)
Treasury stock (at cost) (32.6) (439.8)
------------- -------------
Total Common Shareholders' Equity 2,227.9 2,198.4
------------- -------------
Total Liabilities, Preferred Stock
and Common Shareholders' Equity $6,951.1 $6,938.4
============= =============
</TABLE>
See accompanying notes.
<PAGE>
4
<TABLE>
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED SUMMARY STATEMENTS OF INCOME (Unaudited)
($ in Millions, Except Common Share Data)
------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues: Net premiums earned $378.1 $387.3 $758.4 $783.4
Title, escrow and other fees 50.2 60.0 89.2 117.3
------------- ------------- ------------- -------------
Sub-total 428.3 447.3 847.7 900.8
Net investment income 67.0 65.3 134.9 130.7
Realized investment gains -- 6.9 0.9 21.6
Other income 6.6 7.8 11.7 15.4
------------- ------------- ------------- -------------
Net revenues 502.1 527.4 995.3 1,068.7
------------- ------------- ------------- -------------
Expenses: Benefits, claims and settlement expenses 186.5 193.1 385.0 394.1
Underwriting, acquisition and
insurance expenses 212.3 240.4 424.2 472.0
Interest and other expenses 5.2 3.6 10.2 6.9
------------- ------------- ------------- -------------
Total expenses 404.1 437.2 819.6 873.1
------------- ------------- ------------- -------------
Income before income taxes and items below 97.9 90.2 175.7 195.6
------------- ------------- ------------- -------------
Income Taxes: Currently payable 17.1 3.0 22.8 17.1
Deferred 11.8 23.9 29.2 42.5
------------- ------------- ------------- -------------
Total income taxes 29.0 27.0 52.0 59.6
------------- ------------- ------------- -------------
68.9 63.1 123.6 135.9
Other items - net 0.4 0.6 1.1 1.7
------------- ------------- ------------- -------------
Net Income: $69.4 $63.8 $124.7 $137.6
============= ============= ============= =============
Net Income
Per Share: Basic $0.59 $0.48 $1.04 $1.04
============= ============= ============= =============
Diluted $0.58 $0.48 $1.04 $1.03
============= ============= ============= =============
Dividends Per
Common Share: Cash dividends $0.140 $0.130 $0.270 $0.230
============= ============= ============= =============
Average number of common and
common equivalent shares outstanding:
Basic 118,007,337 130,774,838 119,460,759 131,717,335
============= ============= ============= =============
Diluted 118,863,932 131,816,397 120,085,273 132,813,239
============= ============= ============= =============
</TABLE>
See accompanying notes.
<PAGE>
5
<TABLE>
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
($ in Millions)
------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income as reported $69.4 $63.8 $124.7 $137.6
------------- ------------- ------------- -------------
Other comprehensive income (loss):
Foreign currency translation adjustment (0.7) 0.7 (1.1) 1.1
------------- ------------- ------------- -------------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period 8.2 (20.1) 0.5 (55.2)
Less: elimination of pre-tax realized gains
included in income as reported -- 6.9 0.9 21.6
------------- ------------- ------------- -------------
Pre-tax unrealized gains (losses) on securities
carried at market value 8.2 (27.0) (0.3) (76.8)
Deferred income taxes (credits) 2.9 (9.5) -- (26.9)
------------- ------------- ------------- -------------
Net unrealized gains (losses) on securities 5.3 (17.5) (0.2) (49.8)
------------- ------------- ------------- -------------
Net adjustments 4.5 (16.7) (1.3) (48.7)
------------- ------------- ------------- -------------
Comprehensive income $73.9 $47.1 $123.3 $88.9
============= ============= ============= =============
</TABLE>
See accompanying notes.
<PAGE>
6
<TABLE>
OLD REPUBLIC INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in Millions)
------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $124.7 $137.6
Adjustment to reconcile net income to
net cash provided by operating activities:
Deferred policy acquisition costs 5.1 (6.4)
Premiums and other receivables 3.0 (18.6)
Unpaid claims and related items (29.9) (49.6)
Future policy benefits and policyholders' funds (5.8) (1.8)
Income taxes 44.0 30.5
Reinsurance balances and funds 12.6 (0.9)
Accounts payable, accrued expenses and other (14.4) 2.3
------------- -------------
Total 139.4 93.0
------------- -------------
Cash flows from investing activities:
Sales of fixed maturity securities:
Held to maturity:
Maturities and early calls 155.7 51.6
Available for sale:
Maturities and early calls 97.7 53.9
Other 74.9 83.8
Sales of equity securities 17.2 25.2
Sales of other investments 1.4 0.6
Sales of fixed assets for company use 0.4 1.0
Purchases of fixed maturity securities:
Held to maturity (7.7) (77.2)
Available for sale (282.0) (180.2)
Purchases of equity securities (46.4) (26.9)
Purchases of other investments (13.7) (8.7)
Purchases of fixed assets for company use (5.4) (8.0)
Proceeds from sale of subsidiary -- 25.3
Cash and short-term investments of subsidiary sold -- (31.4)
Other-net (6.9) 0.1
------------- -------------
Total (14.7) (90.7)
------------- -------------
Cash flows from financing activities:
Increase in term loans 47.0 18.0
Issuance of preferred and common stocks 2.1 2.4
Repayments of term loans (30.0) (18.0)
Redemption of debentures and notes (2.3) (1.6)
Dividends on common shares (32.0) (30.0)
Dividends on preferred shares -- --
Purchase of treasury stock (66.4) (83.8)
Other-net 0.3 3.1
------------- -------------
Total (81.4) (109.9)
------------- -------------
Increase (decrease) in cash and short-term investments 43.2 (107.6)
Cash and short-term investments, beginning of period 294.1 400.5
------------- -------------
Cash and short-term investments, end of period $337.3 $292.9
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for: Interest $7.9 $4.9
============= =============
Income taxes $8.5 $28.3
============= =============
</TABLE>
See accompanying notes.
<PAGE>
7
OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED SUMMARY FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)
--------------------------------------------------------------------------------
1. Accounting Policies and Basis of Presentation:
The accompanying consolidated summary financial statements have been
prepared in conformity with generally accepted accounting principles as
described in the Corporation's latest annual report to shareholders or as
disclosed herein. The financial accounting and reporting process relies on
estimates and on the exercise of judgement, but in the opinion of management
all adjustments, consisting of normal recurring accruals, necessary to a
fair presentation of the accompanying statements have been reflected
therein. Realized gains or losses on dispositions of investment securities
have been reflected in the operating results for each period presented.
2. Common Share Data:
Common share data has been retroactively adjusted to reflect all stock
dividends and splits. The following table provides a reconciliation of the
income before extraordinary items and number of shares used in basic and
diluted earnings per share calculations.
<TABLE>
Quarters Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item......................... $ 69.4 $ 63.8 $ 124.7 $ 137.6
Less Preferred stock dividends........................... -- -- -- --
------------- ------------- ------------- -------------
Numerator for basic earnings per share -
income available to common stockholders................ 69.3 63.8 124.7 137.6
Effect of dilutive securities:
Convertible preferred stock dividends.................... -- -- -- --
------------- ------------- ------------- -------------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions................................ $ 69.4 $ 63.8 $ 124.7 $ 137.6
============= ============= ============= =============
Denominator:
Denominator for basic earnings per share -
weighted-average shares................................ 118,007,337 130,774,838 119,460,759 131,717,335
Effect of dilutive securities:
Stock options .......................................... 724,661 846,464 490,279 896,557
Convertible preferred stock.............................. 131,934 195,095 134,235 199,347
------------- ------------- ------------- -------------
Dilutive potential common shares......................... 856,595 1,041,559 624,514 1,095,904
------------- ------------- ------------- -------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions...................................... 118,863,932 131,816,397 120,085,273 132,813,239
============= ============= ============= =============
Basic earnings per share................................... $ .59 $ .48 $ 1.04 $ 1.04
============= ============= ============= =============
Diluted earnings per share................................. $ .58 $ .48 $ 1.04 $ 1.03
============= ============= ============= =============
</TABLE>
3. Unrealized Appreciation of Investments:
Cumulative net unrealized losses on fixed maturity securities available for
sale and equity securities debited to a separate account in common
shareholders' equity amounted to $9.9 at June 30, 2000. Unrealized
depreciation of investments, before applicable deferred income tax credits
of $5.1, at June 30, 2000 included gross unrealized gains and (losses) of
$46.5 and $(61.6), respectively.
For the six months ended June 30, 2000 and 1999, net unrealized
depreciation of investments, net of deferred income tax credits, amounted
to $0.2 and $49.8, respectively.
<PAGE>
8
4. Information About Segments of Business
The Corporation's business segments are organized as the General Insurance
(property and liability insurance), Mortgage Guaranty, Title Insurance and
Life Insurance Groups. The contributions of Old Republic's insurance
industry segments to consolidated revenues and operating results, and
certain balance sheet data pertaining thereto are shown in the following
tables on the basis of 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.
<TABLE>
Segment Reporting
-----------------------------------------------------------------------------------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
General Insurance Group:
Net premiums earned.................................... $ 210.0 $ 208.2 $ 420.7 $ 422.2
Net investment income and other income(a).............. 49.8 50.2 98.9 100.3
------------- ------------- ------------- -------------
Total............................................. $ 259.8 $ 258.4 $ 519.6 $ 522.5
============= ============= ============= =============
Income before taxes.................................... $ 28.7 $ 27.9 $ 50.5 $ 63.3
============= ============= ============= =============
Income tax expense..................................... $ 6.2 $ 6.2 $ 10.7 $ 15.0
============= ============= ============= =============
Mortgage Guaranty Group:
Net premiums earned.................................... $ 80.8 $ 75.3 $ 162.1 $ 151.0
Net investment income and other income(a).............. 14.9 13.8 29.3 28.0
------------- ------------- ------------- -------------
Total............................................. $ 95.8 $ 89.2 $ 191.5 $ 179.1
============= ============= ============= =============
Income before taxes.................................... $ 58.2 $ 46.1 $ 110.9 $ 85.9
============= ============= ============= =============
Income tax expense..................................... $ 19.5 $ 15.4 $ 37.2 $ 28.6
============= ============= ============= =============
Title Insurance Group:
Net premiums earned.................................... $ 74.3 $ 90.8 $ 146.8 $ 180.0
Title, escrow and other fees ......................... 50.2 60.0 89.2 117.3
------------- ------------- ------------- -------------
Subtotal.......................................... 124.6 150.9 236.0 297.3
Net investment income and other income(a).............. 6.1 5.8 12.3 11.3
------------- ------------- ------------- -------------
Total............................................. $ 130.8 $ 156.7 $ 248.3 $ 308.7
============= ============= ============= =============
Income before taxes.................................... $ 13.2 $ 13.5 $ 16.5 $ 30.3
============= ============= ============= =============
Income tax expense..................................... $ 4.4 $ 4.5 $ 5.4 $ 10.2
============= ============= ============= =============
Life Insurance Group (c):
Net premiums earned.................................... $ 12.8 $ 12.8 $ 28.7 $ 30.1
Net investment income and other income(a).............. 2.1 2.2 4.3 4.3
------------- ------------- ------------- --------------
Total............................................. $ 14.9 $ 15.0 $ 33.0 $ 34.4
============= ============= ============= =============
Income (loss) before taxes (credits)................... $ 1.1 $ (1.8) $ 2.1 $ (1.3)
============= ============= ============= =============
Income tax expense (credit)............................ $ -- $ (.8) $ .2 $ (.7)
============= ============= ============= =============
</TABLE>
<PAGE>
9
<TABLE>
Reconciliations of Segments to Consolidated
-----------------------------------------------------------------------------------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Total revenues for reportable segments................. $ 501.4 $ 519.5 $ 992.5 $ 1,044.9
Net realized investment gains.......................... -- 6.9 .9 21.6
Other revenues......................................... 4.5 2.3 9.3 4.6
Elimination of intersegment revenues (b)............... (3.8) (1.3) (7.4) (2.5)
------------- ------------- ------------- -------------
Total consolidated revenues....................... $ 502.1 $ 527.4 $ 995.3 $ 1,068.7
============= ============= ============= =============
Income before taxes:
Total income before taxes of reportable segments....... $ 101.4 $ 85.7 $ 180.1 $ 178.2
Net realized investment gains.......................... -- 6.9 .9 21.6
Other revenues - net................................... (3.4) (2.3) (5.3) (3.9)
Elimination of intersegment profits (b)................ -- (.1) -- (.2)
------------- ------------- ------------- -------------
Income before income taxes and
extraordinary items............................... $ 97.9 $ 90.2 $ 175.7 $ 195.6
============= ============= ============= =============
</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)In the first quarter of 1999,the Company sold its New York
subsidiary and with it, its annuity book of business;this had no material
effect on Old Republic's consolidated results or financial position.
5. Legal Proceedings
Legal proceedings against the Company arise in the normal course of
business and generally pertain to claim matters related to insurance
policies and contracts issued by the Corporation's insurance subsidiaries.
Various governmental entities have filed suit against or performed
examinations of the records of an underwritten title agency subsidiary
headquartered in the State of California. As a result, certain regulatory
and class action litigation has commenced alleging that the subsidiary: 1)
failed to escheat unclaimed escrow funds; 2) charged for services not
necessarily provided; and 3) collected illegal interest payments or fees
from banks on the basis of funds held for escrow customers. The subsidiary
has in turn conducted an internal review of its records and concluded that
it had certain liabilities for part of the issues denoted at (1) and (2).
Management believes that the alleged practices denoted in (3) 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 practices. Through June 30, 2000 the
subsidiary had paid or otherwise provided reserves aggregating $37.2
million to cover its best estimate of litigation and related costs
associated with all these issues.
In December 1999, a class action lawsuit was filed against one of the
Company's mortgage guaranty insurance subsidiaries in the Federal District
Court for the Southern District of Georgia. The suit alleges that the
subsidiary provided pool insurance and other services to mortgage lenders
at preferential, below market prices in return for mortgage insurance
business, and that such practices violated the Real Estate Settlement
Procedures Act. The Company denies any liability in these regards, has
retained legal counsel, and intends to defend itself vigorously. Due in
part to the early stages of this lawsuit, the ultimate outcome of this
litigation is unknown at the present time. Accordingly, no provision for
any liability, including the cost of defense, has been included in the
Company's financial statements.
<PAGE>
10
OLD REPUBLIC INTERNATIONAL CORPORATION
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Six Months Ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
OVERVIEW
This analysis pertains to the consolidated accounts of Old Republic
International Corporation. The Company conducts its business through four major
segments, namely its General (property and liability coverages), Mortgage
Guaranty, Title, and Life insurance groups.
FINANCIAL POSITION
Old Republic's financial position at June 30, 2000 reflected increases in assets
and common shareholders' equity of 0.2% and 1.3%, respectively, while
liabilities decreased 0.4% when compared to the immediately preceding year-end.
Cash and invested assets represented 70.1% and 69.6% of consolidated assets as
of June 30, 2000 and December 31, 1999 respectively. Consolidated operating cash
flow was positive at $139.4 million in the latest six month period, compared to
$93.0 million in the same period of 1999.
Relatively high short-term maturity investment positions continued to be
maintained as of June 30, 2000 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 operating cash needs and investment strategy. Accordingly, the
future level of short-term investments will vary and respond to the interplay of
these factors and may, as a result, increase or decrease from current levels.
During the first six months of 2000, the Corporation committed substantially all
investable funds in short to intermediate-term fixed maturity securities. Old
Republic continues to adhere to its long-term policy of investing primarily in
investment grade, marketable securities; investable funds have not been directed
to so-called "junk bonds" or types of securities categorized as derivaties.
During the first six months of 2000, Old Republic's investment in equity
securities increased by 17.7% vis-a-vis the related invested balance at year-
end 1999 due to securities acquired. At June 30, 2000, the Company had no
investments in default as to principal and/or interest.
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.
Old Republic's capitalization of $2.44 billion at June 30, 2000 consisted of
debt of $220.7 million, convertible preferred stock of $.7 million, and common
shareholders' equity of $2.22 billion. The increase in the common shareholders'
equity account during the six months ended June 30, 2000 reflects primarily the
retention of earnings in excess of dividend requirements, a moderate decrease in
the value of bonds and stocks carried at market values and the reacquisition of
$66.4 million of common shares pursuant to previously announced stock buy-back
programs. In March 2000, the Company canceled 36.4 million common shares
previously reported as treasury stock; this had no effect on total shareholders'
equity or financial condition of the Company.
RESULTS OF OPERATIONS
Revenues:
Consolidated net premiums and fees earned for the second quarter of 2000
amounted to $428.3 million, 4.2% below the amount reported for the same quarter
of 1999. For the second quarter of 2000, the Company's General Insurance Group
reported earned premium volume of $210.0 million, up 0.9% from $208.2 million a
year ago. The slight increase in premium reflects the Company's attempt to
obtain rate increases in a market place that remains quite competitive. Mortgage
Guaranty Group premiums increased by 7.4% to $80.8 million from $75.3 million in
the year-ago quarter. Title Group premium and fee revenues decreased 17.4% to
$124.6 million in the second quarter of 2000 when compared to the same quarter
of 1999. The decrease in Title Group revenues is due to mortgage lending
activity subsiding and refinancings declining significantly as interest rates
charged for home mortgages have risen in the past several quarters. The Life
Group's premium volume of $12.8 million, was approximately equal when compared
to the same quarter of 1999.
Consolidated net premiums and fees earned in the first half of 2000 amounted to
$847.7 million, or 5.9% less than the amount reported for the same 1999 period.
The General Insurance Group's net premiums earned decreased 0.4% to $420.7
million in the first half of 2000. The Mortgage Guaranty Group continued to
experience volume growth and reported net premiums earned of $162.1 million, an
increase of 7.4%. The Title Insurance Group reported premiums and fees in the
first half of $236.0 million, down from $297.3 million in the year- ago period.
Life Insurance Group premiums also declined 4.7% to $28.7 million during the
same 2000 period. The above-cited factors for the second quarter of 2000 had
similar effects on first half 2000 premiums and fees revenues.
<PAGE>
11
Consolidated net investment income was $134.9 million in the first half of 2000
and $67.0 million in the second quarter of 2000 compared to $130.7 million and
$65.3 million, respectively, in the same quarter and six month periods of 1999.
This revenue source reflects a slightly higher invested asset base and an up
trend in yields obtained on fixed maturity securities. The average annualized
yield on investments was approximately 5.7% and 5.5% at the end of June 30, 2000
and 1999, respectively.
The Company's investment policies have not been designed to maximize realized
investment gains. Realized gains of $.9 million in the first half of 2000 were
mostly due to the sale of equity securities. Dispositions of securities were
primarily the result of scheduled maturities of bonds and notes and sales of
equity securities. For the first six months of 2000, 77.2% of total dispositions
represented maturities and early calls of existing holdings; for the year ago
period in 1999, these transactions amounted to 55.7% of the total dispositions.
Expenses:
Consolidated benefit, claim and settlement costs, as a percentage of net
premiums and fees earned, were approximately 45% and 44% in the first six months
of 2000 and 1999, respectively. For the second quarter of each year, these
ratios were 44% in 2000 and 43% in 1999. For both the second quarter and
year-to-date periods of the current year, the General Insurance claims ratio
continued to reflect relatively high claim severity for commercial automobile
(truck) insurance in particular. Compared to second half 1999 experience,
however, the impact of this factor was less pronounced. Mortgage Guaranty claim
costs were lower during the first six months of 2000 compared to the same period
in 1999 mostly due to stable economic and employment conditions which usually
lead to reduced mortgage defaults. Title claims costs were lower in 2000 as a
result of declining claims emergence trends. Life Group claim costs benefited in
the latest six months mostly from fewer travel accident claims.
The ratio of consolidated underwriting, acquisition and insurance expenses to
net premiums and fees earned were approximately 50% and 52% in the first six
months of 2000 and 1999, respectively. These ratios were 50% and 54% for the
second quarters of 2000 and 1999, respectively. 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 ratio remained
basically flat for the first half of 2000 compared to the same period in 1999.
The mortgage guaranty segment's expense ratio moved down due to lower costs
associated with an enhancement of information systems basically completed in
1999 and a decrease in contract underwriting services. The insurance expense
ratio for the title segment was higher in the first half of 2000 compared to the
same period in 1999 due in part to a decrease in premium and fees volume without
a proportional reduction in expenses. Consolidated interest and other charges
increased $3.3 million in the first half of 2000 versus the same period a year
ago due primarily to interest costs on an increased debt level.
Pre-Tax and Net Income:
Consolidated income before taxes increased by 8.6% in the second quarter and
decreased 10.2% in the first six months of 2000 when compared to the same
periods one year ago. The Corporation's Mortgage Guaranty and Life Insurance
segments reflected higher second quarter and year to date pre-tax operating
earnings; General Insurance operations posted an increase in pre-tax operating
earnings in this year's second quarter and a decrease in the first six months.
Title insurance operations posted lower pre-tax earnings in both the second
quarter and year to date periods. Realized gains on sales of securities were
significantly lower in the most recent quarter and for the current year to date
period.
The effective consolidated income tax rate was 30% in the second quarter and six
month period of 2000, respectively, and 30% and 31% in the second quarter and
six month period of 1999, respectively. The rates for each period reflect
primarily the varying proportions of pre-tax operating income derived from
tax-sheltered investment income (principally tax-exempt interest) on the one
hand, and fully taxable investment and underwriting/service income on the other
hand.
Year 2000 Issues:
Year 2000 issues relate primarily to computer programs which were written with
only a two-digit designation for many years. Such programs are often unable to
interpret dates beyond 1999 and as a result may fail or lead to computer errors
which could create a disruption in operations.
Prior to December 31, 1999, the Company and its subsidiaries completed an
implementation of changes and tests of those computer systems and programs that
had been identified as being affected by Year 2000 issues. They also received
confirmations of Year 2000 compliance from certain principal customers, vendors
and other third parties with whom they have significant business relationships.
The Company and its subsidiaries had also developed contingency plans for
operations in the event Year 2000 issues were to arise in spite of the changes
and tests effected.
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12
The costs of identifying, implementing and testing the required changes were not
material to the Company's consolidated operating results. A significant portion
of these costs were not incremental as the Company and its subsidiaries
generally used existing resources.
Early in the current year, no issues are known to have developed nor to have
affected adversely the Company or any of its subsidiaries. Although the Company
considers it increasingly unlikely, it is possible that Year 2000 issues may
have arisen but are not yet known. The aforementioned contingency plans are
deemed appropriate to address such subsequent events; no significant additional
costs are being anticipated with respect to Year 2000 issues.
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 and health trends. At the holding
company level, operating earnings or losses are generally affected by the amount
of debt outstanding and its cost, as well as interest income on temporary
short-term investments.
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.
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OLD REPUBLIC INTERNATIONAL CORPORATION
FORM 10 - Q
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
(a) The annual meeting of registrant's shareholders was held on May 19, 2000.
(b) Proxies for the meeting were solicited by management pursuant to
Regulation 14A under the Security Exchange Act of 1934. There was no
solicitation in opposition to management's nominees for directors as
listed in the proxy statement and all such nominees were elected.
(c) At the meeting, the shareholders voted on the following matter:
1. The election of four Class I directors. There were at least
90,478,429 affirmative votes for each director and no more than
9,414,548 votes withheld.
Item 6 - Reports on Form 8-K
----------------------------
(a) Reports on Form 8-K
1. The registrant has not filed any reports on Form 8-K during the
quarter for which this report is filed.
Items other than those listed are omitted because they are not required.
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14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Old Republic International Corporation
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(Registrant)
Date: August 11, 2000
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/s/ Paul D. Adams
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P. D. Adams
Senior Vice President &
Chief Financial Officer
